1047884--3/16/2006--ANWORTH_MORTGAGE_ASSET

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{loan, real, estate}

{tax, income, asset}

{investment, property, distribution}

{stock, price, share}

{loss, insurance, financial}

{provision, law, control}

{capital, credit, financial}

{debt, indebtedness, cash}

{interest, director, officer}

{stock, price, operating}

{personnel, key, retain}

{acquisition, growth, future}

General Risks Related to Our Business Our leveraging strategy increases the risks of our operations. Our officers devote a portion of their time to another company in capacities that could create conflicts of interest that may harm our investment opportunities; this lack of a full-time commitment could also harm our operating results. We may incur increased borrowing costs related to repurchase agreements and that would harm our profitability. An increase in interest rates may harm our book value and cause a decrease in the demand for mortgage loans, which could harm the cash available for distribution to you. A flat or inverted yield curve may negatively affect our operations, book value and profitability due to its potential impact on investment yields and the supply of ARM products. We depend on borrowings to purchase mortgage-related assets and reach our desired amount of leverage. If we fail to obtain or renew sufficient funding on favorable terms, we will be limited in our ability to acquire mortgage-related assets and our earnings and profitability would decline. Possible market developments could cause our lenders to require us to pledge additional assets as collateral. If our assets are insufficient to meet the collateral requirements, then we may be compelled to liquidate particular assets at an inopportune time. Our use of repurchase agreements to borrow funds may give our lenders greater rights in the event that either we or a lender files for bankruptcy. Because assets we acquire may experience periods of illiquidity, we may lose profits or be prevented from earning capital gains if we cannot sell mortgage-related assets at an opportune time. Our hedging strategies may not be successful in mitigating our risks associated with interest rates. Competition may prevent us from acquiring mortgage-related assets at favorable yields and that would negatively impact our profitability. Our board of directors may change our operating policies and strategies without prior notice or stockholder approval and such changes could harm our business, results of operation and stock price. We depend on our key personnel and the loss of any of our key personnel could harm our operations. Our incentive compensation plan may create an incentive to increase the risk of our mortgage portfolio in an attempt to increase compensation. Risk Related Primarily to Anworth s Business Interest rate mismatches between our adjustable-rate mortgage-backed securities and our borrowings used to fund our purchases of the assets may reduce our income during periods of changing interest rates. Increased levels of prepayments from mortgage-backed securities may decrease our net interest income. We may experience reduced net interest income from holding fixed-rate investments during periods of rising interest rates. Interest rate caps on our adjustable-rate mortgage-backed securities may reduce our income or cause us to suffer a loss during periods of rising interest rates. We may invest in leveraged mortgage derivative securities that generally experience greater volatility in market prices, thus exposing us to greater risk with respect to their rate of return. Our investment policy involves risks associated with the credit quality of our investments. If the credit quality of our investments declines or if there are defaults on the investments we make, our profitability may decline and we may suffer losses. Risk Related Primarily to Belvedere Trust s Business Belvedere Trust s inability to complete an initial public offering or to secure alternate sources of equity could materially harm its business and results. Belvedere Trust s use of short-term debt exposes us to liquidity, market value and securitization execution risks that could result in harm to our financial condition. If Belvedere Trust is unable to complete securitizations or experiences delayed mortgage loan sales or securitization closings, it could face a liquidity shortage which would harm our operating results. Belvedere Trust s business may be significantly harmed by a slowdown in the economy of California, resulting in potentially higher delinquencies and increased loan losses. Belvedere Trust has had only limited operating history in the business of acquiring and securitizing whole mortgage loans and it may not be successful. Belvedere Trust s investment strategy of acquiring, accumulating and securitizing loans involves credit risk that could result in loan losses and could harm our operating results. Belvedere Trust s efforts to manage credit risk may not be successful in limiting delinquencies and defaults in underlying loans or losses on its investments. Belvedere Trust requires a significant amount of capital, and if it is not available, its business and financial performance could be significantly harmed. To the extent that Belvedere Trust has a large number of loans in an area affected by a natural disaster, it may suffer losses. Second-lien mortgage loans expose Belvedere Trust to greater credit risks. Residential mortgage loan delinquencies, defaults, and credit losses could reduce Belvedere Trust s ability to complete securitizations, which could expose Belvedere Trust to risk from holding loans longer than expected. The use of securitizations with over-collateralization requirements may have a negative impact on Belvedere Trust s cash flow. Representations and warranties made by Belvedere Trust in loan sales and securitizations may subject Belvedere Trust to liability that could result in loan losses and could harm our operating results. The mortgage-related assets Belvedere Trust owns expose it to concentrated risks and thus are likely to lead to variable returns. The success of Belvedere Trust s business will depend upon its ability to determine that mortgage loans are serviced effectively. Belvedere Trust acquires and owns interest-only loans which expose it to increased risk of default. Belvedere Trust has acquired most of its mortgage-related assets from a limited number of originators and the failure to properly manage these relationships, or if these originators experience origination problems, Belvedere Trust s ability to acquire loans from them could be harmed, which would negatively affect its operations. Belvedere Trust has acquired non-investment grade securities which bear a greater risk of credit losses. Belvedere Trust is externally managed and this may diminish or eliminate the return on our investment in this line of business. Our Chairman has an ownership interest in BT Management that creates potential conflicts of interest. Risks Related to REIT Compliance and Other Matters If we are disqualified as a REIT, we will be subject to tax as a regular corporation and face substantial tax liability. Complying with REIT requirements may cause us to forego otherwise attractive opportunities. Complying with REIT requirements may limit our ability to hedge effectively. Complying with REIT requirements may force us to liquidate otherwise attractive investments or to make investments inconsistent with our business plan. Complying with REIT requirements may force us to borrow to make distributions to stockholders. If Belvedere Trust fails to qualify as a REIT, a qualified REIT subsidiary or a taxable REIT subsidiary, we may lose our REIT status. If Belvedere Trust fails to qualify as a REIT, Belvedere Trust will be subject to corporate income taxes on its taxable income which will reduce the amount available for distribution to us. We conduct a portion of our business through taxable REIT subsidiaries, which could have adverse tax consequences. The tax imposed on REITs engaging in prohibited transactions will limit our ability to engage in transactions, including certain methods of securitizing loans, which would be treated as sales for federal income tax purposes. Failure to maintain an exemption from the Investment Company Act would harm our results of operations. We may incur excess inclusion income that would increase the tax liability of our stockholders. Misplaced reliance on legal opinions or statements by issuers of mortgage-backed securities and government securities could result in a failure to comply with REIT gross income or asset tests. We may not be able to use the money we raise to acquire investments at favorable prices. We have not established a minimum dividend payment level for our common stockholders and there are no assurances of our ability to pay dividends to them in the future. Our future offerings of debt or preferred equity securities may harm the value of our Series A Cumulative Preferred Stock. Our charter does not permit ownership of over 9.8% of our common or preferred stock and attempts to acquire our common or preferred stock in excess of the 9.8% limit are void without prior approval from our board of directors. Because provisions contained in Maryland law, our charter and our bylaws may have an anti-takeover effect, investors may be prevented from receiving a control premium for their shares. Issuances of large amounts of our stock could cause the price of our stock to decline. Future offerings of debt securities, which would be senior to our common stock or Series A Cumulative Preferred Stock upon liquidation, or equity securities, which would dilute our existing stockholders and may be senior to our common stock or Series A Cumulative Preferred Stock for the purposes of dividend distributions, may harm the market price of our common stock or Series A Cumulative Preferred Stock.

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1047884--3/16/2006--ANWORTH_MORTGAGE_ASSET_CORP