##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-K







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

For the fiscal year ended December 31, 2010

OR



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

For the transition period
from                     to                     
..

Commission file number 001-33740





Cypress Sharpridge Investments, Inc.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Maryland                                                       |  | 20-4072657                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)
|                                                               | 
|437 Madison Avenue, 33rdFloor New York, New York               |  | 10022                            
|(Address of principal executive offices)                       |  | (Zip Code)                       





(212) 612-3210

(Registrants telephone number, including area code)

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







|                              |  |                                          
|----------------------------- |  | -----------------------------------------
|Title of each class           |  | Name of each exchange on which registered
|Common stock, $0.01 par value |  | New York Stock Exchange                  

Securities registered pursuant to Section 12(g) of the Act: None





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.    Yes   ̈    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange
Act.    Yes   ̈    No  x

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

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

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

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



|                        |  |   |  |                                               |  |                           |  |   |  | 
|----------------------- |  | - |  | --------------------------------------------- |  | ------------------------- |  | - |  | 
|Large accelerated filer |  |  ̈ |  |                                               |  | Accelerated filer         |  | x |  | 
|Non-accelerated filer   |  |  ̈ |  | (Do not check if a smaller reporting company) |  | Smaller reporting company |  |  ̈ |  | 

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately
$358,289,947 based on the closing price on the New York Stock Exchange as of June 30, 2010.

Number of the
registrants common stock outstanding as of February 7, 2011: 59,557,854

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants definitive Proxy Statement with respect to its 2011 Annual Meeting of Stockholders to be
filed not later than 120 days after the end of the registrants fiscal year are incorporated by reference into Part III hereof as noted therein.









---

##### Table of Contents

CYPRESS SHARPRIDGE INVESTMENTS, INC.

INDEX



|         |  |                                                                                                               |  |                     |    | 
|-------- |  | ------------------------------------------------------------------------------------------------------------- |  | ------------------- | -- | 
|Item No. |  |                                                                                                               |  | Form 10-KReportPage |   
|         |  | PART I                                                                                                        |  |                     |    | 
|         |  |                                                                                                              
|1.       |  | Business                                                                                                      |  |                     | 1  | 
|1A.      |  | Risk Factors                                                                                                  |  |                     | 9  | 
|1B.      |  | Unresolved Staff Comments                                                                                     |  |                     | 28 | 
|2.       |  | Properties                                                                                                    |  |                     | 28 | 
|3.       |  | Legal Proceedings                                                                                             |  |                     | 28 | 
|4.       |  | (Removed and Reserved)                                                                                        |  |                     | 28 | 
|         |  |                                                                                                              
|         |  | PART II                                                                                                       |  |                     |    | 
|         |  |                                                                                                              
|5.       |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
 Securities |  |                     | 29 | 
|6.       |  | Selected Financial Data                                                                                       |  |                     | 30 | 
|7.       |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations                         |  |                     | 33 | 
|7A.      |  | Quantitative and Qualitative Disclosures About Market Risk                                                    |  |                     | 52 | 
|8.       |  | Financial Statements and Supplementary Data                                                                   |  |                     | 57 | 
|9.       |  | Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure                          |  |                     | 87 | 
|9A.      |  | Controls and Procedures                                                                                       |  |                     | 87 | 
|9B.      |  | Other Information                                                                                             |  |                     | 88 | 
|         |  |                                                                                                              
|         |  | PART III                                                                                                      |  |                     |    | 
|         |  |                                                                                                              
|10.      |  | Directors, Executive Officers and Corporate Governance                                                        |  |                     | 89 | 
|11.      |  | Executive Compensation                                                                                        |  |                     | 89 | 
|12.      |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters                |  |                     | 89 | 
|13.      |  | Certain Relationships and Related Transactions, and Director Independence                                     |  |                     | 89 | 
|14.      |  | Principal Accountant Fees and Services                                                                        |  |                     | 89 | 
|         |  |                                                                                                              
|         |  | PART IV                                                                                                       |  |                     |    | 
|         |  |                                                                                                              
|15.      |  | Exhibits and Financial Statement Schedules                                                                    |  |                     | 90 | 



---

##### Table of Contents

PART I



|Item 1. | Business
|------- | --------

In this
annual report on Form 10-K, we refer to Cypress Sharpridge Investments, Inc. as we, us, our company, or our, unless we specifically state otherwise or the context indicates otherwise. In addition,
the following defines certain of the commonly used terms in this report: RMBS refers to whole-pool residential mortgage pass-through securities collateralized by residential mortgage loans; agency securities or Agency RMBS refers to our RMBS
that are issued or guaranteed by a federally chartered corporation, such as the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac), or an agency of the U.S.
government, such as the Government National Mortgage Association (Ginnie Mae); hybrid ARMs refers to hybrid adjustable-rate residential mortgage loans that have interest rates that are fixed for a specified period of time and,
thereafter, generally adjust annually to an increment over a specified interest rate index; and ARMs refers to adjustable-rate residential mortgage loans which typically have interest rates that adjust monthly to an increment over a specified
interest rate index.

Forward Looking Statements

When used in this annual report on Form 10-K, in future filings with the Securities and Exchange Commission (SEC) or in press
releases or other written or oral communications, statements which are not historical in nature, including those containing words such as believe, expect, anticipate, estimate, plan,
continue, intend, should, may or similar expressions, are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended, and, as such, may involve known and unknown risks, uncertainties and assumptions. The forward looking statements we make in this annual report on Form 10-K include, but are not
limited to, statements about the following:



| |  |  | our investment, financing and hedging strategy (including our financing strategy with respect to collateralized loan obligations, or CLOs) and the
success of these strategies;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the effect of movements in interest rates on our assets and liabilities (including our hedging instruments) and our income;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | the effect of increased prepayment rates on our portfolio;
| | - |  | ----------------------------------------------------------



| |  |  | the effect of widening credit spreads on the value of our assets and investment strategy;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | our ability to convert our assets into cash or extend the financing terms related to our assets;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | an internalization transaction, as such term is defined in Internalization Plans;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | the types of indebtedness we may incur;
| | - |  | ---------------------------------------



| |  |  | our ability to meet our short term liquidity requirements with our cash flow from operations and borrowings;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | our liquidity;
| | - |  | --------------



| |  |  | our ability to quantify risks based on historical experience;
| | - |  | -------------------------------------------------------------



| |  |  | our ability to be taxed as a real estate investment trust, or REIT, and to maintain an exemption from registration under the Investment Company Act of
1940, as amended, or the Investment Company Act;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the tax limitations of capital loss carryforwards and other built in losses;
| | - |  | ----------------------------------------------------------------------------



| |  |  | our assessment of counterparty risk;
| | - |  | ------------------------------------



| |  |  | our asset valuation policies;
| | - |  | -----------------------------



| |  |  | our distribution policy;
| | - |  | ------------------------



1



---

##### Table of Contents

| |  |  | the effect of recent U.S. Government actions on the housing and credit markets;
| | - |  | -------------------------------------------------------------------------------



| |  |  | the structure of our investments in CLOs; and
| | - |  | ---------------------------------------------



| |  |  | the tax treatment of income earned on subordinated tranches of CLOs issued by foreign corporations
| | - |  | --------------------------------------------------------------------------------------------------

Forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all
information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our
business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. The following factors could cause actual results to vary from our forward-looking statements:



| |  |  | the factors referenced in this annual report on Form 10-K, including those set forth under the section captioned Risk Factors;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in our investment, financing and hedging strategy, including our financing strategy with respect to CLOs;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | the adequacy of our cash flow from operations and borrowings to meet our short term liquidity requirements;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | the liquidity of our portfolio;
| | - |  | -------------------------------



| |  |  | unanticipated changes in our industry, interest rates, the credit markets, the general economy or the real estate market;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in interest rates and the market value of our Agency RMBS;
| | - |  | ------------------------------------------------------------------



| |  |  | changes in the prepayment rates on the mortgage loans underlying our Agency RMBS;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | our ability to borrow to finance our assets;
| | - |  | --------------------------------------------



| |  |  | the availability of additional forms of financing for our assets;
| | - |  | -----------------------------------------------------------------



| |  |  | changes in government regulations affecting our business;
| | - |  | ---------------------------------------------------------



| |  |  | our ability to maintain our qualification as a REIT for federal income tax purposes;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | our ability to maintain our exemption from registration under the Investment Company Act;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | changes in tax regulations relating to the treatment of income earned on subordinated tranches of CLOs issued by foreign corporations; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | risks associated with investing in real estate assets, including changes in business conditions and the general economy.
| | - |  | ------------------------------------------------------------------------------------------------------------------------

These and other risks, uncertainties and factors, including those described elsewhere in this report, could cause our actual results to
differ materially from those projected in any forward-looking statements we make. All forward-looking statements speak only as of the date on which they are made. New risks and uncertainties arise over time and it is not possible to predict those
events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Our Company

We are a specialty finance company created with the objective of achieving consistent risk-adjusted investment income. We were formed as a Maryland corporation in February 2006, and we are currently
managed and advised by Cypress Sharpridge Advisors LLC or our Manager. We have elected to be taxed as a REIT for federal income tax purposes. We commenced operations in February 2006 and completed an initial public



2



---

##### Table of Contents

offering of our common stock in June 2009. We conduct all of our business through and hold all of our assets in Cypress Sharpridge Investments, Inc.

Our Investment Strategy

We invest in Agency RMBS collateralized by fixed rate single-family residential mortgage loans (typically 15, 20 or 30 years), ARMs, which typically have coupon rates that reset monthly, or hybrid ARMs,
which typically have a coupon rate that is fixed for an initial period (typically three, five, seven or ten years) and thereafter resets at regular intervals. In addition, our investment guidelines permit investments in collateralized mortgage
obligations issued by a government agency or government sponsored entity that are collateralized by Agency RMBS, or CMOs, although we had not invested in any CMOs as of December 31, 2010. We rely on our Managers expertise in identifying
Agency RMBS for investments. Our Manager makes investment decisions based on various factors, including, but not limited to, relative value, expected cash yield, supply and demand, costs of hedging, costs of financing, liquidity, expected future
interest rate volatility and the overall shape of the U.S. Treasury and interest rate swap yield curves. Our Manager does not attribute any particular quantitative significance to any of these factors, and the weight given to these factors varies
depending on market conditions and economic trends. We believe that this strategy, combined with our Managers experience, will enable us to pay dividends and achieve capital appreciation throughout changing interest rate and credit cycles, and
provide attractive long term returns to investors.

Our investment strategy is designed to:



| |  |  | build an investment portfolio of Agency RMBS that seeks to generate attractive risk-adjusted investment income;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | manage financing, interest and prepayment rate risks;
| | - |  | -----------------------------------------------------



| |  |  | capitalize on discrepancies in the relative valuations in the Agency RMBS market;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | manage cash flow so as to provide for regular quarterly distributions to stockholders;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | limit credit risk;
| | - |  | ------------------



| |  |  | minimize the impact that changing interest rates have on our net investment income;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | cause us to maintain our qualification as a REIT; and
| | - |  | -----------------------------------------------------



| |  |  | cause us to remain exempt from the registration requirements of the Investment Company Act.
| | - |  | -------------------------------------------------------------------------------------------

We believe that the current market and interest rate environment offer significant investment opportunities and that our investment
strategy is suited to this environment because:



| |  |  | the current relative spread differential between Agency RMBS and U.S. Treasury securities is attractive; and
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | the weakness in the housing industry, an elevated national unemployment rate and other economic factors have resulted in a prolonged period of low
short-term interest rates, which generally increases our net interest margin.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our income is generated
primarily from the difference, or net spread, between the interest income we earn on our investment portfolio and the cost of our borrowings and hedging activities. We believe the most prudent approach to generate a positive net spread is to manage
our liabilities to mirror, as closely as possible, the interest rate risks of our investments. To seek to achieve this result, we employ short term financing for our Agency RMBS portfolio in combination with interest rate swaps and caps to hedge all
or a portion of the interest rate risk associated with the financing of our portfolio. In the future, we may, subject to maintaining our REIT qualification, also employ other hedging techniques from time to time, including interest rate floors,
collars and Eurodollar and U.S. Treasury futures, to protect against adverse interest rate movements.



3



---

##### Table of Contents

Because our investments vary in interest rate, prepayment speed and maturity, the leverage
or borrowings that we employ to fund our asset purchases are not exactly matched to the terms or performance of our assets. Based on our experience, because our assets are not match funded, such assets market prices change more slowly than the
corresponding liabilities. Consequently, changes in interest rates, particularly short term interest rates, may significantly influence our net income. Decreases in these rates will tend to increase our net income and the market value of our assets,
while increases in these rates will tend to decrease our net income and the market value of our assets and could possibly result in operating losses. Our approach to managing our investment portfolio is to take a longer term view of assets and
liabilities, such that our net income and mark-to-market valuations at the end of a financial reporting period will not significantly influence our strategy of maximizing cash distributions to stockholders and achieving capital appreciation over the
long term.

Investment Sourcing

Our Manager sources the majority of our investments through its relationships with a large and diverse group of financial intermediaries, ranging from major commercial and investment banks to specialty
investment dealers and brokerage firms.

Investment Process

Our Manager evaluates each one of our investment opportunities based on its expected risk-adjusted investment income relative to the
investment income available from other comparable investments. In addition, our Manager evaluates new opportunities based on their relative expected returns compared to our comparable securities held in our portfolio. The terms of any leverage
available to us for use in funding an investment purchase are also taken into consideration, as are any risks posed by illiquidity or correlations with other securities in the portfolio.

The key steps of our investment process are summarized below:



| |  |  | allocation of our capital to the attractive types of Agency RMBS;
| | - |  | -----------------------------------------------------------------



| |  |  | review of asset allocation plan for overall risk management and diversification;
| | - |  | --------------------------------------------------------------------------------



| |  |  | research and selection of individual securities and financing (leverage) strategies;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | active portfolio monitoring within asset classes, together with ongoing risk management (hedging) and periodic rebalancing, to maximize total returns;
and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | consideration of the impact on maintaining our REIT qualification and our exemption from registration under the Investment Company Act.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------

Financing Strategy

We use leverage to finance a portion of our Agency RMBS portfolio and to seek to increase potential returns to our stockholders. Our use of leverage may, however, also have the effect of increasing losses
when securities in our portfolio decline in value. Currently, our target leverage is in the range of approximately 6 to 10 times the amount of our net assets. The amount of leverage we incur may vary from time to time depending on market conditions
and other factors that our Manager deems relevant. Our investment policies require no minimum or maximum leverage, and our Manager and its investment committee have the discretion, without the need for further approval by our board of directors, to
increase or decrease the amount of leverage employed. As of December 31, 2010, our portfolio was leveraged (as measured by total liabilities to net assets) approximately 8.3 to 1.

We currently, and intend to continue to, finance our Agency RMBS investments using a diversified approach involving repurchase agreements
with multiple commercial and investment banks. Using repurchase agreements, we are able to borrow against the value of our assets. Under these agreements, we sell our assets to a



4



---

##### Table of Contents

counterparty and agree to repurchase the same assets from the counterparty at a price equal to the original sales price plus an interest factor. If the market value of the securities sold by us
to a counterparty declines, we may be required by the counterparty to provide additional collateral, which is commonly referred to as a margin call. These repurchase agreements are accounted for as debt for purposes of generally accepted accounting
principles (GAAP) and secured by the underlying assets. During the period of a repurchase agreement, we are entitled to and receive the principal and interest payments on the related assets.

Our repurchase agreement counterparties are broker/dealers and commercial and investment banks with whom we have or expect to have
agreements in place that cover the terms of our transactions. We maintain formal relationships with multiple counterparties for the purpose of obtaining financing on favorable terms and to mitigate counterparty credit risk. As of December 31,
2010, we had repurchase agreements in place with 28 different counterparties and indebtedness outstanding with 20 counterparties in an aggregate amount of approximately $3,443.8 million, or approximately 54% of the fair value of our portfolio,
and a weighted average borrowing rate of 0.32%. Currently, the haircuts (the difference between the cash we receive from the counterparty when we initially sell the securities to the counterparty and the value of those securities) are 4% to 6% on
Agency RMBS for the repurchase agreements under which we are currently borrowing. As a borrower, we are subject to margin calls from counterparties if the value of the collateral that we have posted has declined below the haircut level, which may
occur due to prepayments of the mortgages causing the face value of the mortgage pool provided as collateral to the counterparty to decline or when the value of the mortgage pool provided as collateral declines as a result of interest rate movements
or spread widening.

Our leverage consists of short term borrowings in the repurchase market and payables for securities
purchased. In the future we may utilize other financing techniques, which may include but not necessarily be limited to the issuance of secured or unsecured debt, preferred stock or trust preferred securities.

We do not currently nor do we intend to finance our subordinated tranches of CLOs. We believe investments of this type are intrinsically
leveraged on a term basis primarily through the issuance of match-funded non-recourse debt specific to each individual transaction.

Hedging Strategy

Subject to maintaining our qualification as a
REIT, we utilize derivative financial instruments to hedge a portion of the interest rate risk associated with the financing of our portfolio. Our most common method of financing Agency RMBS is through repurchase agreements, which generally have
maturities up 30 to 90 days. The weighted average life of the Agency RMBS we own is generally much longer. The difference in maturities, in addition to prepayments, adjustable-rate features of ARMs, and other potential changes in timing and/or
amount of cash flows, creates potential interest rate risk. We engage in interest rate hedging activities intended to mitigate changes in interest rates that we expect would impair our ability to continue to finance assets we own at favorable rates.
Our hedging techniques may also be used in an attempt to protect us against declines in the market value of our assets that result from general trends in debt markets. We rely on our Managers expertise in determining the type and amount of
interest rate hedging methods to achieve these goals. Our interest rate hedging methods have historically consisted of interest rate swaps (a contract exchanging a variable rate for a fixed rate, or vice versa) and interest rate caps (a contract
protecting against a rise in interest rates above a fixed level). In the future, our interest rate hedging methods are likely to continue to consist of interest rate swaps and interest rate caps, but may also include interest rate floors (a contract
protecting against a decline in interest rates below a fixed level), interest rate collars (a combination of caps and floors), cancelable interest rate swaps (swaps that may be canceled at one partys option before expiry), Eurodollar and U.S.
Treasury futures, and other interest rate and non-interest rate derivative instruments or contracts.

We enter into interest
rate swap agreements to offset the potential adverse effects of rising interest rates on certain short term repurchase agreements. Our repurchase agreements generally carry interest rates that correspond to the London Interbank Offered Rate, or
LIBOR, for the borrowing periods. Historically, we have



5



---

##### Table of Contents

sought to enter into interest rate swap agreements structured such that we receive payments based on a variable interest rate and make payments based on a fixed interest rate. The variable
interest rate on which payments are received is calculated based on various reset mechanisms for LIBOR. Additionally, we have entered into interest rate cap agreements structured such that we receive payments based on a variable interest rate being
above a fixed cap interest rate. The variable interest rate on which payments are received on interest rate caps is also calculated based on various reset mechanisms for LIBOR. Our interest rate swap and cap agreements effectively fix or cap our
borrowing cost and are not held for speculative or trading purposes. As of December 31, 2010, of the approximately $3,443.8 million of our portfolio that has been financed under repurchase agreements and $2,234.4 million of payable for
securities purchased, we had established interest rate swap and cap agreements covering $4,390.0 million, or approximately 77% of the aggregate fair value of (i) our portfolio that has been financed under repurchase agreements and
(ii) payables for securities purchased. We only enter into interest rate swap and cap agreements related to financing for Agency RMBS collateralized by hybrid ARMs and fixed rate mortgage loans. We do not hedge Agency RMBS collateralized by
monthly reset ARMs because their interest rates reset monthly and closely in time with the interest rates under the corresponding repurchase agreements.

Our Portfolio

Agency RMBS are residential mortgage pass-through
securities, the principal and interest of which is guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. Our current portfolio of Agency RMBS is backed by fixed rate mortgages; and hybrid ARMs that typically have a fixed coupon for three, five or
seven years, and then pay an adjustable coupon that generally resets annually over a predetermined interest rate index. As of December 31, 2010, our Agency RMBS portfolio consisted of the following:



|                                                   |  |                |           |        |            |   |                    |                  |  |                           |     |   |  |  |      |  |  |  |      |  
|-------------------------------------------------- |  | -------------- | --------- | ------ | ---------- | - | ------------------ | ---------------- |  | ------------------------- | --- | - |  |  | ---- |  |  |  | ---- | -
|                                                   |  | Par Amount     |           |        | Fair Value |   |                    | Weighted Average | 
|Security Description                               |  |                |           | Coupon |            |   | Months 
toReset(1) |                  |  | ConstantPrepaymentRate(2) |    
|                                                   |  | (in thousands) |           |        |            |   |                    |                  |  |                           |     |  
|Agency RMBS collateralized by fixed rate mortgages |  | $              | 4,419,601 |        |            | $ | 4,521,648          |                  |  |                           | 4.0 | % |  |  | N/A  |  |  |  | 19.4 | %
|Agency RMBS collateralized by hybrid ARMs          |  |                | 1,737,307 |        |            |   | 1,788,922          |                  |  |                           | 3.4 |   |  |  | 63.2 |  |  |  | 18.4 |  
|                                                   |  |                |           |        |            |   |                    |                  |  |                           |     |   |  |  |      |  |  |  |      |  
|Total Agency RMBS                                  |  | $              | 6,156,908 |        |            | $ | 6,310,570          |                  |  |                           |     |   |  |  |      |  |  |  |      |  
|                                                   |  |                |           |        |            |   |                    |                  |  |                           |     |   |  |  |      |  |  |  |      |  



|(1) | Months to Reset is the number of months remaining before the fixed rate on a hybrid ARM becomes a variable rate. At the end of the fixed
period, the variable rate will be determined by the margin and the pre-specified caps of the ARM.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Constant Prepayment Rate is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the
remaining principal is prepaid each month or year. Specifically, the constant prepayment rate is an annualized version of the prior three month prepayment rate. Securities with no prepayment history are excluded from this calculation.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We also held $20.5 million of CLOs as of December 31, 2010. The CLOs include non-investment grade and
unrated tranches that we acquired in the secondary market and selected primary issuances. Currently all of our investments in this asset class are in CLOs collateralized primarily by corporate leveraged loans and to a lesser extent by corporate debt
securities, some of which are non-investment grade. Most of the corporate leveraged loans and corporate debt securities that collateralize the CLOs in which we have invested have an explicit rating from one or more nationally recognized statistical
rating agencies. The majority of these leveraged loans and corporate debt securities are considered non-investment grade due to their rating of between Ba1 and B3 by Moodys Investors Services, Inc., or Moodys, and between BB+
and B- by Standard & Poors Ratings Service, or Standard & Poors. We have not leveraged, nor do we intend to leverage our investments in CLOs.



6



---

##### Table of Contents

Our current investment guidelines require that we seek to dispose of our CLOs at reasonable
prices. We are not required, however, to sell these securities. We continue to monitor the market for selling the remaining portion of our CLOs. We disposed of our structured notes during 2010.

Our Manager

We are currently managed and advised by our Manager, which is a joint venture formed in January 2006 between The Cypress Group, or Cypress, and Sharpridge Capital Management, LP, or Sharpridge. All of our
executive officers are employees of Sharpridge. Our Manager is responsible for our operations and the performance of all services and activities relating to the management of our assets and operations pursuant to a management agreement with us. Our
Manager has entered into sub-advisory agreements with Sharpridge and Cypress, pursuant to which they provide certain advisory services to our Manager in conjunction with our Managers service to us.

Sharpridge Capital Management, L.P.

Sharpridge was founded in January 2005 by Kevin E. Grant, our chief executive officer and president, and the chairman of the board of directors. Mr. Grant is the sole member of the general partner of
Sharpridge. Sharpridge owns an interest in and serves as the primary sub-advisor to our Manager, overseeing all of our day-to-day operations and actively managing our investment portfolio. As of January 31, 2010, Sharpridge had 11 employees. As
of December 31, 2010, Sharpridge had approximately $6,331.0 million of total portfolio assets under management, all of which consisted of our assets.

Prior to founding Sharpridge, Mr. Grant was a senior portfolio manager and a member of the Aggregate Bond Team at Fidelity Investments (Fidelity), with direct responsibility for over $25
billion of fixed income assets across 19 separate accounts. At Fidelity, Mr. Grant invested in many types of fixed income investments, ranging from government bonds to below investment grade corporate securities. Over the course of his career
at Fidelity, Mr. Grant had responsibility for managing fixed income funds including Fidelitys Mortgage Securities Fund, Investment Grade Bond Fund, Intermediate Bond Fund, Total Bond Fund and Advisor Mortgage Securities Fund. In addition,
Mr. Grant had responsibility for the fixed income component of certain Fidelity balanced funds, including the Strategic Income Fund, Puritan Fund and Fidelity Balanced Fund. Mr. Grant also managed separate accounts for pension plan
sponsors, insurance companies and other institutional clients.

The Cypress Group

Cypress, founded in 1994, owns an interest in and serves as a sub-advisor to our Manager. Cypress is a financial sponsor of leveraged
buyouts and other private equity transactions for growth-oriented, middle-market companies. Cypress is organized by industry sector, focusing on the financial services, healthcare, consumer, general industrial, automotive, aerospace, media and
leisure industries. Since 1989, Cypress professionals have invested over $4 billion of equity capital in 32 separate investments with an aggregate transaction value of over $22 billion. Cypress professionals have led private equity investments in
companies including Affinia Group Inc., Catlin Group Limited, Cinemark USA, Inc., Communications & Power Industries, Inc., Cooper-Standard Automotive Inc., Financial Guaranty Insurance Corporation, Illinois Central Corporation, Infinity
Broadcasting Corporation, K&F Industries, Inc., Lear Corporation, Loral Corporation, The Meow Mix Company, Montpelier Re Holdings, Ltd., Parisian, Inc., R.P. Scherer Corporation, Scottish Re Group Limited, WESCO International, Inc. and Williams
Scotsman, Inc. As of January 31, 2010, Cypress had 6 employees.

The Management Agreement

We are currently a party to a management agreement with our Manager. Pursuant to the management agreement, our Manager is entitled to
receive a base management fee, and, in certain circumstances, a termination fee and reimbursement of certain expenses. Such fees and expenses do not have fixed and determinable payments.



7



---

##### Table of Contents

The base management fee under our management agreement is payable monthly in arrears in an
amount equal to 1/12th of (a) 1.50% of the first $250,000,000 of our net assets, (b) 1.25% of our net assets that are greater than $250,000,000 and less than or equal to $500,000,000, and (c) 1.00% of our net assets that are greater
than $500,000,000. Our Manager uses the proceeds from its management fee in part to pay compensation to its officers and employees who, notwithstanding that certain of them also are our officers, receive no cash compensation directly from us.
Pursuant to the management agreement, our Manager is also entitled to receive, in certain circumstances, a termination fee and reimbursement of certain expenses. These fees and expenses do not have fixed and determinable payments.

Internalization Plans

As we have raised additional capital since our IPO, our board of directors and management have reviewed and analyzed, and intends to continue to review and analyze, the potential internalization of our
management structure with the goal of realizing economies of scale for our operating expenses, more effectively meeting our management and administrative needs and further aligning the interests of those individuals responsible for executing our
strategy with the interests of our stockholders. We refer to these potential structural changes as an internalization transaction. If our board of directors determines that an internalization transaction is in the best interests of our stockholders,
then we expect that we would proceed with such a transaction. We believe that an internalization transaction would likely be time consuming and complex. We cannot assure you that we will be able to complete an internalization transaction, or when or
on what terms it may be completed. Currently, we continue to maintain our relationship with our Manager and its sub-advisors.

Competition

Our success depends, in large part, on our ability to acquire assets at favorable spreads over our borrowing costs. In acquiring agency securities, we compete with mortgage REITs, mortgage finance and
specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, other lenders, governmental bodies and other entities. Our competitors, as
well as additional competitors which may emerge in the future, may increase the competition for the acquisition of Agency RMBS, which in turn may result in higher prices and lower yields on assets.

Employees

We do not have any employees. We are managed by our Manager pursuant to the management agreement between our Manager and us. All of our executive officers are employees of Sharpridge. As of
January 31, 2011, affiliates of our Manager had 17 employees.

Risk Management

Our board of directors exercises its oversight of risk management in many ways, including through its Risk Management Committee. The Risk
Management Committee was established to oversee our senior managements and our Managers risk-related responsibilities, including reviewing management policies and performance against these policies and related benchmarks.

As part of our risk management process, our Manager seeks to actively manage the interest rate, liquidity, prepayment and counterparty
risks associated with our Agency RMBS portfolio. Our Manager seeks to mitigate our interest rate risk exposure by entering into various hedging instruments in order to minimize our exposure to potential interest rate mismatches between the interest
we earn on our investments and our borrowing costs.

Our Manager seeks to mitigate our liquidity risks by monitoring our
liquidity position on a daily basis and maintaining a prudent level of leverage, which we currently consider to be between 6 and 10 times the amount of net assets in our overall portfolio, based on current market conditions and various other
factors, including the



8



---

##### Table of Contents

health of the financial institutions that lend to us under our repurchase agreements and the presence of special liquidity programs provided by domestic and foreign central banks.

Our Manager seeks to mitigate our prepayment risk by investing in Agency RMBS with (i) a variety of prepayment characteristics,
(ii) prepayment prohibitions and penalties and (iii) prepayment protections, as well as by balancing Agency RMBS purchased at a premium with Agency RMBS purchased at a discount.

Our Manager seeks to mitigate our counterparty risk by (i) diversifying our exposure across a broad number of counterparties
(ii) limiting our exposure to any one counterparty and (iii) monitoring the financial stability of our counterparties.

Additional Information

We have made available copies of the
charters of the committees of our board of directors, our code of business ethics and conduct, which includes our whistleblower policy, our corporate governance guidelines, and any materials we file with the SEC on our website at
www.cysinv.com. All filings we make with the SEC are also available on our website. Information on our website is not part of this Annual Report on Form 10-K.

All reports filed with the SEC may also be read and copied at the SECs public reference room at 100 F Street, N.E., Washington, D.C. 20549. Further information regarding the operation of the public
reference room may be obtained by calling 1-800-SEC-0330. In addition, all of our reports filed with the SEC can be obtained at the SECs website at www.sec.gov.



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

Investment in our common stock involves significant risks. If any of the risks discussed in this report occur, our business, financial
condition, liquidity and results of operations could be materially and adversely affected. The risk factors set forth below are not the only risks that may affect us. Some statements in this report, including statements in the following risk
factors, constitute forward-looking statements. Please refer to the section entitled Forward-Looking Statements.

Risks Related To Our Business

Increases in interest rates and
adverse market conditions may negatively affect the value of our investments and increase the cost of our borrowings, which could result in reduced earnings or losses and reduced cash available for distribution to our stockholders.

We invest indirectly in mortgage loans by purchasing Agency RMBS. Under a normal yield curve, an investment in Agency RMBS will decline in
value if long term interest rates increase. In addition, net interest income could decrease under an inverted or flat yield curve. Despite Fannie Mae, Freddie Mac or Ginnie Mae guarantees of the principal and interest payments related to the Agency
RMBS we own, those guarantees do not protect us from declines in market value caused by changes in interest rates. Declines in the market value of our investments may ultimately result in losses to us, which may reduce earnings and negatively affect
cash available for distribution to our stockholders.

A significant risk associated with our investment in Agency RMBS is the
risk that both long term and short term interest rates will increase significantly. If long term rates were to increase significantly, the market value of our Agency RMBS would decline and the duration and weighted average life of the investments
would increase. We could realize a loss if the securities were sold. At the same time, an increase in short term interest rates would increase the amount of interest owed on our repurchase agreements used to finance the purchase of Agency RMBS,
which would decrease cash available for distribution to our stockholders.



9



---

##### Table of Contents

Market values of our investments may decline without any general increase in interest rates
for a number of reasons, such as increases in defaults, increases in voluntary prepayments for those investments that we have that are subject to prepayment risk, and widening of credit spreads. If the market values of our investments were to
decline for any reason, the value of your investment could also decline.

We leverage our portfolio investments in Agency
RMBS, which may adversely affect our return on our investments and may reduce cash available for distribution to our stockholders.

We leverage our portfolio investments in Agency RMBS through borrowings under repurchase agreements. Leverage can enhance our potential returns but can also exacerbate losses. The percentage of leverage
will vary depending on our ability to obtain these financing facilities and the lenders and rating agencies estimate of the stability of the portfolio investments cash flow. As of December 31, 2010, our portfolio was leveraged
(as measured by total liabilities to net assets) approximately 8.3 to 1. Our return on our investments and cash available for distribution to our stockholders may be reduced if market conditions cause the cost of our financing to increase relative
to the income that can be derived from the assets acquired, which could adversely affect the price of our common stock. In addition, our debt service payments will reduce cash flow available for distributions to stockholders. We may not be able to
meet our debt service obligations. To the extent that we cannot meet our debt service obligations, we risk the loss of some or all of our assets to foreclosure or sale to satisfy our debt obligations.

Our lenders may require us to provide additional collateral, especially when the market values for our investments decline, which may
restrict us from leveraging our assets as fully as desired, and reduce our liquidity, earnings and cash available for distribution to our stockholders.

We currently use repurchase agreements to finance our investments in Agency RMBS. Our repurchase agreements allow the lenders, to varying degrees, to determine a new market value of the collateral to
reflect current market conditions. If the market value of the securities pledged or sold by us to a funding source declines in value, we may be required by the lender to provide additional collateral or pay down a portion of the funds advanced on
minimal notice, which is known as a margin call. Posting additional collateral will reduce our liquidity and limit our ability to leverage our assets, which could adversely affect our business. Additionally, in order to satisfy a margin call, we may
be required to liquidate assets at a disadvantageous time, which could cause us to incur further losses and adversely affect our results of operations and financial condition, and may impair our ability to maintain our current level of distributions
to our stockholders. We receive margin calls from our repurchase agreement counterparties from time to time in the ordinary course of business similar to other entities in the specialty finance business. As of December 31, 2010, we had
approximately $423.4 million in Agency RMBS, U.S. Treasury securities, cash and cash equivalents available to satisfy future margin calls. In the event we do not have sufficient liquidity to satisfy these margin calls, lending institutions can
accelerate our indebtedness, increase our borrowing rates, liquidate our collateral and terminate our ability to borrow. Such a situation would likely result in a rapid deterioration of our financial condition and possibly necessitate a filing for
protection under the U.S. Bankruptcy Code.

Hedging against interest rate exposure may not completely insulate us from
interest rate risk and may adversely affect our earnings, which could adversely affect cash available for distributions to our stockholders.

Subject to compliance with the requirements to qualify as a REIT, we engage in certain hedging transactions to limit our exposure to changes in interest rates and therefore may expose ourselves to risks
associated with such transactions. We may utilize instruments such as interest rate swaps, caps, collars and floors and Eurodollar and U.S. Treasury futures to seek to hedge the interest rate risk associated with our portfolio. Hedging against a
decline in the values of our portfolio positions does not eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of such positions decline. However, we may establish other hedging positions designed
to gain from those same developments, thereby offsetting the decline in the value of such



10



---

##### Table of Contents

portfolio positions. Such hedging transactions may also limit the opportunity for gain if the values of the portfolio positions should increase. Moreover, it may not be possible to hedge against
an interest rate fluctuation that is so generally anticipated that we are not able to enter into a hedging transaction at an acceptable price.

The success of our hedging transactions depends on our Managers ability to accurately predict movements of interest rates and credit spreads. Therefore, while we may enter into such transactions to
seek to reduce interest rate risks, unanticipated changes in interest rates may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price
movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged may vary. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and
the portfolio holdings being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss.

We currently hedge against interest rate risk. Our hedging activity varies in scope based on the level and volatility of interest rates, the type of portfolio investments held, and other changing market
conditions. Interest rate hedging may fail to protect or could adversely affect us because, among other things:



| |  |  | interest rate hedging can be expensive, particularly during periods of volatile interest rates;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | available interest rate hedging may not correspond directly with the interest rate risk for which protection is sought;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | the duration of the hedge may not match the duration of the related liability;
| | - |  | ------------------------------------------------------------------------------



| |  |  | the credit quality of the hedging counterparty may be downgraded to such an extent that it impairs our ability to sell or assign our side of the
hedging transaction; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the counterparty in the hedging transaction may default on its obligation to pay.
| | - |  | ---------------------------------------------------------------------------------

Our interest rate hedging activity may adversely affect our earnings, which could adversely affect cash available for distribution to our
stockholders and negatively impact our stock price.

The federal conservatorship of Fannie Mae and Freddie Mac and related
efforts, along with any changes in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and the U.S. Government, may adversely affect our business.

The payments we receive on the Agency RMBS in which we invest depend upon a steady stream of payments on the mortgages underlying the
securities and are guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac. Ginnie Mae is part of a U.S. Government agency and its guarantees are backed by the full faith and credit of the United States. Fannie Mae and Freddie Mac are U.S.
Government-sponsored entities, or GSEs, but their guarantees are not backed by the full faith and credit of the United States.

Since 2007, Fannie Mae and Freddie Mac have reported substantial losses and a need for substantial amounts of additional capital. In
response to the deteriorating financial condition of Fannie Mae and Freddie Mac and the recent credit market disruption, Congress and the U.S. Treasury undertook a series of actions to stabilize these GSEs and the financial markets, generally. The
Housing and Economic Recovery Act of 2008 was signed into law on July 30, 2008, and established the Federal Housing Finance Agency, or FHFA, with enhanced regulatory authority over, among other things, the business activities of Fannie Mae and
Freddie Mac and the size of their portfolio holdings. On September 7, 2008, in response to the deterioration in the financial condition of Fannie Mae and Freddie Mac, the FHFA placed Fannie Mae and Freddie Mac into conservatorship, which is a
statutory process pursuant to which the FHFA will operate Fannie Mae and Freddie Mac as conservator in an effort to stabilize the entities, and together with the U.S. Treasury and the U.S. Federal Reserve, has undertaken actions designed to boost
investor confidence in Fannie Mae and Freddie Mac, support the availability of mortgage financing and protect taxpayers. Appointing FHFA as conservator of both Fannie Mae and



11



---

##### Table of Contents

Freddie Mac allows the FHFA to control the actions of the two GSEs without forcing them to liquidate, which would be the case under receivership. In addition, the U.S. Treasury has taken
steps to capitalize and provide financing to Fannie Mae and Freddie Mac and agreed to purchase direct obligations and Agency RMBS issued or guaranteed by Fannie Mae or Freddie Mac.

Shortly after Fannie Mae and Freddie Mac were placed in federal conservatorship, the Secretary of the U.S. Treasury, in announcing the
actions, noted that the guarantee structure of Fannie Mae and Freddie Mac required examination and that changes in the structures of the entities were necessary to reduce risk to the financial system. The future roles of Fannie Mae and Freddie Mac
could be significantly reduced and the nature of their guarantees could be eliminated or considerably limited relative to historical measurements. Any changes to the nature of the guarantees provided by Fannie Mae and Freddie Mac could redefine what
constitutes Agency RMBS and could have broad adverse market implications as well as negatively impact us.

The problems faced
by Fannie Mae and Freddie Mac resulting in their being placed into federal conservatorship have stirred debate among some federal policy makers regarding the continued role of the U.S. Government in providing liquidity for the residential mortgage
market. Following expiration of the current authorization, each of Fannie Mae and Freddie Mac could be dissolved and the U.S. Government could decide to stop providing liquidity support of any kind to the mortgage market. If Fannie Mae or Freddie
Mac were eliminated, or their structures were to change radically, we would not be able to acquire Agency RMBS from these companies, which would drastically reduce the amount and type of Agency RMBS available for investment, which are our primary
investments. As of December 31, 2010, 99.7% of our investments had the principal and interest guaranteed by either Fannie Mae, Freddie Mac or Ginnie Mae.

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

As indicated above, recent legislation has changed the relationship between Fannie
Mae and Freddie Mac and the U.S. Government and requires Fannie Mae and Freddie Mac to reduce the amount of mortgage loans they own or for which they provide guarantees on Agency RMBS. The effect of the actions taken by the U.S. Government remains
uncertain. Furthermore, the scope and nature of the actions that the U.S. Government will ultimately undertake are unknown and will continue to evolve. Future legislation could further change the relationship between Fannie Mae and Freddie Mac and
the U.S. Government, and could also nationalize or eliminate these GSEs entirely. Any law affecting these GSEs may create market uncertainty and have the effect of reducing the actual or perceived credit quality of securities issued or guaranteed by
Fannie Mae or Freddie Mac. As a result, such laws could increase the risk of loss on investments in Fannie Mae and/or Freddie Mac Agency RMBS. It is also possible that such laws could adversely impact the market for such securities and spreads at
which they trade. All of the foregoing could materially adversely affect the pricing, supply, liquidity and value of our target assets and otherwise materially adversely affect our business, operations and financial condition.

Mortgage loan modification programs and future legislative action may adversely affect the value of, and the returns on, the Agency
RMBS in which we invest.

During the second half of 2008, the U.S. Government, through the Federal Housing Authority, or
FHA, and the Federal Deposit Insurance Corporation, or FDIC, commenced implementation of programs designed to provide homeowners with assistance in avoiding residential mortgage loan foreclosures. One such program is the Hope for Homeowners program,
which is effective from October 1, 2008 through September 30, 2011 and will



12



---

##### Table of Contents

enable certain distressed borrowers to refinance their mortgages into FHA-insured loans. The programs may involve, among other things, the modification of mortgage loans to reduce the principal
amount of the loans or the rate of interest payable on the loans, or to extend the payment terms of the loans.

In addition,
in February 2009 the U.S. Treasury announced the Homeowner Affordability and Stability Plan, or HASP, which is a multi-faceted plan, intended to prevent residential mortgage foreclosures by, among other things:



| |  |  | allowing certain homeowners whose homes are encumbered by Fannie Mae or Freddie Mac conforming mortgages to refinance those mortgages into lower
interest rate mortgages with either Fannie Mae or Freddie Mac;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | creating the Homeowner Stability Initiative, which is intended to utilize various incentives for banks and mortgage servicers to modify residential
mortgage loans with the goal of reducing monthly mortgage principal and interest payments for certain qualified homeowners; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | allowing judicial modifications of Fannie Mae and Freddie Mac conforming residential mortgage loans during bankruptcy proceedings.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------

It is likely that loan modifications would result in increased prepayments on some Agency RMBS.
SeePrepayment rates could negatively affect the value of our Agency RMBS, which could result in reduced earnings or losses and negatively affect the cash available for distribution to our stockholders, for information relating to
the impact of prepayments on our business.

These loan modification programs, as well as future legislative or regulatory
actions, including amendments to the bankruptcy laws, that result in the modification of outstanding mortgage loans may adversely affect the value of, and the returns on, the Agency RMBS in which we invest.

Prepayment rates could negatively affect the value of our Agency RMBS, which could result in reduced earnings or losses and negatively
affect the cash available for distribution to our stockholders.

In the case of residential mortgage loans, there are
seldom any restrictions on borrowers abilities to prepay their loans. Homeowners tend to prepay mortgage loans faster when applicable mortgage interest rates decline. Consequently, owners of the loans have to reinvest the money received from
the prepayments at the lower prevailing interest rates. Conversely, homeowners tend not to prepay mortgage loans when mortgage interest rates remain steady or increase. Consequently, owners of the loans are unable to reinvest money that would have
otherwise been received from prepayments at the higher prevailing interest rates. This volatility in prepayment rates may affect our ability to maintain targeted amounts of leverage on our Agency RMBS portfolio and may result in reduced earnings or
losses for us and negatively affect the cash available for distribution to our stockholders.

The Hope for Homeowners program,
which is effective from October 1, 2008 through September 30, 2011, and HASP, which was announced in February 2009, will enable certain distressed borrowers to refinance their mortgages, which could increase prepayments on the mortgages
backing our Agency RMBS.

Despite Fannie Mae, Freddie Mac or Ginnie Mae guarantees of principal and interest related to the
Agency RMBS we own, those guarantees do not protect investors against prepayment risks.

Our portfolio investments are
recorded at fair value based on market quotations from pricing services and broker/dealers. The value of our common stock could be adversely affected if our determinations regarding the fair value of these investments were materially higher than the
values that we ultimately realize upon their disposal.

All of our current portfolio investments are, and some of our
future portfolio investments will be, in the form of securities that are not publicly traded. The fair value of securities and other investments that are not



13



---

##### Table of Contents

publicly traded may not be readily determinable. We currently value and will continue to value these investments monthly at fair value as determined in good faith by our Manager based on market
quotations from pricing services and brokers/dealers. Because such quotations and valuations are inherently uncertain, they may fluctuate over short periods of time and may be based on estimates, and our determinations of fair value may differ
materially from the values that would have been used if a public market for these securities existed. The value of our common stock could be adversely affected if our determinations regarding the fair value of these investments were materially
higher than the values that we ultimately realize upon their disposal.

Our delayed delivery transactions, including
to-be-announced transactions, or TBAs, subject us to certain risks, including price risks and counterparty risks.

We purchase a substantial portion of our Agency RMBS through delayed delivery transactions, including TBAs. In a delayed delivery transaction, we enter into a forward purchase agreement with a
counterparty to purchase either (i) an identified Agency RMBS, or (ii) a to-be-issued (or to-be-announced) Agency RMBS with certain terms. As with any forward purchase contract, the value of the underlying Agency RMBS may
decrease between the contract date and the settlement date. Furthermore, a transaction counterparty may fail to deliver the underlying Agency RMBS at the settlement date. If any of the above risks were to occur, our financial condition and results
of operations may be materially adversely affected.

An increase in our borrowing costs relative to the interest we receive
on our assets may impair our profitability and thus our cash available for distributions to our stockholders.

As our
repurchase agreements and other short term borrowings mature, we must either enter into new borrowings or liquidate certain of our investments at times when we might not otherwise choose to do so. Lenders may seek to use a maturity date as an
opportune time to demand additional terms or increased collateral requirements that could be adverse to us and harm our operations. An increase in short term interest rates when we seek new borrowings would reduce the spread between our returns on
our assets and the cost of our borrowings. This would reduce the returns on our assets which might reduce earnings and in turn cash available for distributions to our stockholders. We generally expect that the interest rates tied to our borrowings
will adjust more rapidly than the interest rates tied to the assets in which we invest.

If the lending institution under
one or more of our repurchase agreements defaults on its obligation to resell the underlying security back to us at the end of the agreement term, we will lose money on our repurchase transactions.

When we engage in a repurchase transaction, we will initially sell securities to the transaction counterparty under a master repurchase
agreement in exchange for cash from the counterparty. The counterparty is obligated to resell the same securities back to us at the end of the term of the repurchase agreement, which typically is 30 to 90 days, but which may be up to one year. If
the counterparty in a repurchase transaction defaults on its obligation to resell the securities back to us we will incur a loss on the transaction equal to the amount of the haircut (assuming no change in the value of the securities). Losses
incurred on our repurchase transactions would adversely affect our earnings and our cash available for distribution to our stockholders.

If we default on our obligations under our repurchase agreements, we may be unable to establish a suitable replacement facility on acceptable terms or at all.

If we default on one of our obligations under a repurchase agreement, the counterparty may terminate the agreement and cease entering into
any other repurchase agreements with us. In that case, we would likely need to establish a replacement repurchase facility with another financial institution in order to continue to leverage our investment portfolio and carry out our investment
strategy. We may be unable to establish a suitable replacement repurchase facility on acceptable terms or at all.



14



---

##### Table of Contents

Our repurchase agreements may give our lenders greater rights in the event that we file
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 if 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 under a repurchase agreement in the event that a lender party to such an agreement files for bankruptcy. Thus, the use of
repurchase agreements exposes our pledged assets to increased risk in the event we or any of our lenders files for bankruptcy.

Failure to procure adequate funding and capital would adversely affect our results and may, in turn, negatively affect the value of
our common stock and our ability to distribute dividends to our stockholders.

We depend upon the availability of adequate
funding and capital for our operations. To maintain our status as a REIT, we are required to distribute at least 90% of our REIT taxable income annually, determined without regard to the deduction for dividends paid and excluding net capital gain,
to our stockholders and therefore are not able to retain our earnings for new investments. We cannot assure you that any, or sufficient, funding or capital will be available to us in the future on terms that are acceptable to us. In the event that
we cannot obtain sufficient funding and capital on acceptable terms, there may be a negative impact on the value of our common stock and our ability to make distributions to our stockholders, and you may lose part or all of your investment.

We operate in a highly competitive market for investment opportunities.

A number of entities compete with us to make the types of investments that we make. We compete with other REITs, financial companies,
public and private funds, commercial and investment banks and commercial finance companies. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. Several other REITs
have recently raised, or are expected to raise, significant amounts of capital, and may have investment objectives that overlap with ours, which may create competition for investment opportunities. Some competitors may have a lower cost of funds and
access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more
relationships than us. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations. Also, as a result of this competition, we may not be able to
take advantage of attractive investment opportunities from time to time, and we can offer no assurance that we will be able to identify and make investments that are consistent with our investment objectives.

Our financial condition and results of operations will depend on our ability to manage future growth effectively.

Our ability to achieve our investment objectives will depend on our ability to grow, which will depend, in turn, on our Managers
ability to identify and invest in securities that meet our investment criteria. Accomplishing this result on a cost-effective basis largely will be a function of our Managers structuring and implementation of the investment process, its
ability to provide competent, attentive and efficient services to us and our access to financing on acceptable terms. The senior management team of our Manager has substantial responsibilities under the management agreement. In order to grow, our
Manager, or its sub-advisors, needs to hire, train, supervise and manage new employees successfully. However, we can offer no assurance that any of those employees will contribute to the work of our Manager. Any failure to manage our future growth
effectively could have a material adverse effect on our business, financial condition and results of operations.



15



---

##### Table of Contents

We may change our investment strategy and asset allocation without notice or stockholder
consent, which may result in riskier investments.

Our board of directors has the authority to change our investment
strategy or asset allocation at any time without notice to or consent from our stockholders. In 2008, our board of directors amended our investment guidelines to require that we invest exclusively in Agency RMBS. In 2010, our board of directors
modified our investment guidelines to permit investments in CMOs. To the extent that our investment strategy changes in the future, we may make investments that are different from, and possibly riskier than, the investments described in this annual
report on Form 10-K. A change in our investment strategy may increase our exposure to interest rate and real estate market fluctuations. Furthermore, a change in our asset allocation could result in our allocating assets in a different manner than
as described in this annual report on Form 10-K.

Hedging instruments often are not traded on regulated exchanges,
guaranteed by an exchange or a clearing house, or regulated by any U.S. or foreign governmental authorities and involve risks and costs.

The cost of using hedging instruments increases as the period covered by the instrument increases and during periods of rising and volatile interest rates. We may increase our hedging activity and thus
increase our hedging costs during periods when interest rates are volatile or rising and hedging costs have increased.

In
addition, hedging instruments involve risk since they often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities. Consequently, there are no requirements
with respect to record keeping, financial responsibility or segregation of customer funds and positions. Furthermore, the enforceability of agreements underlying derivative transactions may depend on compliance with applicable statutory and
commodity and other regulatory requirements and, depending on the identity of the counterparty, applicable international requirements. The business failure of a hedging counterparty with whom we enter into a hedging transaction most likely will
result in a default. Default by a party with whom we enter into a hedging transaction may result in the loss of unrealized profits and force us to cover our resale commitments, if any, at the then current market price. In addition, we may not always
be able to dispose of or close out a hedging position without the consent of the hedging counterparty, and we may not be able to enter into an offsetting contract to cover our risk. We cannot assure you that a liquid secondary market will exist for
hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in losses.

We may enter into derivative contracts that could expose us to unexpected economic losses in the future.

Swaps, caps and certain options and other custom instruments are subject to the risk of non-performance by the counterparty, including risks relating to the creditworthiness of the counterparty. In
addition, we also are subject to the risk of the failure of any of the exchanges or clearing houses on which we trade. Subject to maintaining our qualification as a REIT, we may enter into interest rate swaps and caps. Swap and cap agreements can be
individually negotiated and structured to include exposure to a variety of different types of investments or market factors. Depending on their structure, swap and cap agreements may increase or decrease exposure to long term or short term interest
rates (in the United States or abroad), foreign currency values, mortgage securities, corporate borrowing rates, or other factors such as security prices, baskets of equity securities, or inflation rates. Swap agreements can take many different
forms and are known by a variety of names. We are not precluded from any particular form of swap or option agreement if our Manager determines it is consistent with our investment objectives and policies.

Swap and cap agreements tend to shift investment exposure from one type of investment to another. Depending on how they are used, swap
and cap agreements may increase or decrease the overall volatility of our portfolio. The most significant factor in the performance of swap agreements is the change in the specific interest rate, currency, individual equity values or other factors
that determine the amounts of payments due to and from us. If a swap agreement calls for payments or collateral transfers by us, we must be prepared to make such



16



---

##### Table of Contents

payments and transfers when due. Additionally, if a counterpartys creditworthiness declines, the value of swap agreements with the counterparty can be expected to decline, potentially
resulting in losses by us.

The U.S. Commodity Futures Trading Commission and certain commodity exchanges have established
limits referred to as speculative position limits or position limits on the maximum net long or net short position that any person or group of persons may hold or control in particular futures and options. Limits on trading in options contracts also
have been established by the various options exchanges. It is possible that trading decisions may have to be modified and that positions held may have to be liquidated to avoid exceeding such limits. Such modification or liquidation, if required,
could adversely affect our operations and profitability.

Part of our investment strategy involves entering into derivative
contracts that could require us to fund cash payments in the future under certain circumstances, such as the early termination of the derivative agreement caused by any event of default or other early termination event, or the decision by a
counterparty to request margin securities it is contractually owed under the terms of the derivative contract. The amount due would be equal to the unrealized loss of the open derivative positions with the respective counterparty and could also
include other fees and charges. These potential payments will be contingent liabilities and therefore may not appear on our balance sheet. The economic losses will be reflected in our financial results of operations, and our ability to fund these
obligations will depend on the liquidity of our assets and access to capital at the time. The need to fund these obligations could adversely impact our financial condition.

Loss of our exemption from regulation under the Investment Company Act would negatively affect the value of shares of our common stock and our ability to distribute cash to our stockholders.

We have operated and intend to continue to operate our business so as to be exempt from registration under the Investment
Company Act because we are primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate. Specifically, we invest and intend to continue to invest so that at least 55% of
the assets that we own on an unconsolidated basis consist of qualifying mortgages and other liens and interests in real estate, which are collectively referred to as qualifying real estate assets, and so that at least 80% of the assets
we own on an unconsolidated basis consist of real estate related assets (including our qualifying real estate assets). We treat Fannie Mae, Freddie Mac and Ginnie Mae whole-pool residential mortgage pass-through securities issued with respect to an
underlying pool of mortgage loans in which we hold all of the certificates issued by the pool as qualifying real estate assets. Although CMOs are real estate related assets, they are not qualifying real estate assets for purposes of the
Investment Company Act.

If we fail to qualify for this exemption, we could be required to restructure our activities in a
manner that, or at a time when, we would not otherwise choose to do so, which could negatively affect the value of shares of our common stock and our ability to make distributions to our stockholders. For example, if the market value of our
investments in CLOs, which are not qualifying real estate assets or real estate related assets were to increase by an amount that resulted in less than 80% of our assets being invested in whole-pool Agency RMBS, we might have to sell CLOs in order
to maintain our exemption from the Investment Company Act. Also, if the market value of our investments in CMOs, which are not qualifying real estate assets, were to increase by an amount that resulted in less than 55% of our assets being invested
in whole-pool Agency RMBS, we might have to sell CMOs in order to maintain our exemption from the Investment Company Act. These sales could occur during adverse market conditions, and we could be forced to accept a price below that which we believe
is acceptable.

We are highly dependent on communications and information systems operated by third parties, and systems
failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to pay distributions to our stockholders.

Our business is highly dependent on communications and information systems that allow us to monitor, value, buy, sell, finance and hedge
our investments. These systems are operated by third parties and, as a result, we have limited ability to ensure their continued operation. In the event of systems failure or interruption, we will



17



---

##### Table of Contents

have limited ability to affect the timing and success of systems restoration. Any failure or interruption of our systems could cause delays or other problems in our securities trading activities,
including Agency RMBS trading activities, which could have a material adverse effect on our operating results and negatively affect the market price of our common stock and our ability to make distributions to our stockholders.

CMOs may be subject to greater risks than whole-pool Agency RMBS.

In March 2010, our board of directors amended our investment guidelines to allow us to invest in CMOs. CMOs are securitizations issued by
a government agency or a government sponsored entity that are collateralized by Agency RMBS that are divided into various tranches that have different characteristics (such as different maturities or different coupon payments), and, therefore, may
carry greater risk than an investment in whole-pool Agency RMBS. For example, certain CMO tranches, such as interest-only securities, principal-only securities, support securities and securities purchased at a significant premium, are more sensitive
to prepayment risks than other tranches or whole-pool Agency RMBS. In addition, the yield on floating rate and inverse floating rate tranches are sensitive to changes in the interest rate index used to calculate the coupon on such classes. If we
were to invest in CMO tranches that were more sensitive to prepayment risks relative to other CMO tranches or whole-pool Agency RMBS, we may increase our portfolio-wide prepayment and interest rate risk.

Our investments in subordinated tranches of CLOs may be subject to losses.

We have invested a small portion of our total assets in lower-rated or non-rated deeply subordinated tranches of CLOs collateralized
primarily by corporate leveraged loans, and to a lesser extent, by corporate debt securities. In general, losses on a loan or other asset included in a securitization will be borne first by equity support, a cash reserve fund or a letter of credit,
if any, and then by the subordinated security holders. In the event of nonpayment on the loan or other asset and the exhaustion of any equity support, reserve fund, letter of credit and any classes of securities junior to those in which we invest,
we will not be able to recover all of our investment in the securities we purchased. In addition, if the underlying asset portfolio has been overvalued by the originator, or if the values subsequently decline and, as a result, less collateral is
available to satisfy payments due on the related CLO, significant losses to us may result. The prices of lower credit quality securities are generally less sensitive to interest rate changes than more highly rated investments, but more sensitive to
adverse economic downturns or individual issuer developments. A projection of an economic downturn, for example, could cause a decline in the price of lower credit quality securities because the ability of obligors of loans underlying the CLO to
make required payments may be impaired. In such event, existing credit support in the securitization structure may be insufficient to protect us against loss of our principal on these securities.

CLOs in which we have invested may not be adequately managed or may not have a liquid market. If this were the case, we could lose a
portion, or potentially all, of our investment in subordinated tranches of CLOs.

Many CLO managers are relatively new to
the securitization business and may not have the systems or processes in place to adequately manage such CLOs. Failure to adequately manage a CLO could result in, among other things, mistimed collateral sales and purchases, purchasing
underperforming collateral, and inadequate cash flow processing, all of which could negatively affect the performance of the CLO. In addition, the market for these securities is relatively new and has been volatile for the last two years due to the
continued adverse developments in the fixed income and credit markets, and we may have difficulty valuing them, financing them or finding a market should we decide to sell them. As a result, we could lose a portion, or potentially all, of our
investment in subordinated tranches of CLOs, which could adversely impact our results of operations, financial condition and business.

The assets collateralizing the CLOs in which we have invested will subject us to specific risks that could adversely affect our operating results and the value of our assets.

The CLOs in which we have invested are collateralized primarily by corporate leveraged loans. These loans are term loans and revolving
loans, pay interest at a fixed or floating rate, are senior or subordinated and secured or unsecured. These loans are illiquid. To the extent that they are non-investment grade, they may also bear risks associated with high-yield bonds.



18



---

##### Table of Contents

The CLOs in which we have invested may acquire interests in corporate leveraged loans either
directly (by way of sale or assignment) or indirectly (by way of participation). The purchaser of an assignment typically succeeds to all the rights and obligations of the assigning institution and becomes a lender under the credit agreement with
respect to the debt obligation; however, its rights can be more restricted than those of the assigning institution. Participation interests in a portion of the debt obligation typically result in a contractual relationship only with the institution
participating out the interest, not with the borrower. In purchasing participations, the CLOs in which we have invested generally have no right to enforce compliance by the borrower with the terms of the credit agreement, or any rights of set-off
against the borrower, and the CLOs in which we have invested do not directly benefit from the collateral supporting the debt obligation in which it has purchased the participation. As a result, the CLOs in which we invest will assume the credit risk
of both the borrower and the institution selling the participation. Default rates on the corporate leveraged loans collateralizing the CLOs in which we have invested increased in 2008, and the respective CLO managers have been unable to seek
adequate recourse, which has resulted in a decrease in the value of and income generated by our CLOs. We could experience increased defaults on the loans in our CLOs in the future.

Our investments in CLOs with over-collateralization requirements may have a negative impact on our cash flow.

The terms of CLOs in which we have invested require that the principal amount of assets must exceed the principal balance of the related
bonds by a certain amount, commonly referred to as over-collateralization. The CLO terms generally provide that, if certain delinquencies and/or losses exceed specified levels, which are established based on the analysis by the rating
agencies (or any financial guaranty insurer) of the characteristics of the assets collateralizing the bonds, our ability to receive net income from the assets collateralizing the obligations may be impaired. We cannot assure you that the
over-collateralization tests will be satisfied.

If we issue debt securities, our operations may be restricted and we will
be exposed to additional risk.

If we decide to issue debt securities in the future, it is likely that such securities will
be governed by an indenture or other instrument containing covenants restricting our operating flexibility. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more
favorable than those of our common stock. We, and indirectly our stockholders, will bear the cost of issuing and servicing such securities. Holders of debt securities may be granted specific rights, including but not limited to, the right to hold a
perfected security interest in certain of our assets, the right to accelerate payments due under the indenture, rights to restrict dividend payments, and rights to approve the sale of assets. Such additional restrictive covenants and operating
restrictions could have a material adverse effect on our operating results and negatively affect the market price of our common stock and our ability to pay distributions to our stockholders.

Risks Related To Our Management and Our Relationship with Our Manager, Cypress and Sharpridge

We are dependent on our Manager and may not find a suitable replacement if our Manager terminates the management agreement.

We have no employees. Our officers are employees of Sharpridge. We are completely reliant on our Manager, which has
significant discretion as to the implementation of our operating policies and strategies. We are subject to the risk that our Manager will terminate the management agreement and that no suitable replacement will be found to manage us. We believe
that our success depends to a significant extent upon the experience of our Managers executive officers, whose continued service is not guaranteed. If our Manager terminates the management agreement, we may not be able to execute our business
plan and may suffer losses, which could materially decrease cash available for distribution to our stockholders.



19



---

##### Table of Contents

We are dependent on certain key personnel of Sharpridge and Cypress for our future
success, and their continued service to us is not guaranteed.

The senior management of our Manager evaluates, negotiates,
structures, closes and monitors our investments. We depend on the diligence, skill, investment expertise and network of business contacts of the senior management of our Manager and its affiliates. For a description of the senior management team,
see Item 10 of this annual report on Form 10-K. Kevin E. Grant is the chief executive officer of our Manager and has extensive experience managing investment portfolios maximizing risk adjusted returns. We are reliant on Mr. Grants
expertise and his ability to select a highly talented team of senior management professionals to evaluate, negotiate, structure, close and monitor our investments. The loss of Mr. Grants services or the services of any of our executive
officers could have a material adverse effect on our performance and our ability to effectively monitor our portfolio of assets, source investment opportunities, make investment decisions, or execute our strategy and achieve our investment
objectives. We also depend, to a significant extent, on our Managers access to the investment professionals and principals of Sharpridge and Cypress and the information and investment sourcing generated by the Sharpridge and Cypress investment
professionals in the course of their investment and portfolio management activities. We are also subject to the risk that Sharpridge and/or Cypress will terminate their respective sub-advisory agreements with our Manager and that no suitable
replacements will be found to advise our Manager. We can offer no assurance that our Manager will remain our Manager or that we will continue to have access to Sharpridges or Cypress principals and investment professionals or their
information and deal flow.

Because our management agreement was negotiated between related parties and due to our
relationship with our Manager, conflicts of interest exist that could result in decisions that are not in the best interests of our stockholders.

We are subject to potential conflicts arising out of our relationship with our Manager and its affiliates. We are entirely dependent on our Manager for our day-to-day management and have no independent
officers. Our chairman, chief executive officer and president, chief financial officer, chief operating officer and secretary also serve as officers of Sharpridge. In addition, certain of our other directors are affiliated with our Manager. As a
result, our management agreement with our Manager was negotiated between related parties and its terms, including fees payable, may not be as favorable to us as if it had been negotiated with an unaffiliated third party.

Although our Manager and its affiliates are not permitted to raise, advise or sponsor a new REIT that invests in domestic mortgage-backed
securities, or MBS, a portfolio company of any private equity fund controlled by Cypress shall not be deemed to be an affiliate or an entity under common control with our Manager. As a result, any such entity could engage in a business directly in
competition with us. If our Manager or its affiliates engages in additional management or investment opportunities that have overlapping objectives with us, our Manager or its affiliates may face conflicts in the allocation of investment
opportunities to these other managed entities or investments. As a result of our available liquidity, our investment policies, REIT requirements and other legal restrictions applicable to us and other relevant considerations, it is possible that we
may not be given the opportunity to participate in certain investments made by existing or future entities affiliated with our Manager. Additionally, the ability of our Manager and its officers and employees to engage in other business activities
may reduce the time our Manager spends managing us. In addition, we may compete, directly or indirectly, with other accounts or pools of capital affiliated or managed by Cypress and/or Sharpridge for access to Cypress and Sharpridges resources
and investment opportunities, which may reduce investment opportunities available to us.

Our investment focus is different
from those of other entities that are or have been managed by Cypress or Sharpridge investment professionals.

Even though
our Manager is an affiliate of Cypress and Sharpridge, our investment focus is different from those of other entities that are or have been managed by Cypress or Sharpridge investment professionals. We can offer no assurance that our Manager will
replicate the historical success of the Managers investment



20



---

##### Table of Contents

professionals in their previous endeavors, and we caution you that our investment returns could be substantially lower than the returns achieved by our Managers investment
professionals previous endeavors.

Our board of directors does not approve each investment decision made by our
Manager.

Our directors periodically review our investment guidelines and our investment portfolio. However, our board of
directors does not review all of our proposed investments. In addition, in conducting periodic reviews, the directors may rely primarily on information provided to them by our Manager. Furthermore, transactions entered into or structured for us by
our Manager may be difficult or impossible to unwind by the time they are reviewed by the directors.

Our base management
fee is payable regardless of our performance.

Our Manager is entitled to receive a base management fee that is based on
the amount of our net assets (as defined in the management agreement), regardless of the performance of our portfolio. Our Managers entitlement to substantial non-performance based compensation might reduce its incentive to devote its time and
effort to seeking profitable opportunities for our portfolio. This in turn could hurt our ability to make distributions to our stockholders and could negatively impact our stock price.

Termination by us of the management agreement with our Manager without cause is difficult and costly.

The initial term of the management agreement expired on December 31, 2008, and it has been automatically renewed each year for a
one-year term currently that will expire on December 31, 2011. Going forward, the management agreement will be automatically renewed for a one-year term each anniversary date thereafter unless notice of non-renewal is given to us by our
Manager. Our independent directors will review our Managers performance annually and the management agreement may be terminated upon the affirmative vote of at least two-thirds of our independent directors, or by a vote of the holders of a
majority of the outstanding shares of our common stock, based upon:



| |  |  | unsatisfactory performance by our Manager that is materially detrimental to us or
| | - |  | ---------------------------------------------------------------------------------



| |  |  | a determination that the management fees payable to our Manager are not fair, subject to our Managers right to prevent such a termination by
accepting a reduction of management fees agreed to by at least two-thirds of our independent directors and our Manager.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We must provide 180 days prior notice of any such termination. Our Manager will be paid a termination fee equal to four times the sum of (a) the average annual base management fee earned by the
Manager during the 24-month period prior to such termination and (b) the average annual incentive compensation earned (notwithstanding that the payment of any such incentive compensation may have been waived) by our Manager during the 24-month
period immediately prior to such termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination. However, we and our Manager have agreed to terminate the management agreement upon the completion
of an internalization transaction without payment of any termination fee to our Manager pursuant to the terms of the management agreement. The current termination fee may make it more difficult for us to terminate the management agreement. These
provisions may increase the effective cost to us of terminating the management agreement, thereby adversely affecting our ability to terminate our Manager without cause.

Our Managers liability is limited under the management agreement, and we have agreed to indemnify our Manager against certain liabilities.

Pursuant to the management agreement, our Manager does not assume any responsibility other than to render the services called for
thereunder and is not responsible for any action of our board of directors in following or declining to follow its advice or recommendations. Our Manager and its sub-advisors, members,



21



---

##### Table of Contents

officers and employees are not liable to us, any subsidiary of ours, our directors, our stockholders or any subsidiarys stockholders for acts performed in accordance with and pursuant to
the management agreement, except by reason of acts constituting bad faith, willful misconduct, gross negligence or reckless disregard of their duties under the management agreement. We have agreed to indemnify our Manager and its sub-advisors,
members, officers, and employees and each person controlling our Manager with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from acts of such indemnified party (i) not constituting bad faith, willful
misconduct, gross negligence or reckless disregard of duties and (ii) performed in good faith in accordance with and pursuant to the management agreement.

Risks Related to Our Organization and Structure

Our charter and
bylaws contain provisions that may inhibit potential acquisition bids that you and other stockholders may consider favorable, and the market price of our common stock may be lower as a result.

Our charter and bylaws contain provisions that may have an anti-takeover effect and inhibit a change in our board of directors. These
provisions include the following:

There are ownership limits and restrictions on transferability and ownership in our
charter.In order to qualify as a REIT for each taxable year after 2006, not more than 50% of the value of our outstanding capital stock may be owned, directly or constructively, by five or fewer individuals (as defined under the Internal
Revenue Code of 1986, as amended (the Internal Revenue Code) to include natural persons and certain entities) during the second half of any calendar year and our shares must be beneficially owned by 100 or more persons during at least
335 days of a taxable year of twelve months or during a proportionate part of a shorter taxable year. To assist us in meeting these requirements, subject to some exceptions, our charter generally prohibits any stockholder from beneficially or
constructively owning more than 9.8% in value or number of shares, whichever is more restrictive, of any class or series of our outstanding capital stock unless an exemption is granted by our board of directors in its sole discretion. For purposes
of this calculation, warrants treated as held by a person will be deemed to have been exercised. However, warrants held by other unrelated persons will not be deemed to have been exercised.

This ownership restriction may:



| |  |  | discourage a tender offer or other transactions or a change in the composition of our board of directors or control that might involve a premium price
for our shares or otherwise be in the best interests of our stockholders; or
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | result in shares issued or transferred in violation of such restriction being automatically transferred to a trust for a charitable beneficiary and
thereby resulting in a forfeiture of such shares.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our charter permits our board of directors to issue
common or preferred stock with terms that may discourage a third party from acquiring us. Our charter permits our board of directors to amend our charter, without approval of our stockholders, to increase the total number of authorized shares of
stock or the number of shares of any class or series, and to cause the issuance of common or preferred stock, having preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications, or terms or
conditions of redemption as determined by our board of directors. Thus, our board of directors could authorize the issuance of common or preferred stock with terms and conditions that could have the effect of discouraging a takeover or other
transaction in which holders of some or a majority of our shares might receive a premium for their shares over the then-prevailing market price of our shares.

Our charter and bylaws contain other possible anti-takeover provisions.Our charter and bylaws contain other provisions that may have the effect of delaying, deferring or preventing a change
in control of us or the removal of existing directors and, as a result, could prevent our stockholders from being paid a premium for their common stock over the then-prevailing market price.



22



---

##### Table of Contents

Certain provisions of Maryland law could inhibit changes in control.

Certain provisions of the Maryland General Corporation Law, or MGCL, may have the effect of inhibiting a third party from making a
proposal to acquire us or impeding a change of control under circumstances that otherwise could provide our stockholders with the opportunity to realize a premium over the then-prevailing market price of our common stock, including:



| |  |  | business combination provisions that, subject to limitations, prohibit certain business combinations between us and an interested
stockholder (defined generally as any person who beneficially owns 10% or more of the voting power of our shares or an affiliate thereof) for five years after the most recent date on which the stockholder becomes an interested stockholder, and
thereafter special stockholder voting requirements on these combinations; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | control share provisions that provide that control shares of our company (defined as shares which, when aggregated with other
shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a control share acquisition (defined as the direct or indirect acquisition of
ownership or control of control shares) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested
shares.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We have elected to opt out of these provisions of the MGCL, in the case of the business combination
provisions of the MGCL, by resolution of our board of directors, and in the case of the control share provisions of the MGCL, pursuant to a provision in our bylaws. However, our board of directors may by resolution elect to repeal the foregoing
opt-outs from the business combination provisions of the MGCL, and we may, by amendment to our bylaws, opt in to the control share provisions of the MGCL in the future.

Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit your recourse in the event of actions not in your best interests.

Our charter limits the liability of our directors and officers to us and our stockholders for money damages, except for
liability resulting from:



| |  |  | actual receipt of an improper benefit or profit in money, property or services; or
| | - |  | ----------------------------------------------------------------------------------



| |  |  | a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the cause of action
adjudicated.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

We have entered into indemnification agreements with our directors and executive officers that
obligate us to indemnify them to the maximum extent permitted by Maryland law. In addition, our charter authorizes our company to obligate itself to indemnify our present and former directors and officers for actions taken by them in those
capacities to the maximum extent permitted by Maryland law. Our bylaws require us, to the maximum extent permitted by Maryland law, to indemnify each present or former director or officer who has been successful in the defense of any proceeding to
which he or she is made, or threatened to be made, a party by reason of his or her service to us. In addition, we may be obligated to fund the defense costs incurred by our directors and officers.

We may be subject to adverse legislative or regulatory changes that could reduce the market price of our common stock.

At any time, laws or regulations, or the administrative interpretations of those laws or regulations, that impact our business and
Maryland corporations may be amended. In addition, the markets for MBS and derivatives, including swaps, have been the subject of intense scrutiny in recent years. We cannot predict when or if any new law, regulation or administrative
interpretation, or any amendment to any existing law, regulation or administrative interpretation, will be adopted or promulgated or will become effective. Additionally, revisions in



23



---

##### Table of Contents

these laws, regulations or administrative interpretations could cause us to change our investments. We could be adversely affected by any such change in, or any new, law, regulation or
administrative interpretation, which could reduce the market price of our common stock.

Tax Risks

Failure to qualify as a REIT would subject us to federal income tax, which could adversely affect the value of the shares of our common
stock and would reduce the cash available for distribution to our stockholders.

We operate in a manner that is intended to
cause us to qualify as a REIT for federal income tax purposes. However, the federal income tax laws governing REITs are complex, and interpretations of the federal income tax laws governing qualification as a REIT are limited. Qualifying as a REIT
requires us to meet various tests regarding the nature of our assets and our income, the ownership of our outstanding stock, and the amount of our distributions on an ongoing basis.

Our ability to satisfy the asset tests depends upon the characterization and fair market values of our assets, some of which are not
susceptible to a precise determination, and for which we will not obtain independent appraisals. Our compliance with the REIT income and quarterly asset requirements also depends upon our ability to successfully manage the composition of our income
and assets on an ongoing basis. Although we intend to operate so that we will qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in
our circumstances, no assurance can be given that we will so qualify for any particular year.

If we fail to qualify as a REIT
in any calendar year, we would be required to pay federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates, and dividends paid to our stockholders would not be deductible by us in
computing our taxable income. Further, if we fail to qualify as a REIT, we might need to borrow money or sell assets in order to pay any resulting tax. Our payment of income tax would decrease the amount of our income available for distribution to
our stockholders. Furthermore, if we fail to maintain our qualification as a REIT, we no longer would be required to distribute substantially all of our REIT taxable income to our stockholders. Unless our failure to qualify as a REIT was subject to
relief under federal tax laws, we could not re-elect to qualify as a REIT until the fifth calendar year following the year in which we failed to qualify.

Our ability to invest in and dispose of to be announced securities could be limited by our REIT status, and we could lose our REIT status as a result of these investments.

We have purchased, and may purchase in the future, Agency RMBS through to-be-announced forward contracts, or TBAs, or dollar
roll transactions. In certain instances, rather than take delivery of the Agency RMBS subject to a TBA, we will dispose of the TBA through a dollar roll transaction in which we agree to purchase similar securities in the future at a predetermined
price or otherwise, which may result in the recognition of income or gains. We account for dollar roll transactions as purchases and sales. The law is unclear regarding whether TBAs will be qualifying assets for the 75% asset test and whether income
and gains from dispositions of TBAs will be qualifying income for the 75% gross income test.

Until such time as we seek and
receive a favorable private letter ruling from the Internal Revenue Service, or the IRS, or we are advised by counsel that TBAs should be treated as qualifying assets for purposes of the 75% asset test, we will limit our investment in TBAs and any
non-qualifying assets to no more than 25% of our assets at the end of any calendar quarter. Further, until such time as we seek and receive a favorable private letter ruling from the IRS or we are advised by counsel that income and gains from the
disposition of TBAs should be treated as qualifying income for purposes of the 75% gross income test, we will limit our gains from dispositions of TBAs and any non-qualifying income to no more than 25% of our gross income for each calendar year.
Accordingly, our ability to purchase Agency RMBS through TBAs and to dispose of TBAs, through dollar roll transactions or otherwise, could be limited.



24



---

##### Table of Contents

Moreover, even if we are advised by counsel that TBAs should be treated as qualifying
assets or that income and gains from dispositions of TBAs should be treated as qualifying income, it is possible that the IRS could successfully take the position that such assets are not qualifying assets and such income is not qualifying income.
In that event, we could be subject to a penalty tax or we could fail to qualify as a REIT if (i) the value of our TBAs, together with our non-qualifying assets for the 75% asset test, exceeded 25% of our gross assets at the end of any calendar
quarter or (ii) our income and gains from the disposition of TBAs, together with our non-qualifying income for the 75% gross income test, exceeded 25% of our gross income for any taxable year.

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

To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our
income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. In order to meet these tests, we may be required to forego attractive business or investment opportunities. Thus,
compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.

Liquidation of assets may jeopardize our REIT qualification.

To qualify as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled to liquidate
our investments to repay obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on any resultant gain if we sell assets that are treated
as dealer property or inventory.

Failure to make required distributions would subject us to tax, which would reduce the
cash available for distribution to our stockholders.

In order to qualify as a REIT, an entity must distribute to its
stockholders, each calendar year, at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain. To the extent that a REIT satisfies the 90% distribution requirement, but
distributes less than 100% of its taxable income, it will be subject to federal corporate income tax on its undistributed income. In addition, a REIT will incur a 4% nondeductible excise tax on the amount, if any, by which its distributions in any
calendar year are less than the sum of:



| |  |  | 85% of its REIT ordinary income for that year;
| | - |  | ----------------------------------------------



| |  |  | 95% of its REIT capital gain net income for that year; and
| | - |  | ----------------------------------------------------------



| |  |  | 100% of its undistributed taxable income from prior years.
| | - |  | ----------------------------------------------------------

We intend to continue to make distributions in the future to our stockholders in a manner intended to satisfy the 90% distribution requirement and to avoid both federal corporate income tax and the 4%
nondeductible excise tax. However, there is no requirement that TRSs distribute their after-tax net income to their parent REIT or their stockholders, and if we utilize a TRS it may determine not to make any distributions to us.

Our taxable income may substantially exceed our net income as determined based on GAAP because, for example, realized capital losses will
be deducted in determining our GAAP net income, but may not be deductible in computing our taxable income. In addition, we may invest in assets that generate taxable income in excess of economic income or in advance of the corresponding cash flow
from the assets, referred to as phantom income. Although some types of phantom income are excluded in determining the 90% distribution requirement, we will incur corporate income tax and the 4% nondeductible excise tax with respect to any phantom
income items if we do not distribute those items on an annual basis. As a result of the foregoing, we may generate less cash flow than taxable income in a particular year. In that event, we may be required to use cash reserves, incur debt or
liquidate non-cash assets at rates or times that we regard as unfavorable in order to satisfy the distribution requirement and to avoid federal corporate income tax and the 4% nondeductible excise tax in that year.



25



---

##### Table of Contents

We may satisfy the 90% distribution test with taxable distributions of our stock or debt
securities. Pursuant to Revenue Procedure 2010-12 (Revenue Procedure), the IRS has indicated that it will treat distributions from certain publicly traded REITs that are paid part in cash and part in stock as dividends that would satisfy
the REITs annual distribution requirements and qualify for the dividends paid deduction for federal income tax purposes. In order to qualify for such treatment, the Revenue Procedure requires that at least 10% of the total distribution be
payable in cash and that each stockholder have a right to elect to receive its entire distribution in cash. If too many stockholders elect to receive cash, each stockholder electing to receive cash must receive a proportionate share of the cash to
be distributed (although no stockholder electing to receive cash may receive less than 10% of such stockholders distribution in cash). This Revenue Procedure applies to distributions declared on or before December 31, 2012 with respect to
taxable years ending on or before December 31, 2011. Although we have no current intention of paying dividends in our own stock, if in the future we choose to pay dividends in our own stock, our stockholders may be required to pay tax in excess
of the cash that they receive.

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

The REIT provisions of the Internal Revenue Code limit our ability to hedge Agency RMBS and related borrowings. Under
these provisions, we must limit our aggregate gross income from non-qualifying hedges, fees, and certain other non-qualifying sources to 5% or less of our annual gross income. As a result, we might in the future have to limit our use of advantageous
hedging techniques or implement those hedges through a domestic TRS. This could increase the cost of our hedging activities, because a domestic TRS would be subject to tax on gains, or leave us exposed to greater risks associated with changes in
interest rates than we would otherwise want to bear.

Withholding tax may apply to our dividends and proceeds of sales in
respect of our common stock after December 31, 2012.

For payments made after December 31, 2012, United States
federal withholding tax at a 30% rate will apply to payments of dividends and gross proceeds from sales of our stock made to foreign financial institutions (and certain of their affiliates) unless the payee foreign financial institution agrees,
among other things, to disclose the identity of certain United States persons and United States owned foreign entities with accounts at the institution (or the institutions affiliates) and to annually report certain information about such
accounts. The withholding tax also will apply to payments of dividends and gross proceeds of sales to certain foreign entities that do not disclose the name, address and taxpayer identification number of any substantial United States owners (or
certify that they do not have any substantial United States owners). Thus, if a stockholder holds our shares through a foreign financial institution or foreign corporation or trust, dividends and gross proceeds of sales made after December 31,
2012 may be subject to a 30% withholding tax. Stockholders that are not United States persons may be subject to withholding tax on our dividends under current law.

The taxation of corporate dividends may adversely affect the value of our stock.

Legislation enacted in 2003, 2006 and 2010, among other things, generally reduces to 15% the maximum marginal rate of tax payable by taxpayers taxed at individual rates on dividends received from a
regular C corporation until January 1, 2013. This reduced tax rate, however, will not apply to dividends paid by a REIT on its stock, except for certain limited amounts. While the earnings of a REIT that are distributed to its stockholders
generally will still be subject to less federal income taxation than earnings of a non-REIT C corporation that are distributed to its stockholders net of corporate-level income tax, this legislation could cause taxpayers taxed at individual rates to
view the stock of regular C corporations as more attractive relative to the stock of a REIT than was the case prior to the enactment of the legislation, because the dividends from regular C corporations will generally be taxed at a lower rate while
dividends from REITs will generally be taxed at the same rate as the investors other ordinary income. We cannot predict what effect, if any, this legislation may have on the value of the stock of REITs in general or on the value of our common
stock in particular, either in terms of price or relative to other investments.



26



---

##### Table of Contents

The failure of Agency RMBS subject to a repurchase agreement to qualify as real estate
assets would adversely affect our ability to qualify as a REIT.

We have entered into sale and repurchase agreements under
which we nominally sold certain of our Agency RMBS to a counterparty and simultaneously entered into an agreement to repurchase the sold assets. We believe that we are treated for federal income tax purposes as the owner of the Agency RMBS that are
the subject of any such agreement notwithstanding that such agreements may transfer record ownership of such assets to the counterparty during the term of the agreement. It is possible, however, that the IRS could successfully assert that we did not
own the Agency RMBS during the term of the sale and repurchase agreement, in which case we could fail to qualify as a REIT.

We may lose our REIT qualification or be subject to a penalty tax if the IRS, successfully challenges our characterization of income
from our investments in subordinated tranches of CLOs issued by foreign corporations.

We likely will be required to
include in our income, even without the receipt of actual distributions, earnings from our investment in the subordinated tranches of CLOs and issued by foreign corporations. We intend to treat certain of these income inclusions as qualifying income
for purposes of the 95% gross income test but not the 75% gross income test. The provisions that set forth what income is qualifying income for purposes of the 95% gross income test provide that gross income derived from dividends, interest and
certain other enumerated classes of passive income qualify for purposes of the 95% gross income test. Income inclusions from equity investments in foreign corporations are technically neither actual dividends nor any of the other enumerated
categories of income specified in the 95% gross income test for U.S. federal income tax purposes, and there is no other clear precedent with respect to the qualification of such income. However, based on advice of counsel, we intend to treat such
income inclusions as qualifying income for purposes of the 95% gross income test. Nevertheless, because this income does not meet the literal requirements of the REIT provisions, it is possible that the IRS could successfully take the position that
such income is not qualifying income. In the event that such income was determined not to qualify for the 95% gross income test, we would be subject to a penalty tax with respect to such income to the extent it and our other non-qualifying income
exceeds 5% of our gross income or we could fail to qualify as a REIT. In addition, if such income was determined not to qualify for the 95% gross income test, we would need to invest in sufficient qualifying assets, or sell some of our interests in
other foreign corporations, to ensure that the income recognized by us from our investment in the subordinated tranches of CLOs issued by foreign corporations does not exceed 5% of our gross income, or we would cease to qualify as a REIT. We
currently intend that income inclusions from our investment in subordinated tranches of CLOs issued by foreign corporations together with any non-qualifying income will not exceed 5% of our gross income; however, no assurance can be given that this
will not change in the future.

If the CLO issuers in which we have invested are subject to federal income tax at the
entity level, it would greatly reduce the amounts those entities would have available to pay their creditors and to distribute to us.

We have invested in subordinated tranches of CLOs which are treated as equity for federal income tax purposes. The CLO issuers in which we have invested will be treated as corporations for federal income
tax purposes. The CLO issuers are organized in foreign countries. There is a specific exemption from federal income tax for non-U.S. corporations that restrict their activities in the United States to trading stock and securities (or any activity
closely related thereto) for their own account whether such trading (or such other activity) is conducted by the corporation or its employees or through a resident broker, commission agent, custodian or other agent. We expect that the CLO issuers in
which we have invested will rely on that exemption or otherwise operate in a manner so that they will not be subject to federal income tax on their net income at the entity level. If the IRS were to succeed in challenging that tax treatment, it
could greatly reduce the amount that those CLO issuers would have available to pay to their creditors and to distribute to us.



27



---

##### Table of Contents

Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our
cash flow.

Even if we remain qualified for taxation as a REIT, we may be subject to certain federal, state and local taxes
on our income and assets. Any of these taxes would decrease cash available for distribution to our stockholders.

We may be
subject to adverse legislative or regulatory tax changes that could reduce the market price of our common stock.

At any
time, the federal income tax laws or regulations governing REITs or the administrative interpretations of those laws or regulations may be amended. We cannot predict when or if any new federal income tax law, regulation or administrative
interpretation, or any amendment to any existing federal income tax law, regulation or administrative interpretation, will be adopted or promulgated or will become effective and any such law, regulation or interpretation may take effect
retroactively. We and our stockholders could be adversely affected by any such change in, or any new, federal income tax law, regulation or administrative interpretation. Additionally, revisions in federal tax laws and interpretations thereof could
cause us to change our investments and commitments and affect the tax considerations of an investment in us.



|Item 1B. | Unresolved Staff Comments
|-------- | -------------------------

None.



|Item 2. | Properties
|------- | ----------

We do not own
any properties. Our offices are located in leased space at 437 Madison Avenue, Floor 33, New York, New York 10022 and the telephone number of our offices is (212) 612-3210. The offices of our Manager and The Cypress Group are at the same
location. Sharpridge Capital Management, L.P. is located at 890 Winter Street, Suite 200, Waltham, Massachusetts, 02451. As part of our management agreement, our Manager is responsible for providing offices necessary for all operations, and
accordingly, all lease responsibilities belong to our Manager.



|Item 3. | Legal Proceedings
|------- | -----------------

Neither we, nor our Manager are currently subject to any material legal proceedings.



|Item 4. | [Removed and Reserved.]
|------- | -----------------------



28



---

##### Table of Contents

PART II



|Item 5. | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|------- | ------------------------------------------------------------------------------------------------------------

Market Information

Our common stock has been listed and is traded on the New York Stock Exchange (NYSE) under the symbol CYS since June 12, 2009. The following table presents the high and low
sales prices for our common stock as reported by the NYSE for the period from June 12, 2009 to December 31, 2010.



|                                           |  |      |       |  |     |   |       | 
|------------------------------------------ |  | ---- | ----- |  | --- | - | ----- | 
|                                           |  | High |       |  | Low |  
|Period from June 12, 2009 to June 30, 2009 |  | $    | 12.10 |  |     | $ | 11.00 | 
|Quarter Ended September 30, 2009           |  |      | 14.89 |  |     |   | 11.80 | 
|Quarter Ended December 31, 2009            |  |      | 14.29 |  |     |   | 12.77 | 
|Quarter Ended March 31, 2010               |  |      | 13.85 |  |     |   | 12.69 | 
|Quarter Ended June 30, 2010                |  |      | 14.57 |  |     |   | 5.00  | 
|Quarter Ended September 30, 2010           |  |      | 14.25 |  |     |   | 12.30 | 
|Quarter Ended December 31, 2010            |  |      | 14.07 |  |     |   | 12.46 | 

The per-share closing
price for our common stock, as reported by the NYSE on February 4, 2011, was $12.74.

Holders of Our Common Stock

As of January 31, 2011, there were approximately 69 record holders of our common stock, including shares held in
street name by nominees who are record holders.

Dividends

We intend to continue to pay quarterly dividends to holders of shares of common stock. Future dividends will be at the discretion of the
board of directors and will depend on our earnings and financial condition, maintenance of our REIT qualification, restrictions on making distributions under Maryland law and such other factors as our board of directors deems relevant. For 2010, the
Company paid $2.35 in cash per share of common stock in dividends of which 42% represented ordinary income, 3% represented capital gain and 55% represented return of capital, for tax purposes. The following table sets forth, for the periods
indicated, the dividends declared per share of common stock.



|                                     |  |                                    |      | 
|------------------------------------ |  | ---------------------------------- | ---- | 
|                                     |  | Common DividendsDeclared Per Share |     
|January 1, 2009 to March 31, 2009    |  | $                                  |     | 
|April 1, 2009 to June 30, 2009       |  | $                                  | 1.20 | 
|July 1, 2009 to September 30, 2009   |  | $                                  | 0.35 | 
|October 1, 2009 to December 31, 2009 |  | $                                  | 0.55 | 
|January 1, 2010 to March 31, 2010    |  | $                                  | 0.55 | 
|April 1, 2010 to June 30, 2010       |  | $                                  | 0.60 | 
|July 1, 2010 to September 30, 2010   |  | $                                  | 0.60 | 
|October 1, 2010 to December 31, 2010 |  | $                                  | 0.60 | 



29



---

##### Table of Contents

Performance Graph

The following graph provides a comparison of the cumulative total return on our common stock from June 12, 2009 to the NYSE closing
price per share on December 31, 2010 with the cumulative total return on the Standard & Poors 500 Composite Stock Price Index (the S&P 500) and the FTSE National Association of Real Estate Investment Trusts
Mortgage REIT Index (the FTSE NAREIT MREIT Index). Total return values were calculated assuming a $100 investment on June 12, 2009 with reinvestment of all dividends in (i) the common stock, (ii) the S&P 500 and
(iii) the FTSE NAREIT MREIT Index.

LOGO

The actual returns shown on the graph above are as follows:



|                                     |  |          |        |  |          |   |        |          |  |   |          |  |  |          |        |  |          |   |        |          |  |   |          |  |  |   |        |  |  |   |        | 
|------------------------------------ |  | -------- | ------ |  | -------- | - | ------ | -------- |  | - | -------- |  |  | -------- | ------ |  | -------- | - | ------ | -------- |  | - | -------- |  |  | - | ------ |  |  | - | ------ | 
|                                     |  | 06/12/09 |        |  | 06/30/09 |   |        | 09/30/09 |  |   | 12/31/09 |  |  | 03/31/10 |        |  | 06/30/10 |   |        | 09/30/10 |  |   | 12/31/10 | 
|Cypress Sharpridge Investments, Inc. |  | $        | 100.00 |  |          | $ | 103.03 |          |  | $ | 122.94   |  |  | $        | 120.03 |  |          | $ | 123.72 |          |  | $ | 122.07   |  |  | $ | 134.47 |  |  | $ | 142.15 | 
|S&P 500 Total Return                 |  |          | 100.00 |  |          |   | 97.23  |          |  |   | 112.40   |  |  |          | 119.19 |  |          |   | 125.61 |          |  |   | 111.26   |  |  |   | 123.82 |  |  |   | 137.14 | 
|FTSE NAREIT MREIT                    |  |          | 100.00 |  |          |   | 106.79 |          |  |   | 128.66   |  |  |          | 127.06 |  |          |   | 130.12 |          |  |   | 131.89   |  |  |   | 141.80 |  |  |   | 155.76 | 



|Item 6. | Selected Financial Data
|------- | -----------------------

The following table presents selected historical financial and operating information. The selected historical income statement and balance
sheet data presented below as of December 31, 2010, 2009, 2008, 2007 and 2006, for the years ended December 31, 2010, 2009, 2008 and 2007 and for the period from February 10, 2006 (commencement of operations) to December 31,
2006, has been derived from our audited financial statements. Because we only operated our business for a portion of the year ended December 31, 2006, we do not believe



30



---

##### Table of Contents

that a comparison of our operating results for the years ended December 31, 2010, 2009, 2008 and 2007 to the period from February 10, 2006 (commencement of operations) to
December 31, 2006 is indicative of the trends in our performance. The Key Portfolio Statistics have been derived from our underlying books and records.

The information presented below is only a summary and does not provide all of the information contained in our historical financial statements, including the related notes. You should read it in
conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations, and our historical financial statements, including the related notes. The per share amounts in the chart below have been
adjusted to reflect the three-for-one reverse stock split effective May 28, 2008.



|                                                                     |  |                         |               |   |      |   |             |      |  |   |             |      |  |       |               |   |  |   |             |  
|-------------------------------------------------------------------- |  | ----------------------- | ------------- | - | ---- | - | ----------- | ---- |  | - | ----------- | ---- |  | ----- | ------------- | - |  | - | ----------- | -
|                                                                     |  | Year Ended December 31, |              
|                                                                     |  | 2010                    |               |   | 2009 |   |             | 2008 |  |   | 2007        |      |  | 2006* |              
|Income Statement Data:                                               |  |                         |               |   |      |   |             |      |  |   |             |      |  |       |               |   |  |   |             |  
|Investment incomeInterest income                                    |  |                         |               |   |      |   |             |      |  |   |             |      |  |       |               |   |  |   |             |  
|Interest IncomeAgency RMBS                                          |  | $                       | 72,703,350    |   |      | $ | 44,060,342  |      |  | $ | 48,997,293  |      |  | $     | 129,505,620   |   |  | $ | 45,184,854  |  
|Interest IncomeCLOs, Structured Notes & Cash Equivalents            |  |                         | 2,835,607     |   |      |   | 1,465,807   |      |  |   | 6,478,529   |      |  |       | 6,079,522     |   |  |   | 2,882,851   |  
|                                                                     |  |                         |               |   |      |   |             |      |  |   |             |      |  |       |               |   |  |   |             |  
|Total interest income                                                |  |                         | 75,538,957    |   |      |   | 45,526,149  |      |  |   | 55,475,822  |      |  |       | 135,585,142   |   |  |   | 48,067,705  |  
|                                                                     |  |                         |               |   |      |   |             |      |  |   |             |      |  |       |               |   |  |   |             |  
|EXPENSES:                                                            |  |                         |               |   |      |   |             |      |  |   |             |      |  |       |               |   |  |   |             |  
|Interest expense                                                     |  |                         | 5,055,584     |   |      |   | 4,461,432   |      |  |   | 23,980,836  |      |  |       | 112,995,775   |   |  |   | 38,716,966  |  
|Operating expenses                                                   |  |                         | 10,461,098    |   |      |   | 7,013,669   |      |  |   | 7,747,884   |      |  |       | 5,246,895     |   |  |   | 3,637,531   |  
|                                                                     |  |                         |               |   |      |   |             |      |  |   |             |      |  |       |               |   |  |   |             |  
|Total expenses                                                       |  |                         | 15,516,682    |   |      |   | 11,475,101  |      |  |   | 31,728,720  |      |  |       | 118,242,670   |   |  |   | 42,354,497  |  
|                                                                     |  |                         |               |   |      |   |             |      |  |   |             |      |  |       |               |   |  |   |             |  
|Net investment income                                                |  |                         | 60,022,275    |   |      |   | 34,051,048  |      |  |   | 23,747,102  |      |  |       | 17,342,472    |   |  |   | 5,713,208   |  
|                                                                     |  |                         |               |   |      |   |             |      |  |   |             |      |  |       |               |   |  |   |             |  
|Net gain (loss) from investments                                     |  |                         | 1,282,932     |   |      |   | 39,513,017  |      |  |   | (34,360,594 | )    |  |       | (19,725,349   | ) |  |   | (5,752,421  | )
|                                                                     |  |                         |               |   |      |   |             |      |  |   |             |      |  |       |               |   |  |   |             |  
|GAINS AND (LOSSES) FROM SWAP AND CAP CONTRACTS:                      |  |                         |               |   |      |   |             |      |  |   |             |      |  |       |               |   |  |   |             |  
|Net swap and cap interest income (expense)                           |  |                         | (18,563,320   | ) |      |   | (7,623,821  | )    |  |   | (6,945,012  | )    |  |       | 3,001,870     |   |  |   | 75,267      |  
|Net gain (loss) on termination of swap contracts                     |  |                         | (36,925,072   | ) |      |   | (10,804,123 | )    |  |   | (35,118,468 | )    |  |       | (3,432,742    | ) |  |   | 64,733      |  
|Net unrealized appreciation (depreciation) on swap and cap contracts |  |                         | 16,573,541    |   |      |   | 8,709,674   |      |  |   | 13,504,523  |      |  |       | (26,873,523   | ) |  |   | 865,480     |  
|                                                                     |  |                         |               |   |      |   |             |      |  |   |             |      |  |       |               |   |  |   |             |  
|Net gain (loss) from swap and cap contracts                          |  |                         | (38,914,851   | ) |      |   | (9,718,270  | )    |  |   | (28,558,957 | )    |  |       | (27,304,395   | ) |  |   | 1,005,480   |  
|                                                                     |  |                         |               |   |      |   |             |      |  |   |             |      |  |       |               |   |  |   |             |  
|NET INCOME (LOSS)                                                    |  | $                       | 22,390,356    |   |      | $ | 63,845,795  |      |  | $ | (39,172,449 | )    |  | $     | (29,687,272   | ) |  | $ | 966,267     |  
|                                                                     |  |                         |               |   |      |   |             |      |  |   |             |      |  |       |               |   |  |   |             |  
|Net income (loss) per common share (diluted)                         |  | $                       | 0.73          |   |      | $ | 4.75        |      |  | $ | (5.50       | )    |  | $     | (4.68         | ) |  | $ | 0.24        |  
|Distributions per common share                                       |  | $                       | 2.35          |   |      | $ | 2.10        |      |  | $ | 1.32        |      |  | $     | 3.00          |   |  | $ | 1.98        |  
|                                                                     |  |                         |               |   |     
|Key Portfolio Statistics**                                           |  |                         |               |   |      |   |             |      |  |   |             |      |  |       |               |   |  |   |             |  
|Average Agency RMBS(1)                                               |  | $                       | 2,080,888,734 |   |      | $ | 992,329,669 |      |  | $ | 897,714,150 |      |  | $     | 2,147,699,675 |   |  | $ | 890,543,418 |  
|Average repurchase agreements                                        |  |                         | 1,765,953,105 |   |      |   | 847,359,432 |      |  |   | 796,027,700 |      |  |       | 2,044,976,836 |   |  |   | 832,746,432 |  
|Average net assets                                                   |  |                         | 390,906,564   |   |      |   | 178,411,354 |      |  |   | 110,261,494 |      |  |       | 163,990,080   |   |  |   | 83,355,831  |  
|Average yield on Agency RMBS(2)                                      |  |                         | 3.49          | % |      |   | 4.44        | %    |  |   | 5.46        | %    |  |       | 6.03          | % |  |   | 5.72        | %
|Average cost of funds and hedge(3)                                   |  |                         | 1.34          | % |      |   | 1.43        | %    |  |   | 3.89        | %    |  |       | 5.38          | % |  |   | 5.23        | %
|Interest rate spread net of hedge(4)                                 |  |                         | 2.15          | % |      |   | 3.01        | %    |  |   | 1.57        | %    |  |       | 0.65          | % |  |   | 0.49        | %
|Operating expense ratio(5)                                           |  |                         | 2.68          | % |      |   | 3.93        | %    |  |   | 7.03        | %*** |  |       | 3.20          | % |  |   | 4.90        | %
|Leverage ratio (at period end)(6)                                    |  |                         | 8.3:1         |   |      |   | 6.6:1       |      |  |   | 6.1:1       |      |  |       | 13.3:1        |   |  |   | 12.8:1      |  



|(1) | Our average Agency
RMBS for the period was calculated by averaging the cost basis of our settled Agency RMBS during the period.
|--- | -------------------------------------------------------------------------------------------------------------------------------



31



---

##### Table of Contents

|(2) | Our average yield
on Agency RMBS for the period was calculated by dividing our interest income from Agency RMBS by our average Agency RMBS.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Our average cost
of funds and hedge for the period was calculated by dividing our total interest expense, including our net swap and cap interest income (expense), by our average repurchase agreements.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Our interest rate
spread net of hedge for the period was calculated by subtracting our average cost of funds and hedge from our average yield on Agency RMBS.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Our operating
expense ratio is calculated by dividing operating expenses by average net assets.
|--- | -----------------------------------------------------------------------------------------------

|(6) | Our leverage ratio
was calculated by dividing total liabilities by net assets.
|--- | ------------------------------------------------------------------------------

|* | For the period from February 10, 2006 (commencement of operations) to December 31, 2006.
|- | ----------------------------------------------------------------------------------------

|** | All percentages
are annualized.
|-- | -------------------------------

|*** | Includes expensing
offering costs, a non-recurring expense, which amounted to $2,274,362, or 2.06% of average net assets.
|--- | -------------------------------------------------------------------------------------------------------------------------



|                            |  |                    |               |  |      |   |               |      |  |   |             |  |  |      |               |  |  |   |               | 
|--------------------------- |  | ------------------ | ------------- |  | ---- | - | ------------- | ---- |  | - | ----------- |  |  | ---- | ------------- |  |  | - | ------------- | 
|                            |  | As of December 31, |              
|                            |  | 2010               |               |  | 2009 |   |               | 2008 |  |   | 2007        |  |  | 2006 |              
|Balance Sheet Data:         |  |                    |               |  |      |   |               |      |  |   |             |  |  |      |               |  |  |   |               | 
|Cash and cash equivalents   |  | $                  | 1,510,378     |  |      | $ | 1,889,667     |      |  | $ | 7,156,140   |  |  | $    | 122,254       |  |  | $ | 984,498       | 
|Total assets                |  |                    | 6,389,267,228 |  |      |   | 1,866,196,296 |      |  |   | 702,445,559 |  |  |      | 1,884,409,297 |  |  |   | 2,491,807,479 | 
|Repurchase agreements       |  |                    | 3,443,843,294 |  |      |   | 1,372,707,572 |      |  |   | 587,485,241 |  |  |      | 1,337,613,863 |  |  |   | 2,306,318,000 | 
|Net assets                  |  |                    | 690,339,317   |  |      |   | 244,290,982   |      |  |   | 98,800,849  |  |  |      | 132,146,036   |  |  |   | 180,300,933   | 
|Net assets per common share |  | $                  | 11.59         |  |      | $ | 13.02         |      |  | $ | 12.89       |  |  | $    | 19.75         |  |  | $ | 26.97         | 



32



---

##### Table of Contents

|Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

The following discussion should be read in conjunction with our financial statements and accompanying notes included elsewhere in this
report.

Overview

We are a specialty finance company created with the objective of achieving consistent risk-adjusted investment income. We seek to achieve this objective by investing, on a leveraged basis in Agency RMBS.
In addition, our investment guidelines permit investments in CMOs, although we had not invested in any CMOs as of December 31, 2010. We are currently managed by Cypress Sharpridge Advisors LLC, a joint venture between affiliates of The Cypress
Group and Sharpridge Capital Management, L.P.

We earn income from our investment portfolio, and we use leverage to seek to
enhance our returns. Our income is generated primarily from the difference, or net spread, between the interest income we earn on our investment portfolio and the cost of our borrowings and hedging activities. The amount of income we earn on our
investments depends in part on our ability to control our financing costs, which comprise a significant portion of our operating expenses. Although we leverage our portfolio investments in Agency RMBS to seek to enhance our potential returns,
leverage also may exacerbate losses.

While we use hedging to mitigate some of our interest rate risk, we do not hedge all of
our exposure to changes in interest rates. This is because there are practical limitations on our ability to insulate our portfolio from all potential negative consequences associated with changes in short term interest rates in a manner that will
allow us to seek attractive spreads on our portfolio.

In addition to investing in issued pools of Agency RMBS, we regularly
utilize delayed delivery transactions, including forward-settling purchases of Agency RMBS where the pool is to-be-announced, or TBAs. Pursuant to these TBA transactions, we agree to purchase, for future delivery, Agency RMBS with
certain principal and interest terms and certain types of underlying collateral, but the particular Agency RMBS to be delivered is not identified until shortly before the TBA settlement date. For our other delayed delivery transactions, we agree to
purchase, for future delivery, Agency RMBS; however, unlike our TBAs, these delayed delivery transactions reference an identified Agency RMBS.

We commenced operations in February 2006 and completed an initial public offering of our common stock in June 2009. During 2010, we completed three public offerings raising a total of approximately
$481.1 million in net proceeds. In addition, during 2010 we raised approximately $8.0 million in net proceeds pursuant to our dividend reinvestment and direct stock purchase plan.

We have elected to be taxed as a REIT and have complied, and intend to continue to comply, with the provisions of the Internal Revenue
Code of 1986, as amended (the Internal Revenue Code), with respect thereto. Accordingly, we do not expect to be subject to federal income tax on our REIT taxable income that we currently distribute to our stockholders if certain asset,
income and ownership tests and recordkeeping requirements are fulfilled. Even if we maintain our qualification as a REIT, we may be subject to some federal, state and local taxes on our income.

Factors that Affect our Results of Operations and Financial Condition

A variety of industry and economic factors may impact our results of operations and financial condition. These factors include:



| |  |  | interest rate trends;
| | - |  | ---------------------



| |  |  | prepayment rates on mortgages underlying our Agency RMBS, and credit trends insofar as they affect prepayment rates;
| | - |  | --------------------------------------------------------------------------------------------------------------------



33



---

##### Table of Contents

| |  |  | competition for investments in Agency RMBS;
| | - |  | -------------------------------------------



| |  |  | actions taken by the U.S. Federal Reserve and the U.S. Treasury; and
| | - |  | --------------------------------------------------------------------



| |  |  | other market developments.
| | - |  | --------------------------

In addition, a variety of factors relating to our business may also impact our results of operation and financial condition. These factors include:



| |  |  | our degree of leverage;
| | - |  | -----------------------



| |  |  | our access to funding and borrowing capacity;
| | - |  | ---------------------------------------------



| |  |  | our borrowing costs;
| | - |  | --------------------



| |  |  | our hedging activities;
| | - |  | -----------------------



| |  |  | the market value of our investments; and
| | - |  | ----------------------------------------



| |  |  | the REIT requirements and the requirements to qualify for a registration exemption under the Investment Company Act.
| | - |  | --------------------------------------------------------------------------------------------------------------------

We anticipate that, for any period during which changes in the interest rates earned on our assets do not coincide with interest rate
changes on the corresponding liabilities, such assets will reprice more slowly than the corresponding liabilities. Consequently, changes in interest rates, particularly short term interest rates, may significantly influence our net investment
income.

Our net investment income may be affected by a difference between actual prepayment rates and our projections.
Prepayments on loans and securities may be influenced by changes in market interest rates and homeowners ability and desire to refinance their mortgages. To the extent we have acquired assets at a premium or discount to par value, changes in
prepayment rates may impact our anticipated yield.

Trends and Recent Market Impacts

The following trends and recent market impacts may also affect our business:

Interest Rates and Liquidity

Currently the U.S. economy appears to be in a weak recovery with little or no broad inflationary pressures. As a result, the U.S. Federal Funds Target Rate has remained at 0  0.25%, with no change
since mid-December 2008. Since mid-December 2008, 30-Day LIBOR has also remained low, though the rate has increased from 0.23% at December 31, 2009 to 0.26% at December 31, 2010. The availability of repurchase agreement financing is stable
with interest rates near 0.30%, although these rates have slightly decoupled from 30-Day LIBOR with which they have generally been correlated. The following table shows 30-Day LIBOR, 3-Month LIBOR and the U.S. Federal Funds Target Rate at the end of
each respective fiscal quarter:



|                   |  |              |       |   |               |  |       |                           |  |  |      |  
|------------------ |  | ------------ | ----- | - | ------------- |  | ----- | ------------------------- |  |  | ---- | -
|Date               |  | 30-Day LIBOR |       |   | 3-Month LIBOR |  |       | Federal Funds Target Rate | 
|December 31, 2010  |  |              | 0.261 | % |               |  | 0.303 | %                         |  |  | 0.25 | %
|September 30, 2010 |  |              | 0.256 | % |               |  | 0.290 | %                         |  |  | 0.25 | %
|June 30, 2010      |  |              | 0.348 | % |               |  | 0.534 | %                         |  |  | 0.25 | %
|March 31, 2010     |  |              | 0.249 | % |               |  | 0.292 | %                         |  |  | 0.25 | %
|December 31, 2009  |  |              | 0.231 | % |               |  | 0.251 | %                         |  |  | 0.25 | %
|September 30, 2009 |  |              | 0.246 | % |               |  | 0.287 | %                         |  |  | 0.25 | %
|June 30, 2009      |  |              | 0.309 | % |               |  | 0.595 | %                         |  |  | 0.25 | %
|March 31, 2009     |  |              | 0.501 | % |               |  | 1.192 | %                         |  |  | 0.25 | %
|December 31, 2008  |  |              | 0.436 | % |               |  | 1.425 | %                         |  |  | 0.25 | %



Source: Bloomberg



34



---

##### Table of Contents

Longer-term interest rates fell sharply in 2010. Rates on three-year interest rate swaps,
currently one of our primary hedging vehicles, decreased by 78 basis points during the year ended December 31, 2010, from 2.06% to 1.28%; however these rates have increased in recent months, moving from a low of 0.73% at October 31, 2010
to 1.28% at December 31, 2010. Meanwhile, 3-Month LIBOR, which is the rate used to calculate the interest payments we receive on interest rate swaps and interest rate caps, if any, also increased during the year ended December 31, 2010 by
five basis points, ending the year at 0.303%.

During 2010 yields on Agency RMBS fell to their lowest levels in more than a
year, with prices reaching record highs. While the yield on a par-priced Fannie Mae Agency RMBS backed by 30-year fixed-rate mortgage loans rose by 63 basis points over the year ended March 31, 2010, by September 30, 2010 the yield had
fallen by 113 basis points to 3.39%. However, yields rose during the last three months of 2010 with a par-priced Fannie Mae Agency RMBS backed by 30-year fixed-rate mortgage loans yielding 4.13% at December 31, 2010.

During the year ended December 31, 2010, yields on U.S. Treasury securities fell with the yield on five-year U.S. Treasury notes
falling by 67 basis points, while at the same time market prices of Agency RMBS rose. The following table illustrates this situation by comparing market levels for two benchmark securities, the yield on five-year U.S. Treasury Notes and the price of
15-year Fannie Mae 4.5% Agency RMBS:



|                   |  |                              |      |   |                                                     |   |         | 
|------------------ |  | ---------------------------- | ---- | - | --------------------------------------------------- | - | ------- | 
|Date               |  | Five-Year U.S. Treasury Note |      |   | Market Prices of 15-YearFannie Mae 4.5% Agency RMBS |  
|December 31, 2010  |  |                              | 2.01 | % |                                                     | $ | 104.797 | 
|September 30, 2010 |  |                              | 1.26 | % |                                                     | $ | 105.203 | 
|June 30, 2010      |  |                              | 1.77 | % |                                                     | $ | 105.484 | 
|March 31, 2010     |  |                              | 2.54 | % |                                                     | $ | 103.672 | 
|December 31, 2009  |  |                              | 2.68 | % |                                                     | $ | 102.984 | 
|September 30, 2009 |  |                              | 2.31 | % |                                                     | $ | 103.547 | 
|June 30, 2009      |  |                              | 2.56 | % |                                                     | $ | 101.984 | 
|March 31, 2009     |  |                              | 1.66 | % |                                                     | $ | 102.984 | 
|December 31, 2008  |  |                              | 1.55 | % |                                                     | $ | 101.984 | 



Source: Bloomberg

One of the
main factors impacting market prices during 2009 and the first three months of 2010 was the U.S. Federal Reserves program to purchase Agency RMBS, which commenced in January 2009 and was terminated on March 31, 2010. In total, $1.25
trillion of Agency RMBS was purchased. The market expectation was that when this program terminated, the demand for these securities would decrease and likely reduce the market price for Agency RMBS. However, we continue to see strong demand as
these securities remain desirable assets in the current economic environment.

In November 2010 the U.S. Federal Reserve
announced a program to purchase an additional $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. One of the effects of this program may be to increase the price of Agency
RMBS, which may also decrease our net interest margin. Once the program is terminated it may cause a decrease in demand for these securities, which likely would reduce their market price.

Prepayment Rates and Loan Buy-back Programs

In early March 2010, both Freddie Mac and Fannie Mae announced they would purchase from the pools of mortgage loans underlying their RMBS all mortgage loans that are more than 120 days delinquent. The
impact of these programs thus far is reflected in the constant prepayment rate, or CPR, of our portfolio. Because a substantial portion of our portfolio consists of Agency RMBS backed by 15 year fixed-rate mortgage loans, which have low delinquency
rates, these programs have not caused a significant increase in the CPR of our portfolio.



35



---

##### Table of Contents

During the year ended December 31, 2010, the prepayment rates changed primarily in line
with the delinquent loan purchase programs described above. During 2009, prepayment rates on Agency RMBS increased slightly by the end of the year. The following table shows the prepayment rates for Agency RMBS backed by 30 year fixed rate
mortgages:



|            |  |        |      |   |        |  |      |        |  |  |        |   |  |        |      |   |        |  |      |        |  |  |        |   |  |        |      |   |        |  |      |        |  |  |        |   |  |  |      |   |  |  |      |   |  |  |      |  
|----------- |  | ------ | ---- | - | ------ |  | ---- | ------ |  |  | ------ | - |  | ------ | ---- | - | ------ |  | ---- | ------ |  |  | ------ | - |  | ------ | ---- | - | ------ |  | ---- | ------ |  |  | ------ | - |  |  | ---- | - |  |  | ---- | - |  |  | ---- | -
|            |  | Jan-09 |      |   | Feb-09 |  |      | Mar-09 |  |  | Apr-09 |   |  | May-09 |      |   | Jun-09 |  |      | Jul-09 |  |  | Aug-09 |   |  | Sep-09 |      |   | Oct-09 |  |      | Nov-09 |  |  | Dec-09 |  
|Fannie Mae  |  |        | 16.4 | % |        |  | 22.2 | %      |  |  | 21.7   | % |  |        | 21.4 | % |        |  | 23.4 | %      |  |  | 22.6   | % |  |        | 18.3 | % |        |  | 15.0 | %      |  |  | 13.7   | % |  |  | 15.7 | % |  |  | 14.9 | % |  |  | 18.5 | %
|Freddie Mac |  |        | 17.3 |   |        |  | 24.5 |        |  |  | 24.1   |   |  |        | 23.8 |   |        |  | 24.8 |        |  |  | 24.4   |   |  |        | 19.3 |   |        |  | 13.9 |        |  |  | 12.5   |   |  |  | 14.2 |   |  |  | 15.7 |   |  |  | 18.2 |  
|Ginnie Mae  |  |        | 23.8 |   |        |  | 24.4 |        |  |  | 25.6   |   |  |        | 28.2 |   |        |  | 29.6 |        |  |  | 24.0   |   |  |        | 19.5 |   |        |  | 17.5 |        |  |  | 20.7   |   |  |  | 21.0 |   |  |  | 23.2 |   |  |  | 29.0 |  



|            |  |        |      |   |        |  |      |        |  |  |        |   |  |        |      |   |        |  |      |        |  |  |        |   |  |        |      |   |        |  |      |        |  |  |        |   |  |  |      |   |  |  |      |   |  |  |      |  
|----------- |  | ------ | ---- | - | ------ |  | ---- | ------ |  |  | ------ | - |  | ------ | ---- | - | ------ |  | ---- | ------ |  |  | ------ | - |  | ------ | ---- | - | ------ |  | ---- | ------ |  |  | ------ | - |  |  | ---- | - |  |  | ---- | - |  |  | ---- | -
|            |  | Jan-10 |      |   | Feb-10 |  |      | Mar-10 |  |  | Apr-10 |   |  | May-10 |      |   | Jun-10 |  |      | Jul-10 |  |  | Aug-10 |   |  | Sep-10 |      |   | Oct-10 |  |      | Nov-10 |  |  | Dec-10 |  
|Fannie Mae  |  |        | 15.7 | % |        |  | 14.9 | %      |  |  | 27.7   | % |  |        | 29.0 | % |        |  | 27.0 | %      |  |  | 17.8   | % |  |        | 18.8 | % |        |  | 23.7 | %      |  |  | 25.0   | % |  |  | 25.7 | % |  |  | 27.2 | % |  |  | 25.9 | %
|Freddie Mac |  |        | 14.7 |   |        |  | 40.8 |        |  |  | 18.2   |   |  |        | 16.7 |   |        |  | 14.7 |        |  |  | 17.4   |   |  |        | 19.7 |   |        |  | 25.8 |        |  |  | 28.0   |   |  |  | 28.7 |   |  |  | 30.8 |   |  |  | 28.6 |  
|Ginnie Mae  |  |        | 13.8 |   |        |  | 14.8 |        |  |  | 13.4   |   |  |        | 11.8 |   |        |  | 13.1 |        |  |  | 13.0   |   |  |        | 18.4 |   |        |  | 19.5 |        |  |  | 19.5   |   |  |  | 19.5 |   |  |  | 19.6 |   |  |  | 19.1 |  



LOGO

Recent Government Activity

Certain programs initiated by the U.S. Government, through the FHA and the FDIC, to provide homeowners with assistance in avoiding residential mortgage loan foreclosures are currently in effect. The
programs may involve, among other things, the modification of mortgage loans to reduce the principal amount of the loans or the rate of interest payable on the loans, or to extend the payment terms of the loans. One such program is the Hope for
Homeowners program, which is effective from October 1, 2008 through September 30, 2011 and will enable certain distressed borrowers to refinance their mortgages into FHA-insured loans. In addition, in February 2009, the U.S. Treasury
announced the Homeowner Affordability and Stability Plan (HASP), which is a multi-faceted plan that also is intended to prevent residential mortgage foreclosures.

While the effect of these programs has not been as extensive as originally expected, the effect of such programs as the Hope for Homeowners program and HASP for holders of Agency RMBS could be that such



36



---

##### Table of Contents

holders would experience changes in the anticipated yields of their Agency RMBS due to (i) increased prepayment rates on their Agency RMBS and (ii) lower interest and principal payments
on their Agency RMBS.

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer
Protection Act, or the Act. This legislation aims to restore responsibility and accountability to the financial system. It is unclear how this legislation may impact the borrowing environment, investing environment for Agency RMBS and interest
rate swaps and other derivatives as much of the Acts implementation has not yet been defined by the regulators.

Credit Spreads

Over the past few years, the credit markets generally experienced tightening credit spreads (specifically, spreads between U.S. Treasury securities and other securities that are identical in all
respects except for ratings) mainly due to the strong demand for lending opportunities. Generally, when credit spreads tighten the value of Agency RMBS increases, which results in an increase in our book value. Due to these tightening credit spreads
our book value has increased. If credit spreads were to widen, we expect the market value of Agency RMBS would decrease, which could reduce our book value but also create an attractive opportunity to reinvest principal and interest from our existing
portfolio as well as deploy new capital into higher-yielding Agency RMBS.

Financial Condition

As of December 31, 2010, 2009 and 2008, the Agency RMBS in our portfolio were purchased at a net premium to their par value, with a
weighted-average amortized cost of $102.5, $101.4 and $101.4, respectively, due to the average interest rates on these investments being higher than prevailing market rates. As of December 31, 2010, 2009 and 2008, we had approximately $152.7,
$25.0 million and $10.0 million, respectively, of unamortized premium included in the cost basis of our investments.

As of
December 31, 2010, 2009 and 2008, our Agency RMBS portfolio consisted of the following assets:

December 31, 2010



|                                                   |  |                |           |        |            |   |                    |                  |  |                           |     |   |  |  |      |  |  |  |      |  
|-------------------------------------------------- |  | -------------- | --------- | ------ | ---------- | - | ------------------ | ---------------- |  | ------------------------- | --- | - |  |  | ---- |  |  |  | ---- | -
|                                                   |  | Par Amount     |           |        | Fair Value |   |                    | Weighted Average | 
|Security Description                               |  |                |           | Coupon |            |   | Months 
toReset(1) |                  |  | ConstantPrepaymentRate(2) |    
|                                                   |  | (in thousands) |           |        |            |   |                    |                  |  |                           |     |  
|Agency RMBS collateralized by fixed rate mortgages |  | $              | 4,419,601 |        |            | $ | 4,521,648          |                  |  |                           | 4.0 | % |  |  | N/A  |  |  |  | 19.4 | %
|Agency RMBS collateralized by hybrid ARMs          |  |                | 1,737,307 |        |            |   | 1,788,922          |                  |  |                           | 3.4 |   |  |  | 63.2 |  |  |  | 18.4 |  
|                                                   |  |                |           |        |            |   |                    |                  |  |                           |     |   |  |  |      |  |  |  |      |  
|Total Agency RMBS                                  |  | $              | 6,156,908 |        |            | $ | 6,310,570          |                  |  |                           |     |   |  |  |      |  |  |  |      |  
|                                                   |  |                |           |        |            |   |                    |                  |  |                           |     |   |  |  |      |  |  |  |      |  



37



---

##### Table of Contents

|                                                         |  |                |           |        |            |   |                    |                  |  |                           |     |   |  |  |      |  |  |  |      |  
|-------------------------------------------------------- |  | -------------- | --------- | ------ | ---------- | - | ------------------ | ---------------- |  | ------------------------- | --- | - |  |  | ---- |  |  |  | ---- | -
|December 31, 2009                                        |  |                |           |        |            |  
|                                                         |  | Par Amount     |           |        | Fair Value |   |                    | Weighted Average | 
|Security Description                                     |  |                |           | Coupon |            |   | Months 
toReset(1) |                  |  | ConstantPrepaymentRate(2) |    
|                                                         |  | (in thousands) |           |        |            |   |                    |                  |  |                           |     |  
|Agency RMBS collateralized by hybrid ARMs                |  | $              | 565,396   |        |            | $ | 586,834            |                  |  |                           | 4.5 | % |  |  | 46.8 |  |  |  | 23.4 | %
|Agency RMBS collateralized by short-reset hybrid ARMs(3) |  |                | 263,728   |        |            |   | 275,717            |                  |  |                           | 4.5 |   |  |  | 13.3 |  |  |  | 19.0 |  
|Agency RMBS collateralized by monthly reset ARMs         |  |                | 140,226   |        |            |   | 145,134            |                  |  |                           | 3.0 |   |  |  | 1    |  |  |  | 11.2 |  
|Agency RMBS collateralized by fixed rate mortgages       |  |                | 814,716   |        |            |   | 836,126            |                  |  |                           | 4.5 |   |  |  | N/A  |  |  |  | 9.0  |  
|                                                         |  |                |           |        |            |   |                    |                  |  |                           |     |   |  |  |      |  |  |  |      |  
|Total Agency RMBS                                        |  | $              | 1,784,066 |        |            | $ | 1,843,811          |                  |  |                           |     |   |  |  |      |  |  |  |      |  
|                                                         |  |                |           |        |            |   |                    |                  |  |                           |     |   |  |  |      |  |  |  |      |  
|December 31, 2008                                        |  |                |           |        |            |  
|                                                         |  | Par Amount     |           |        | Fair Value |   |                    | Weighted Average | 
|Security Description                                     |  |                |           | Coupon |            |   | Months 
toReset(1) |                  |  | ConstantPrepaymentRate(2) |    
|                                                         |  | (in thousands) |           |        |            |   |                    |                  |  |                           |     |  
|Agency RMBS collateralized by hybrid ARMs                |  | $              | 332,468   |        |            | $ | 341,132            |                  |  |                           | 5.7 | % |  |  | 42.2 |  |  |  | 10.6 | %
|Agency RMBS collateralized by short-reset hybrid ARMs(3) |  |                | 8,723     |        |            |   | 8,785              |                  |  |                           | 4.6 |   |  |  | 4.0  |  |  |  | 18.3 |  
|Agency RMBS collateralized by monthly reset ARMs         |  |                | 154,575   |        |            |   | 153,609            |                  |  |                           | 4.7 |   |  |  | 1    |  |  |  | 5.5  |  
|Agency RMBS collateralized by fixed rate mortgages       |  |                | 176,566   |        |            |   | 182,040            |                  |  |                           | 5.8 |   |  |  | N/A  |  |  |  | 6.6  |  
|                                                         |  |                |           |        |            |   |                    |                  |  |                           |     |   |  |  |      |  |  |  |      |  
|Total Agency RMBS                                        |  | $              | 672,332   |        |            | $ | 685,566            |                  |  |                           |     |   |  |  |      |  |  |  |      |  
|                                                         |  |                |           |        |            |   |                    |                  |  |                           |     |   |  |  |      |  |  |  |      |  



|(1) | Months to Reset is the number of months remaining before the fixed rate on a hybrid ARM becomes a variable rate. At the end of the fixed
period, the variable rate will be determined by the margin and the pre-specified caps of the ARM.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Constant Prepayment Rate is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the
remaining principal is prepaid each month or year. Specifically, the constant prepayment rate is an annualized version of the prior three month prepayment rate. Securities with no prepayment history are excluded from this calculation.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Short-reset is defined as 24 months or less to reset.
|--- | -------------------------------------------------------

Actual maturities of Agency RMBS are generally shorter than stated contractual maturities (which range up to 30 years), as they are
affected by the contractual lives of the underlying mortgages, periodic payments and prepayments of principal. As of December 31, 2010, 2009 and 2008, the average final contractual maturity of the mortgage portfolio is in year 2031, 2031 and
2035, respectively.

The average expected life of our Agency RMBS reflects the estimated average period of time the securities
in the portfolio will remain outstanding. The average expected lives of our Agency RMBS do not exceed five years, based upon prepayment models obtained through subscription-based financial information service providers. The prepayment model
considers current yield, forward yield, steepness of the yield curve, current mortgage rates, the mortgage rate of the outstanding loan, loan age, margin and volatility. The actual lives of the Agency RMBS in our investment portfolio could be longer
or shorter than those estimates depending on the



38



---

##### Table of Contents

actual prepayment rates experienced over the lives of the applicable securities. As of December 31, 2010, 2009 and 2008 we had CLOs with a fair value of $20.5 million, $9.2 million and $4.3
million, respectively. We disposed of our structured notes during 2010.

Hedging Instruments

We generally intend to hedge as much of the interest rate risk we determine is in the best interests of our stockholders. Our policies do
not contain specific requirements as to the percentages or amount of interest rate risk that our Manager is required to hedge. No assurance can be given that our hedging activities will have the desired beneficial impact on our results of operations
or financial condition.

Interest rate hedging may fail to protect or could adversely affect us because, among other things:



| |  |  | interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | available interest rate hedging may not correspond directly with the interest rate risk for which protection is sought;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | due to prepayments on assets and repayments of debt securing such assets, the duration of the hedge may not match the duration of the related liability
or asset;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the credit quality of the hedging counterparty may be downgraded to such an extent that it impairs our ability to sell or assign our side of the
hedging transaction; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the hedging counterparty may default on its obligation to pay.
| | - |  | --------------------------------------------------------------

We engage in interest rate swaps and caps as a means of mitigating our interest rate risk on forecasted interest expense associated with
repurchase agreements for the term of the swap contract. An interest rate swap is a contractual agreement entered into by two counterparties under which each agrees to make periodic payments to the other for an agreed period of time based upon a
notional amount of principal. Under the most common form of interest rate swap, commonly known as a fixed-floating interest rate swap, a series of fixed interest rate payments on a notional amount of principal is exchanged for a series of floating
interest rate payments on such notional amount. In a simple interest rate cap, one investor pays a premium for a notional principal amount based on a capped interest rate (the cap rate). When the floating interest rate (the
floating rate) exceeds the cap rate, the investor receives a payment from the cap counterparty equal to the difference between the floating rate and the cap rate on the same notional principal amount for a specified period of time.
Alternatively, an investor may receive a premium and pay the difference in cap rate and floating rate.

At December 31,
2010, we were a party to 12 interest rate swaps and three interest rate caps (whereby we will receive interest payments when three-month LIBOR exceeds the cap rate) with maturities between May 2013 and November 2015 with an aggregate notional amount
of $4,390.0 million and a fair value of approximately $30.3 million. At December 31, 2009, we were a party to four interest rate swaps with maturities between April 2012 and November 2013 with an aggregate notional amount of $740.0 million and
a fair value of approximately $(3.8) million. At December 31, 2008, we were a party to one interest rate swap with a maturity of May 2010 with an aggregate notional amount of $240.0 million and a fair value of approximately $(12.5) million. As
of December 31, 2010, 2009 and 2008, the weighted average fixed rate on our interest rate swaps was 1.354%, 2.034% and 5.164%, respectively. As of December 31, 2010 the weighted average cap rate on our interest rate caps was 1.593%. We did
not hold any interest rate caps as of December 31, 2009 and 2008.

The current fair value of interest rate swaps and caps
is heavily dependent on the current market fixed rate, the corresponding term structure of floating rates (known as the yield curve) as well as the expectation of changes in future floating rates. As expectations of future floating rates change, the
fair value of interest rate swaps changes.



39



---

##### Table of Contents

Liabilities

We have entered into repurchase agreements to finance some of our purchases of Agency RMBS. These agreements are secured by our Agency RMBS and bear interest at rates that have historically moved in close
relationship to LIBOR. At December 31, 2010, we had approximately $3,443.8 million of liabilities pursuant to repurchase agreements with 20 counterparties that had weighted-average interest rates of approximately 0.32%, and maturities of
between seven and 80 days. In addition, as of December 31, 2010 we had approximately $2,234.4 million in payables for securities purchased, a portion of which will be financed through repurchase agreements. Because we measure leverage as total
liabilities divided by net assets, the approximately $2,234.4 million payable for securities purchased is included in our December 31, 2010 leverage ratio of 8.3 to 1. At December 31, 2009, we had approximately $1,372.7 million of
liabilities pursuant to repurchase agreements with 16 counterparties that had weighted-average interest rates of approximately 0.28%, and maturities of between four and 68 days. In addition, as of December 31, 2009 we had approximately $229.8
million in payables for securities purchased, a portion of which was financed through repurchase agreements, which was included in our December 31, 2009 leverage ratio of 6.6 to 1. At December 31, 2008, we had approximately $587.5 million
of liabilities pursuant to repurchase agreements with six counterparties that had weighted-average interest rates of approximately 2.44%, and maturities of between two and 20 days.

Below is a summary of our payable for securities purchased as of December 31, 2010 and 2009. We did not have any payable for
securities purchased at December 31, 2008.

December 31, 2010



|                              |  |             |           |  |           |   |               |         |  |   |               | 
|----------------------------- |  | ----------- | --------- |  | --------- | - | ------------- | ------- |  | - | ------------- | 
|Forward Settling Purchases    |  | Settle Date |           |  | Par Value |   |               | Payable | 
|FNMA15 Year 3.5% Fixed       |  |             | 1/19/2011 |  |           | $ | 150,000,000   |         |  | $ | 154,621,875   | 
|FNMA15 Year 4.0% Fixed       |  |             | 1/19/2011 |  |           |   | 31,095,699    |         |  |   | 32,008,162    | 
|FNMA30 Year 3.25% Hybrid ARM |  |             | 1/25/2011 |  |           |   | 49,645,982    |         |  |   | 51,432,879    | 
|FNMA30 Year 5.5% Fixed       |  |             | 2/10/2011 |  |           |   | 200,000,000   |         |  |   | 212,556,250   | 
|FNMA15 Year 3.5% Fixed       |  |             | 2/15/2011 |  |           |   | 550,000,000   |         |  |   | 563,951,736   | 
|FNMA15 Year 4.0% Fixed       |  |             | 2/15/2011 |  |           |   | 100,000,000   |         |  |   | 103,835,243   | 
|FNMA15 Year 4.5% Fixed       |  |             | 2/15/2011 |  |           |   | 300,000,000   |         |  |   | 313,626,563   | 
|FNMA15 Year 3.5% Fixed       |  |             | 3/16/2011 |  |           |   | 150,000,000   |         |  |   | 150,933,594   | 
|FHLMC15 Year 3.5% Fixed      |  |             | 3/16/2011 |  |           |   | 200,000,000   |         |  |   | 200,260,417   | 
|FNMA15 Year 3.5% Fixed       |  |             | 4/18/2011 |  |           |   | 400,000,000   |         |  |   | 399,661,112   | 
|FNMA15 Year 4.0% Fixed       |  |             | 4/18/2011 |  |           |   | 50,444,143    |         |  |   | 51,512,841    | 
|                              |  |             |           |  |           |   |               |         |  |   |               | 
|                              |  |             |           |  |           | $ | 2,181,185,824 |         |  | $ | 2,234,400,672 | 
|                              |  |             |           |  |           |   |               |         |  |   |               | 

December 31, 2009



|                             |  |             |           |  |           |   |             |         |  |   |             | 
|---------------------------- |  | ----------- | --------- |  | --------- | - | ----------- | ------- |  | - | ----------- | 
|Forward Settling Purchases   |  | Settle Date |           |  | Par Value |   |             | Payable | 
|FNMA15 Year 4.0% Fixed      |  |             | 1/19/2010 |  |           | $ | 75,000,000  |         |  | $ | 76,439,088  | 
|GNMA30 Year 4.0% Hybrid ARM |  |             | 1/25/2010 |  |           |   | 25,000,000  |         |  |   | 25,541,301  | 
|FNMA15 Year 4.5% Fixed      |  |             | 2/17/2010 |  |           |   | 75,000,000  |         |  |   | 77,118,775  | 
|FNMA15 Year 4.0% Fixed      |  |             | 3/16/2010 |  |           |   | 50,000,000  |         |  |   | 50,739,608  | 
|                             |  |             |           |  |           |   |             |         |  |   |             | 
|                             |  |             |           |  |           | $ | 225,000,000 |         |  | $ | 229,838,772 | 
|                             |  |             |           |  |           |   |             |         |  |   |             | 



40



---

##### Table of Contents

Results of Operations



|                                                                     |  |                         |               |   |      |   |             |      |  |   |             |   
|-------------------------------------------------------------------- |  | ----------------------- | ------------- | - | ---- | - | ----------- | ---- |  | - | ----------- | --
|                                                                     |  | Year Ended December 31, |              
|                                                                     |  | 2010                    |               |   | 2009 |   |             | 2008 | 
|Income Statement Data:                                               |  |                         |               |   |      |   |             |      |  |   |             |   
|Investment incomeInterest income                                    |  |                         |               |   |      |   |             |      |  |   |             |   
|Interest IncomeAgency RMBS                                          |  | $                       | 72,703,350    |   |      | $ | 44,060,342  |      |  | $ | 48,997,293  |   
|Interest IncomeCLOs, Structured Notes & Cash Equivalents            |  |                         | 2,835,607     |   |      |   | 1,465,807   |      |  |   | 6,478,529   |   
|                                                                     |  |                         |               |   |      |   |             |      |  |   |             |   
|Total interest income                                                |  |                         | 75,538,957    |   |      |   | 45,526,149  |      |  |   | 55,475,822  |   
|                                                                     |  |                         |               |   |      |   |             |      |  |   |             |   
|EXPENSES:                                                            |  |                         |               |   |      |   |             |      |  |   |             |   
|Interest expense                                                     |  |                         | 5,055,584     |   |      |   | 4,461,432   |      |  |   | 23,980,836  |   
|Operating expenses                                                   |  |                         | 10,461,098    |   |      |   | 7,013,669   |      |  |   | 7,747,884   |   
|                                                                     |  |                         |               |   |      |   |             |      |  |   |             |   
|Total expenses                                                       |  |                         | 15,516,682    |   |      |   | 11,475,101  |      |  |   | 31,728,720  |   
|                                                                     |  |                         |               |   |      |   |             |      |  |   |             |   
|Net investment income                                                |  |                         | 60,022,275    |   |      |   | 34,051,048  |      |  |   | 23,747,102  |   
|                                                                     |  |                         |               |   |      |   |             |      |  |   |             |   
|Net gain (loss) from investments                                     |  |                         | 1,282,932     |   |      |   | 39,513,017  |      |  |   | (34,360,594 | ) 
|                                                                     |  |                         |               |   |      |   |             |      |  |   |             |   
|GAINS AND (LOSSES) FROM SWAP AND CAP CONTRACTS:                      |  |                         |               |   |      |   |             |      |  |   |             |   
|Net swap and cap interest income (expense)                           |  |                         | (18,563,320   | ) |      |   | (7,623,821  | )    |  |   | (6,945,012  | ) 
|Net gain (loss) on termination of swap contracts                     |  |                         | (36,925,072   | ) |      |   | (10,804,123 | )    |  |   | (35,118,468 | ) 
|Net unrealized appreciation (depreciation) on swap and cap contracts |  |                         | 16,573,541    |   |      |   | 8,709,674   |      |  |   | 13,504,523  |   
|                                                                     |  |                         |               |   |      |   |             |      |  |   |             |   
|Net gain (loss) from swap and cap contracts                          |  |                         | (38,914,851   | ) |      |   | (9,718,270  | )    |  |   | (28,558,957 | ) 
|                                                                     |  |                         |               |   |      |   |             |      |  |   |             |   
|NET INCOME (LOSS)                                                    |  | $                       | 22,390,356    |   |      | $ | 63,845,795  |      |  | $ | (39,172,449 | ) 
|                                                                     |  |                         |               |   |      |   |             |      |  |   |             |   
|Net income (loss) per common share (diluted)                         |  | $                       | 0.73          |   |      | $ | 4.75        |      |  | $ | (5.50       | ) 
|Distributions per common share                                       |  | $                       | 2.35          |   |      | $ | 2.10        |      |  | $ | 1.32        |   
|                                                                     |  |                         |              
|Key Portfolio Statistics                                             |  |                         |               |   |      |   |             |      |  |   |             |   
|Average Agency RMBS(1)                                               |  | $                       | 2,080,888,734 |   |      | $ | 992,329,669 |      |  | $ | 897,714,150 |   
|Average repurchase agreements                                        |  |                         | 1,765,953,105 |   |      |   | 847,359,432 |      |  |   | 796,027,700 |   
|Average net assets                                                   |  |                         | 390,906,564   |   |      |   | 178,411,354 |      |  |   | 110,261,494 |   
|Average yield on Agency RMBS(2)                                      |  |                         | 3.49          | % |      |   | 4.44        | %    |  |   | 5.46        | % 
|Average cost of funds and hedge(3)                                   |  |                         | 1.34          | % |      |   | 1.43        | %    |  |   | 3.89        | % 
|Interest rate spread net of hedge(4)                                 |  |                         | 2.15          | % |      |   | 3.01        | %    |  |   | 1.57        | % 
|Operating expense ratio(5)                                           |  |                         | 2.68          | % |      |   | 3.93        | %    |  |   | 7.03        | %*
|Leverage ratio (at period end)(6)                                    |  |                         | 8.3:1         |   |      |   | 6.6:1       |      |  |   | 6.1:1       |   



|(1) | Our average Agency RMBS for the period was calculated by averaging the cost basis of our settled Agency RMBS during the period.
|--- | -------------------------------------------------------------------------------------------------------------------------------

|(2) | Our average yield
on Agency RMBS for the period was calculated by dividing our interest income from Agency RMBS by our average Agency RMBS.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Our average cost
of funds and hedge for the period was calculated by dividing our total interest expense, including our net swap and cap interest income (expense), by our average repurchase agreements.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Our interest rate
spread net of hedge for the period was calculated by subtracting our average cost of funds and hedge from our average yield on Agency RMBS.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Our operating
expense ratio is calculated by dividing operating expenses by average net assets.
|--- | -----------------------------------------------------------------------------------------------

|(6) | Our leverage ratio
was calculated by dividing total liabilities by net assets.
|--- | ------------------------------------------------------------------------------

|* | Includes expensing offering costs, a non-recurring expense, which amounted to $2,274,362, or 2.06% of average net assets.
|- | -------------------------------------------------------------------------------------------------------------------------

Core Earnings

Core Earnings represents a non-GAAP financial measure and is defined as net income (loss) excluding net realized gain (loss) on investments, net unrealized appreciation (depreciation) on investments, net
realized gain (loss) on termination of swap contracts and unrealized appreciation (depreciation) on swap and cap contracts. In



41



---

##### Table of Contents

order to evaluate the effective yield of the portfolio, management uses Core Earnings to reflect the net investment income of our portfolio as adjusted to reflect the net swap and cap interest
income (expense). Core Earnings allows management to isolate the interest income (expense) associated with our swaps and caps in order to monitor and project our borrowing costs and interest rate spread. In addition, management utilizes Core
Earnings as a key metric in conjunction with other portfolio and market factors to determine the appropriate leverage and hedging ratios, as well as the overall structure of the portfolio.

We adopted Accounting Standards Codification (ASC) 946, Clarification of the Scope of Audit and Accounting Guide
Investment Companies(ASC 946),prior to its deferral in February 2008, while most, if not all, other public companies that invest only in Agency RMBS have not adopted ASC 946. Under ASC 946, we use the financial reporting
specified for investment companies, and accordingly, our investments are carried at fair value with changes in fair value included in earnings. Most other public companies that invest only in Agency RMBS include most changes in the fair value of
their investments within shareholders equity, not in earnings. As a result, investors are not able to readily compare our results of operations to those of most of our competitors. We believe that the presentation of our Core Earnings is
useful to investors because it provides a means of comparing our Core Earnings to those of our competitors. In addition, because Core Earnings isolates the net swap and cap interest income (expense) it provides investors with an additional metric to
identify trends in our portfolio as they relate to the interest rate environment.

The primary limitation associated with Core
Earnings as a measure of our financial performance over any period is that it excludes the effects of net realized gain (loss) from investments. In addition, our presentation of Core Earnings may not be comparable to similarly-titled measures of
other companies, who may use different calculations. As a result, Core Earnings should not be considered as a substitute for our GAAP net income (loss) as a measure of our financial performance or any measure of our liquidity under GAAP.



|                                                                     |  |                          |             |   |      |   |             |      |  |   |             |  
|-------------------------------------------------------------------- |  | ------------------------ | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                     |  | Years Ended December 31, |            
|                                                                     |  | 2010                     |             |   | 2009 |   |             | 2008 | 
|Non-GAAP Reconciliation:                                             |  |                          |             |   |      |   |             |      |  |   |             |  
|NET INCOME (LOSS)                                                    |  | $                        | 22,390,356  |   |      | $ | 63,845,795  |      |  | $ | (39,172,449 | )
|Net (gain) loss from investments                                     |  |                          | (1,282,932  | ) |      |   | (39,513,017 | )    |  |   | 34,360,594  |  
|Net (gain) loss on termination of swap contracts                     |  |                          | 36,925,072  |   |      |   | 10,804,123  |      |  |   | 35,118,468  |  
|Net unrealized (appreciation) depreciation on swap and cap contracts |  |                          | (16,573,541 | ) |      |   | (8,709,674  | )    |  |   | (13,504,523 | )
|                                                                     |  |                          |             |   |      |   |             |      |  |   |             |  
|Core Earnings                                                        |  | $                        | 41,458,955  |   |      | $ | 26,427,227  |      |  | $ | 16,802,090  |  
|                                                                     |  |                          |             |   |      |   |             |      |  |   |             |  

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

Net Income (Loss).Net income decreased $41.4 million to $22.4 million for the year ended December 31, 2010, compared to $63.8
million for the year ended December 31, 2009. The major components of this decrease are detailed below.

Net Gain
(Loss) From Investments. Net gain from investments decreased by $38.2 million to $1.3 million for the year ended December 31, 2010, as compared to $39.5 million for the year ended December 31, 2009. The change was primarily the
due to the following, (i) during a portion of 2009 and the first three months of 2010 the U.S. Federal Reserve program to purchase up to $1.25 trillion of Agency RMBS caused an increase in the fair value of Agency RMBS and (ii) an increase
in the size of our portfolio from June 2010 through December 2010 as a result of raising approximately $481.1 million from public offerings coupled with a decline in the market for Agency RMBS, with the price of a Fannie Mae Agency RMBS backed by
15-Year 4.5% mortgages decreasing from $105.484 at June 30, 2010 to $104.797 at December 31, 2010.

Net Gain
(Loss) from swap and cap contracts. Net loss from swap and cap contracts increased by $29.2 million to $(38.9) million for the year ended December 31, 2010, compared to $(9.7) million for the year ended



42



---

##### Table of Contents

December 31, 2009. The change in net gain (loss) on swap and cap contracts was primarily due to the change in swap rates combined with the change in the size of our interest rate swap and
cap portfolio. During the year ended December 31, 2010 we added net $3,650.0 million notional amount of interest rate swaps and caps, ending the period with $4,390.0 million notional amount. During the year ended December 31, 2009 we added
net $500.0 million of interest rate swaps, ending the period with a notional amount of $740.0 million during the period. During the years ended December 31, 2010 and 2009, three year swap rates decreased by 78 basis points and increased by 31
basis points, respectively.

LOGO

Total Expenses. Interest expense increased by $0.6 million to $5.1 million for the year ended
December 31, 2010, as compared to $4.5 million for the year ended December 31, 2009. The increase in interest expense is due to the increase in the size of our borrowings. During the year ended December 31, 2010, our average
repurchase agreements balance was $1,766.0 million compared to $847.4 million for the year ended December 31, 2009. However the impact of the increased borrowings was offset by the decrease in borrowing rates. The average rate on our repurchase
agreements was 0.29% compared with 0.53% during the years ended December 31, 2010 and 2009, respectively.

For the year
ended December 31, 2010, operating expenses increased by $3.5 million to $10.5 million compared to $7.0 million for the year ended December 31, 2009, primarily as a result of higher management fees due to a larger asset base. However,
despite the $3.5 million increase, overall we experienced a significant decrease in expenses as a percentage of net assets with an expense ratio of 2.68% and 3.93% for the years ended December 31, 2010 and 2009, respectively. The primary reason
for the decrease in our expense ratio was the increase in our asset base in 2010. Average net assets were $390.9 million and $178.4 million for the years ended December 31, 2010 and 2009, respectively. Operating expenses consist of management
fees payable to our Manager in accordance with our management agreement, amortization related to restricted stock and stock options granted to our executive officers, certain officers and employees of our Manager and its sub-advisors and other
individuals who provide services to us, as designated by our Manager, and our independent directors, directors fees, insurance premium expenses for directors and officers insurance and other general and administrative expenses, including legal
and accounting fees.



43



---

##### Table of Contents

Interest Income. Interest income, which consists of interest income on Agency
RMBS, subordinated tranches of CLOs and short term investments, increased by $30.0 million to $75.5 million for the year ended December 31, 2010, as compared to $45.5 million for the year ended December 31, 2009. The change in interest
income is due to the increase in the size of our Agency RMBS portfolio. For the years ended December 31, 2010 and 2009, our average Agency RMBS was $2,080.9 million and $992.3 million, respectively. However, the increase due to the size of our
portfolio was offset by the decreased average yield on Agency RMBS. During the year ended December 31, 2010 and 2009, our average yield on Agency RMBS was 3.49% and 4.44%, respectively.

Interest on CLO and CDO securities is accrued at a rate determined based on estimated future cash flows and adjusted prospectively as
future cash flow amounts are recast. For CDO and CLO securities placed on nonaccrual status or when the Company cannot reliably estimate cash flows, the cost recovery method is used. Interest income on subordinated tranches of CLOs and short term
investments, increased by $1.3 million to $2.8 million for the year ended December 31, 2010, as compared to $1.5 million for the year ended December 31, 2009. Additionally, for the year ended December 31, 2010, the Company received
$3.3 million of cash distributions from CLOs that were accounted for as a reduction of the cost basis and thereby excluded from our interest income and Core Earnings. This compared to $2.0 million of cash distributions from CLOs that were treated as
a reduction of the cost basis for the year ended December 31, 2009.

Year Ended December 31, 2009 Compared to
Year Ended December 31, 2008

Net Income (Loss).Net income (loss) increased $103.0 million to net income
of $63.8 million for the year ended December 31, 2009, compared to a net loss of $(39.2) million for the year ended December 31, 2008. The major components of this increase are detailed below.

Net Gain (Loss) From Investments. Net gain (loss) from investments increased by $73.9 million to a net gain of $39.5 million
for the year ended December 31, 2009, as compared to a net loss of $(34.4) million for the year ended December 31, 2008. The change was primarily due to the increase in fair value of Agency RMBS primarily resulting from the U.S. Federal
Reserve program to purchase up to $1.25 trillion of Agency RMBS. The U.S. Federal Reserves program began in January 2009 and they purchased $1.2 trillion of Agency RMBS through January 28, 2010, representing approximately 80% of total
origination. The program was terminated on March 31, 2010.

Net Gain (Loss) from swap contracts. Net loss
from swap contracts decreased by $18.9 million to $(9.7) million for the year ended December 31, 2009, compared to $(28.6) million for the year ended December 31, 2008. The net gain (loss) on termination of swap contracts combined with the
net unrealized appreciation (depreciation) on swap contracts (the Market Impact) was $(2.0) million for the year ended December 31, 2009, compared with $(21.6) million for the year ended December 31, 2008, a decrease in loss of
$19.5 million. The Market Impact of our swaps is summarized below. During 2008, we reduced the size of our interest rate swaps as we de-levered our portfolio. During the year ended December 31, 2008, we terminated net $650.0 million of interest
rate swaps, ending the period with a notional amount of $240.0 million. In 2009 we added additional swaps after our initial public offering and additionally in November of 2009, as we sought to reduce the interest rate risk of our portfolio. During
the year ended December 31, 2009, we added net $500.0 million of interest rate swaps, ending the period with a notional amount of $740.0 million.



44



---

##### Table of Contents

The following is a chart of 3-year swap rates during the years ended December 31, 2009
and 2008:

LOGO

Total Expenses. Interest expense decreased by $19.5 million to $4.5 million for the year ended
December 31, 2009, as compared to $24.0 million for the year ended December 31, 2008, due to the impact of a significant decrease in short-term interest rates even though we had a larger asset base. During the year ended December 31,
2009, the average rate on our repurchase agreements was 0.53% compared with 3.01% during the year ended December 31, 2008.

For the year ended December 31, 2009, operating expenses decreased by $0.7 million to $7.0 million compared to $7.7 million for the
year ended December 31, 2008. This decrease represents a significant decrease in expenses as a percentage of net assets of 3.93% and 7.03% for the years ended December 31, 2009 and 2008, respectively. The primary reasons for the decrease
in the expense ratio were that (i) our expenses for 2008 included $2.3 million of offering expenses, a non-recurring expense and (ii) we had a larger asset base in 2009. Average net assets were $178.4 million and $110.3 million for the
years ended December 31, 2009 and 2008, respectively. Operating expenses consist of management fees payable to our Manager in accordance with our management agreement, amortization related to restricted stock and stock options granted to our
executive officers, certain officers and employees of our Manager and its sub-advisors and other individuals who provide services to us, as designated by our Manager, and our independent directors, directors fees, insurance premium expenses
for directors and officers insurance and other general and administrative expenses, including legal and accounting fees.

Interest Income. Interest income, which consists of interest income on Agency RMBS, subordinated tranches of CLOs, structured
notes and short term investments and other debt securities, decreased by $9.9 million to $45.5 million for the year ended December 31, 2009, as compared to $55.5 million for the year ended December 31, 2008. The change in interest income
is due to the decreased average yield on Agency RMBS and the reduction of income earned on our CLOs. During the year ended December 31, 2009 and 2008, our average yield on Agency RMBS was 4.44% and 5.46%, respectively.



45



---

##### Table of Contents

Interest on CLO and collateralized debt obligation (CDO) securities is accrued
at a rate determined based on estimated future cash flows and adjusted prospectively as future cash flow amounts are recast. For CDO and CLO securities placed on nonaccrual status or when the Company cannot reliably estimate cash flows, the cost
recovery method is used. Interest income on subordinated tranches of CLOs and short term investments and other debt securities, decreased by $5.0 million to $1.5 million for the year ended December 31, 2009, as compared to $6.5 million for the
year ended December 31, 2008. Additionally, a component of the Companys net income for 2009 was $2.0 million of distributions from CLOs that were accounted for under the cost recovery method and thereby excluded from our interest income
and Core Earnings. This compared to $2.7 million for the year ended December 31, 2008.

Contractual Obligations and
Commitments

The base management fee under our management agreement is payable monthly in arrears
in an amount equal to 1/12thof (a) 1.50% of the
first $250,000,000 of our net assets, (b) 1.25% of our net assets that are greater than $250,000,000 and less than or equal to $500,000,000, and (c) 1.00% of our net assets that are greater than $500,000,000. Pursuant to that agreement,
our Manager is also entitled to receive, in certain circumstances, a termination fee and reimbursement of certain expenses as described therein. Such fees and expenses do not have fixed and determinable payments.

We had the following contractual obligations under repurchase agreements as of December 31, 2010 and 2009 (dollar amounts in
thousands):



|                   |  |                   |           |  |                                  |  |      |                              |  |   |                             |  |  |   |           | 
|------------------ |  | ----------------- | --------- |  | -------------------------------- |  | ---- | ---------------------------- |  | - | --------------------------- |  |  | - | --------- | 
|                   |  | December 31, 2010 |          
|                   |  | Balance           |           |  | Weighted AverageContractual Rate |  |      | ContractualInterest Payments |  |   | Total ContractualObligation | 
|Within 30 days     |  | $                 | 1,291,544 |  |                                  |  | 0.33 | %                            |  | $ | 614                         |  |  | $ | 1,292,158 | 
|30 days to 60 days |  |                   | 1,499,864 |  |                                  |  | 0.32 |                              |  |   | 1,135                       |  |  |   | 1,500,999 | 
|60 days to 90 days |  |                   | 652,435   |  |                                  |  | 0.32 |                              |  |   | 520                         |  |  |   | 652,955   | 
|                   |  |                   |           |  |                                  |  |      |                              |  |   |                             |  |  |   |           | 
|                   |  | $                 | 3,443,843 |  |                                  |  | 0.32 | %                            |  | $ | 2,269                       |  |  | $ | 3,446,112 | 
|                   |  |                   |           |  |                                  |  |      |                              |  |   |                             |  |  |   |           | 
|                   | 
|                   |  | December 31, 2009 |          
|                   |  | Balance           |           |  | Weighted AverageContractual Rate |  |      | ContractualInterest Payments |  |   | Total ContractualObligation | 
|Within 30 days     |  | $                 | 878,802   |  |                                  |  | 0.26 | %                            |  | $ | 257                         |  |  | $ | 879,059   | 
|30 days to 60 days |  |                   | 430,526   |  |                                  |  | 0.31 |                              |  |   | 346                         |  |  |   | 430,872   | 
|60 days to 90 days |  |                   | 63,380    |  |                                  |  | 0.27 |                              |  |   | 43                          |  |  |   | 63,423    | 
|                   |  |                   |           |  |                                  |  |      |                              |  |   |                             |  |  |   |           | 
|                   |  | $                 | 1,372,708 |  |                                  |  | 0.28 | %                            |  | $ | 646                         |  |  | $ | 1,373,354 | 
|                   |  |                   |           |  |                                  |  |      |                              |  |   |                             |  |  |   |           | 



46



---

##### Table of Contents

We enter into interest rate swap and cap contracts as a means of mitigating our interest
rate risk on forecasted interest expense associated with repurchase agreements for the term of the swap or cap contract. At December 31, 2010 and 2009, we had the following interest rate swap and cap contracts:

As of December 31, 2010

Interest Rate Swaps



|                                       |  |                 |                |  |          |  |        |              |  |  |                |  |  |            |               |  |  |   |            |  
|-------------------------------------- |  | --------------- | -------------- |  | -------- |  | ------ | ------------ |  |  | -------------- |  |  | ---------- | ------------- |  |  | - | ---------- | -
|Counterparty                           |  | Expiration Date |                |  | Pay Rate |  |        | Receive Rate |  |  | NotionalAmount |  |  | Fair Value |              
|The Royal Bank of Scotland plc         |  |                 | May 2013       |  |          |  | 1.6000 | %            |  |  | 3-Month LIBOR  |  |  |            | 100,000,000   |  |  |   | (1,495,761 | )
|The Royal Bank of Scotland plc         |  |                 | June 2013      |  |          |  | 1.3775 | %            |  |  | 3-Month LIBOR  |  |  |            | 300,000,000   |  |  |   | (2,718,389 | )
|The Royal Bank of Scotland plc         |  |                 | July 2013      |  |          |  | 1.3650 | %            |  |  | 3-Month LIBOR  |  |  |            | 300,000,000   |  |  |   | (2,484,208 | )
|Goldman Sachs                          |  |                 | December 2013  |  |          |  | 1.3088 | %            |  |  | 3-Month LIBOR  |  |  |            | 400,000,000   |  |  |   | (776,014   | )
|The Royal Bank of Scotland plc         |  |                 | December 2013  |  |          |  | 1.2813 | %            |  |  | 3-Month LIBOR  |  |  |            | 500,000,000   |  |  |   | (539,051   | )
|Goldman Sachs                          |  |                 | December 2013  |  |          |  | 1.2640 | %            |  |  | 3-Month LIBOR  |  |  |            | 400,000,000   |  |  |   | (255,360   | )
|Deutsche Bank Group                    |  |                 | December 2013  |  |          |  | 1.3225 | %            |  |  | 3-Month LIBOR  |  |  |            | 400,000,000   |  |  |   | (904,287   | )
|The Royal Bank of Scotland plc         |  |                 | July 2014      |  |          |  | 1.7200 | %            |  |  | 3-Month LIBOR  |  |  |            | 100,000,000   |  |  |   | (732,908   | )
|Nomura Global Financial Products, Inc. |  |                 | July 2014      |  |          |  | 1.7325 | %            |  |  | 3-Month LIBOR  |  |  |            | 250,000,000   |  |  |   | (1,786,556 | )
|Deutsche Bank Group                    |  |                 | August 2014    |  |          |  | 1.3530 | %            |  |  | 3-Month LIBOR  |  |  |            | 200,000,000   |  |  |   | 1,529,006  |  
|Goldman Sachs                          |  |                 | September 2014 |  |          |  | 1.3120 | %            |  |  | 3-Month LIBOR  |  |  |            | 500,000,000   |  |  |   | 5,460,027  |  
|Deutsche Bank Group                    |  |                 | October 2014   |  |          |  | 1.1725 | %            |  |  | 3-Month LIBOR  |  |  |            | 240,000,000   |  |  |   | 4,059,533  |  
|                                       |  |                 |                |  |          |  |        |              |  |  |                |  |  |            |               |  |  |   |            |  
|Total                                  |  |                 |                |  |          |  |        |              |  |  |                |  |  | $          | 3,690,000,000 |  |  | $ | (643,968   | )
|                                       |  |                 |                |  |          |  |        |              |  |  |                |  |  |            |               |  |  |   |            |  
|                                       |  |                 |                | 
|Interest Rate Caps                     |  |                 |                |  |          |  |        |              |  |  |                |  |  |            |               |  | 
|Counterparty                           |  | Expiration Date |                |  | Cap Rate |  |        |              |  |  | NotionalAmount |  |  | Fair Value |              
|The Royal Bank of Scotland plc         |  |                 | December 2014  |  |          |  | 2.0725 | %            |  |  |                |  |  | $          | 200,000,000   |  |  | $ | 4,752,395  |  
|The Royal Bank of Scotland plc         |  |                 | October 2015   |  |          |  | 1.4275 | %            |  |  |                |  |  |            | 300,000,000   |  |  |   | 15,339,727 |  
|The Royal Bank of Scotland plc         |  |                 | November 2015  |  |          |  | 1.3600 | %            |  |  |                |  |  |            | 200,000,000   |  |  |   | 10,891,514 |  
|                                       |  |                 |                |  |          |  |        |              |  |  |                |  |  |            |               |  |  |   |            |  
|Total                                  |  |                 |                |  |          |  |        |              |  |  |                |  |  | $          | 700,000,000   |  |  | $ | 30,983,636 |  
|                                       |  |                 |                |  |          |  |        |              |  |  |                |  |  |            |               |  |  |   |            |  
|                                       |  |                 |                |  |         
|As of December 31, 2009                |  |                 |                |  |          |  |        |              |  |  |                |  |  |            |               |  |  |   |            |  
|Counterparty                           |  | Expiration Date |                |  | Pay Rate |  |        | Receive Rate |  |  | NotionalAmount |  |  | Fair Value |              
|Deutsche Bank Group                    |  |                 | April 2012     |  |          |  | 1.6910 | %            |  |  | 3-Month LIBOR  |  |  | $          | 240,000,000   |  |  | $ | (543,716   | )
|Deutsche Bank Group                    |  |                 | June 2012      |  |          |  | 2.2660 | %            |  |  | 3-Month LIBOR  |  |  |            | 200,000,000   |  |  |   | (2,558,748 | )
|The Royal Bank of Scotland plc         |  |                 | July 2012      |  |          |  | 2.1250 | %            |  |  | 3-Month LIBOR  |  |  |            | 200,000,000   |  |  |   | (1,822,869 | )
|The Royal Bank of Scotland plc         |  |                 | November 2013  |  |          |  | 2.2125 | %            |  |  | 3-Month LIBOR  |  |  |            | 100,000,000   |  |  |   | 1,131,487  |  
|                                       |  |                 |                |  |          |  |        |              |  |  |                |  |  |            |               |  |  |   |            |  
|Total                                  |  |                 |                |  |          |  |        |              |  |  |                |  |  | $          | 740,000,000   |  |  | $ | (3,793,846 | )
|                                       |  |                 |                |  |          |  |        |              |  |  |                |  |  |            |               |  |  |   |            |  

We enter into certain contracts that contain a variety of indemnification obligations, principally with our
Manager, brokers and counterparties to interest rate swap contracts and repurchase agreements. The maximum potential future payment amount we could be required to pay under these indemnification obligations is unlimited. We have not incurred any
costs to defend lawsuits or settle claims related to these indemnification obligations. As a result, the estimated fair value of these agreements is minimal. Accordingly, we recorded no liabilities for these agreements as of December 31, 2010
and 2009. In addition, as of December 31, 2010 and 2009, we had a $2,234.4 million and $229.8 million payable for securities purchased, respectively, a portion of which will be financed through repurchase agreements. The increase in payable for
securities purchased of



47



---

##### Table of Contents

$2,004.6 million is primarily due to increased purchases to invest the net proceeds from the public offering that closed December 15, 2010. Because we measure leverage as total liabilities
divided by net assets, the amount of payable for securities purchased is included in our December 31, 2010 and 2009 leverage ratio of 8.3 to 1 and 6.6 to 1, respectively. A summary of our payable for securities purchased as of December 31,
2010 and 2009 is included in the Financial ConditionLiabilities section.

Off-Balance Sheet
Arrangements

As of December 31, 2010 and 2009, we did not maintain any relationships with unconsolidated entities
or financial partnerships, such as entities often referred to as structured finance, or special purpose or variable interest entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. Further, as of December 31, 2010 and 2009, we had not guaranteed any obligations of unconsolidated entities or entered into any commitment or intent to provide funding to any such entities.

Liquidity and Capital Resources

During the years ended December 31, 2010, 2009 and 2008, our cash flows from operations provided (used) cash of $(2,483.4) million, $(880.7) million and $757.5 million, respectively. For the years
ended December 31, 2010 and 2009, we used the cash generated from our public offerings to purchase investment securities. During the year ended December 31, 2008, the cash provided from operations was the result of delevering the
portfolio. During the years ended December 31, 2010, 2009 and 2008, we had net (purchases) sales of securities (net of purchases, sales, premium paid on interest rate caps and paydown proceeds) of $(4,504.0) million, $(1,126.5) million and
$1,142.7 million, respectively.

We held cash and cash equivalents of $1.5 million, $1.9 million and $7.2 million at
December 31, 2010, 2009 and 2008, respectively. As of December 31, 2010, our source of funds, excluding our equity offerings, consisted of net proceeds from repurchase agreements totaling $3,443.8 million, with a weighted average borrowing
rate of 0.32%, which we used to finance the acquisition of Agency RMBS. We expect to continue to borrow funds primarily in the form of repurchase agreements. As of December 31, 2010, we had established 28 borrowing arrangements with various
investment banking firms and other lenders, 20 of which were in use. In addition, during the year ended December 31, 2010, we raised a total of approximately $489.1 million in net proceeds from the issuance of common stock. As of
December 31, 2009, our source of funds, excluding our equity offerings, consisted of net proceeds from repurchase agreements totaling $1,372.7 million, with a weighted average borrowing rate of 0.28%, which we used to finance the acquisition of
Agency RMBS. As of December 31, 2009, we had established 25 borrowing arrangements with various investment banking firms and other lenders, 16 of which were in use. In addition, during the year ended December 31, 2009, we raised $105.8
million in net proceeds from the issuance of common stock. As of December 31, 2008, our source of funds, excluding our equity offerings, consisted of net proceeds from repurchase agreements totaling $587.5 million, with a weighted average
borrowing rate of 2.44%, which we used to finance the acquisition of Agency RMBS. As of December 31, 2008, we had established 20 borrowing arrangements with various investment banking firms and other lenders, six of which were in use. In
addition, during the year ended December 31, 2008, we raised $12.8 million in net proceeds from the issuance of common stock.

Additionally, we sponsor a dividend reinvestment and direct stock purchase plan through which stockholders may purchase additional shares of common stock by reinvesting some or all of the cash dividends
received on shares of common stock. This plan became effective on June 22, 2010. Stockholders may also make optional cash purchases of shares of common stock subject to certain limitations detailed in the plan prospectus. From June 22,
2010 to December 31, 2010, we issued 607,902 shares under the plan raising approximately $8.0 million of net proceeds, which is a component of the $489.1 million in net proceeds from issuance of common stock, disclosed above. As of
December 31, 2010, there were approximately 9.4 million shares available for issuance under this plan.



48



---

##### Table of Contents

The following tables present certain information regarding our risk exposure on our
repurchase agreements as of December 31, 2010, 2009 and 2008:

December 31, 2010



|                                      |  |                             |               |  |            |  |       |                    |  |   |                                  |  |  |  |    | 
|------------------------------------- |  | --------------------------- | ------------- |  | ---------- |  | ----- | ------------------ |  | - | -------------------------------- |  |  |  | -- | 
|Counterparty                          |  | Total OutstandingBorrowings |               |  | % of Total |  |       | Amount at 
Risk(1) |  |   | Weighted AverageMaturity in Days | 
|Bank of America Securities LLC        |  | $                           | 162,617,000   |  |            |  | 4.7   | %                  |  | $ | 9,755,834                        |  |  |  | 18 | 
|Barclays Capital, Inc.                |  |                             | 275,315,864   |  |            |  | 8.0   |                    |  |   | 18,522,578                       |  |  |  | 29 | 
|BNP Paribas                           |  |                             | 210,840,000   |  |            |  | 6.1   |                    |  |   | 13,885,256                       |  |  |  | 75 | 
|Cantor Fitzgerald & Co.               |  |                             | 317,137,000   |  |            |  | 9.2   |                    |  |   | 19,619,850                       |  |  |  | 49 | 
|Citigroup Global Markets, Inc.        |  |                             | 58,587,000    |  |            |  | 1.7   |                    |  |   | 2,777,830                        |  |  |  | 20 | 
|Credit Suisse First Boston            |  |                             | 199,352,323   |  |            |  | 5.8   |                    |  |   | 16,299,135                       |  |  |  | 41 | 
|Daiwa Securities America, Inc.        |  |                             | 80,058,000    |  |            |  | 2.3   |                    |  |   | 3,974,676                        |  |  |  | 7  | 
|Deutsche Bank Securities, Inc.        |  |                             | 292,920,000   |  |            |  | 8.5   |                    |  |   | 17,829,800                       |  |  |  | 45 | 
|Goldman Sachs Group, Inc.             |  |                             | 395,995,623   |  |            |  | 11.5  |                    |  |   | 26,487,308                       |  |  |  | 57 | 
|Greenwich Capital Markets, Inc.       |  |                             | 221,347,815   |  |            |  | 6.4   |                    |  |   | 15,879,464                       |  |  |  | 7  | 
|Guggenheim Liquidity Services, LLC    |  |                             | 151,671,000   |  |            |  | 4.4   |                    |  |   | 9,413,736                        |  |  |  | 46 | 
|ING Financial Markets LLC             |  |                             | 82,701,000    |  |            |  | 2.4   |                    |  |   | 4,516,639                        |  |  |  | 74 | 
|Jefferies & Company, Inc.             |  |                             | 35,937,000    |  |            |  | 1.1   |                    |  |   | 1,835,103                        |  |  |  | 11 | 
|LBBW Securities LLC                   |  |                             | 157,277,000   |  |            |  | 4.6   |                    |  |   | 11,607,275                       |  |  |  | 45 | 
|MF Global, Ltd                        |  |                             | 135,766,020   |  |            |  | 4.0   |                    |  |   | 6,140,674                        |  |  |  | 30 | 
|Mitsubishi UFJ Securities (USA), Inc. |  |                             | 120,487,000   |  |            |  | 3.5   |                    |  |   | 6,450,632                        |  |  |  | 20 | 
|Mizuho Securities USA, Inc.           |  |                             | 145,028,000   |  |            |  | 4.2   |                    |  |   | 9,189,738                        |  |  |  | 18 | 
|Nomura Securities International, Inc. |  |                             | 167,506,649   |  |            |  | 4.9   |                    |  |   | 10,791,081                       |  |  |  | 34 | 
|South Street Securities LLC           |  |                             | 159,807,000   |  |            |  | 4.6   |                    |  |   | 14,001,666                       |  |  |  | 46 | 
|UBS AG                                |  |                             | 73,492,000    |  |            |  | 2.1   |                    |  |   | 4,736,281                        |  |  |  | 46 | 
|                                      |  |                             |               |  |            |  |       |                    |  |   |                                  |  |  |  |    | 
|Total                                 |  | $                           | 3,443,843,294 |  |            |  | 100.0 | %                  |  | $ | 223,714,556                      |  |  |  |    | 
|                                      |  |                             |               |  |            |  |       |                    |  |   |                                  |  |  |  |    | 

December 31, 2009



|                                |  |                             |               |  |            |  |       |                    |  |   |                                  |  |  |  |    | 
|------------------------------- |  | --------------------------- | ------------- |  | ---------- |  | ----- | ------------------ |  | - | -------------------------------- |  |  |  | -- | 
|Counterparty                    |  | Total OutstandingBorrowings |               |  | % of Total |  |       | Amount at 
Risk(1) |  |   | Weighted AverageMaturity in Days | 
|Bank of America Securities LLC  |  | $                           | 93,068,000    |  |            |  | 6.8   | %                  |  | $ | 9,029,721                        |  |  |  | 7  | 
|Barclays Capital, Inc.          |  |                             | 107,654,754   |  |            |  | 7.8   |                    |  |   | 6,157,773                        |  |  |  | 60 | 
|BNP Paribas                     |  |                             | 99,865,000    |  |            |  | 7.3   |                    |  |   | 5,096,043                        |  |  |  | 29 | 
|Cantor Fitzgerald & Co.         |  |                             | 47,521,000    |  |            |  | 3.5   |                    |  |   | 2,730,716                        |  |  |  | 53 | 
|Credit Suisse First Boston      |  |                             | 48,635,251    |  |            |  | 3.5   |                    |  |   | 1,636,061                        |  |  |  | 19 | 
|Daiwa Securities America, Inc.  |  |                             | 51,031,000    |  |            |  | 3.7   |                    |  |   | 2,151,365                        |  |  |  | 8  | 
|Deutsche Bank Securities, Inc.  |  |                             | 125,247,000   |  |            |  | 9.1   |                    |  |   | 9,140,161                        |  |  |  | 7  | 
|Goldman Sachs Group, Inc.       |  |                             | 134,802,000   |  |            |  | 9.8   |                    |  |   | 8,005,697                        |  |  |  | 42 | 
|Greenwich Capital Markets, Inc. |  |                             | 135,004,688   |  |            |  | 9.8   |                    |  |   | 7,263,592                        |  |  |  | 5  | 
|ING Financial Markets LLC       |  |                             | 78,581,000    |  |            |  | 5.7   |                    |  |   | 3,865,514                        |  |  |  | 22 | 
|Jefferies & Company, Inc.       |  |                             | 59,209,000    |  |            |  | 4.3   |                    |  |   | 2,702,664                        |  |  |  | 11 | 
|LBBW Securities LLC             |  |                             | 58,992,000    |  |            |  | 4.3   |                    |  |   | 2,622,859                        |  |  |  | 15 | 
|MF Global, Ltd                  |  |                             | 122,066,000   |  |            |  | 8.9   |                    |  |   | 3,304,281                        |  |  |  | 60 | 
|Mizuho Securities USA, Inc.     |  |                             | 81,474,579    |  |            |  | 6.0   |                    |  |   | 4,024,203                        |  |  |  | 20 | 
|Morgan Keegan & Co.             |  |                             | 41,894,000    |  |            |  | 3.1   |                    |  |   | 3,110,849                        |  |  |  | 4  | 
|South Street Securities LLC     |  |                             | 87,662,300    |  |            |  | 6.4   |                    |  |   | 6,401,808                        |  |  |  | 50 | 
|                                |  |                             |               |  |            |  |       |                    |  |   |                                  |  |  |  |    | 
|Total                           |  | $                           | 1,372,707,572 |  |            |  | 100.0 | %                  |  | $ | 77,243,307                       |  |  |  |    | 
|                                |  |                             |               |  |            |  |       |                    |  |   |                                  |  |  |  |    | 



49



---

##### Table of Contents

December 31, 2008



|                                  |  |                             |             |  |            |  |       |                    |  |   |                                  |  |  |  |    | 
|--------------------------------- |  | --------------------------- | ----------- |  | ---------- |  | ----- | ------------------ |  | - | -------------------------------- |  |  |  | -- | 
|Counterparty                      |  | Total OutstandingBorrowings |             |  | % of Total |  |       | Amount at 
Risk(1) |  |   | Weighted AverageMaturity in Days | 
|Bank of America Securities LLC(2) |  | $                           | 95,952,000  |  |            |  | 16.3  | %                  |  | $ | 13,373,003                       |  |  |  | 10 | 
|Deutsche Bank Securities, Inc.    |  |                             | 154,691,840 |  |            |  | 26.3  |                    |  |   | 15,064,027                       |  |  |  | 9  | 
|Goldman Sachs Group, Inc.         |  |                             | 152,788,000 |  |            |  | 26.0  |                    |  |   | 12,893,032                       |  |  |  | 6  | 
|MF Global, Ltd.                   |  |                             | 111,845,401 |  |            |  | 19.1  |                    |  |   | 5,693,697                        |  |  |  | 15 | 
|Morgan Keegan & Co.               |  |                             | 21,808,000  |  |            |  | 3.7   |                    |  |   | 1,271,593                        |  |  |  | 5  | 
|Pershing, LLC.                    |  |                             | 50,400,000  |  |            |  | 8.6   |                    |  |   | 3,506,859                        |  |  |  | 12 | 
|                                  |  |                             |             |  |            |  |       |                    |  |   |                                  |  |  |  |    | 
|Total                             |  | $                           | 587,485,241 |  |            |  | 100.0 | %                  |  | $ | 51,802,211                       |  |  |  |    | 
|                                  |  |                             |             |  |            |  |       |                    |  |   |                                  |  |  |  |    | 



|(1) | Equal to the fair value of pledged securities plus accrued interest income, minus the sum of repurchase agreement liabilities and accrued interest
expense.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Formerly Merrill Lynch & Co., acquired by Bank of America Corp., effective January 1, 2009.
|--- | -------------------------------------------------------------------------------------------

Our repurchase agreements do not include substantive provisions other than those covenants and other customary provisions contained in
the standard master repurchase agreement as published by the Bond Market Association (now the Securities Industry and Financial Markets Association). The repurchase agreements generally require us to transfer additional securities to the
counterparty in the event the value of the securities then held by the counterparty in the margin account falls below specified levels and contain events of default in cases where we breach our obligations under the agreement. We receive margin
calls from our repurchase agreement counterparties from time to time in the ordinary course of business similar to other entities in the specialty finance business. As of December 31, 2010, 2009 and 2008, we had approximately $423.4 million,
$153.0 million and $40.7 million, respectively, in Agency RMBS, U.S. Treasury securities and cash and cash equivalents available to satisfy future margin calls. To date, we have maintained sufficient liquidity to meet margin calls, and we have never
been unable to satisfy a margin call, although no assurance can be given that we will be able to satisfy requests from our lenders to post additional collateral in the future.

An event of default or termination event under the standard master repurchase agreement would give our counterparty the option to terminate all repurchase transactions existing with us and make any amount
due by us to the counterparty to be payable immediately.

We have made and intend to continue to make regular quarterly
distributions of all or substantially all of our REIT taxable income to holders of our common stock. In order to qualify as a REIT and to avoid federal corporate income tax on the income that we distribute to our stockholders, we are required to
distribute at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain, on an annual basis. This requirement can impact our liquidity and capital resources.

For our short term (one year or less) and long term liquidity, we also rely on the cash flow from operations, primarily monthly principal
and interest payments to be received on our Agency RMBS, as well as any primary securities offerings authorized by our board of directors.

Based on our current portfolio, leverage rate and available borrowing arrangements, we believe that our cash flow from operations and the utilization of borrowings will be sufficient to enable us to meet
anticipated short term (one year or less) liquidity requirements such as to fund our investment activities, pay fees under our management agreement, fund our distributions to stockholders and for general corporate expenses. However, an increase in
prepayment rates substantially above our expectations could cause a temporary liquidity shortfall due to the timing of the necessary margin calls on the financing arrangements and the actual receipt of the cash related to principal paydowns. If our
cash resources are at any time insufficient to satisfy our liquidity requirements, we may have to issue debt or additional equity securities or sell Agency RMBS in our portfolio. If required, the sale of Agency RMBS at prices lower than their
amortized cost would result in realized losses. We believe that we have additional capacity through repurchase agreements to leverage our equity further should the need for additional short term (one year or less) liquidity arise.



50



---

##### Table of Contents

Our ability to meet our long term (greater than one year) liquidity and capital resource
requirements will be subject to obtaining additional debt financing and equity capital. We may increase our capital resources by obtaining long term credit facilities or making public or private offerings of equity or debt securities, possibly
including classes of preferred stock, common stock, commercial paper, medium-term notes, CDOs, collateralized mortgage obligations and senior or subordinated notes. Such financing will depend on market conditions for capital raises and for the
investment of any proceeds. If we are unable to renew, replace or expand our sources of financing on substantially similar terms, it may have an adverse effect on our business and results of operations.

We generally seek to borrow (on a recourse basis) between six and 10 times the amount of our net assets. At December 31, 2010, 2009
and 2008, our total liabilities were $5,698.9 million, $1,621.9 million and $603.6 million, respectively, which represented a leverage ratio of 8.3 to 1, 6.6 to 1 and 6.1 to 1, respectively.

Qualitative and Quantitative Disclosures about Short-Term Borrowings

The following table discloses quantitative disclosures about our short-term borrowings under repurchase agreements during the years ended
December 31, 2010 and 2009.



|                                        |  |                          |         |   |      |   |         |  
|--------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | -
|                                        |  | Years Ended December 31, |        
|(In millions)                           |  | 2010                     |         |   | 2009 |  
|Outstanding at period end               |  | $                        | 3,443.8 |   |      | $ | 1,372.7 |  
|Weighted average rate at period end     |  |                          | 0.32    | % |      |   | 0.28    | %
|Average outstanding during period       |  | $                        | 1,766.0 |   |      | $ | 847.4   |  
|Weighted average rate during period     |  |                          | 0.29    | % |      |   | 0.53    | %
|Largest month end balance during period |  | $                        | 3,443.8 |   |      | $ | 1,372.7 |  

During year ended
December 31, 2010, our repurchase agreement balance increased significantly during the end of the year due to an increase in our capital base that allowed us to finance additional asset purchases. Our net assets as of December 31, 2010
were $690.3 million compared to the average during the year ended December 31, 2010 of $390.9 million. During the year ended December 31, 2009, our repurchase agreement balance increased significantly during the end of the year due to an
increase in our capital base that allowed us to finance additional asset purchases. Our net assets as of December 31, 2009 were $244.3 million compared to the average during the year ended December 31, 2009 of $178.4 million.

Inflation

Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance far more than inflation. Changes in interest
rates do not necessarily correlate with inflation rates or changes in inflation rates. Our financial statements are prepared in accordance with GAAP and our distributions are determined by our board of directors based in part on our REIT taxable
income as calculated according to the requirements of the Internal Revenue Code; in each case, our activities and balance sheet are measured with reference to fair value without considering inflation.

Critical Accounting Policies

Investment Company Accounting

Our financial statements are prepared by
management in accordance with GAAP. Although we conduct our operations so that we are not required to register as an investment company under the Investment Company Act, for financial reporting purposes we are an investment company and follow the
accounting and reporting specified in ASC 946, Financial Services-Investment Companies. Accordingly, investments in securities are carried at fair value with changes in fair value recorded in the statement of operations. Our most critical
accounting policies require us to make complex and subjective decisions and assessments that could affect our reported assets and liabilities, as well as our reported interest income and expenses. We believe that all of the decisions and



51



---

##### Table of Contents

assessments upon which our financial statements are based were reasonable at the time made based upon information available to us at that time. We rely on our Managers experience and
analysis of historical and current market data in order to arrive at what we believe to be reasonable estimates. See Note 2 to the financial statements included elsewhere in this annual report on Form 10-K for a complete discussion of our
significant accounting policies. We have identified our most critical accounting policies to be the following:

Valuation

Valuation of our investments is determined by our Manager using third-party pricing services and dealer quotes. The
third-party pricing services use pricing models that incorporate such factors as coupons, primary and secondary mortgage rates, prepayment speeds, spread to the Treasury curves and interest rate swap curves, convexity, duration, periodic and life
caps and credit enhancement. The dealer quotes incorporate common market pricing methods, including a spread measurement to the Treasury curves or interest rate swap curve as well as underlying characteristics of the particular security including
coupon, periodic and life caps, rate reset period, issuer, additional credit support and expected life of the security. CLOs are priced using indicative dealer quotes which are validated using internal cash flow models and the income approach. Major
inputs to the model are prepayment speeds, reinvestment spreads, default rates and recovery rates. Our Manager reviews all prices used to ensure that current market conditions are represented. This review includes comparisons of similar market
transactions, alternative third-party pricing services and dealer quotes, or comparisons to a pricing model. Based on this review our Manager will use judgment to determine the price that fairly represents the highest exit price and therefore the
best representation of fair value. The resulting unrealized gains and losses are reflected in the statement of operations.

Recent Accounting Pronouncements

In January 2010, the FASB provided additional disclosure requirements for fair value measurements under ASC 820,Fair Value Measurements and Disclosures. The new pronouncement requires a reporting
entity to disclose the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. In addition, the reconciliation for fair value measurements using significant unobservable
inputs (Level 3) should present separately information about purchases, sales, issuances and settlements (that is, on a gross rather than net basis). We adopted the pronouncement in January 2010, and it did not have a material effect on our
financial statements.



|Item 7A. | Quantitative and Qualitative Disclosures about Market Risk
|-------- | ----------------------------------------------------------

As of December 31, 2010 and 2009, the primary component of our market risk was interest rate risk, as described below. While we do not seek to avoid risk completely, we do believe that risk can be
quantified from historical experience and seek to actively manage risk, to earn sufficient compensation to justify taking risks and to maintain capital levels consistent with the risks we undertake. Our board of directors has a risk management
committee that oversees our risk management process. See BusinessRisk Management for a further discussion of our risk management committee and risk mitigation practices.

Interest Rate Risk

We are subject to interest rate risk in connection with our investments in Agency RMBS collateralized by ARMs, hybrid ARMs and fixed rate mortgage loans and our related debt obligations, which are
generally repurchase agreements of limited duration that are periodically refinanced at current market rates. We seek to mitigate this risk through utilization of derivative contracts, primarily interest rate swap and cap agreements.

Effect on Net Investment Income. We fund our investments in long term Agency RMBS collateralized by ARMs, hybrid ARMs and
fixed rate mortgage loans with short term borrowings under repurchase agreements. During periods of rising interest rates, the borrowing costs associated with those Agency RMBS tend to increase while the income earned on such Agency RMBS (during the
fixed rate component of such securities) may remain substantially unchanged. This results in a narrowing of the net interest spread between the related assets and borrowings and may even result in losses.



52



---

##### Table of Contents

We are a party to the interest rate swap and cap contracts as of December 31, 2010,
2009 and 2008 described in detail under Item 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsContractual Obligations and Commitments in this annual report on Form 10-K.

Hedging techniques are partly based on assumed levels of prepayments of our Agency RMBS. If prepayments are slower or faster than
assumed, the life of the Agency RMBS will be longer or shorter, which would reduce the effectiveness of any hedging strategies we may use and may cause losses on such transactions.

Occasionally we invest in Agency RMBS collateralized by ARMs which are based on mortgages whose coupon rates reset monthly based on the
Monthly Treasury Average, or MTA. However, our borrowing costs pursuant to our repurchase agreements are generally based on 30-day LIBOR, which may change more quickly than the MTA index. Hence, in a rapidly rising interest rate
environment, we would expect our net interest margin to decrease, temporarily. In a falling interest rate environment, we would expect our net interest margin to rise temporarily. For a discussion of the effects of interest rate changes on our
Agency RMBS collateralized by hybrid ARMs and fixed-rate mortgages, see Extension Risk.

Effect on
Fair Value. Another component of interest rate risk is the effect changes in interest rates will have on the fair value of our assets. We face the risk that the fair value of our assets will increase or decrease at different rates than that
of our liabilities, including our hedging instruments.

We primarily assess our interest rate risk by estimating the duration
of our assets and the duration of our liabilities. Duration essentially measures the market price volatility of financial instruments as interest rates change. We generally calculate duration using various third-party financial models and empirical
data. Different models and methodologies can produce different duration numbers for the same securities.

Extension
Risk. We invest in Agency RMBS collateralized by hybrid ARMs, which have interest rates that are fixed for the first few years of the loan (typically three, five, seven or 10 years) and thereafter reset periodically on the same basis as
Agency RMBS collateralized by ARMs. We compute the projected weighted average life of our Agency RMBS collateralized by hybrid ARMs based on assumptions regarding the rate at which the borrowers will prepay the underlying mortgages. In general, when
Agency RMBS collateralized by fixed rate or hybrid ARMs is acquired with borrowings, we may, but are not required to, enter into an interest rate swap agreement or other hedging instrument that effectively fixes our borrowing costs for a period
close to the anticipated weighted average life of the fixed rate portion of the related Agency RMBS. This strategy is designed to protect us from rising interest rates by fixing our borrowing costs for the duration of the fixed rate period of the
collateral underlying the related Agency RMBS.

We have structured our swaps to expire in conjunction with the estimated
weighted average life of the fixed period of the mortgages underlying our Agency RMBS portfolio. However, in a rising interest rate environment, the weighted average life of the fixed rate mortgages underlying our Agency RMBS could extend beyond the
term of the swap agreement or other hedging instrument. This could have a negative impact on our results from operations, as borrowing costs would no longer be fixed after the term of the hedging instrument while the income earned on the remaining
Agency RMBS would remain fixed for a period of time. This situation may also cause the market value of our Agency RMBS to decline, with little or no offsetting gain from the related hedging transactions. In extreme situations, we may be forced to
sell assets to maintain adequate liquidity, which could cause us to incur losses.

Interest Rate Cap Risk. Both
the ARMs and hybrid ARMs that collateralize our Agency RMBS are typically subject to periodic and lifetime interest rate caps and floors, which limit the amount by which the securitys interest yield may change during any given period. However,
our borrowing costs will not be subject to similar restrictions. Therefore, in a period of increasing interest rates, the interest costs on our borrowings could increase without limitation by caps, while the interest-rate yields on our Agency RMBS
would effectively be limited by caps. This problem will be magnified to the extent that we acquire Agency RMBS that are collateralized by



53



---

##### Table of Contents

hybrid ARMs that are not fully indexed. In addition, the underlying mortgages may be subject to periodic payment caps that result in some portion of the interest being deferred and added to the
principal outstanding. This could result in our receipt of less cash income on our Agency RMBS than we need in order to pay the interest cost on our related borrowings. These factors could lower our net investment income or cause a net loss during
periods of rising interest rates, which would harm our financial condition, cash flows and results of operations.

Interest
Rate Mismatch Risk. We intend to fund a substantial portion of our acquisitions of Agency RMBS with borrowings that, after the effect of hedging, 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 the Agency RMBS. Thus, we anticipate that in most cases the interest rate indices and repricing terms of our Agency RMBS and our funding sources will not be identical, thereby
creating an interest rate mismatch between assets and liabilities. Therefore, our cost of funds would likely rise or fall more quickly than would our earnings rate on assets. During periods of changing interest rates, such interest rate mismatches
could negatively impact our financial condition, cash flows and results of operations. To mitigate interest rate mismatches, we may utilize the hedging strategies discussed above.

Our analysis of risks is based on our Managers experience, estimates, models and assumptions. These analyses rely on models which
utilize estimates of fair value and interest rate sensitivity. Actual economic conditions or implementation of investment decisions by our management may produce results that differ significantly from the estimates and assumptions used in our models
and the projected results reflected herein.

Prepayment Risk

Prepayments are the full or partial repayment of principal prior to the original contractual maturity of a mortgage loan and typically
occur due to refinancing of mortgage loans. Prepayment rates for existing Agency RMBS generally increase when prevailing mortgage interest rates fall. In addition, prepayment rates on Agency RMBS collateralized by ARMs and hybrid ARMs generally
increase when the difference between long term and short term interest rates declines or becomes negative. Some ARMs underlying our Agency RMBS may bear initial teaser mortgage interest rates that are lower than their fully-indexed rates, which
refers to the applicable index rates plus a margin. In the event that such an ARM is prepaid prior to or soon after the time of adjustment to a fully-indexed rate, the holder of the related Agency RMBS would have held such security while it was less
profitable and lost the opportunity to receive interest at the fully-indexed rate over the expected life of the Agency RMBS. We currently do not own any Agency RMBS collateralized by ARMs with teaser mortgage interest rates. Additionally, we
currently own Agency RMBS that were purchased at a premium. The prepayment of such Agency RMBS at a rate faster than anticipated would result in a write-off of any remaining capitalized premium amount.

In early March 2010, both Freddie Mac and Fannie Mae announced they would purchase from the pools of mortgage loans underlying RMBS
guaranteed by them, all mortgage loans that are more than 120 days delinquent. The impact of these programs thus far is reflected in the CPR of our portfolio. Because a substantial portion of our portfolio consists of Agency RMBS backed by 15 year
fixed-rate loans, which have low delinquency rates, these programs have not caused a significant increase in the CPR of our portfolio.

Our Manager seeks to mitigate our prepayment risk by investing in Agency RMBS with (i) a variety of prepayment characteristics, (ii) prepayment prohibitions and penalties and
(iii) prepayment protections, as well as by balancing Agency RMBS purchased at a premium with Agency RMBS purchased at a discount.

Effect on Fair Value and Net Income

Another component of interest
rate risk is the effect changes in interest rates will have on the fair value of our assets and our net income exclusive of the effect on fair value. We face the risk that the fair value of our assets and net investment income will increase or
decrease at different rates than that of our liabilities, including our hedging instruments.



54



---

##### Table of Contents

We primarily assess our interest rate risk by estimating the duration of our assets and the
duration of our liabilities. Duration essentially measures the market price volatility of financial instruments as interest rates change. We generally calculate duration using various financial models and empirical data. Different models and
methodologies can produce different duration numbers for the same securities.

The following sensitivity analysis table shows
the estimated impact on the fair value and net income exclusive of the effect on fair value of our interest rate-sensitive investments and repurchase agreement liabilities at December 31, 2010 and 2009, assuming a static portfolio and that
rates instantaneously fall 25, 50 and 75 basis points and rise 25, 50 and 75 basis points.

December 31, 2010



|                         |  |                                                 |       |   |                                  |  |       |  
|------------------------ |  | ----------------------------------------------- | ----- | - | -------------------------------- |  | ----- | -
|Change in Interest Rates |  | Projected Change in theFair Value of Our Assets |       |   | Projected Change inOur NetIncome | 
|- 75 basis points        |  |                                                 | 2.79  | % |                                  |  | 1.02  | %
|- 50 basis points        |  |                                                 | 1.93  | % |                                  |  | 1.01  | %
|- 25 basis points        |  |                                                 | 0.99  | % |                                  |  | 1.00  | %
|No Change                |  |                                                 | 0.00  | % |                                  |  | 0.00  | %
|+ 25 basis points        |  |                                                 | -1.03 | % |                                  |  | -1.04 | %
|+ 50 basis points        |  |                                                 | -2.01 | % |                                  |  | -1.08 | %
|+ 75 basis points        |  |                                                 | -3.19 | % |                                  |  | -1.13 | %

December 31, 2009



|                         |  |                                                 |       |   |                                  |  |       |  
|------------------------ |  | ----------------------------------------------- | ----- | - | -------------------------------- |  | ----- | -
|Change in Interest Rates |  | Projected Change in theFair Value of Our Assets |       |   | Projected Change inOur NetIncome | 
|- 75 basis points        |  |                                                 | 0.83  | % |                                  |  | 2.50  | %
|- 50 basis points        |  |                                                 | 0.65  | % |                                  |  | 1.35  | %
|- 25 basis points        |  |                                                 | 0.38  | % |                                  |  | 0.29  | %
|No Change                |  |                                                 | 0.00  | % |                                  |  | 0.00  | %
|+ 25 basis points        |  |                                                 | -0.45 | % |                                  |  | -1.59 | %
|+ 50 basis points        |  |                                                 | -0.98 | % |                                  |  | -4.76 | %
|+ 75 basis points        |  |                                                 | -1.57 | % |                                  |  | -6.85 | %

While the charts above
reflect the estimated immediate impact of interest rate increases and decreases on a static portfolio, we rebalance our portfolio from time to time either to take advantage or minimize the impact of changes in interest rates. Additionally, the
effects of interest rate changes on our portfolio illustrated in the above chart does not take into account the effect that our hedging instruments, mainly interest rate swaps and caps, would have on the fair value of our portfolio, but does take
into account the effect that our hedging instruments, would have on our net income exclusive of the effect on fair value. Generally, our interest rate swaps reset in the quarter following changes in interest rates. It is important to note that the
impact of changing interest rates on fair value and net income can change significantly when interest rates change beyond 75 basis points from current levels. Therefore, the volatility in the fair value of our assets could increase significantly
when interest rates change beyond 75 basis points. In addition, other factors impact the fair value of and net income from our interest rate-sensitive investments and hedging instruments, such as the shape of the yield curve, market expectations as
to future interest rate changes and other market conditions. Accordingly, in the event of changes in actual interest rates, the change in the fair value of our assets and our net income would likely differ from that shown above, and such difference
might be material and adverse to our stockholders.



55



---

##### Table of Contents

Risk Management

Our board of directors exercises its oversight of risk management in many ways, including through its Risk Management Committee. The Risk
Management Committee was established to oversee our senior managements and our Managers risk-related responsibilities, including reviewing management policies and performance against these policies and related benchmarks.

As part of our risk management process, our Manager seeks to actively manage the interest rate, liquidity, prepayment and counterparty
risks associated with our Agency RMBS portfolio. Our Manager seeks to mitigate our interest rate risk exposure by entering into various hedging instruments in order to minimize our exposure to potential interest rate mismatches between the interest
we earn on our investments and our borrowing costs.

Our Manager seeks to mitigate our liquidity risks by monitoring our
liquidity position on a daily basis and maintaining a prudent level of leverage, which we currently consider to be between 6 and 10 times the amount of net assets in our overall portfolio, based on current market conditions and various other
factors, including the health of the financial institutions that lend to us under our repurchase agreements and the presence of special liquidity programs provided by domestic and foreign central banks.

Our Manager seeks to mitigate our prepayment risk by investing in Agency RMBS with (i) a variety of prepayment characteristics,
(ii) prepayment prohibitions and penalties and (iii) prepayment protections, as well as by balancing Agency RMBS purchased at a premium with Agency RMBS purchased at a discount.

Our Manager seeks to mitigate our counterparty risk by (i) diversifying our exposure across a broad number of counterparties
(ii) limiting our exposure to any one counterparty and (iii) monitoring the financial stability of our counterparties.



56



---

##### Table of Contents

|Item 8. | Financial Statements and Supplementary Data
|------- | -------------------------------------------

INDEX TO FINANCIAL STATEMENTS



|                                                                                                                 |  |  |    | 
|---------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|FINANCIAL STATEMENTS AS OF DECEMBER 31, 2010 AND 2009, AND FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008: |  |  |    | 
|                                                                                                                 | 
|REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                                                         |  |  | 58 | 
|                                                                                                                 | 
|Statements of Assets and Liabilities                                                                             |  |  | 60 | 
|                                                                                                                 | 
|Schedules of Investments                                                                                         |  |  | 61 | 
|                                                                                                                 | 
|Statements of Operations                                                                                         |  |  | 68 | 
|                                                                                                                 | 
|Statements of Changes in Net Assets                                                                              |  |  | 69 | 
|                                                                                                                 | 
|Statements of Cash Flows                                                                                         |  |  | 70 | 
|                                                                                                                 | 
|Notes to Financial Statements                                                                                    |  |  | 71 | 



57



---

##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Cypress Sharpridge Investments, Inc.:

We have audited the accompanying statements of assets and liabilities, including the schedules of investments, of Cypress Sharpridge
Investments, Inc. (the Company) as of December 31, 2010 and 2009, and the related statements of operations, changes in net assets, and cash flows for each of the three years in the period ended December 31, 2010. These
financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on the financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material respects, the financial position of Cypress Sharpridge
Investments, Inc. as of December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the
United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Companys internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 7, 2011 expressed an unqualified opinion on the Companys internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP

February 7, 2011

New York, New York



58



---

##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Cypress Sharpridge Investments, Inc.:

We have audited the internal control over financial reporting of Cypress Sharpridge Investments, Inc. (the Company) as of
December 31, 2010, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Companys management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Control over Financial Reporting.
Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A companys
internal control over financial reporting is a process designed by, or under the supervision of, the companys principal executive and principal financial officers, or persons performing similar functions, and effected by the companys
board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a material effect on the financial statements.

Because of the
inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.
Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
financial statements as of and for the year ended December 31, 2010 of the Company and our report dated February 7, 2011 expressed an unqualified opinion on those financial statements.

/s/ DELOITTE & TOUCHE LLP

February 7, 2011

New York, New York



59



---

##### Table of Contents

CYPRESS SHARPRIDGE INVESTMENTS, INC.

STATEMENTS OF ASSETS AND LIABILITIES



|                                                                                                                                     |  |              |               |   |      |   |               |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ------------- | - | ---- | - | ------------- | -
|                                                                                                                                     |  | December 31, |              
|                                                                                                                                     |  | 2010         |               |   | 2009 |  
|ASSETS:                                                                                                                              |  |              |               |   |      |   |               |  
|Investments in securities, at fair value (including net pledged assets of $3,671,582,721 and $1,464,713,648,
respectively)           |  | $            | 6,331,048,543 |   |      | $ | 1,853,251,613 |  
|Interest rate cap contracts, at fair value                                                                                           |  |              | 30,983,636    |   |      |   |              |  
|Interest rate swap contracts, at fair value                                                                                          |  |              | 9,112,905     |   |      |   | 1,131,487     |  
|Cash and cash equivalents                                                                                                            |  |              | 1,510,378     |   |      |   | 1,889,667     |  
|Receivable for securities sold                                                                                                       |  |              |              |   |      |   | 2,724,805     |  
|Interest receivable                                                                                                                  |  |              | 16,182,862    |   |      |   | 6,886,816     |  
|Other assets                                                                                                                         |  |              | 428,904       |   |      |   | 311,908       |  
|                                                                                                                                     |  |              |               |   |      |   |               |  
|Total assets                                                                                                                         |  |              | 6,389,267,228 |   |      |   | 1,866,196,296 |  
|                                                                                                                                     |  |              |               |   |      |   |               |  
|                                                                                                                                     |  |             
|LIABILITIES:                                                                                                                         |  |              |               |   |      |   |               |  
|Repurchase agreements                                                                                                                |  |              | 3,443,843,294 |   |      |   | 1,372,707,572 |  
|Interest rate swap contracts, at fair value                                                                                          |  |              | 9,756,873     |   |      |   | 4,925,333     |  
|Payable for securities purchased                                                                                                     |  |              | 2,234,400,672 |   |      |   | 229,838,772   |  
|Distribution payable                                                                                                                 |  |              |              |   |      |   | 10,316,082    |  
|Accrued interest payable (including accrued interest on repurchase agreements of $1,084,400 and $353,856,
respectively)              |  |              | 9,412,301     |   |      |   | 3,387,431     |  
|Related party management fee payable                                                                                                 |  |              | 799,413       |   |      |   | 356,873       |  
|Accrued expenses and other liabilities                                                                                               |  |              | 715,358       |   |      |   | 373,251       |  
|                                                                                                                                     |  |              |               |   |      |   |               |  
|Total liabilities                                                                                                                    |  |              | 5,698,927,911 |   |      |   | 1,621,905,314 |  
|                                                                                                                                     |  |              |               |   |      |   |               |  
|Contingencies (note 10)                                                                                                              |  |              |               |   |      |   |               |  
|NET ASSETS                                                                                                                           |  | $            | 690,339,317   |   |      | $ | 244,290,982   |  
|                                                                                                                                     |  |              |               |   |      |   |               |  
|                                                                                                                                     |  |             
|Net Assets consist of:                                                                                                               |  |              |               |   |      |   |               |  
|Common Stock, $0.01 par value, 500,000,000 shares authorized (59,550,836 and 18,756,512 shares issued and outstanding,
respectively) |  | $            | 595,508       |   |      | $ | 187,565       |  
|Additional paid in capital                                                                                                           |  |              | 739,005,614   |   |      |   | 309,368,569   |  
|Accumulated net realized gain (loss) on investments                                                                                  |  |              | (138,681,783  | ) |      |   | (87,363,976   | )
|Net unrealized appreciation (depreciation) on investments                                                                            |  |              | 14,203,977    |   |      |   | 2,462,487     |  
|Undistributed (distributions in excess of) net investment income                                                                     |  |              | 75,216,001    |   |      |   | 19,636,337    |  
|                                                                                                                                     |  |              |               |   |      |   |               |  
|NET ASSETS                                                                                                                           |  | $            | 690,339,317   |   |      | $ | 244,290,982   |  
|                                                                                                                                     |  |              |               |   |      |   |               |  
|NET ASSET VALUE PER SHARE                                                                                                            |  | $            | 11.59         |   |      | $ | 13.02         |  
|                                                                                                                                     |  |              |               |   |      |   |               |  

See notes to financial statements.



60



---

##### Table of Contents

CYPRESS SHARPRIDGE INVESTMENTS, INC.

SCHEDULES OF INVESTMENTS

DECEMBER 31, 2010

INVESTMENTS IN SECURITIESUNITED STATES OF
AMERICA



|                                            |  |             |             |  |            |   |             | 
|------------------------------------------- |  | ----------- | ----------- |  | ---------- | - | ----------- | 
|                                            |  | Face Amount |             |  | Fair Value |  
|Investments in Securities917.1%(d)         |  |             |             |  |            |   |             | 
|Mortgage Pass-Through Agency RMBS914.1%(d) |  |             |             |  |            |   |             | 
|Fannie Mae Pools802.1%(d)                  |  |             |             |  |            |   |             | 
|3.000%, due 1/1/2041(a)(b)                  |  | $           | 50,363,273  |  |            | $ | 51,416,124  | 
|3.013%, due 10/1/2040(a)(b)                 |  |             | 59,284,177  |  |            |   | 60,418,074  | 
|3.042%, due 12/1/2040(b)                    |  |             | 194,331,078 |  |            |   | 199,189,355 | 
|3.210%, due 11/1/2040(a)(b)                 |  |             | 49,730,849  |  |            |   | 50,956,893  | 
|3.212%, due 12/1/2040(a)(b)                 |  |             | 100,076,086 |  |            |   | 103,078,369 | 
|3.233%, due 7/1/2040(a)(b)                  |  |             | 47,318,116  |  |            |   | 48,667,357  | 
|3.251%, due 11/1/2040(a)(b)                 |  |             | 49,711,810  |  |            |   | 50,761,812  | 
|3.309%, due 8/1/2040(a)(b)                  |  |             | 47,107,215  |  |            |   | 48,594,420  | 
|3.336%, due 9/1/2040(a)(b)                  |  |             | 48,525,304  |  |            |   | 49,857,653  | 
|3.340%, due 9/1/2040(a)(b)                  |  |             | 55,821,372  |  |            |   | 57,416,317  | 
|3.462%, due 11/1/2040(a)(b)                 |  |             | 24,735,111  |  |            |   | 25,193,369  | 
|3.500%, due 12/1/2025(a)                    |  |             | 100,441,112 |  |            |   | 101,367,054 | 
|3.500%, due 1/1/2026(a)                     |  |             | 179,923,555 |  |            |   | 181,582,225 | 
|3.500%, due 12/1/2025                       |  |             | 4,138,467   |  |            |   | 4,176,618   | 
|3.500%, due 12/1/2025                       |  |             | 16,273,430  |  |            |   | 16,423,451  | 
|3.500%, due 12/1/2025(a)                    |  |             | 99,910,237  |  |            |   | 100,831,285 | 
|3.500%, due 1/1/2026                        |  |             | 150,000,000 |  |            |   | 151,031,250 | 
|3.500%, due 2/1/2026                        |  |             | 550,000,000 |  |            |   | 552,234,122 | 
|3.500%, due 3/1/2026                        |  |             | 150,000,000 |  |            |   | 150,093,750 | 
|3.500%, due 4/1/2026                        |  |             | 400,000,000 |  |            |   | 399,031,250 | 
|3.506%, due 8/1/2040(a)(b)                  |  |             | 48,468,450  |  |            |   | 50,032,233  | 
|3.558%, due 7/1/2040(a)(b)                  |  |             | 22,366,674  |  |            |   | 22,889,858  | 
|3.571%, due 7/1/2040(a)(b)                  |  |             | 19,639,476  |  |            |   | 20,084,720  | 
|3.579%, due 8/1/2040(a)(b)                  |  |             | 49,286,907  |  |            |   | 50,415,026  | 
|3.605%, due 10/1/2040(a)(b)                 |  |             | 59,742,384  |  |            |   | 61,157,729  | 
|3.605%, due 8/1/2040(a)(b)                  |  |             | 21,609,178  |  |            |   | 22,104,362  | 
|3.615%, due 8/1/2040(a)(b)                  |  |             | 48,456,375  |  |            |   | 49,631,304  | 
|3.648%, due 6/1/2040(a)(b)                  |  |             | 19,497,312  |  |            |   | 20,224,393  | 
|3.664%, due 7/1/2040(a)(b)                  |  |             | 45,354,116  |  |            |   | 46,986,613  | 
|3.676%, due 7/1/2039(a)(b)                  |  |             | 6,107,702   |  |            |   | 6,364,249   | 
|3.679%, due 7/1/2040(a)(b)                  |  |             | 46,360,349  |  |            |   | 47,666,743  | 
|3.683%, due 8/1/2040(a)(b)                  |  |             | 47,673,844  |  |            |   | 48,944,371  | 
|3.688%, due 5/1/2040(a)(b)                  |  |             | 13,922,560  |  |            |   | 14,464,079  | 
|3.694%, due 8/1/2040(a)(b)                  |  |             | 23,798,206  |  |            |   | 24,436,916  | 
|3.755%, due 5/1/2040(a)(b)                  |  |             | 46,830,226  |  |            |   | 48,486,034  | 
|3.771%, due 8/1/2040(a)(b)                  |  |             | 14,107,660  |  |            |   | 14,523,704  | 
|3.776%, due 9/1/2039(a)(b)                  |  |             | 29,582,467  |  |            |   | 30,983,973  | 
|3.830%, due 7/1/2040(a)(b)                  |  |             | 46,250,475  |  |            |   | 47,773,074  | 
|3.974%, due 10/1/2039(a)(b)                 |  |             | 38,778,427  |  |            |   | 40,545,457  | 
|3.983%, due 9/1/2039(a)(b)                  |  |             | 18,867,839  |  |            |   | 19,788,773  | 
|4.000%, due 12/1/2025(a)                    |  |             | 25,104,392  |  |            |   | 25,951,666  | 
|4.000%, due 12/1/2030(a)                    |  |             | 75,492,674  |  |            |   | 76,496,453  | 



61



---

##### Table of Contents

CYPRESS SHARPRIDGE INVESTMENTS, INC.

SCHEDULES OF INVESTMENTS(Continued)

DECEMBER 31, 2010



|                           |  |             |               |  |            |   |               | 
|-------------------------- |  | ----------- | ------------- |  | ---------- | - | ------------- | 
|                           |  | Face Amount |               |  | Fair Value |  
|4.000%, due 1/1/2026(a)    |  | $           | 50,369,291    |  |            | $ | 52,069,257    | 
|4.000%, due 12/1/2025(a)   |  |             | 75,088,211    |  |            |   | 77,622,442    | 
|4.000%, due 12/1/2025      |  |             | 30,566,463    |  |            |   | 31,598,083    | 
|4.000%, due 1/1/2026       |  |             | 50,444,143    |  |            |   | 51,510,170    | 
|4.000%, due 12/1/2025      |  |             | 31,095,699    |  |            |   | 31,858,517    | 
|4.000%, due 12/1/2024(a)   |  |             | 22,837,119    |  |            |   | 23,554,349    | 
|4.000%, due 10/1/2024(a)   |  |             | 11,035,106    |  |            |   | 11,381,678    | 
|4.000%, due 1/1/2025(a)    |  |             | 41,383,571    |  |            |   | 42,683,276    | 
|4.000%, due 1/1/2025(a)    |  |             | 65,068,758    |  |            |   | 67,264,831    | 
|4.000%, due 2/1/2025(a)    |  |             | 43,086,018    |  |            |   | 44,540,173    | 
|4.000%, due 3/1/2025(a)    |  |             | 43,404,460    |  |            |   | 44,869,363    | 
|4.000%, due 9/1/2030(a)    |  |             | 96,940,128    |  |            |   | 98,229,080    | 
|4.000%, due 9/1/2030(a)    |  |             | 23,973,873    |  |            |   | 24,292,639    | 
|4.000%, due 10/1/2025(a)   |  |             | 27,531,176    |  |            |   | 28,460,355    | 
|4.000%, due 10/1/2030(a)   |  |             | 49,695,191    |  |            |   | 50,355,957    | 
|4.000%, due 10/1/2030(a)   |  |             | 74,994,411    |  |            |   | 75,991,564    | 
|4.000%, due 10/1/2030(a)   |  |             | 74,412,606    |  |            |   | 75,402,023    | 
|4.000%, due 10/1/2025(a)   |  |             | 29,823,374    |  |            |   | 30,829,914    | 
|4.000%, due 10/1/2030(a)   |  |             | 74,750,151    |  |            |   | 75,744,057    | 
|4.000%, due 10/1/2025(a)   |  |             | 49,679,595    |  |            |   | 51,356,284    | 
|4.000%, due 11/1/2025(a)   |  |             | 49,460,875    |  |            |   | 51,130,182    | 
|4.000%, due 11/1/2025(a)   |  |             | 50,118,131    |  |            |   | 51,809,620    | 
|4.000%, due 11/1/2025(a)   |  |             | 9,940,898     |  |            |   | 10,276,404    | 
|4.000%, due 2/1/2026       |  |             | 100,000,000   |  |            |   | 102,734,406   | 
|4.063%, due 6/1/2039(a)(b) |  |             | 19,102,482    |  |            |   | 20,082,071    | 
|4.096%, due 9/1/2039(a)(b) |  |             | 24,490,834    |  |            |   | 25,700,752    | 
|4.500%, due 5/1/2024(a)    |  |             | 12,185,735    |  |            |   | 12,855,950    | 
|4.500%, due 6/1/2024(a)    |  |             | 20,004,576    |  |            |   | 20,979,798    | 
|4.500%, due 5/1/2024(a)    |  |             | 13,063,498    |  |            |   | 13,700,343    | 
|4.500%, due 6/1/2024(a)    |  |             | 17,942,673    |  |            |   | 18,817,377    | 
|4.500%, due 9/1/2024(a)    |  |             | 21,594,382    |  |            |   | 22,647,107    | 
|4.500%, due 9/1/2024(a)    |  |             | 21,094,683    |  |            |   | 22,123,047    | 
|4.500%, due 10/1/2024(a)   |  |             | 36,292,336    |  |            |   | 38,061,586    | 
|4.500%, due 9/1/2024(a)    |  |             | 1,936,724     |  |            |   | 2,031,139     | 
|4.500%, due 11/1/2024(a)   |  |             | 11,630,839    |  |            |   | 12,197,842    | 
|4.500%, due 10/1/2024(a)   |  |             | 38,298,608    |  |            |   | 40,165,663    | 
|4.500%, due 11/1/2024(a)   |  |             | 49,978,307    |  |            |   | 52,414,747    | 
|4.500%, due 10/1/2024(a)   |  |             | 29,910,162    |  |            |   | 31,368,281    | 
|4.500%, due 4/1/2030(a)    |  |             | 28,916,011    |  |            |   | 29,997,591    | 
|4.500%, due 5/1/2030(a)    |  |             | 48,181,939    |  |            |   | 49,984,145    | 
|4.500%, due 6/1/2025(a)    |  |             | 33,361,298    |  |            |   | 35,050,212    | 
|4.500%, due 10/1/2030(a)   |  |             | 49,664,259    |  |            |   | 51,521,910    | 
|4.500%, due 11/1/2030(a)   |  |             | 50,338,372    |  |            |   | 52,221,238    | 
|4.500%, due 2/1/2026       |  |             | 300,000,000   |  |            |   | 314,109,282   | 
|5.500%, due 9/1/2023(a)    |  |             | 32,265,437    |  |            |   | 34,713,778    | 
|5.500%, due 2/1/2041       |  |             | 200,000,000   |  |            |   | 213,593,812   | 
|6.000%, due 5/1/2037(a)    |  |             | 8,748,648     |  |            |   | 9,400,860     | 
|6.000%, due 4/1/2038(a)    |  |             | 14,298,625    |  |            |   | 15,554,799    | 
|                           |  |             |               |  |            |   |               | 
|Total Fannie Mae Pools     |  |             | 5,403,988,561 |  |            |   | 5,537,130,432 | 
|                           |  |             |               |  |            |   |               | 



62



---

##### Table of Contents

CYPRESS SHARPRIDGE INVESTMENTS, INC.

SCHEDULES OF INVESTMENTS(Continued)

DECEMBER 31, 2010



|                                                                   |  |             |               |  |            |   |               | 
|------------------------------------------------------------------ |  | ----------- | ------------- |  | ---------- | - | ------------- | 
|                                                                   |  | Face Amount |               |  | Fair Value |  
|Freddie Mac Pools88.6%(d)                                         |  |             |               |  |            |   |               | 
|3.052%, due 1/1/2041(a)(b)                                         |  | $           | 45,411,000    |  |            | $ | 46,424,189    | 
|3.200%, due 12/1/2040(a)(b)                                        |  |             | 50,012,229    |  |            |   | 51,281,379    | 
|3.247%, due 12/1/2040(b)                                           |  |             | 49,645,982    |  |            |   | 50,980,218    | 
|3.500%, due 3/1/2026                                               |  |             | 200,000,000   |  |            |   | 199,937,592   | 
|4.000%, due 10/1/2025(a)                                           |  |             | 73,473,803    |  |            |   | 75,689,497    | 
|4.500%, due 7/1/2024(a)                                            |  |             | 48,351,188    |  |            |   | 50,526,989    | 
|4.500%, due 2/1/2025(a)                                            |  |             | 43,716,947    |  |            |   | 45,738,853    | 
|4.500%, due 12/1/2024(a)                                           |  |             | 15,508,725    |  |            |   | 16,206,617    | 
|4.500%, due 12/1/2024(a)                                           |  |             | 15,095,857    |  |            |   | 15,775,170    | 
|4.500%, due 1/1/2025(a)                                            |  |             | 33,201,467    |  |            |   | 34,695,532    | 
|4.500%, due 5/1/2025(a)                                            |  |             | 18,565,000    |  |            |   | 19,423,630    | 
|5.500%, due 9/1/2023(a)                                            |  |             | 4,998,102     |  |            |   | 5,359,684     | 
|                                                                   |  |             |               |  |            |   |               | 
|Total Freddie Mac Pools                                            |  |             | 597,980,300   |  |            |   | 612,039,350   | 
|                                                                   |  |             |               |  |            |   |               | 
|Ginnie Mae Pools23.4%(d)                                          |  |             |               |  |            |   |               | 
|3.500%, due 7/20/2040(a)(b)                                        |  |             | 84,443,930    |  |            |   | 87,840,536    | 
|3.500%, due 7/20/2040(a)(b)                                        |  |             | 49,867,913    |  |            |   | 51,873,760    | 
|4.000%, due 1/20/2040(a)(b)                                        |  |             | 20,627,242    |  |            |   | 21,686,415    | 
|                                                                   |  |             |               |  |            |   |               | 
|Total Ginnie Mae Pools                                             |  |             | 154,939,085   |  |            |   | 161,400,711   | 
|                                                                   |  |             |               |  |            |   |               | 
|Total Mortgage Pass-Through Agency RMBS (cost$6,308,441,294)      |  |             | 6,156,907,946 |  |            |   | 6,310,570,493 | 
|                                                                   |  |             |               |  |            |   |               | 
|Collateralized Loan Obligation Securities3.0%(d)                  |  |             |               |  |            |   |               | 
|AMMC CLO V LTD(c)                                                  |  |             | 2,249,000     |  |            |   | 1,349,400     | 
|AMMC CLO VII, LTD(c)                                               |  |             | 3,900,000     |  |            |   | 2,577,900     | 
|ARES VIR CLO, LTD(c)(e)                                            |  |             | 3,775,000     |  |            |   | 1,623,250     | 
|BALLYROCK CLO 2006-2, LTD(c)                                       |  |             | 4,270,000     |  |            |   | 3,843,000     | 
|CARLYLE HIGH YIELD PARTNERS VIII, LTD(c)                           |  |             | 3,000,000     |  |            |   | 2,250,000     | 
|EATON VANCE CDO IX, LTD(c)                                         |  |             | 2,500,000     |  |            |   | 1,915,000     | 
|FLAGSHIP CLO V, LTD(c)                                             |  |             | 3,750,000     |  |            |   | 2,362,500     | 
|PHOENIX CLO II, LTD (formerly AVENUE CLO V)(c)(e)                  |  |             | 2,000,000     |  |            |   | 1,127,000     | 
|PRIMUS CLO I, LTD(c)                                               |  |             | 2,500,000     |  |            |   | 1,750,000     | 
|TRIMARAN CLO VII, LTD(c)                                           |  |             | 2,000,000     |  |            |   | 1,680,000     | 
|                                                                   |  |             |               |  |            |   |               | 
|Total Collateralized Loan Obligation Securities (cost$21,182,967) |  |             | 29,944,000    |  |            |   | 20,478,050    | 
|                                                                   |  |             |               |  |            |   |               | 
|Total Investments in Securities (cost$6,329,624,261)              |  | $           | 6,186,851,946 |  |            | $ | 6,331,048,543 | 
|                                                                   |  |             |               |  |            |   |               | 



63



---

##### Table of Contents

CYPRESS SHARPRIDGE INVESTMENTS, INC.

SCHEDULES OF INVESTMENTS(Continued)

DECEMBER 31, 2010



|                                                                       |  |                 |               |  |            |   |            |  
|---------------------------------------------------------------------- |  | --------------- | ------------- |  | ---------- | - | ---------- | -
|                                                                       |  | Notional Amount |               |  | Fair Value |  
|Interest Rate Cap Contracts4.5%(d)                                    |  |                 |               |  |            |   |            |  
|December 2014 Expiration, Cap Rate 2.073%                              |  | $               | 200,000,000   |  |            | $ | 4,752,395  |  
|October 2015 Expiration, Cap Rate 1.428%                               |  |                 | 300,000,000   |  |            |   | 15,339,727 |  
|November 2015 Expiration, Cap Rate 1.360%                              |  |                 | 200,000,000   |  |            |   | 10,891,514 |  
|                                                                       |  |                 |               |  |            |   |            |  
|Total Interest Rate Cap Contracts (Cost, $17,559,973)                  |  | $               | 700,000,000   |  |            | $ | 30,983,636 |  
|                                                                       |  |                 |               |  |            |   |            |  
|Interest Rate Swap Contracts(0.1)%(d)                                 |  |                 |               |  |            |   |            |  
|May 2013 Expiration, Pay Rate 1.600%, Receive Rate 3-Month LIBOR       |  | $               | 100,000,000   |  |            | $ | (1,495,761 | )
|June 2013 Expiration, Pay Rate 1.378%, Receive Rate 3-Month LIBOR      |  |                 | 300,000,000   |  |            |   | (2,718,389 | )
|July 2013 Expiration, Pay Rate 1.365%, Receive Rate 3-Month LIBOR      |  |                 | 300,000,000   |  |            |   | (2,484,208 | )
|December 2013 Expiration, Pay Rate 1.309%, Receive Rate 3-Month LIBOR  |  |                 | 400,000,000   |  |            |   | (776,014   | )
|December 2013 Expiration, Pay Rate 1.281%, Receive Rate 3-Month LIBOR  |  |                 | 500,000,000   |  |            |   | (539,051   | )
|December 2013 Expiration, Pay Rate 1.264%, Receive Rate 3-Month LIBOR  |  |                 | 400,000,000   |  |            |   | (255,360   | )
|December 2013 Expiration, Pay Rate 1.323%, Receive Rate 3-Month LIBOR  |  |                 | 400,000,000   |  |            |   | (904,287   | )
|July 2014 Expiration, Pay Rate 1.720%, Receive Rate 3-Month LIBOR      |  |                 | 100,000,000   |  |            |   | (732,908   | )
|July 2014 Expiration, Pay Rate 1.733%, Receive Rate 3-Month LIBOR      |  |                 | 250,000,000   |  |            |   | (1,786,556 | )
|August 2014 Expiration, Pay Rate 1.353%, Receive Rate 3-Month LIBOR    |  |                 | 200,000,000   |  |            |   | 1,529,006  |  
|September 2014 Expiration, Pay Rate 1.312%, Receive Rate 3-Month LIBOR |  |                 | 500,000,000   |  |            |   | 5,460,027  |  
|October 2014 Expiration, Pay Rate 1.173%, Receive Rate 3-Month LIBOR   |  |                 | 240,000,000   |  |            |   | 4,059,533  |  
|                                                                       |  |                 |               |  |            |   |            |  
|Total Interest Rate Swap Contracts (Cost, $0)                          |  | $               | 3,690,000,000 |  |            | $ | (643,968   | )
|                                                                       |  |                 |               |  |            |   |            |  



LEGEND

|(a) | Securities or a portion of the securities are pledged as collateral for repurchase agreements or interest rate swap contracts.
|--- | ------------------------------------------------------------------------------------------------------------------------------

|(b) | The coupon rate shown on floating or adjustable rate securities represents the rate at December 31, 2010.
|--- | ---------------------------------------------------------------------------------------------------------

|(c) | Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may only be resold in transactions exempt from
registration, normally to qualified institutional buyers. At December 31, 2010, the fair value of these securities amounted to $20,478,050, or 3.0% of net assets.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) | Percentage of net assets.
|--- | -------------------------

|(e) | Non-income producing security.
|--- | ------------------------------



64



---

##### Table of Contents

CYPRESS SHARPRIDGE INVESTMENTS, INC.

SCHEDULES OF INVESTMENTS(Continued)

DECEMBER 31, 2009

INVESTMENTS IN SECURITIESUNITED STATES OF
AMERICA



|                                            |  |             |            |  |            |   |            | 
|------------------------------------------- |  | ----------- | ---------- |  | ---------- | - | ---------- | 
|                                            |  | Face Amount |            |  | Fair Value |  
|Investments in Securities758.6%(d)         |  |             |            |  |            |   |            | 
|Mortgage Pass-Through Agency RMBS754.7%(d) |  |             |            |  |            |   |            | 
|Fannie Mae Pools652.2%(d)                  |  |             |            |  |            |   |            | 
|2.907%, due 1/1/2035(a)(b)                  |  | $           | 29,968,527 |  |            | $ | 31,010,529 | 
|2.993%, due 4/1/2036(a)(b)                  |  |             | 39,693,779 |  |            |   | 41,083,061 | 
|3.004%, due 7/1/2036(a)(b)                  |  |             | 34,473,372 |  |            |   | 35,679,941 | 
|3.007%, due 10/1/2036(a)(b)                 |  |             | 33,776,514 |  |            |   | 34,958,692 | 
|3.024%, due 6/1/2036(a)(b)                  |  |             | 32,282,832 |  |            |   | 33,412,732 | 
|3.281%, due 9/1/2034(a)(b)                  |  |             | 28,217,356 |  |            |   | 29,147,118 | 
|3.533%, due 8/1/2037(a)(b)                  |  |             | 24,301,362 |  |            |   | 25,125,421 | 
|3.710%, due 7/1/2039(b)                     |  |             | 9,464,706  |  |            |   | 9,674,350  | 
|3.726%, due 3/1/2034(a)(b)                  |  |             | 38,348,806 |  |            |   | 39,680,660 | 
|3.736%, due 5/1/2034(a)(b)                  |  |             | 7,506,917  |  |            |   | 7,763,278  | 
|3.744%, due 9/1/2039(a)(b)                  |  |             | 35,213,718 |  |            |   | 35,962,010 | 
|3.815%, due 9/1/2039(a)(b)                  |  |             | 34,774,099 |  |            |   | 35,599,984 | 
|3.990%, due 10/1/2039(a)(b)                 |  |             | 52,564,978 |  |            |   | 54,059,795 | 
|3.997%, due 9/1/2039(a)(b)                  |  |             | 24,760,921 |  |            |   | 25,472,797 | 
|4.000%, due 12/1/2024(a)                    |  |             | 25,206,097 |  |            |   | 25,367,574 | 
|4.000%, due 1/1/2025(a)                     |  |             | 49,442,119 |  |            |   | 49,758,858 | 
|4.000%, due 2/1/2025                        |  |             | 75,000,000 |  |            |   | 75,480,469 | 
|4.000%, due 3/1/2025                        |  |             | 50,000,000 |  |            |   | 49,984,375 | 
|4.028%, due 9/1/2039(a)(b)                  |  |             | 48,482,758 |  |            |   | 49,914,454 | 
|4.053%, due 7/1/2039(b)                     |  |             | 41,086,634 |  |            |   | 42,324,164 | 
|4.071%, due 6/1/2039(a)(b)                  |  |             | 23,842,099 |  |            |   | 24,599,324 | 
|4.089%, due 7/1/2039(a)(b)                  |  |             | 39,480,789 |  |            |   | 40,711,405 | 
|4.100%, due 9/1/2039(a)(b)                  |  |             | 47,540,515 |  |            |   | 48,996,443 | 
|4.110%, due 8/1/2033(a)(b)                  |  |             | 6,230,747  |  |            |   | 6,470,257  | 
|4.500%, due 1/1/2025                        |  |             | 75,000,000 |  |            |   | 76,945,313 | 
|4.500%, due 10/1/2024(a)                    |  |             | 14,215,383 |  |            |   | 14,624,075 | 
|4.500%, due 10/1/2024(a)                    |  |             | 35,133,397 |  |            |   | 36,143,482 | 
|4.500%, due 10/1/2024(a)                    |  |             | 49,070,971 |  |            |   | 50,481,761 | 
|4.500%, due 10/1/2024(a)                    |  |             | 48,847,852 |  |            |   | 50,252,228 | 
|4.500%, due 11/1/2024(a)                    |  |             | 61,023,597 |  |            |   | 62,778,025 | 
|4.500%, due 11/1/2024(a)                    |  |             | 14,050,143 |  |            |   | 14,454,084 | 
|4.500%, due 5/1/2024(a)                     |  |             | 17,126,118 |  |            |   | 17,618,494 | 
|4.500%, due 6/1/2024(a)                     |  |             | 32,265,407 |  |            |   | 33,193,038 | 
|4.500%, due 6/1/2024(a)                     |  |             | 21,583,471 |  |            |   | 22,203,996 | 
|4.500%, due 6/1/2024(a)                     |  |             | 27,170,767 |  |            |   | 27,951,927 | 
|4.500%, due 9/1/2024(a)                     |  |             | 27,005,239 |  |            |   | 27,781,640 | 
|4.500%, due 9/1/2024(a)                     |  |             | 28,600,339 |  |            |   | 29,422,599 | 
|4.500%, due 9/1/2024(a)                     |  |             | 2,928,860  |  |            |   | 3,013,065  | 
|4.562%, due 4/1/2035(a)(b)                  |  |             | 9,767,018  |  |            |   | 10,141,290 | 
|5.290%, due 3/1/2038(a)(b)                  |  |             | 23,875,089 |  |            |   | 25,188,219 | 
|5.500%, due 9/1/2023(a)                     |  |             | 47,390,027 |  |            |   | 50,204,995 | 
|5.564%, due 11/1/2037(a)(b)                 |  |             | 7,238,022  |  |            |   | 7,681,351  | 



65



---

##### Table of Contents

CYPRESS SHARPRIDGE INVESTMENTS, INC.

SCHEDULES OF INVESTMENTS(Continued)

DECEMBER 31, 2009



|                                                                   |  |             |               |  |            |   |               | 
|------------------------------------------------------------------ |  | ----------- | ------------- |  | ---------- | - | ------------- | 
|                                                                   |  | Face Amount |               |  | Fair Value |  
|5.859%, due 8/1/2037(a)(b)                                         |  | $           | 43,151,052    |  |            | $ | 45,822,102    | 
|5.937%, due 11/1/2036(a)(b)                                        |  |             | 32,327,827    |  |            |   | 34,369,653    | 
|5.983%, due 12/1/2036(a)(b)                                        |  |             | 31,889,626    |  |            |   | 33,890,062    | 
|6.000%, due 4/1/2038(a)                                            |  |             | 25,259,295    |  |            |   | 26,873,364    | 
|6.000%, due 5/1/2037(a)                                            |  |             | 15,167,653    |  |            |   | 16,088,329    | 
|6.113%, due 5/1/2037(a)(b)                                         |  |             | 22,463,223    |  |            |   | 23,923,332    | 
|                                                                   |  |             |               |  |            |   |               | 
|Total Fannie Mae Pools                                             |  |             | 1,544,210,021 |  |            |   | 1,593,284,115 | 
|                                                                   |  |             |               |  |            |   |               | 
|Freddie Mac Pools92.1%(d)                                         |  |             |               |  |            |   |               | 
|4.145%, due 4/1/2035(a)(b)                                         |  |             | 11,093,925    |  |            |   | 11,503,069    | 
|4.500%, due 7/1/2024                                               |  |             | 66,102,683    |  |            |   | 67,961,821    | 
|4.788%, due 12/1/2038(a)(b)                                        |  |             | 11,411,495    |  |            |   | 11,960,387    | 
|4.978%, due 5/1/2038(a)(b)                                         |  |             | 42,663,027    |  |            |   | 44,975,363    | 
|5.500%, due 9/1/2023(a)                                            |  |             | 7,126,262     |  |            |   | 7,542,435     | 
|5.790%, due 11/1/2036(a)(b)                                        |  |             | 39,662,375    |  |            |   | 41,981,830    | 
|5.956%, due 1/1/2036(a)(b)                                         |  |             | 4,413,530     |  |            |   | 4,633,676     | 
|5.996%, due 10/1/2037(a)(b)                                        |  |             | 32,382,377    |  |            |   | 34,406,275    | 
|                                                                   |  |             |               |  |            |   |               | 
|Total Freddie Mac Pools                                            |  |             | 214,855,674   |  |            |   | 224,964,856   | 
|                                                                   |  |             |               |  |            |   |               | 
|Ginnie Mae Pools10.4%(d)                                          |  |             |               |  |            |   |               | 
|4.000%, due 1/1/2040(b)                                            |  |             | 25,000,000    |  |            |   | 25,562,500    | 
|                                                                   |  |             |               |  |            |   |               | 
|Total Ginnie Mae Pools                                             |  |             | 25,000,000    |  |            |   | 25,562,500    | 
|                                                                   |  |             |               |  |            |   |               | 
|Total Mortgage Pass-Through Agency RMBS (cost$1,808,695,017)      |  |             | 1,784,065,695 |  |            |   | 1,843,811,471 | 
|                                                                   |  |             |               |  |            |   |               | 
|Collateralized Loan Obligation Securities3.8%(d)                  |  |             |               |  |            |   |               | 
|AMMC CLO V, LTD(c)(e)                                              |  |             | 2,249,000     |  |            |   | 494,780       | 
|AMMC CLO VII, LTD(c)(e)                                            |  |             | 3,900,000     |  |            |   | 585,000       | 
|ARES VIR CLO, LTD(c)(e)                                            |  |             | 3,775,000     |  |            |   | 792,750       | 
|AVENUE CLO V, LTD(c)                                               |  |             | 2,000,000     |  |            |   | 80,000        | 
|BALLYROCK CLO 2006-2, LTD(c)                                       |  |             | 4,270,000     |  |            |   | 1,750,700     | 
|CARLYLE HIGH YIELD PARTNERS VIII, LTD(c)                           |  |             | 3,000,000     |  |            |   | 210,000       | 
|EATON VANCE CDO IX, LTD(c)                                         |  |             | 2,500,000     |  |            |   | 600,000       | 
|FLAGSHIP CLO V, LTD(c)                                             |  |             | 3,750,000     |  |            |   | 825,000       | 
|PRIMUS CLO I, LTD(c)(e)                                            |  |             | 2,500,000     |  |            |   | 500,000       | 
|START III CLO, LTD(c)                                              |  |             | 3,000,000     |  |            |   | 2,660,400     | 
|TRIMARAN CLO VII, LTD(c)                                           |  |             | 2,000,000     |  |            |   | 700,000       | 
|                                                                   |  |             |               |  |            |   |               | 
|Total Collateralized Loan Obligation Securities (cost$27,145,692) |  |             | 32,944,000    |  |            |   | 9,198,630     | 
|                                                                   |  |             |               |  |            |   |               | 
|Structured Notes0.1%(d)                                           |  |             |               |  |            |   |               | 
|RESIX 2006-B B9, 6.233%, due 7/15/2038(b)(c)                       |  |             | 1,849,306     |  |            |   | 55,479        | 
|RESIX 2006-B B10, 7.733%, due 7/15/2038(b)(c)                      |  |             | 1,849,306     |  |            |   | 36,986        | 
|RESIX 2006-C B11, 7.483%, due 7/15/2038(b)(c)                      |  |             | 708,387       |  |            |   | 14,168        | 
|RESIX 2007-A B11, 6.733%, due 2/15/2039(b)(c)                      |  |             | 3,246,274     |  |            |   | 64,925        | 
|RESIX 2007-B B11, 8.733%, due 4/15/2039(b)(c)                      |  |             | 3,497,675     |  |            |   | 69,954        | 
|                                                                   |  |             |               |  |            |   |               | 
|Total Structured Notes (cost$11,154,571)                          |  |             | 11,150,948    |  |            |   | 241,512       | 
|                                                                   |  |             |               |  |            |   |               | 
|Total Investments in Securities (cost$1,846,995,280)              |  | $           | 1,828,160,643 |  |            | $ | 1,853,251,613 | 
|                                                                   |  |             |               |  |            |   |               | 



66



---

##### Table of Contents

CYPRESS SHARPRIDGE INVESTMENTS, INC.

SCHEDULES OF INVESTMENTS(Continued)

DECEMBER 31, 2009



|                                                                      |  |                 |             |  |            |   |            |  
|--------------------------------------------------------------------- |  | --------------- | ----------- |  | ---------- | - | ---------- | -
|                                                                      |  | Notional Amount |             |  | Fair Value |  
|Interest Rate Swap Contracts(1.6%)(d)                                |  |                 |             |  |            |   |            |  
|April 2012 Expiration, Pay Rate 1.691%, Receive Rate 3-Month LIBOR    |  | $               | 240,000,000 |  |            | $ | (543,716   | )
|June 2012 Expiration, Pay Rate 2.266%, Receive Rate 3-Month LIBOR     |  |                 | 200,000,000 |  |            |   | (2,558,748 | )
|July 2012 Expiration, Pay Rate 2.125%, Receive Rate 3-Month LIBOR     |  |                 | 200,000,000 |  |            |   | (1,822,869 | )
|November 2013 Expiration, Pay Rate 2.213%, Receive Rate 3-Month LIBOR |  |                 | 100,000,000 |  |            |   | 1,131,487  |  
|                                                                      |  |                 |             |  |            |   |            |  
|Total Interest Rate Swap Contracts (Cost, $0)                         |  | $               | 740,000,000 |  |            | $ | (3,793,846 | )
|                                                                      |  |                 |             |  |            |   |            |  



LEGEND

|(a) | Securities or a portion of the securities are pledged as collateral for repurchase agreements or interest rate swap contracts.
|--- | ------------------------------------------------------------------------------------------------------------------------------

|(b) | The coupon rate shown on floating or adjustable rate securities represents the rate at December 31, 2009.
|--- | ---------------------------------------------------------------------------------------------------------

|(c) | Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may only be resold in transactions exempt from
registration, normally to qualified institutional buyers. At December 31, 2009, the fair value of these securities amounted to $9,440,142, or 3.9% of net assets.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) | Percentage of net assets.
|--- | -------------------------

|(e) | Non-income producing security.
|--- | ------------------------------





See notes to financial statements.



67



---

##### Table of Contents

CYPRESS SHARPRIDGE INVESTMENTS, INC.

STATEMENTS OF OPERATIONS



|                                                                     |  |                          |             |   |      |   |             |      |  |   |             |  
|-------------------------------------------------------------------- |  | ------------------------ | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                     |  | Years Ended December 31, |            
|                                                                     |  | 2010                     |             |   | 2009 |   |             | 2008 | 
|INVESTMENT INCOMEInterest income                                    |  | $                        | 75,538,957  |   |      | $ | 45,526,149  |      |  | $ | 55,475,822  |  
|                                                                     |  |                          |             |   |      |   |             |      |  |   |             |  
|EXPENSES:                                                            |  |                          |             |   |      |   |             |      |  |   |             |  
|Interest                                                             |  |                          | 5,055,584   |   |      |   | 4,461,432   |      |  |   | 23,980,836  |  
|Management fees                                                      |  |                          | 6,088,277   |   |      |   | 3,633,005   |      |  |   | 2,554,539   |  
|Related party management compensation                                |  |                          | 1,459,445   |   |      |   | 985,053     |      |  |   | 1,280,277   |  
|General, administrative and other                                    |  |                          | 2,913,376   |   |      |   | 2,395,611   |      |  |   | 3,913,068   |  
|                                                                     |  |                          |             |   |      |   |             |      |  |   |             |  
|Total expenses                                                       |  |                          | 15,516,682  |   |      |   | 11,475,101  |      |  |   | 31,728,720  |  
|                                                                     |  |                          |             |   |      |   |             |      |  |   |             |  
|Net investment income                                                |  |                          | 60,022,275  |   |      |   | 34,051,048  |      |  |   | 23,747,102  |  
|                                                                     |  |                          |             |   |      |   |             |      |  |   |             |  
|GAINS AND (LOSSES) FROM INVESTMENTS:                                 |  |                          |             |   |      |   |             |      |  |   |             |  
|Net realized gain (loss) on investments                              |  |                          | 6,114,983   |   |      |   | (48,338     | )    |  |   | (7,982,797  | )
|Net unrealized appreciation (depreciation) on investments            |  |                          | (4,832,051  | ) |      |   | 39,561,355  |      |  |   | (26,377,797 | )
|                                                                     |  |                          |             |   |      |   |             |      |  |   |             |  
|Net gain (loss) from investments                                     |  |                          | 1,282,932   |   |      |   | 39,513,017  |      |  |   | (34,360,594 | )
|                                                                     |  |                          |             |   |      |   |             |      |  |   |             |  
|GAINS AND (LOSSES) FROM SWAP AND CAP CONTRACTS:                      |  |                          |             |   |      |   |             |      |  |   |             |  
|Net swap and cap interest income (expense)                           |  |                          | (18,563,320 | ) |      |   | (7,623,821  | )    |  |   | (6,945,012  | )
|Net gain (loss) on termination of swap contracts                     |  |                          | (36,925,072 | ) |      |   | (10,804,123 | )    |  |   | (35,118,468 | )
|Net unrealized appreciation (depreciation) on swap and cap contracts |  |                          | 16,573,541  |   |      |   | 8,709,674   |      |  |   | 13,504,523  |  
|                                                                     |  |                          |             |   |      |   |             |      |  |   |             |  
|Net gain (loss) from swap and cap contracts                          |  |                          | (38,914,851 | ) |      |   | (9,718,270  | )    |  |   | (28,558,957 | )
|                                                                     |  |                          |             |   |      |   |             |      |  |   |             |  
|NET INCOME (LOSS)                                                    |  | $                        | 22,390,356  |   |      | $ | 63,845,795  |      |  | $ | (39,172,449 | )
|                                                                     |  |                          |             |   |      |   |             |      |  |   |             |  
|NET INCOME (LOSS) PER COMMON SHARE:                                  |  |                          |             |   |      |   |             |      |  |   |             |  
|Basic                                                                |  | $                        | 0.73        |   |      | $ | 4.76        |      |  | $ | (5.50       | )
|                                                                     |  |                          |             |   |      |   |             |      |  |   |             |  
|Diluted                                                              |  | $                        | 0.73        |   |      | $ | 4.75        |      |  | $ | (5.50       | )
|                                                                     |  |                          |             |   |      |   |             |      |  |   |             |  

See notes to financial statements.



68



---

##### Table of Contents

CYPRESS SHARPRIDGE INVESTMENTS, INC.

STATEMENTS OF CHANGES IN NET ASSETS



|                                                          |  |                          |             |   |      |   |             |      |  |   |             |  
|--------------------------------------------------------- |  | ------------------------ | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                          |  | Years Ended December 31, |            
|                                                          |  | 2010                     |             |   | 2009 |   |             | 2008 | 
|Net income (loss):                                        |  |                          |             |   |      |   |             |      |  |   |             |  
|Net investment income                                     |  | $                        | 60,022,275  |   |      | $ | 34,051,048  |      |  | $ | 23,747,102  |  
|Net realized gain (loss) on investments                   |  |                          | 6,114,983   |   |      |   | (48,338     | )    |  |   | (7,982,797  | )
|Net unrealized appreciation (depreciation) on investments |  |                          | (4,832,051  | ) |      |   | 39,561,355  |      |  |   | (26,377,797 | )
|Net gain (loss) from swap and cap contracts               |  |                          | (38,914,851 | ) |      |   | (9,718,270  | )    |  |   | (28,558,957 | )
|                                                          |  |                          |             |   |      |   |             |      |  |   |             |  
|Net income (loss)                                         |  |                          | 22,390,356  |   |      |   | 63,845,795  |      |  |   | (39,172,449 | )
|                                                          |  |                          |             |   |      |   |             |      |  |   |             |  
|Capital transactions:                                     |  |                          |             |   |      |   |             |      |  |   |             |  
|Net proceeds from issuance of common shares               |  |                          | 488,950,591 |   |      |   | 106,553,047 |      |  |   | 14,021,478  |  
|Distributions to shareholders                             |  |                          | (29,860,945 | ) |      |   | (6,001,756  | )    |  |   | (9,474,493  | )
|Tax return of capital distributions                       |  |                          | (36,891,112 | ) |      |   | (19,892,006 | )    |  |   |            |  
|Amortization of related party compensation                |  |                          | 1,459,445   |   |      |   | 985,053     |      |  |   | 1,280,277   |  
|                                                          |  |                          |             |   |      |   |             |      |  |   |             |  
|Increase in net assets from capital transactions          |  |                          | 423,657,979 |   |      |   | 81,644,338  |      |  |   | 5,827,262   |  
|                                                          |  |                          |             |   |      |   |             |      |  |   |             |  
|Total increase (decrease) in net assets                   |  |                          | 446,048,335 |   |      |   | 145,490,133 |      |  |   | (33,345,187 | )
|Net assets:                                               |  |                          |             |   |      |   |             |      |  |   |             |  
|Beginning of year                                         |  |                          | 244,290,982 |   |      |   | 98,800,849  |      |  |   | 132,146,036 |  
|                                                          |  |                          |             |   |      |   |             |      |  |   |             |  
|End of year                                               |  | $                        | 690,339,317 |   |      | $ | 244,290,982 |      |  | $ | 98,800,849  |  
|                                                          |  |                          |             |   |      |   |             |      |  |   |             |  

See notes to financial statements.



69



---

##### Table of Contents

CYPRESS SHARPRIDGE INVESTMENTS, INC.

STATEMENTS OF CASH FLOWS



|                                                                                                   |  |                          |                 |   |      |   |                |      |  |   |                 |  
|-------------------------------------------------------------------------------------------------- |  | ------------------------ | --------------- | - | ---- | - | -------------- | ---- |  | - | --------------- | -
|                                                                                                   |  | Years Ended December 31, |                
|                                                                                                   |  | 2010                     |                 |   | 2009 |   |                | 2008 | 
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                              |  |                          |                 |   |      |   |                |      |  |   |                 |  
|Net income (loss)                                                                                  |  | $                        | 22,390,356      |   |      | $ | 63,845,795     |      |  | $ | (39,172,449     | )
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                          |                 |   |      |   |                |      |  |   |                 |  
|Purchase of investment securities                                                                  |  |                          | (6,612,954,500  | ) |      |   | (1,370,711,330 | )    |  |   | (1,942,505,453  | )
|Premium paid on interest rate caps                                                                 |  |                          | (18,595,000     | ) |      |   |               |      |  |   |                |  
|Proceeds from disposition of investment securities                                                 |  |                          | 1,587,024,561   |   |      |   | 51,634,497     |      |  |   | 2,972,601,715   |  
|Proceeds from paydowns of investment securities                                                    |  |                          | 540,531,136     |   |      |   | 192,526,871    |      |  |   | 112,561,371     |  
|Amortization of related party compensation                                                         |  |                          | 1,459,445       |   |      |   | 985,053        |      |  |   | 1,280,277       |  
|Amortization of premiums on investment securities                                                  |  |                          | 859,212         |   |      |   | 887,248        |      |  |   | 695,686         |  
|Amortization of premiums on interest rate cap contracts                                            |  |                          | 1,035,027       |   |      |   |               |      |  |   |                |  
|Accretion of discounts on investment securities                                                    |  |                          |                |   |      |   |               |      |  |   | (77,099         | )
|Offering expenses                                                                                  |  |                          |                |   |      |   |               |      |  |   | 2,274,362       |  
|Net realized (gain) loss on investments                                                            |  |                          | (6,114,983      | ) |      |   | 48,338         |      |  |   | 7,982,797       |  
|Net realized (gain) loss on paydowns                                                               |  |                          | 8,025,593       |   |      |   | 2,434,091      |      |  |   | 2,296,430       |  
|Net unrealized (appreciation) depreciation on swap and cap contracts                               |  |                          | (16,573,541     | ) |      |   | (8,709,674     | )    |  |   | (13,504,523     | )
|Net unrealized (appreciation) depreciation on investments                                          |  |                          | 4,832,051       |   |      |   | (39,561,355    | )    |  |   | 26,377,797      |  
|Change in assets and liabilities:                                                                  |  |                          |                 |   |      |   |                |      |  |   |                 |  
|Receivable for securities sold                                                                     |  |                          | 2,724,805       |   |      |   | (1,839,796     | )    |  |   | 1,646,023       |  
|Interest receivable                                                                                |  |                          | (9,296,046      | ) |      |   | (3,058,230     | )    |  |   | 6,496,923       |  
|Other assets                                                                                       |  |                          | (116,996        | ) |      |   | (23,791        | )    |  |   | (36,685         | )
|Payable for securities purchased                                                                   |  |                          | 2,004,561,900   |   |      |   | 229,838,772    |      |  |   | (378,187,031    | )
|Accrued interest payable                                                                           |  |                          | 6,024,870       |   |      |   | 1,060,223      |      |  |   | (3,364,955      | )
|Related party management fee payable                                                               |  |                          | 442,540         |   |      |   | 136,828        |      |  |   | 54,657          |  
|Accrued expenses and other liabilities                                                             |  |                          | 342,107         |   |      |   | (224,876       | )    |  |   | 78,074          |  
|                                                                                                   |  |                          |                 |   |      |   |                |      |  |   |                 |  
|Net cash provided by (used in) operating activities                                                |  |                          | (2,483,397,463  | ) |      |   | (880,731,336   | )    |  |   | 757,497,917     |  
|                                                                                                   |  |                          |                 |   |      |   |                |      |  |   |                 |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                              |  |                          |                 |   |      |   |                |      |  |   |                 |  
|Proceeds from repurchase agreements                                                                |  |                          | 16,389,071,336  |   |      |   | 9,135,440,168  |      |  |   | 14,152,289,497  |  
|Repayments of repurchase agreements                                                                |  |                          | (14,317,935,614 | ) |      |   | (8,350,217,837 | )    |  |   | (14,902,418,119 | )
|Proceeds from issuance of common shares                                                            |  |                          | 489,739,733     |   |      |   | 107,740,917    |      |  |   | 14,021,478      |  
|Offering costs paid                                                                                |  |                          | (789,142        | ) |      |   | (1,920,705     | )    |  |   | (1,269,425      | )
|Distributions paid                                                                                 |  |                          | (77,068,139     | ) |      |   | (15,577,680    | )    |  |   | (13,087,462     | )
|                                                                                                   |  |                          |                 |   |      |   |                |      |  |   |                 |  
|Net cash provided by (used in) financing activities                                                |  |                          | 2,483,018,174   |   |      |   | 875,464,863    |      |  |   | (750,464,031    | )
|                                                                                                   |  |                          |                 |   |      |   |                |      |  |   |                 |  
|Net increase (decrease) in cash and cash equivalents                                               |  |                          | (379,289        | ) |      |   | (5,266,473     | )    |  |   | 7,033,886       |  
|CASH AND CASH EQUIVALENTSBeginning of period                                                      |  |                          | 1,889,667       |   |      |   | 7,156,140      |      |  |   | 122,254         |  
|                                                                                                   |  |                          |                 |   |      |   |                |      |  |   |                 |  
|CASH AND CASH EQUIVALENTSEnd of period                                                            |  | $                        | 1,510,378       |   |      | $ | 1,889,667      |      |  | $ | 7,156,140       |  
|                                                                                                   |  |                          |                 |   |      |   |                |      |  |   |                 |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                                                 |  |                          |                 |   |      |   |                |      |  |   |                 |  
|Interest paid                                                                                      |  | $                        | 19,728,149      |   |      | $ | 13,664,969     |      |  | $ | 45,820,914      |  
|                                                                                                   |  |                          |                 |   |      |   |                |      |  |   |                 |  
|SUPPLEMENTAL DISCLOSURES OF NONCASH FLOW INFORMATION:                                              |  |                          |                 |   |      |   |                |      |  |   |                 |  
|Distributions declared, not yet paid                                                               |  | $                        |                |   |      | $ | 10,316,082     |      |  | $ |                |  
|                                                                                                   |  |                          |                 |   |      |   |                |      |  |   |                 |  
|Change in accrued offering costs                                                                   |  | $                        |                |   |      | $ | (510,569       | )    |  | $ | 46,818          |  
|                                                                                                   |  |                          |                 |   |      |   |                |      |  |   |                 |  

See notes to financial statements.



70



---

##### Table of Contents

CYPRESS SHARPRIDGE INVESTMENTS, INC.

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION

Cypress Sharpridge Investments, Inc. (the
Company) was formed as a Maryland corporation on January 3, 2006, and commenced operations on February 10, 2006. The Company is externally managed and advised by Cypress Sharpridge Advisors LLC (the Manager), a
Delaware limited liability company, pursuant to a management agreement (the Management Agreement). The Manager is a joint venture between Cypress CSI Advisors LLC, a sponsor of private equity funds and leveraged buyouts of U.S. companies
in the industrial, consumer, media and financial sectors, and Sharpridge Capital Management, L.P., a fixed income asset management company. Certain individuals associated with Cypress CSI Advisors LLC and Sharpridge Capital Management, L.P. serve on
the Companys board of directors and the Managers investment committee.

The Company has elected to be taxed and
intends to continue to qualify as a real estate investment trust (REIT) and is required to comply with the provisions of the Internal Revenue Code of 1986, as amended (the Code), with respect thereto. The Companys
strategy had been to invest a majority of its capital in residential mortgage-backed securities (RMBS) that are issued and guaranteed by a federally chartered corporation, such as the Federal National Mortgage Association (Fannie
Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac), or an agency of the U.S. government such as the Government National Mortgage Association (Ginnie Mae) (Agency RMBS), and subordinated
tranches of asset-backed securities, including collateralized debt or loan obligations (CLOs). In March 2008, the board of directors amended the investment guidelines, pursuant to which the Company elected to invest exclusively in Agency
RMBS. In March 2010, the board of directors further amended the investment guidelines so that the Company may also invest in collateralized mortgage obligations issued by Fannie Mae, Freddie Mac or Ginnie Mae. The Company engages in business
activities under one operating segment. The Companys common stock trades on the New York Stock Exchange under the symbol CYS.

On May 1, 2008, the board of directors of the Company approved a three-for-one reverse stock split of issued and outstanding common stock, which was then approved by stockholders at the May 23,
2008 annual meeting of stockholders. The reverse stock split was effective May 28, 2008, and the accompanying financial statements were adjusted to give effect to the reverse stock split.

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying financial statements have
been prepared in conformity with accounting principles generally accepted in the United States of America for investment companies (GAAP). Accordingly, investments in securities are carried at fair value with changes in fair value
recorded in the statement of operations.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual results could differ from those management estimates.

Cash and Cash Equivalents

Cash and cash equivalents include cash on
hand, cash held in banks and highly liquid investments with original maturities of three months or less. Interest income earned on cash and cash equivalents is recorded in interest income.



71



---

##### Table of Contents

Interest Rate Swap and Cap Contracts

The Company utilizes interest rate swaps and caps to hedge the interest rate risk associated with the financing of its portfolio.
Specifically, the Company seeks to hedge the exposure to potential interest rate mismatches between the interest earned on investments and the borrowing costs caused by fluctuations in short term interest rates. In a simple interest rate swap, one
investor pays a floating rate of interest on a notional principal amount and receives a fixed rate of interest on the same notional principal amount for a specified period of time. Alternatively, an investor may pay a fixed rate and receive a
floating rate. In a simple interest rate cap, one investor pays a premium for a notional principal amount based on a capped interest rate (the cap rate). When the floating interest rate (the floating rate) exceeds the cap
rate, the investor receives a payment from the cap counterparty equal to the difference between the floating rate and the cap rate on the same notional principal amount for a specified period of time. Alternatively, an investor may receive a premium
and pay the difference in cap rate and floating rate. Interest rate swaps and caps are asset/liability management tools.

During the term of the interest rate swap or cap, the Company makes or receives periodic payments and unrealized gains or losses are
recorded as a result of marking the swap and cap to their fair value. When the swap or cap is terminated, the Company records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the
Companys cost basis in the contract, if any. The periodic payments, amortization of premiums on cap contracts and any realized or unrealized gains or losses are reported under gains and losses from swap and cap contracts in the statement of
operations. Swaps involve a risk that interest rates will move contrary to the Companys expectations, thereby increasing its payment obligation.

The Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 946, Clarification of the Scope of Audit and Accounting Guide Investment
Companies(ASC 946), prior to its deferral in February 2008. Under ASC 946, the Company uses financial reporting for investment companies, and accordingly, its investments including its interest rate swap and cap contracts, are
carried at fair value with changes in fair value included in earnings. Consequently, there is no impact to designating interest rate swaps and caps as cash flow or fair value hedges under GAAP.

The Company is exposed to credit loss in the event of nonperformance by the counterparty to the swap and cap, limited to any gains
recognized. However, as of December 31, 2010 the Company did not anticipate nonperformance by any counterparty. Should interest rates move unexpectedly, the Company may not achieve the anticipated benefits of the interest rate swap or cap and
may realize a loss.

Investment Valuation

Valuation of the Companys investments is determined by the Manager. Investments are valued using third-party pricing services and
dealer quotes. The third-party pricing services use pricing models that incorporate such factors as coupons, primary and secondary mortgage rates, prepayment speeds, spread to the Treasury curves and interest rate swap curves, convexity, duration,
periodic and life caps and credit enhancement. The dealer quotes incorporate common market pricing methods, including a spread measurement to the Treasury curves or interest rate swap curve as well as underlying characteristics of the particular
security including coupon, periodic and life caps, rate reset period, issuer, additional credit support and expected life of the security. CLOs are priced using indicative dealer quotes which are validated using internal cash flow models and the
income approach. Major inputs to the model are prepayment speeds, reinvestment spreads, default rates and recovery rates. The Manager reviews all prices used to ensure that current market conditions are represented. This review includes comparisons
of similar market transactions, alternative third-party pricing services and dealer quotes, or comparisons to a pricing model. Based on this review the Companys Manager will use judgment to determine the price that fairly represents the
highest exit price and therefore the best representation of fair value. The resulting unrealized gains and losses are reflected in the statement of operations.

Agency Mortgage-Backed Securities

The Companys investments in
Agency RMBS consist of whole-pool pass-through certificates backed by fixed rate, monthly reset adjustable-rate and hybrid adjustable-rate residential mortgage (ARM) loans guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. Hybrid ARMs
have interest rates that have an initial fixed period (typically three, five, seven or ten years) and thereafter reset at regular intervals in a manner similar to adjustable-rate mortgage-backed securities and loans.



72



---

##### Table of Contents

Delayed Delivery Transactions

The Company may engage in delayed delivery transactions. The Company records delayed delivery securities on the trade date and maintains
security positions such that sufficient liquid assets will be available to make payment for the securities purchased. Securities purchased on a delayed delivery basis are carried at fair value and begin earning interest on the settlement date.
Losses may occur on these transactions due to changes in market conditions or the failure of counterparties to perform under the contract. The Company may transact in To Be Announced Securities (TBAs). As with other delayed delivery
transactions, a seller agrees to issue TBAs at a future date. However, the seller does not specify the particular securities to be delivered. Instead, the Company agrees to accept any security that meets specified terms such as issuer, interest rate
and terms of underlying mortgages. The Company records TBAs on the trade date utilizing information associated with the specified terms of the transaction as opposed to the specific mortgages. TBAs are carried at fair value and begin earning
interest on the settlement date. Losses may occur due to the fact that the actual underlying mortgages received may be less favorable than those anticipated by the Company. Delayed delivery transactions and TBAs are recorded as payables for
securities purchased on the Companys statement of assets and liabilities. As of December 31, 2010 and 2009 the Company had pledged Agency RMBS with a fair value of $10.1 million and $0, respectively, on its $2,234.4 million and $229.8
million, respectively, of open delayed delivery and TBA transactions.

Collateralized Debt or Loan Obligations

The Company has investments in securities backed by a pool of variously rated loans or bonds. Underwriters of CLOs
package a large and diversified pool of loans or bonds, including high risk, high yield bonds, which is then separated into tiers. Typically, the top tier represents the higher quality collateral and pays the lower interest rate; a
middle tier is backed by riskier loans or bonds and pays a higher rate; the bottom tier represents the lowest credit quality and, instead of receiving a fixed interest rate, may receive the residual interest payments from the pool.

Repurchase Agreements

Repurchase agreements are borrowings which are generally collateralized by the Companys investments in fixed income securities and are carried at their amortized cost, which approximates their fair
value due to their short term nature, generally 30-90 days. The Company has not elected to fair value these liabilities under ASC 825 and consequently has not included these in any ASC 820 disclosures. Should fair value be elected under ASC 825 such
liabilities would be included in the leveling tables required under ASC 820. Counterparties are large institutional dealers in fixed income securities. Collateral is valued daily and counterparties may require additional collateral when appropriate.
At December 31, 2010 and 2009, fixed income securities owned with a fair value of approximately $3,657.2 million and $1,445.2 million, respectively, have been pledged as collateral for repurchase agreements for which the counterparty has the
right to sell or repledge the securities.

Investment Transactions and Income

The Company records its transactions in securities on a trade date basis. Realized gains and losses on securities transactions are
recorded on an identified cost basis. Interest income and expense are recorded on the accrual basis.Interest income on Agency RMBS is accrued based on outstanding principal amount of the securities and their contractual terms. Interest on
CLOs is accrued at a rate determined based on estimated future cash flows and adjusted prospectively as future cash flow amounts are recast. For CLO securities placed on nonaccrual status or when the Company cannot reliably estimate cash flows, the
cost recovery method is used. Amortization of premium and accretion of discount are recorded using the yield to maturity method, and are included in interest income in the statement of operations.

Share-Based Compensation

The Company accounts for share-based compensation issued to its non-management directors and executive officers and certain officers and employees of its Manager and its sub-advisors and other individuals
who provide



73



---

##### Table of Contents

services to the Company, as designated by its Manager (Manager Designees), using the fair value based methodology prescribed by ASC 718, Share-Based Payment (ASC
718). Compensation cost related to restricted common stock and common stock options issued to the Manager Designees is initially measured at estimated fair value at the grant date, and is remeasured on subsequent dates to the extent the awards
are unvested. Compensation cost related to non-management directors is measured at its estimated fair value at the grant date and amortized and expensed over the vesting period. The Company has elected to use the straight line method pursuant to ASC
718 to amortize compensation expense for the restricted common stock and common stock options granted to the Manager Designees.

Income Taxes

The Company has elected to be taxed as a REIT and intends to continue to comply with provisions of the Code with respect thereto. As a REIT, the Company generally will not be subject to federal or state
income tax. To maintain its qualification as a REIT, the Company must distribute at least 90% of its REIT taxable income to its stockholders and meet certain other tests relating to assets and income.

Earnings Per Share (EPS)

Basic EPS is computed using the two class method by dividing net income (loss) after adjusting for the impact of unvested stock awards deemed to be participating securities, by the weighted average number
of common shares outstanding calculated excluding unvested stock awards. Diluted EPS is computed by dividing net income (loss), after adjusting for the impact of unvested stock awards deemed to be participating securities, by the weighted average
number of common shares outstanding calculated excluding unvested stock awards, giving effect to common stock options and warrants, if they are not anti-dilutive. See note 3 for EPS computations.

Recent Accounting Pronouncements

In January 2010, the FASB provided additional disclosure requirements for fair value measurements under ASC 820,Fair Value Measurements and Disclosures. The new pronouncement requires a reporting
entity to disclose the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. In addition, the reconciliation for fair value measurements using significant unobservable
inputs (Level 3) should present separately information about purchases, sales, issuances and settlements (that is, on a gross rather than net basis). The Company adopted the pronouncement in January 2010, and it did not have a material effect on the
Companys financial statements.

3. EARNINGS PER SHARE

Components of the computation of basic and diluted EPS were as follows:



|                                         |  |                          |             |   |      |   |             |      |  |   |             |  
|---------------------------------------- |  | ------------------------ | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                         |  | Years Ended December 31, |            
|                                         |  | 2010                     |             |   | 2009 |   |             | 2008 | 
|Net income (loss)                        |  | $                        | 22,390,356  |   |      | $ | 63,845,795  |      |  | $ | (39,172,449 | )
|Less dividends paid:                     |  |                          |             |   |      |   |             |      |  |   |             |  
|Common shares                            |  |                          | (65,259,627 | ) |      |   | (25,511,098 | )    |  |   | (9,303,403  | )
|Unvested shares                          |  |                          | (1,492,430  | ) |      |   | (381,685    | )    |  |   | (169,419    | )
|                                         |  |                          |             |   |      |   |             |      |  |   |             |  
|Undistributed (overdistributed) earnings |  |                          | (44,361,701 | ) |      |   | 37,953,012  |      |  |   | (48,645,271 | )
|                                         |  |                          |             |   |      |   |             |      |  |   |             |  



74



---

##### Table of Contents

|                                             |  |                          |            |   |      |   |            |      |  |   |           |  
|-------------------------------------------- |  | ------------------------ | ---------- | - | ---- | - | ---------- | ---- |  | - | --------- | -
|                                             |  | Years Ended December 31, |           
|                                             |  | 2010                     |            |   | 2009 |   |            | 2008 | 
|Basic weighted average shares outstanding:   |  |                          |            |   |      |   |            |      |  |   |           |  
|Common shares                                |  |                          | 28,439,653 |   |      |   | 13,303,848 |      |  |   | 7,149,374 |  
|                                             |  |                          |            |   |      |   |            |      |  |   |           |  
|Basic earnings per common share:             |  |                          |            |   |      |   |            |      |  |   |           |  
|Distributed earnings                         |  | $                        | 2.29       |   |      | $ | 1.92       |      |  | $ | 1.30      |  
|Undistributed (overdistributed) earnings     |  |                          | (1.56      | ) |      |   | 2.84       |      |  |   | (6.80     | )
|                                             |  |                          |            |   |      |   |            |      |  |   |           |  
|Basic earnings per common share              |  | $                        | 0.73       |   |      | $ | 4.76       |      |  | $ | (5.50     | )
|                                             |  |                          |            |   |      |   |            |      |  |   |           |  
|Diluted weighted average shares outstanding: |  |                          |            |   |      |   |            |      |  |   |           |  
|Common shares                                |  |                          | 28,439,653 |   |      |   | 13,303,848 |      |  |   | 7,149,374 |  
|Net effect of dilutive warrants              |  |                          | 10,091     |   |      |   | 15,717     |      |  |   |          |  
|                                             |  |                          |            |   |      |   |            |      |  |   |           |  
|                                             |  |                          | 28,449,744 |   |      |   | 13,319,565 |      |  |   | 7,149,374 |  
|                                             |  |                          |            |   |      |   |            |      |  |   |           |  
|Diluted earnings per common share:           |  |                          |            |   |      |   |            |      |  |   |           |  
|Distributed earnings                         |  | $                        | 2.29       |   |      | $ | 1.92       |      |  | $ | 1.30      |  
|Undistributed earnings                       |  |                          | (1.56      | ) |      |   | 2.83       |      |  |   | (6.80     | )
|                                             |  |                          |            |   |      |   |            |      |  |   |           |  
|Diluted earnings per common share            |  | $                        | 0.73       |   |      | $ | 4.75       |      |  | $ | (5.50     | )
|                                             |  |                          |            |   |      |   |            |      |  |   |           |  

4. INVESTMENTS IN SECURITIES AND INTEREST RATE SWAP AND CAP CONTRACTS

The Companys valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data
from independent sources, while unobservable inputs reflect the Companys market assumptions. ASC 820 classifies these inputs into the following hierarchy:

Level 1 InputsQuoted prices for identical instruments in active markets.

Level 2 InputsQuoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose
inputs are observable or whose significant value drivers are observable.

Level 3
InputsInstruments with primarily unobservable value drivers.

Effective January 1, 2008, the Company adopted
the provisions of ASC 820. The adoption of ASC 820 had no effect on the manner in which the Company measures fair value, but requires certain additional disclosures about the fair value of securities and derivatives, based on the level of inputs.
The following table provides a summary of the significant assets and liabilities that are measured at fair value on a recurring basis:

December 31, 2010



|                                |         |                               |   |         |  |   |           |  |  |       |        |  |  |   |           | 
|------------------------------- | ------- | ----------------------------- | - | ------- |  | - | --------- |  |  | ----- | ------ |  |  | - | --------- | 
|                                |         | Fair Value Measurements Using |  
|                                | Level 1 |                               |   | Level 2 |  |   | Level 3   |  |  | Total |       
|                                |         | (in thousands)                |  
|Assets                          |         |                               |   |         |  |   |           |  |  |       |        |  |  |   |           | 
|Agency RMBS                     |         | $                             |  |         |  | $ | 6,310,570 |  |  | $     |       |  |  | $ | 6,310,570 | 
|CLOs                            |         |                               |  |         |  |   |          |  |  |       | 20,478 |  |  |   | 20,478    | 
|Interest rate cap contracts     |         |                               |  |         |  |   | 30,984    |  |  |       |       |  |  |   | 30,984    | 
|Interest rate swap contracts(a) |         |                               |  |         |  |   | 9,113     |  |  |       |       |  |  |   | 9,113     | 
|                                |         |                               |   |         |  |   |           |  |  |       |        |  |  |   |           | 
|Total                           |         | $                             |  |         |  | $ | 6,350,667 |  |  | $     | 20,478 |  |  | $ | 6,371,145 | 
|                                |         |                               |   |         |  |   |           |  |  |       |        |  |  |   |           | 
|Liabilities                     |         |                               |   |         |  |   |           |  |  |       |        |  |  |   |           | 
|Interest rate swap contracts    |         | $                             |  |         |  | $ | 9,757     |  |  | $     |       |  |  | $ | 9,757     | 
|                                |         |                               |   |         |  |   |           |  |  |       |        |  |  |   |           | 



75



---

##### Table of Contents

December 31, 2009



|                                          |         |                               |   |         |  |   |           |  |  |       |   |  |  |   |           | 
|----------------------------------------- | ------- | ----------------------------- | - | ------- |  | - | --------- |  |  | ----- | - |  |  | - | --------- | 
|                                          |         | Fair Value Measurements Using |  
|                                          | Level 1 |                               |   | Level 2 |  |   | Level 3   |  |  | Total |  
|                                          |         | (in thousands)                |  
|Assets                                    |         |                               |   |         |  |   |           |  |  |       |   |  |  |   |           | 
|Agency RMBS                               |         | $                             |  |         |  | $ | 1,843,811 |  |  | $     |  |  |  | $ | 1,843,811 | 
|CLOs and Structured notes                 |         |                               |  |         |  |   | 9,440     |  |  |       |  |  |  |   | 9,440     | 
|Interest rate swap contracts(a)           |         |                               |  |         |  |   | 1,132     |  |  |       |  |  |  |   | 1,132     | 
|                                          |         |                               |   |         |  |   |           |  |  |       |   |  |  |   |           | 
|Total                                     |         | $                             |  |         |  | $ | 1,854,383 |  |  | $     |  |  |  | $ | 1,854,383 | 
|                                          |         |                               |   |         |  |   |           |  |  |       |   |  |  |   |           | 
|Liabilities                               |         |                               |   |         |  |   |           |  |  |       |   |  |  |   |           | 
|Interest rate swap contracts              |         | $                             |  |         |  | $ | 4,925     |  |  | $     |  |  |  | $ | 4,925     | 
|                                          |         |                               |   |         |  |   |           |  |  |       |   |  |  |   |           | 
|(a)Subject
to master netting arrangements |         |                               |   |         |  |   |           |  |  |       |   |  |  |   |           | 

The table below presents a reconciliation of changes in assets classified as Level 3 in the
Companys financial statements for the year ended December 31, 2010. There were no changes in 2009. A discussion of the method of fair valuing these assets is included above in Investment Valuation. Transfers into Level 3
relate to CLOs classified as Level 2 in the prior period for which the inputs relating to default rates and recovery rates are no longer being considered observable. Net unrealized appreciation (depreciation) on the assets is included in net
unrealized appreciation (depreciation) on investments in the statement of operations.

Fair Value Reconciliation, Level 3

(dollars in thousands)



|                                                     |  |                   |        | 
|---------------------------------------------------- |  | ----------------- | ------ | 
|                                                     |  | December 31, 2010 |       
|CLOs                                                 |  |                   |        | 
|Beginning balance Level 3 assets                     |  | $                 |       | 
|Transfers into Level 3                               |  |                   | 20,478 | 
|                                                     |  |                   |        | 
|Ending balance Level 3 assets                        |  | $                 | 20,478 | 
|                                                     |  |                   |        | 
|Change in net unrealized appreciation (depreciation) |  | $                 | 17,218 | 
|                                                     |  |                   |        | 

The Agency RMBS portfolio consisted of Agency RMBS as follows:

December 31, 2010



|                                                   |  |                |           |        |            |   |                    |                  |  |                           |     |   |  |  |      |  |  |  |      |  
|-------------------------------------------------- |  | -------------- | --------- | ------ | ---------- | - | ------------------ | ---------------- |  | ------------------------- | --- | - |  |  | ---- |  |  |  | ---- | -
|                                                   |  | Par Amount     |           |        | Fair Value |   |                    | Weighted Average | 
|Security Description                               |  |                |           | Coupon |            |   | Months 
toReset(1) |                  |  | ConstantPrepaymentRate(2) |    
|                                                   |  | (in thousands) |           |        |            |   |                    |                  |  |                           |     |  
|Agency RMBS collateralized by fixed rate mortgages |  | $              | 4,419,601 |        |            | $ | 4,521,648          |                  |  |                           | 4.0 | % |  |  | N/A  |  |  |  | 19.4 | %
|Agency RMBS collateralized by hybrid ARMs          |  |                | 1,737,307 |        |            |   | 1,788,922          |                  |  |                           | 3.4 |   |  |  | 63.2 |  |  |  | 18.4 |  
|                                                   |  |                |           |        |            |   |                    |                  |  |                           |     |   |  |  |      |  |  |  |      |  
|Total Agency RMBS                                  |  | $              | 6,156,908 |        |            | $ | 6,310,570          |                  |  |                           |     |   |  |  |      |  |  |  |      |  
|                                                   |  |                |           |        |            |   |                    |                  |  |                           |     |   |  |  |      |  |  |  |      |  



76



---

##### Table of Contents

December 31, 2009



|                                                         |  |                |           |        |            |   |                    |                  |  |                           |     |   |  |  |      |  |  |  |      |  
|-------------------------------------------------------- |  | -------------- | --------- | ------ | ---------- | - | ------------------ | ---------------- |  | ------------------------- | --- | - |  |  | ---- |  |  |  | ---- | -
|                                                         |  | Par Amount     |           |        | Fair Value |   |                    | Weighted Average | 
|Security Description                                     |  |                |           | Coupon |            |   | Months 
toReset(1) |                  |  | ConstantPrepaymentRate(2) |    
|                                                         |  | (in thousands) |           |        |            |   |                    |                  |  |                           |     |  
|Agency RMBS collateralized by hybrid ARMs                |  | $              | 565,396   |        |            | $ | 586,834            |                  |  |                           | 4.5 | % |  |  | 46.8 |  |  |  | 23.4 | %
|Agency RMBS collateralized by short-reset hybrid ARMs(3) |  |                | 263,728   |        |            |   | 275,717            |                  |  |                           | 4.5 |   |  |  | 13.3 |  |  |  | 19.0 |  
|Agency RMBS collateralized by monthly reset ARMs         |  |                | 140,226   |        |            |   | 145,134            |                  |  |                           | 3.0 |   |  |  | 1    |  |  |  | 11.2 |  
|Agency RMBS collateralized by fixed rate mortgages       |  |                | 814,716   |        |            |   | 836,126            |                  |  |                           | 4.5 |   |  |  | N/A  |  |  |  | 9.0  |  
|                                                         |  |                |           |        |            |   |                    |                  |  |                           |     |   |  |  |      |  |  |  |      |  
|Total Agency RMBS                                        |  | $              | 1,784,066 |        |            | $ | 1,843,811          |                  |  |                           |     |   |  |  |      |  |  |  |      |  
|                                                         |  |                |           |        |            |   |                    |                  |  |                           |     |   |  |  |      |  |  |  |      |  



|(1) | Months to Reset is the number of months remaining before the fixed rate on a hybrid ARM becomes a variable rate. At the end of the fixed
period, the variable rate will be determined by the margin and the pre-specified caps of the ARM.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Constant Prepayment Rate is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the
remaining principal is prepaid each month or year. Specifically, the constant prepayment rate is an annualized version of the prior three month prepayment rate. Securities with no prepayment history are excluded from this calculation.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Short-reset is defined as 24 months or less to reset.
|--- | -------------------------------------------------------

As of December 31, 2010 and 2009, the Companys Agency RMBS were purchased at a net premium to their par value, with a
weighted-average amortized cost of $102.5 and $101.4, respectively, due to the average interest rates on these investments being higher than prevailing market rates. As of December 31, 2010 and 2009, approximately $152.7 million and $25.0
million, respectively, of unamortized premium was included in the cost basis of the securities.

Actual maturities of Agency
RMBS are generally shorter than stated contractual maturities (which range up to 30 years), as they are affected by the contractual lives of the underlying mortgages, periodic payments and prepayments of principal. As of December 31, 2010 and
2009, the average final contractual maturity of the Companys Agency RMBS portfolio is in year 2031. Based on current estimates, the Agency RMBS will have a weighted average expected life of less than five years. Interest income on Agency RMBS
for the years ended December 31, 2010, 2009 and 2008 was $72.7 million, $44.0 million and $49.0 million, respectively.



77



---

##### Table of Contents

In order to mitigate its interest rate exposure, the Company enters into interest rate swap
and cap contracts. The Company had the following interest rate swap and cap transactions during the years ended December 31, 2010 and 2009:



|                             |  |             |  |          |               |  
|---------------------------- |  | ----------- |  | -------- | ------------- | -
|Year Ended December 31,
2010 | 
|Trade Date                   |  | Transaction |  | Notional |              
|April 2010                   |  | Opened      |  | $        | 400,000,000   |  
|April 2010                   |  | Terminated  |  |          | (640,000,000  | )
|May 2010                     |  | Opened      |  |          | 740,000,000   |  
|May 2010                     |  | Terminated  |  |          | (400,000,000  | )
|June 2010                    |  | Opened      |  |          | 400,000,000   |  
|June 2010                    |  | Terminated  |  |          | (100,000,000  | )
|July 2010                    |  | Opened      |  |          | 750,000,000   |  
|August 2010                  |  | Opened      |  |          | 200,000,000   |  
|August 2010                  |  | Terminated  |  |          | (200,000,000  | )
|September 2010               |  | Opened      |  |          | 500,000,000   |  
|October 2010                 |  | Opened      |  |          | 540,000,000   |  
|October 2010                 |  | Terminated  |  |          | (240,000,000  | )
|November 2010                |  | Opened      |  |          | 200,000,000   |  
|November 2010                |  | Terminated  |  |          | (200,000,000  | )
|December 2010                |  | Opened      |  |          | 1,700,000,000 |  
|                             |  |             |  |          |               |  
|Net Increase                 |  |             |  | $        | 3,650,000,000 |  
|                             |  |             |  |          |               |  



|                             |  |             |  |          |              |  
|---------------------------- |  | ----------- |  | -------- | ------------ | -
|Year Ended December 31,
2009 | 
|Trade Date                   |  | Transaction |  | Notional |             
|April 2009                   |  | Opened      |  | $        | 240,000,000  |  
|April 2009                   |  | Terminated  |  |          | (240,000,000 | )
|June 2009                    |  | Opened      |  |          | 400,000,000  |  
|November 2009                |  | Opened      |  |          | 100,000,000  |  
|                             |  |             |  |          |              |  
|Net Increase                 |  |             |  | $        | 500,000,000  |  
|                             |  |             |  |          |              |  



78



---

##### Table of Contents

As of December 31, 2010 and 2009, the Company had net pledged Agency RMBS and U.S
Treasury securities with a fair value of $4.3 million and $19.5 million, respectively, as collateral on interest rate swap and cap contracts. Below is a summary of our interest rate swap and cap contracts open as of December 31, 2010 and 2009:



|                                                                   |  |          |        |   |             |  |              |                |  |   |               |  |  |                                              |            |   |  |                                               
|------------------------------------------------------------------ |  | -------- | ------ | - | ----------- |  | ------------ | -------------- |  | - | ------------- |  |  | -------------------------------------------- | ---------- | - |  | ----------------------------------------------
|Derivatives not designated as hedging
instruments under ASC 815(a)
|As of December 31, 2010                                            |  | Pay Rate |        |   | ReceiveRate |  |              | NotionalAmount |  |   | Fair Value    |  |  | Statement of Assets and Liabilities Location
|Expiration Date                                                    |  |          |        |   |            
|May 2013                                                           |  |          | 1.6000 | % |             |  | 3-MonthLIBOR | (b)            |  | $ | 100,000,000   |  |  | $                                            | (1,495,761 | ) |  | Interest rate swap contracts, at fair value   
|June 2013                                                          |  |          | 1.3775 | % |             |  | 3-MonthLIBOR | (b)            |  |   | 300,000,000   |  |  |                                              | (2,718,389 | ) |  | Interest rate swap contracts, at fair value   
|July 2013                                                          |  |          | 1.3650 | % |             |  | 3-MonthLIBOR | (b)            |  |   | 300,000,000   |  |  |                                              | (2,484,208 | ) |  | Interest rate swap contracts, at fair value   
|December 2013                                                      |  |          | 1.3088 | % |             |  | 3-MonthLIBOR | (b)            |  |   | 400,000,000   |  |  |                                              | (776,014   | ) |  | Interest rate swap contracts, at fair
value(c)
|December 2013                                                      |  |          | 1.2813 | % |             |  | 3-MonthLIBOR | (b)            |  |   | 500,000,000   |  |  |                                              | (539,051   | ) |  | Interest rate swap contracts, at fair value   
|December 2013                                                      |  |          | 1.2640 | % |             |  | 3-MonthLIBOR | (b)            |  |   | 400,000,000   |  |  |                                              | (255,360   | ) |  | Interest rate swap contracts, at fair
value(c)
|December 2013                                                      |  |          | 1.3225 | % |             |  | 3-MonthLIBOR | (b)            |  |   | 400,000,000   |  |  |                                              | (904,287   | ) |  | Interest rate swap contracts, at fair
value(c)
|July 2014                                                          |  |          | 1.7200 | % |             |  | 3-MonthLIBOR | (b)            |  |   | 100,000,000   |  |  |                                              | (732,908   | ) |  | Interest rate swap contracts, at fair value   
|July 2014                                                          |  |          | 1.7325 | % |             |  | 3-MonthLIBOR | (b)            |  |   | 250,000,000   |  |  |                                              | (1,786,556 | ) |  | Interest rate swap contracts, at fair value   
|August 2014                                                        |  |          | 1.3530 | % |             |  | 3-MonthLIBOR | (b)            |  |   | 200,000,000   |  |  |                                              | 1,529,006  |   |  | Interest rate swap contracts, at fair value   
|September 2014                                                     |  |          | 1.3120 | % |             |  | 3-MonthLIBOR | (b)            |  |   | 500,000,000   |  |  |                                              | 5,460,027  |   |  | Interest rate swap contracts, at fair value   
|October 2014                                                       |  |          | 1.1725 | % |             |  | 3-MonthLIBOR | (b)            |  |   | 240,000,000   |  |  |                                              | 4,059,533  |   |  | Interest rate swap contracts, at fair value   
|                                                                   |  |          |        |   |             |  |              |                |  |   |               |  |  |                                              |            |   |  |                                               
|Total                                                              |  |          |        |   |             |  |              |                |  | $ | 3,690,000,000 |  |  | $                                            | (643,968   | ) |  |                                               
|                                                                   |  |          |        |   |             |  |              |                |  |   |               |  |  |                                              |            |   |  |                                               
|                                                                   |  |          |        |   |            
|Expiration Date                                                    |  |          |        |   | CapRate     |  |              | NotionalAmount |  |   | Fair Value    |  |  | Statement of Assets and Liabilities Location
|December 2014                                                      |  |          |        |   |             |  | 2.0725       | %              |  | $ | 200,000,000   |  |  | $                                            | 4,752,395  |   |  | Interest rate cap contracts, at fair value    
|October 2015                                                       |  |          |        |   |             |  | 1.4275       | %              |  |   | 300,000,000   |  |  |                                              | 15,339,727 |   |  | Interest rate cap contracts, at fair value    
|November 2015                                                      |  |          |        |   |             |  | 1.3600       | %              |  |   | 200,000,000   |  |  |                                              | 10,891,514 |   |  | Interest rate cap contracts, at fair value    
|                                                                   |  |          |        |   |             |  |              |                |  |   |               |  |  |                                              |            |   |  |                                               
|Total                                                              |  |          |        |   |             |  |              |                |  | $ | 700,000,000   |  |  | $                                            | 30,983,636 |   |  |                                               
|                                                                   |  |          |        |   |             |  |              |                |  |   |               |  |  |                                              |            |   |  |                                               
|                                                                   |  |          |        |   |            
|As of December 31, 2009                                            |  | Pay Rate |        |   | ReceiveRate |  |              | NotionalAmount |  |   | Fair Value    |  |  | Statement of Assets and Liabilities Location
|Expiration Date                                                    |  |          |        |   |            
|April 2012                                                         |  |          | 1.6910 | % |             |  | 3-MonthLIBOR | (b)            |  | $ | 240,000,000   |  |  | $                                            | (543,716   | ) |  | Interest rate swap contracts, at fair value   
|June 2012                                                          |  |          | 2.2660 | % |             |  | 3-MonthLIBOR | (b)            |  |   | 200,000,000   |  |  |                                              | (2,558,748 | ) |  | Interest rate swap contracts, at fair value   
|July 2012                                                          |  |          | 2.1250 | % |             |  | 3-MonthLIBOR | (b)            |  |   | 200,000,000   |  |  |                                              | (1,822,869 | ) |  | Interest rate swap contracts, at fair value   
|November 2013                                                      |  |          | 2.2125 | % |             |  | 3-MonthLIBOR | (b)            |  |   | 100,000,000   |  |  |                                              | 1,131,487  |   |  | Interest rate swap contracts, at fair value   
|                                                                   |  |          |        |   |             |  |              |                |  |   |               |  |  |                                              |            |   |  |                                               
|Total                                                              |  |          |        |   |             |  |              |                |  | $ | 740,000,000   |  |  | $                                            | (3,793,846 | ) |  |                                               
|                                                                   |  |          |        |   |             |  |              |                |  |   |               |  |  |                                              |            |   |  |                                               



79



---

##### Table of Contents

|                                                                 |  |                                                              |  |                                                            |             |   |  |      |            |   |  |   |             |  
|---------------------------------------------------------------- |  | ------------------------------------------------------------ |  | ---------------------------------------------------------- | ----------- | - |  | ---- | ---------- | - |  | - | ----------- | -
|                                                                 |  |                                                              |  | Amount of Gain or (Loss)Recognized in Income on Derivative |            
|Derivatives not designated as hedgingInstruments underASC 815(a) |  | Location of Gain or (Loss)Recognized in
Income on Derivative |  | Years Ended December 31,                                   |            
|                                                                 |  | 2010                                                         |  |                                                            | 2009        |   |  | 2008 |           
|Interest rate swap and cap contracts                             |  | Net gain (loss) from swap and cap contracts                  |  | $                                                          | (38,914,851 | ) |  | $    | (9,718,270 | ) |  | $ | (28,558,957 | )
|                                                                 |  |                                                              |  |                                                            |             |   |  |      |            |   |  |   |             |  



|(a) | See note 2 for additional information on the Companys purpose for entering into interest rate swaps and caps and the decision not to designate
them as hedging instruments.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | London InterBank Offered Rate (LIBOR).
|--- | ----------------------------------------

|(c) | This contract is subject to master netting arrangements and has been netted against an asset balance with the same counterparty on the statement of
assets and liabilities.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Credit Risk

At December 31, 2010 and 2009, the Company reduced its exposure to credit losses on its mortgage assets by purchasing Agency RMBS.
The payment of principal and interest on the Agency RMBS are guaranteed by Freddie Mac, Fannie Mae and Ginnie Mae. In September 2008, both Freddie Mac and Fannie Mae were placed in the conservatorship of the United States government. While it is
hoped that the conservatorship will help stabilize Freddie Macs and Fannie Maes losses and overall financial position, there can be no assurance that it will succeed or that, if necessary, Freddie Mac or Fannie Mae will be able to
satisfy their guarantees of Agency RMBS.

The Companys CLOs do not have the backing of Fannie Mae, Freddie Mac or Ginnie
Mae. Payment of principal and interest is dependent on the performance of the underlying loans, which are subject to borrower default and possible losses.

5. BORROWINGS

The Company leverages its Agency RMBS portfolio through the
use of repurchase agreements. Each of the borrowing vehicles used by the Company bears interest at floating rates based on a spread above or below the LIBOR. The fair value of borrowings under repurchase agreements approximates their carrying amount
due to the short-term nature of these financial instruments.

Certain information with respect to the Companys
borrowings is summarized in the following tables. Each of the borrowings listed is contractually due in one year or less (dollars in thousands).



|                                              |  |   |           |  
|--------------------------------------------- |  | - | --------- | -
|December 31, 2010                             |  |   |          
|Outstanding borrowings                        |  | $ | 3,443,843 |  
|Interest accrued thereon                      |  | $ | 1,084     |  
|Weighted average borrowing rate               |  |   | 0.32      | %
|Weighted average remaining maturity (in days) |  |   | 39.3      |  
|Fair value of the collateral(1)               |  | $ | 3,657,185 |  
|                                              | 
|December 31, 2009                             |  |   |          
|Outstanding borrowings                        |  | $ | 1,372,708 |  
|Interest accrued thereon                      |  | $ | 354       |  
|Weighted average borrowing rate               |  |   | 0.28      | %
|Weighted average remaining maturity (in days) |  |   | 27.6      |  
|Fair value of the collateral(1)               |  | $ | 1,445,191 |  



|(1) | Collateral for borrowings consists of Agency RMBS.
|--- | --------------------------------------------------



80



---

##### Table of Contents

At December 31, 2010 and 2009, the Company did not have any repurchase agreements where
the amount at risk exceeded 10% of net assets.

6. SHARE CAPITAL

The Company authorized 500,000,000 shares of common stock having par value of $0.01 per share. As of December 31, 2010 and
December 31, 2009, the Company had issued and outstanding 59,550,836 and 18,756,512 shares of common stock, respectively, and warrants to purchase an additional 15,200 and 78,190 shares of common stock, respectively. The Company issued
40,794,324 and 11,093,806 shares of common stock during the years ended December 31, 2010 and 2009, respectively.

Below
is a description of the warrants outstanding at December 31, 2010 and December 31, 2009:

December 31, 2010



|               |  |                                  |        |  |                |   |       | 
|-------------- |  | -------------------------------- | ------ |  | -------------- | - | ----- | 
|Expiration     |  | Additional sharesof common stock |        |  | Exercise Price |  
|April 30, 2011 |  |                                  | 15,200 |  |                | $ | 11.00 | 

December 31, 2009



|               |  |                                  |        |  |                |   |       | 
|-------------- |  | -------------------------------- | ------ |  | -------------- | - | ----- | 
|Expiration     |  | Additional sharesof common stock |        |  | Exercise Price |  
|April 30, 2011 |  |                                  | 78,190 |  |                | $ | 11.00 | 

The Company also
authorized 50,000,000 shares of preferred stock having a par value of $0.01 per share. As of December 31, 2010 and 2009, no such shares were issued or outstanding.

On June 17, 2009, the Company closed its initial public offering of 10,465,000 shares of its common stock at a public offering price of $11.00 per share for total net proceeds of approximately $105.8
million, after the underwriting discount and commissions and expenses. On June 30, 2010, the Company closed a public offering of 10,925,000 shares of its common stock at a public offering price of $12.50 per share for total net proceeds of
approximately $129.4 million, after the underwriting discount and commissions and expenses. On September 24, 2010, the Company closed a public offering of 14,950,000 shares of its common stock at a public offering price of $12.95 per share for
total net proceeds of approximately $184.7 million, after the underwriting discount and commissions and expenses. On December 15, 2010, the Company closed a public offering of 13,972,500 shares of its common stock at a public offering price of
$12.46 per share for total net proceeds of approximately $166.9 million, after the underwriting discount and commissions and expenses.

The Company sponsors a dividend reinvestment and direct stock purchase plan through which stockholders may purchase additional shares of common stock by reinvesting some or all of the cash dividends
received on shares of common stock. This plan became effective on June 22, 2010. Stockholders may also make optional cash purchases of shares of common stock subject to certain limitations detailed in the plan prospectus. From
June 22, 2010 to December 31, 2010 the Company issued 607,902 shares under the plan raising approximately $8.0 million of net proceeds. As of December 31, 2010, there were approximately 9.4 million shares available for issuance
under this plan.



81



---

##### Table of Contents

7. STOCK OPTIONS AND RESTRICTED STOCK

The Company has adopted a stock incentive plan (the 2006 Stock Incentive Plan) that provides for the grant of non-qualified
common stock options, stock appreciation rights, restricted common stock and other share-based awards. The compensation committee of the Companys board of directors (the Committee) administers the plan. Awards under the 2006 Stock
Incentive Plan may be granted to the Companys directors and executive officers and Manager Designees.

The exercise
price for any stock option granted under the 2006 Stock Incentive Plan may not be less than 100% of the fair value of the shares of common stock at the time the common stock option is granted. Each common stock option must terminate no later than
ten years from the date it is granted. The 2006 Stock Incentive Plan authorizes a total of 3,333,333 shares that may be used to satisfy awards under the plan. New shares will be issued on the exercise of any option. As of December 31, 2010 and
2009 the remaining shares to be authorized under the 2006 Stock Incentive Plan were 2,064,492 and 2,386,848, respectively.

On
November 3, 2010 (the Grant Date) the Committee approved grants (the Restricted Stock Grants) of an aggregate of 300,000 shares of the Companys common stock to certain employees of Sharpridge. Sharpridge serves as
a sub-advisor to the Manager. The Restricted Stock Grants were awarded pursuant to the Companys 2006 Stock Incentive Plan. The Restricted Stock Grants to those employees of Sharpridge that also serve as executive officers of the Company are
each made pursuant to the five year vesting schedule described below.

The Committee approved the Restricted Stock Grants as
part of its review of the Companys long-term compensation planning, and as a way to acknowledge and reward the employees of Sharpridge for their service to the Company and the Manager, and to incentivize and retain the Companys executive
officers. In connection with the Restricted Stock Grants, the Committee approved two separate forms of Restricted Stock Award Agreements. For grants of an aggregate 40,000 shares, the shares will vest ratably over a three year vesting period,
one-third of such shares vesting on each of the first three anniversary dates of the Grant Date. For grants of an aggregate 260,000 shares, the shares will vest ratably over a five year vesting period, one-fifth of such shares vesting on each of the
first five anniversary dates of the Grant Date.

Restricted common stock granted to certain directors vests over a one-year
period. The following table summarizes restricted common stock transactions for the years ended December 31, 2010, 2009 and 2008:



|                                                       |  |                          |         |   |           |  |         |       |  |  |         |  
|------------------------------------------------------ |  | ------------------------ | ------- | - | --------- |  | ------- | ----- |  |  | ------- | -
|Years ended December 31, 2008, 2009 and 2010           |  | Officers
andEmployees(1) |         |   | Directors |  |         | Total | 
|Unvested Shares as of December 31, 2007                |  |                          | 162,617 |   |           |  | 7,334   |       |  |  | 169,951 |  
|Issued (Weighted average grant date fair value $15.75) |  |                          |        |   |           |  | 10,154  |       |  |  | 10,154  |  
|Vested                                                 |  |                          | (81,310 | ) |           |  | (6,333  | )     |  |  | (87,643 | )
|                                                       |  |                          |         |   |           |  |         |       |  |  |         |  
|Unvested Shares as of December 31, 2008                |  |                          | 81,307  |   |           |  | 11,155  |       |  |  | 92,462  |  
|Issued (Weighted average grant date fair value $13.61) |  |                          | 538,000 |   |           |  | 14,988  |       |  |  | 552,988 |  
|Vested                                                 |  |                          | (81,307 | ) |           |  | (11,155 | )     |  |  | (92,462 | )
|                                                       |  |                          |         |   |           |  |         |       |  |  |         |  
|Unvested Shares as of December 31, 2009                |  |                          | 538,000 |   |           |  | 14,988  |       |  |  | 552,988 |  
|Issued (Weighted average grant date fair value $13.35) |  |                          | 300,000 |   |           |  | 22,356  |       |  |  | 322,356 |  
|Vested                                                 |  |                          | (83,999 | ) |           |  | (14,988 | )     |  |  | (98,987 | )
|                                                       |  |                          |         |   |           |  |         |       |  |  |         |  
|Unvested Shares as of December 31, 2010                |  |                          | 754,001 |   |           |  | 22,356  |       |  |  | 776,357 |  
|                                                       |  |                          |         |   |           |  |         |       |  |  |         |  



|(1) | Includes grants to the Companys executive officers and certain officers and Manager Designees.
|--- | -----------------------------------------------------------------------------------------------



82



---

##### Table of Contents

Pursuant to ASC 718 the Company is required to value any unvested shares of restricted
common stock granted to the Companys executive officers and Manager Designees at the fair value at each reporting period. The Company valued the unvested restricted common stock at $12.91 and $13.51 per share at December 31, 2010 and
2009, respectively. Unrecognized compensation cost related to unvested restricted common stock granted as of December 31, 2010 and 2009 was $9.7 million and $7.3 million, respectively. The total fair value of restricted stock awards vested
during the years ended December 31, 2010, 2009 and 2008 were $1.2 million, $1.4 million and $1.4 million, respectively based upon the fair market value of the Companys common stock on the vesting date.

There were no common stock options granted during the years ended December 31, 2010 and 2009. As of December 31, 2010 and 2009,
there were 131,088 options outstanding, all of which were vested and exercisable, with a weighted average exercise price of $30.00. The common stock options were remeasured during the vesting period using the Black-Scholes model based on the
following assumptions:



|               |  |                          |           |   |      |  |           |  
|-------------- |  | ------------------------ | --------- | - | ---- |  | --------- | -
|               |  | Years ended December 31, |          
|               |  | 2009                     |           |   | 2008 | 
|Expected life  |  |                          | 7.0 years |   |      |  | 7.1 years |  
|Discount rate  |  |                          | 2.832     | % |      |  | 2.329     | %
|Volatility     |  |                          | 86.78     | % |      |  | 84.62     | %
|Dividend yield |  |                          | 15.69     | % |      |  | 32.44     | %

The estimated fair value
of the common stock options was $3.31 and $2.14 per share for the years ended December 31, 2009 and 2008, respectively. The components of share based compensation expense for each period were as follows:



|                                                               |  |                          |           |  |      |   |         |      |  |   |           | 
|-------------------------------------------------------------- |  | ------------------------ | --------- |  | ---- | - | ------- | ---- |  | - | --------- | 
|                                                               |  | Years ended December 31, |          
|                                                               |  | 2010                     |           |  | 2009 |   |         | 2008 | 
|Options granted to CEO                                         |  | $                        |          |  |      | $ | 57,278  |      |  | $ | 72,637    | 
|Restricted shares granted to officers and Manager Designees(1) |  |                          | 1,185,023 |  |      |   | 747,170 |      |  |   | 1,017,473 | 
|Restricted shares granted to certain directors                 |  |                          | 274,422   |  |      |   | 180,605 |      |  |   | 190,167   | 
|                                                               |  |                          |           |  |      |   |         |      |  |   |           | 
|Total shared based compensation expense                        |  | $                        | 1,459,445 |  |      | $ | 985,053 |      |  | $ | 1,280,277 | 
|                                                               |  |                          |           |  |      |   |         |      |  |   |           | 



|(1) | Includes grants to the Companys executive officers and Manager Designees.
|--- | --------------------------------------------------------------------------

8. MANAGEMENT AGREEMENT AND RELATED PARTY TRANSACTIONS

The Manager manages the Companys day-to-day operations, subject to the direction and oversight of the Companys board of directors. The Management Agreement was executed on February 10,
2006. The initial term of the Management Agreement expired on December 31, 2008, and it was automatically renewed for a one-year term and will continue to be automatically renewed for one-year term on each anniversary date thereafter. The
Management Agreement may be terminated upon the affirmative vote of at least two-thirds of the Companys independent directors, or by a vote of the holders of a majority of the outstanding shares of the Companys common stock. In the event
the Management Agreement is terminated as described above, the Company shall pay to the Manager a termination fee in accordance with the provisions of the Management Agreement.

The Management Agreement provides, among other things, that the Company pays to the Manager, in exchange for managing the day-to-day
operations of the Company, certain fees and reimbursements, consisting of a base management fee and reimbursement for out-of-pocket and certain other costs incurred by the Manager and on behalf of the Company. The base management fee, which is paid
monthly, was equal to 1/12 of (A) 1.50% of the first $250,000,000 of Net Assets (as defined in the Management Agreement), (B) 1.25% of such



83



---

##### Table of Contents

Net Assets that are greater than $250,000,000 and less than or equal to $500,000,000, and (C) 1.00% of such Net Assets that are greater than $500,000,000. The Company is also required to
reimburse the Manager for its pro-rata portion of rent, utilities, legal and investment services, market information systems and research publications and materials. In addition, the Company recognized share-based compensation expense related to
common stock options and restricted common stock granted to the Companys executive officers and Manager Designees which is included in related party management compensation on the statement of operations and described in note 7.

For the years ended December 31, 2010, 2009 and 2008 the Company incurred the following in base management fees and expense
reimbursement:



|                      |  |                          |           |  |      |   |           |      |  |   |           | 
|--------------------- |  | ------------------------ | --------- |  | ---- | - | --------- | ---- |  | - | --------- | 
|                      |  | Years ended December 31, |          
|                      |  | 2010                     |           |  | 2009 |   |           | 2008 | 
|Base Management Fees  |  | $                        | 5,469,372 |  |      | $ | 2,778,340 |      |  | $ | 1,609,990 | 
|Expense Reimbursement |  |                          | 618,905   |  |      |   | 854,665   |      |  |   | 944,549   | 
|                      |  |                          |           |  |      |   |           |      |  |   |           | 
|Total                 |  | $                        | 6,088,277 |  |      | $ | 3,633,005 |      |  | $ | 2,554,539 | 
|                      |  |                          |           |  |      |   |           |      |  |   |           | 

9. INCOME TAXES

The Company has elected to be taxed as a REIT under Section 856 of the Code and intends to continue to comply with the provisions of the Code. As a REIT, the Company generally is not subject to
federal or state income tax. To maintain its qualification as a REIT, the Company must distribute at least 90% of its REIT taxable income to its stockholders each year and meet certain other tests relating to assets and income. If the Company fails
to qualify as a REIT in any taxable year, the Company will be subject to federal income tax on its taxable income at regular corporate rates. The Company may also be subject to certain state and local taxes. Under certain circumstances, even though
the Company qualifies as a REIT, federal income and excise taxes may be due on its undistributed taxable income. No provision for income taxes has been provided in the accompanying financial statements related to the REIT because the Company has
paid or will pay dividends in amounts that exceed at least 90% of its current year taxable income.

Book/tax differences
primarily relate to amortization of realized losses on swaps, related party management compensation expense and income on CLOs.

The tax character of the $2.35 of distributions declared to shareholders during 2010 is estimated to be $0.98 as ordinary income $0.07 as
capital gain and $1.30 as return of capital. Upon filing the December 31, 2009 tax return, the tax character of the $2.10 of distributions declared to shareholders during 2009 was determined to be $0.48 as ordinary income and $1.62 as return of
capital.

The estimated federal tax cost and the tax basis components of distributable earnings were as follows:



|                                           |  |   |               |  
|------------------------------------------ |  | - | ------------- | -
|As of December 31, 2010                    |  |   |              
|Cost of investments                        |  | $ | 6,331,907,460 |  
|                                           |  |   |               |  
|Gross appreciation                         |  | $ | 39,291,730    |  
|Gross depreciation                         |  |   | (40,150,647   | )
|                                           |  |   |               |  
|Net unrealized appreciation (depreciation) |  | $ | (858,917      | )
|                                           |  |   |               |  
|Undistributed ordinary income              |  | $ |              |  
|                                           |  |   |               |  
|Capital loss carryforwards                 |  | $ | (23,068,579   | )
|                                           |  |   |               |  



84



---

##### Table of Contents

As of December 31, 2010, the Company had estimated capital loss carryforwards available
to offset future realized gains. Such losses are subject to an annual and future limitations in accordance with Internal Revenue Code section 382 and expire as follows:



|                  |  |   |             |  
|----------------- |  | - | ----------- | -
|December 31, 2012 |  | $ | (15,274,343 | )
|December 31, 2013 |  |   | (7,745,897  | )
|December 31, 2014 |  |   | (48,339     | )
|                  |  |   |             |  
|                  |  | $ | (23,068,579 | )
|                  |  |   |             |  

As of December 31, 2010 and 2009, the Companys estimated undistributed taxable income was
approximately $0. No income tax provision was recorded for the years ended December 31, 2010, 2009 and 2008.

10. CONTINGENCIES

The Company enters into certain contracts that contain a variety of indemnifications, principally with the Manager and
brokers. The maximum potential amount of future payment the Company could be required to make under these indemnification provisions is unlimited. The Company has not incurred any costs to defend lawsuits or settle claims related to these
indemnification agreements. As a result, the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of December 31, 2010 and 2009.

11. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK OR CONCENTRATIONS OF CREDIT RISK

In the normal course of its business, the Company trades various financial instruments and enters into various investment activities with
off-balance sheet risk, including interest rate swap contracts. These financial instruments contain varying degrees of off-balance sheet risk whereby losses resulting from changes in the fair values of the securities underlying the financial
instruments or the Companys obligations thereunder may ultimately exceed the amount recognized in the statement of assets and liabilities.

The notional amounts of the swap contracts do not represent the Companys risk of loss due to counterparty nonperformance. The Companys exposure to credit risk associated with counterparty
nonperformance on swap contracts is limited to the unrealized gains, if any, inherent in such contracts which are recognized in the statement of assets and liabilities. Any counterparty nonperformance of these transactions is not expected to have a
material effect on the Companys financial condition.

The Companys investments are primarily concentrated in
securities that pass through collections of principal and interest from underlying mortgages, and there is a risk that some borrowers on the underlying mortgages will default. Therefore, mortgage-backed securities may bear some exposure to credit
losses. However, the Company mitigates credit risk by primarily holding securities that are either guaranteed by government (or government-sponsored) agencies.

The Company bears certain other risks typical in investing in a portfolio of mortgage-backed securities. The principal risks potentially affecting the Companys financial position, results of
operations and cash flows include the risks that: (a) interest rate changes can negatively affect the fair value of the Companys mortgage-backed securities, (b) interest rate changes can influence borrowers decisions to prepay
the mortgages underlying the securities, which can negatively affect both cash flows from, and the fair value of, the securities, and (c) adverse changes in the fair value of the Companys mortgage-backed securities and/or the inability of
the Company to renew short term borrowings under repurchase agreements can result in the need to sell securities at inopportune times and incur realized losses.



85



---

##### Table of Contents

The Company enters into derivative transactions with counterparties as hedges of interest
rate exposure and in the course of investing. In the event of nonperformance by a counterparty, the Company is potentially exposed to losses, although the counterparties to these agreements are primarily major financial institutions with investment
grade ratings.

The Company is subject to interest rate risk. Generally, the value of fixed income securities will change
inversely with changes in interest rates. As interest rates rise, the market value of fixed income securities tends to decrease. Conversely, as interest rates fall, the market value of fixed income securities tends to increase.

The Companys principal trading activities are primarily with brokers and other financial institutions located in North America. All
securities transactions of the Company are cleared by multiple major securities firms pursuant to customer agreements. At December 31, 2010 and 2009, substantially all the investments in securities and receivable for securities sold are
positions with and amounts due from these brokers. The Company had substantially all of its individual counterparty concentrations with these brokers and their affiliates.

12. FINANCIAL HIGHLIGHTS

In accordance with financial reporting
requirements applicable to investment companies, the Company has included below certain financial highlight information for the years ended December 31, 2010, 2009 and 2008.



|                                                                                    |  |                          |       |      |      |   |       |      |  |   |        |     
|----------------------------------------------------------------------------------- |  | ------------------------ | ----- | ---- | ---- | - | ----- | ---- |  | - | ------ | ----
|                                                                                    |  | Per Share                |      
|                                                                                    |  | Years ended December 31, |      
|                                                                                    |  | 2010                     |       |      | 2009 |   |       | 2008 | 
|Net asset value, beginning of period                                                |  | $                        | 13.02 |      |      | $ | 12.89 |      |  | $ | 19.75  |     
|Net income (loss):                                                                  |  |                          |       |      |      |   |       |      |  |   |        |     
|Net investment income                                                               |  |                          | 2.07  | (a)  |      |   | 2.55  | (a)  |  |   | 3.26   | (a) 
|Net gain (loss) from investments and swap and cap contracts                         |  |                          | (1.30 | )(a) |      |   | 2.23  | (a)  |  |   | (8.63  | )(a)
|                                                                                    |  |                          |       |      |      |   |       |      |  |   |        |     
|Net income (loss)                                                                   |  |                          | 0.77  |      |      |   | 4.78  |      |  |   | (5.37  | )   
|                                                                                    |  |                          |       |      |      |   |       |      |  |   |        |     
|Capital transactions:                                                               |  |                          |       |      |      |   |       |      |  |   |        |     
|Distributions to shareholders                                                       |  |                          | (1.03 | )(a) |      |   | (0.45 | )(a) |  |   | (1.30  | )(a)
|Tax return of capital distributions                                                 |  |                          | (1.27 | )(a) |      |   | (1.49 | )(a) |  |   |       |     
|Issuance of common shares and amortization of related party management compensation |  |                          | 0.10  | (a)  |      |   | (2.71 | )(a) |  |   | (0.19  | )(a)
|                                                                                    |  |                          |       |      |      |   |       |      |  |   |        |     
|Net decrease in net asset value from capital transactions                           |  |                          | (2.20 | )    |      |   | (4.65 | )    |  |   | (1.49  | )   
|                                                                                    |  |                          |       |      |      |   |       |      |  |   |        |     
|Net asset value, end of period                                                      |  | $                        | 11.59 |      |      | $ | 13.02 |      |  | $ | 12.89  |     
|                                                                                    |  |                          |       |      |      |   |       |      |  |   |        |     
|Total return (%)                                                                    |  |                          | 6.68  | %    |      |   | 16.06 | %    |  |   | (28.15 | )%  
|Ratios to Average Net Assets                                                        |  |                          |       |      |      |   |       |      |  |   |        |     
|Expenses before interest expense                                                    |  |                          | 2.68  | %    |      |   | 3.93  | %    |  |   | 7.03   | %(b)
|Expenses                                                                            |  |                          | 3.97  | %    |      |   | 6.43  | %    |  |   | 28.78  | %(b)
|Net investment income                                                               |  |                          | 15.35 | %    |      |   | 19.09 | %    |  |   | 21.54  | %   



|(a) | Calculated based on average shares outstanding during the period. Average shares outstanding include vested and unvested restricted shares and differs
from weighted average shares outstanding used in calculating EPS (see note 3).
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Includes expensing offering costs, a non-recurring expense, which amounted to $2,274,362, or 2.06% of average net assets.
|--- | -------------------------------------------------------------------------------------------------------------------------



86



---

##### Table of Contents

13. SUBSEQUENT EVENTS

On January 1, 2011, an aggregate of 6,984 shares of restricted common stock were granted to certain directors as a portion of their compensation for serving on the Companys board of directors.
On January 25, 2011, the Company issued 34 shares of common stock as part of the Companys Dividend Reinvestment and Direct Stock Purchase Plan.

14. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)



|                                             |  |                    |             |   |                   |   |             |               |  |   |                |   |  |   |             |  
|-------------------------------------------- |  | ------------------ | ----------- | - | ----------------- | - | ----------- | ------------- |  | - | -------------- | - |  | - | ----------- | -
|                                             |  | Three Months Ended |            
|                                             |  | December 31,2010   |             |   | September 30,2010 |   |             | June 30, 2010 |  |   | March 31, 2010 |  
|Investment IncomeInterest Income            |  | $                  | 25,025,293  |   |                   | $ | 16,311,419  |               |  | $ | 17,265,278     |   |  | $ | 16,936,967  |  
|Total expenses                               |  |                    | 5,305,664   |   |                   |   | 3,826,063   |               |  |   | 3,167,106      |   |  |   | 3,217,849   |  
|                                             |  |                    |             |   |                   |   |             |               |  |   |                |   |  |   |             |  
|Net investment income                        |  |                    | 19,719,629  |   |                   |   | 12,485,356  |               |  |   | 14,098,172     |   |  |   | 13,719,118  |  
|Net gain (loss) from investments             |  |                    | (66,125,063 | ) |                   |   | 28,576,016  |               |  |   | 32,367,676     |   |  |   | 6,464,303   |  
|Net gain (loss) from swap and cap contracts  |  |                    | 29,137,920  |   |                   |   | (39,152,211 | )             |  |   | (18,860,358    | ) |  |   | (10,040,202 | )
|                                             |  |                    |             |   |                   |   |             |               |  |   |                |   |  |   |             |  
|Net income (loss)                            |  | $                  | (17,267,514 | ) |                   | $ | 1,909,161   |               |  | $ | 27,605,490     |   |  | $ | 10,143,219  |  
|                                             |  |                    |             |   |                   |   |             |               |  |   |                |   |  |   |             |  
|Net income (loss) per common share (diluted) |  | $                  | (0.38       | ) |                   | $ | 0.05        |               |  | $ | 1.46           |   |  | $ | 0.54        |  
|                                             | 
|                                             |  | Three Months Ended |            
|                                             |  | December 31,2009   |             |   | September 30,2009 |   |             | June 30, 2009 |  |   | March 31, 2009 |  
|Investment IncomeInterest Income            |  | $                  | 15,767,509  |   |                   | $ | 10,709,920  |               |  | $ | 9,727,375      |   |  | $ | 9,321,345   |  
|Total expenses                               |  |                    | 3,102,641   |   |                   |   | 2,895,317   |               |  |   | 2,525,397      |   |  |   | 2,951,746   |  
|                                             |  |                    |             |   |                   |   |             |               |  |   |                |   |  |   |             |  
|Net investment income                        |  |                    | 12,664,868  |   |                   |   | 7,814,603   |               |  |   | 7,201,978      |   |  |   | 6,369,599   |  
|Net gain (loss) from investments             |  |                    | (4,320,481  | ) |                   |   | 24,410,936  |               |  |   | 12,443,441     |   |  |   | 6,979,121   |  
|Net gain (loss) from swap contracts          |  |                    | (1,307,494  | ) |                   |   | (9,007,109  | )             |  |   | 930,877        |   |  |   | (334,544    | )
|                                             |  |                    |             |   |                   |   |             |               |  |   |                |   |  |   |             |  
|Net income (loss)                            |  | $                  | 7,036,893   |   |                   | $ | 23,218,430  |               |  | $ | 20,576,296     |   |  | $ | 13,014,176  |  
|                                             |  |                    |             |   |                   |   |             |               |  |   |                |   |  |   |             |  
|Net income (loss) per common share (diluted) |  | $                  | 0.37        |   |                   | $ | 1.28        |               |  | $ | 2.22           |   |  | $ | 1.70        |  



|Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|------- | ------------------------------------------------------------------------------------

None.



|Item 9A. | Controls and Procedures
|-------- | -----------------------

Our management, including our Chief Executive Officer (the CEO) and Chief Financial Officer (the CFO), reviewed
and evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this annual
report. Based on that review and evaluation, the CEO and CFO have concluded that our current disclosure controls and procedures, as designed and implemented, (1) were effective in ensuring that information regarding the Company and its
subsidiaries is made known to our management, including our CEO and CFO, by our officers and our Manager, as appropriate to allow timely



87



---

##### Table of Contents

decisions regarding required disclosure and (2) were effective in providing reasonable assurance that information the Company must disclose in its periodic reports under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods prescribed by the SECs rules and forms.

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

Managements Report on Internal Control over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal
control over financial reporting is defined in Rules 13a-15(f) under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, the Companys principal executive and principal financial officers and
effected by the Companys Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and procedures that:



| |  |  | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the
Company;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Companys assets that
could have a material effect on the financial statements.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. As a result, even systems determined to be effective can provide only reasonable assurance regarding the preparation and presentation of financial statements. Moreover,
projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

The Companys management assessed the effectiveness of the Companys internal control over financial reporting as
of December 31, 2010. In making this assessment, the Companys management used criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.

Based on managements assessment, the Companys management believes that, as of December 31, 2010, the Companys
internal control over financial reporting was effective based on those criteria. The Companys independent registered public accounting firm, Deloitte & Touche LLP, has issued an attestation report on the Companys internal
control over financial reporting. This report appears on page 59 of this annual report on Form 10-K.



|Item 9B. | Other Information.
|-------- | ------------------

Not
applicable.



88



---

##### Table of Contents

PART III



|Item 10. | Directors, Executive Officers and Corporate Governance
|-------- | ------------------------------------------------------

The information required by Item 10 is incorporated by reference to our definitive Proxy Statement for our 2011 annual stockholders meeting.



|Item 11. | Executive Compensation
|-------- | ----------------------

The information required by Item 11 is incorporated by reference to our definitive Proxy Statement for our 2011 annual
stockholders meeting.



|Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|-------- | ----------------------------------------------------------------------------------------------

The information required by Item 12 is incorporated by reference to our definitive Proxy Statement for our 2011 annual
stockholders meeting.



|Item 13. | Certain Relationships and Related Transactions, and Director Independence
|-------- | -------------------------------------------------------------------------

The information required by Item 13 is incorporated by reference to our definitive Proxy Statement for our 2011 annual stockholders meeting.



|Item 14. | Principal Accountant Fees and Services
|-------- | --------------------------------------

The information required by Item 14 is incorporated by reference to our definitive Proxy Statement for our 2011 annual stockholders meeting.



89



---

##### Table of Contents

PART IV



|Item 15. | Exhibits and Financial Statement Schedules
|-------- | ------------------------------------------

(a) Documents filed as part of this report:

1.
Financial Statements.

See Index to financial statements, included in Part II, Item 8 of this Annual Report on Form 10-K.

2. Schedules to Financial Statements:

All financial statement schedules not included have been omitted because they are either inapplicable or the information required is provided in our Financial Statements and Notes thereto, included in
Part II, Item 8, of this Annual Report on Form 10-K.

3. Exhibits



|              |  |                                                                                                                                                                            
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit                                                                                                                                                     
|3.1*          |  | Articles of Amendment and Restatement of Cypress Sharpridge Investments, Inc.                                                                                              
|              | 
|3.2*          |  | Bylaws of Cypress Sharpridge Investments, Inc.                                                                                                                             
|              | 
|3.3*          |  | Amended and Restated Bylaws of Cypress Sharpridge Investments, Inc.                                                                                                        
|              | 
|3.4**         |  | Articles of Amendment to the Articles of Amendment and Restatement.                                                                                                        
|              | 
|3.5**         |  | Articles of Amendment to the Articles of Amendment and Restatement.                                                                                                        
|              | 
|4.1*          |  | Form of Certificate for Common Stock for Cypress Sharpridge Investments, Inc.                                                                                              
|              | 
|4.2*          |  | Warrant Agreement, by and between Cypress Sharpridge Investments, Inc. and National City Bank, dated as of May 22, 2008.                                                   
|              | 
|4.3*          |  | First Amendment to Warrant Agreement, by and between Cypress Sharpridge Investments, Inc. and National City Bank, dated as of June 11, 2008.                               
|              | 
|10.1*         |  | License Agreement, between Cypress Sharpridge Investments, Inc. and The Cypress Group L.L.C., dated as of February 10, 2006.                                               
|              | 
|10.2*         |  | License Agreement, between Cypress Sharpridge Investments, Inc. and Sharpridge Capital Management, L.P., dated as of February 10, 2006.                                    
|              | 
|10.3*        |  | 2006 Stock Incentive Plan.                                                                                                                                                 
|              | 
|10.4***      |  | Forms of Restricted Stock Award Agreements.                                                                                                                                
|              | 
|10.5*        |  | Form of Stock Option Agreement.                                                                                                                                            
|              | 
|10.6*         |  | Second Amended and Restated Management Agreement, by and between Cypress Sharpridge Investments, Inc. and Cypress Sharpridge Advisors LLC, effective as of January 1,
2009.
|              | 
|10.7*         |  | Form of Indemnification Agreement.                                                                                                                                         
|              | 
|12.1          |  | Statement re: Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends.                                                                    
|              | 
|23.1          |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                  
|              | 
|31.1          |  | Certification of Chief Executive Officer pursuant to Section 302 of the SarbanesOxley Act of 2002                                                                         
|              | 
|31.2          |  | Certification of Chief Financial Officer pursuant to Section 302 of the SarbanesOxley Act of 2002                                                                         



90



---

##### Table of Contents

|              |  |                                                                                                                                                   
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit                                                                                                                            
|32.1          |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the SarbanesOxley Act of 2002.
|              | 
|32.2          |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the SarbanesOxley Act of 2002.



|* | Incorporated by reference to the Registrants Registration Statement on Form S-11 filed with the Securities and Exchange Commission (File No. 333-142236).
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|** | Incorporated by reference from the Registrants Form 10-K filed with the Securities and Exchange Commission on February 10, 2010.
|-- | ---------------------------------------------------------------------------------------------------------------------------------

|*** | Incorporated by reference from the Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on November 3, 2010; the
Registrants Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on October 22, 2009 and to the Registrants Registration Statement on Form S-11 filed with the Securities and Exchange Commission (File No.
333-142236).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Compensatory plan or arrangement.
|- | ---------------------------------



91



---

##### Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.



|                        |  |                                      |  |                                                  
|----------------------- |  | ------------------------------------ |  | -------------------------------------------------
|                        |  | CYPRESS SHARPRIDGE INVESTMENTS, INC.
|                        |  |                                     
|Dated: February 7, 2011 |  | By:                                  |  | /s/    KEVIN E.
GRANT                            
|                        |  |                                      |  | Kevin E. Grant                                   
|                        |  |                                      |  | Chairman of the Board
and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and dates indicated.



|                                                         |  |                                                                                                                      |  |                 
|-------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | ----------------
|Signature                                                |  | Title                                                                                                                |  | Date            
|                                                         |  |                                                                                                                     
|/s/    KEVIN E.
GRANT Kevin E. Grant                     |  | Chief Executive Officer, President; Director; Chairman of the Board (Principal Executive Officer)                    |  | February 7, 2011
|                                                         |  |                                                                                                                     
|/s/    FRANCES
SPARK Frances Spark                       |  | Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting
Officer) |  | February 7, 2011
|                                                         |  |                                                                                                                     
|/s/    DOUGLAS CROCKER,
II Douglas Crocker, II           |  | Director                                                                                                             |  | February 7, 2011
|                                                         |  |                                                                                                                     
|/s/    JEFFREY P.
HUGHES Jeffrey P. Hughes               |  | Director                                                                                                             |  | February 7, 2011
|                                                         |  |                                                                                                                     
|/s/    STEPHEN P.
JONAS Stephen P. Jonas                 |  | Director                                                                                                             |  | February 7, 2011
|                                                         |  |                                                                                                                     
|/s/    RAYMOND A.
REDLINGSHAFER Raymond A. Redlingshafer |  | Director                                                                                                             |  | February 7, 2011
|                                                         |  |                                                                                                                     
|/s/    JAMES A.
STERN James A. Stern                     |  | Director                                                                                                             |  | February 7, 2011
|                                                         |  |                                                                                                                     
|/s/    DAVID A. TYSON,
PHD David A. Tyson, PhD           |  | Director                                                                                                             |  | February 7, 2011



92



---

##### Table of Contents

EXHIBIT INDEX



|                  |  |                                                                                                                                                                                                                                                                       
|----------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber     |  | Description of Exhibit                                                                                                                                                                                                                                                
|3.1*              |  | Articles of Amendment and Restatement of Cypress Sharpridge Investments, Inc.                                                                                                                                                                                         
|                  | 
|3.2*              |  | Bylaws of Cypress Sharpridge Investments, Inc.                                                                                                                                                                                                                        
|                  | 
|3.3*              |  | Amended and Restated Bylaws of Cypress Sharpridge Investments, Inc.                                                                                                                                                                                                   
|                  | 
|3.4**             |  | Articles of Amendment to the Articles of Amendment and Restatement.                                                                                                                                                                                                   
|                  | 
|3.5**  4.1* 
4.2* |  | Articles of Amendment to the Articles of Amendment and Restatement.
 Form of Certificate for Common Stock for Cypress Sharpridge Investments,
Inc.  Warrant Agreement, by and between Cypress Sharpridge Investments,
Inc. and National City Bank, dated May 22, 2008.
|                  | 
|4.3*              |  | First Amendment to Warrant Agreement, by and between Cypress Sharpridge Investments, Inc. and National City Bank, dated as of June 11, 2008.                                                                                                                          
|                  | 
|10.1*             |  | License Agreement, between Cypress Sharpridge Investments, Inc. and The Cypress Group L.L.C., dated as of February 10, 2006.                                                                                                                                          
|                  | 
|10.2*             |  | License Agreement, between Cypress Sharpridge Investments, Inc. and Sharpridge Capital Management, L.P., dated as of February 10, 2006.                                                                                                                               
|                  | 
|10.3*            |  | 2006 Stock Incentive Plan.                                                                                                                                                                                                                                            
|                  | 
|10.4***          |  | Forms of Restricted Stock Award Agreement.                                                                                                                                                                                                                            
|                  | 
|10.5*            |  | Form of Stock Option Agreement.                                                                                                                                                                                                                                       
|                  | 
|10.6*             |  | Second Amended and Restated Management Agreement, by and between Cypress Sharpridge Investments, Inc. and Cypress Sharpridge Advisors LLC, effective as of January 1,
2009.                                                                                           
|                  | 
|10.7*             |  | Form of Indemnification Agreement.                                                                                                                                                                                                                                    
|                  | 
|12.1              |  | Statement re: Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends.                                                                                                                                                               
|                  | 
|23.1              |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                             
|                  | 
|31.1              |  | Certification of Chief Executive Officer pursuant to Section 302 of the SarbanesOxley Act of 2002.                                                                                                                                                                   
|                  | 
|31.2              |  | Certification of Chief Financial Officer pursuant to Section 302 of the SarbanesOxley Act of 2002.                                                                                                                                                                   
|                  | 
|32.1              |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the SarbanesOxley Act of 2002.                                                                                                                    
|                  | 
|32.2              |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the SarbanesOxley Act of 2002.                                                                                                                    



|* | Incorporated by reference to the Registrants Registration Statement on Form S-11 filed with the Securities and Exchange Commission (File No. 333-142236).
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|** | Incorporated by reference from the Registrants Form 10-K filed with the Securities and Exchange Commission on February 10, 2010.
|-- | ---------------------------------------------------------------------------------------------------------------------------------

|*** | Incorporated by reference from the Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on November 3, 2010; the
Registrants Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on October 22, 2009 and to the Registrants Registration Statement on Form S-11 filed with the Securities and Exchange Commission (File No.
333-142236).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Compensatory plan or arrangement.
|- | ---------------------------------



93