Edgar Filing: ANWORTH MORTGAGE ASSET CORP

As filed with the Securities and Exchange Commission on April 3, 2002

Registration No. 333-81698

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT No. 1

FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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Anworth Mortgage Asset Corporation
(Exact Name of Registrant as Specified in Its Charter)

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Maryland 52-2059785
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)

1299 Ocean Avenue, Suite 200
Santa Monica, California 90401
(310) 394-0115
(Address, Including Zip Code, and Telephone Number, including Area Code, of
Registrant's Principal Executive Offices)

Lloyd McAdams
Chairman and Chief Executive Officer
1299 Ocean Avenue, Suite 200
Santa Monica, California 90401
(310) 394-0115
(Name, Address, Including Zip Code, and Telephone Number, including Area Code,
of Agent for Service)

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Copies to:

Mark J. Kelson
Allen Matkins Leck Gamble & Mallory LLP
1901 Avenue of the Stars, 18th Floor
Los Angeles, California 90067
(310) 788-2400
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If the registrant elects to deliver its latest annual report to security
holders or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434 of
the Securities Act, please check the following box. [_]

We hereby amend this Registration Statement on such date or dates as may be
necessary to delay its effective date until we file a further amendment which
specifically states that this Registration Statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of 1933, or
until the Registration Statement shall become effective on such date as the
Securities and Exchange Commission, acting pursuant to said Section 8(a), may
determine.
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PROSPECTUS

500,000 Shares

[LOGO] LOGO OF ANWORTH MORTGAGE ASSET CORPORATION

Anworth Mortgage Asset Corporation

Common Stock

All of the shares of common stock offered by this prospectus will be sold by
FBR Asset Investment Corporation ("FBR Asset"). We will not receive any of the
proceeds from the sale of these shares.

Our common stock is traded on the American Stock Exchange under the ticker
symbol "ANH." On April 1, 2002, the last reported price of our common stock was
$9.60 per share.

We originally issued all of the shares offered by this propectus pursuant to
a Purchase Agreement between us and FBR Asset dated December 20, 2002, and we
are registering the shares pursuant to that agreement.

The offering price for the common stock may be the market price for our
common stock prevailing at the time of sale, a price related to the prevailing
market price, at negotiated prices, or such other price as FBR Asset may
determine from time to time.

Investing in our common stock involves a high degree of risk. You should
carefully consider the information under the heading "Risk Factors" beginning
on page 5 of this prospectus before buying shares of our common stock .

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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.

The date of this prospectus is April 3, 2002

You should rely only on the information contained in or incorporated by
reference into this prospectus. We have not authorized any other person to
provide you with different information. If anyone provides you with different
or inconsistent information, you should not rely on it. The information in this
prospectus is current as of the date of this prospectus. Our business,
financial condition, results of operations and prospects may have changed since
that date.

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TABLE OF CONTENTS

Page
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Forward-Looking Statements................................................ ii
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 5
Our Company............................................................... 16
Description of Securities................................................. 23
Certain Federal Income Tax Considerations................................. 28
Use of Proceeds........................................................... 39
Selling Stockholder....................................................... 39
Plan of Distribution...................................................... 39
Experts................................................................... 40
Legal Matters............................................................. 40
Where You Can Find More Information....................................... 40
Information Incorporated by Reference..................................... 41

FORWARD-LOOKING STATEMENTS

This prospectus contains or incorporates by reference certain
forward-looking statements. Forward-looking statements are those that predict
or describe future events or trends and that do not relate solely to historical
matters. You can generally identify forward-looking statements as statements
containing the words "will," "believe," "expect," "anticipate," "intend,"
"estimate," "assume" or other similar expressions. You should not rely on our
forward-looking statements because the matters they describe are subject to
known and unknown risks, uncertainties and other unpredictable factors, many of
which are beyond our control. Statements regarding the following subjects are
forward-looking by their nature:

. our business strategy;

. market trends and risks;

. assumptions regarding interest rates; and

. assumptions regarding prepayment rates on the mortgage loans securing our
mortgage-backed securities.

These forward-looking statements are subject to various risks and
uncertainties, including those relating to:

. increases in the prepayment rates on the mortgage loans securing our
mortgage-backed securities;

. our ability to use borrowings to finance our assets;

. risks associated with investing in mortgage-related assets, including
changes in business conditions and the general economy;

. our ability to maintain our qualification as a real estate investment
trust for federal income tax purposes; and

. management's ability to manage our growth and planned expansion.

Other risks, uncertainties and factors, including those discussed under
"Risk Factors" in this prospectus or described in reports that we file from
time to time with the Securities and Exchange Commission, such as our Forms
10-K and 10-Q, could cause our actual results to differ materially from those
projected in any forward-looking statements we make. We are not obligated to
publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise.

PROSPECTUS SUMMARY

This summary highlights selected information in this prospectus. The summary
is not complete and does not contain all of the information you should consider
before investing in our common stock. We urge you to carefully read this entire
prospectus, including the financial statements, along with the information that
is incorporated by reference into this prospectus. You should carefully
consider the information discussed under "Risk Factors" before you decide to
purchase our common stock. All references to "we," "us" or the "Company" mean
Anworth Mortgage Asset Corporation.

Our Business

We are in the business of investing primarily in United States agency and
other highly rated single-family adjustable-rate and fixed-rate mortgage-backed
securities that we acquire in the secondary market. We seek attractive
long-term investment returns by investing our equity capital and borrowed funds
in such securities. Our returns are earned on the spread between the yield on
our earning assets and the interest cost of the funds we borrow. We have
elected to be taxed as a real estate investment trust, or REIT, under the
United States Internal Revenue Code. As a REIT, we routinely distribute
substantially all of the income generated from our operations to our
stockholders. As long as we retain our REIT status, we generally will not be
subject to federal or state taxes on our income to the extent that we
distribute our net income to our stockholders.

At December 31, 2001, we had total assets of $424.6 million and all of our
mortgage assets were secured by single-family mortgage loans. As of that date,
approximately 99% of our assets consisted of mortgage-backed securities
guaranteed by an agency of the United States government such as Fannie Mae or
Freddie Mac.

Our Strategy

Our strategy is to acquire mortgage-related assets, finance our purchases in
the capital markets and use leverage to increase our return on stockholders'
equity. Through this strategy we expect to earn income that will enable us to
generate dividends for our stockholders.

We intend to acquire mortgage-related assets that we believe will generate
attractive returns on capital invested. Before making these investments, we
consider the amount and nature of the anticipated returns from the assets, our
ability to pledge the assets to secure collateralized borrowings, and the costs
associated with financing, managing, securitizing and reserving for the assets.
We have also established a written asset acquisition policy that provides the
following investment guidelines:

. Category I--At least 60% of our total assets will generally be adjustable
or fixed-rate mortgage securities and short-term investments. Assets in
this category will be rated within one of the two highest rating
categories by at least one nationally recognized statistical rating
organization, or if not rated, will be obligations guaranteed by the
United States government or its agencies, Fannie Mae or Freddie Mac.

. Category II--At least 90% of our total assets will generally consist of
Category I investments plus unrated mortgage loans, mortgage securities
rated at least investment grade by at least one nationally recognized
statistical rating organization, or shares of other REITs or
mortgage-related companies.

. Category III--No more than 10% of our total assets may be of a type not
meeting any of the above criteria. Among the types of assets generally
assigned to this category are mortgage securities rated below investment
grade and leveraged mortgage derivative securities.

We finance our acquisition of mortgage-related assets through borrowing at
short-term rates using repurchase agreements. We generally borrow between eight
and twelve times the amount of our equity. At December 31, 2001, we had
$325.3 million of repurchase agreements outstanding with a weighted average
current borrowing rate of 2.49% and an average maturity of 179 days. We
actively manage the adjustment periods and the selection of the interest rate
indices of our borrowings against the adjustment periods and the selection of
indices on our mortgage-related assets in order to limit our liquidity and
interest rate related risks.

We also seek to lessen the effects on our income if mortgage loans
underlying our securities prepay at a rate materially different than
anticipated. We do this by structuring a diversified portfolio with a variety
of prepayment characteristics, investing in mortgage assets or structures with
prepayment protections and purchasing mortgage assets at a premium and at a
discount. Although we have not yet done so, we may choose to engage in various
hedging activities designed to mitigate our exposure to changes in interest
rates and prepayment rates.

We review credit risk and other risks of loss associated with each potential
investment and may diversify our portfolio to avoid undue geographic, insurer,
industry and other types of concentrations. Given the fact that we maintain
such a large percentage of our assets in high quality or highly rated assets,
many of which include an implied guarantee of the federal government as to
payment of principal and interest, we believe we have limited exposure to
losses from credit risk.

In addition to the strategies described above, we intend to pursue other
strategies to grow our earnings and our dividends per share, which may include
the following:

. increasing the size of our balance sheet at a rate faster than the rate of
increase in our operating expenses;

. issuing new common stock when market opportunities exist to profitably
increase the size of our balance sheet through the use of leverage; and

. lowering our effective borrowing costs over time by seeking direct funding
with collateralized lenders, rather than using financial intermediaries,
possibly using commercial paper, medium term note programs, preferred
stock and other forms of capital.

Our Manager and Executive Officers

Our day-to-day operations are conducted by our management company, Anworth
Mortgage Advisory Corporation, through the authority delegated to it under a
management agreement and pursuant to the policies established by our board of
directors. We have currently elected to be managed by our management company as
a result of the efficiencies and economies of scale that can be achieved by
utilizing the resources presently available to our management company. A trust
controlled by our Chairman and Chief Executive Officer, Lloyd McAdams, and our
Executive Vice President, Heather U. Baines, is the principal stockholder of
our management company and Pacific Income Advisers, Inc., an investment
advisory firm that began operations in 1986. As of December 31, 2001, Pacific
Income Advisers and its affiliates managed approximately $4 billion for
institutional and individual investors. Our executive officers also serve as
members of the management teams of our management company and Pacific Income
Advisers. A majority of our board of directors is unaffiliated with either our
management company or Pacific Income Advisers. We have no ownership interest in
our management company or Pacific Income Advisers.

We pay our management company a management fee equal to 1% per year of the
first $300 million of stockholders' equity plus 0.8% per year of the portion of
our stockholders' equity above $300 million. We also pay our management company
an annual incentive compensation fee of 20% of the amount by which our return
on our equity exceeds a return based on the ten-year U.S. Treasury Rate plus 1%.

Our executive officers are as follows:

Lloyd McAdams. Mr. McAdams is Chairman of the Board, President and Chief
Executive Officer of our company and our management company. Mr. McAdams is
also the Chairman of the Board, Chief Investment Officer and co-founder of
Pacific Income Advisers and is the President of Syndicated Capital, Inc., a
registered broker-dealer. Mr. McAdams also serves as a director of Monterey
Mutual Fund. Before joining Pacific Income Advisers, Mr. McAdams was President
of Security Pacific Investment Managers, Inc. and served as Senior Vice
President of Trust Company of the West. Mr. McAdams is a Chartered Financial
Analyst charterholder, Chartered Investment Counselor and a Certified Employee
Benefit Specialist.

Pamela J. Watson. Ms. Watson is Executive Vice President and the Chief
Financial Officer, Treasurer and Secretary of our company and an Executive Vice
President and the Chief Financial Officer and Secretary of our management
company. Prior to joining Pacific Income Advisers, Ms. Watson was Chief
Financial Officer of Kleinwort Benson Cross Financing Inc. and Kleinwort Benson
Capital Management Inc., an interest rate swap dealer and investment management
firm owned by the British merchant bank Kleinwort Benson Group plc.

Heather U. Baines. Ms. Baines is Executive Vice President of our company
and our management company. Ms. Baines is also the President, Chief Executive
Officer and co-founder of Pacific Income Advisers. Prior to joining Pacific
Income Advisers, Ms. Baines was employed by Security Pacific Investment
Managers, Inc., ultimately holding the position of Senior Vice President and
Director.

Evangelos Karagiannis. Mr. Karagiannis is Vice President of our company and
our management company with responsibility for managing our portfolio. Mr.
Karagiannis is also Vice President of Pacific Income Advisers where he serves
as Fixed Income Portfolio Manager with a specialty in mortgage securities and
is responsible for Pacific Income Advisers' quantitative research. Mr.
Karagiannis is a Chartered Financial Analyst Charter Holder and holds a Ph.D.
in physics.

Joseph E. McAdams. Mr. McAdams is Vice President of our company and our
management company with responsibility for managing our portfolio. Mr. McAdams
is also Vice President of Pacific Income Advisers where he serves as Fixed
Income Portfolio Manager with a specialty in mortgage securities and is
responsible for Pacific Income Advisers' fixed income trading. Prior to joining
Pacific Income Advisers, Mr. McAdams was a mortgage security trader and analyst
at Donaldson, Lufkin & Jenrette Securities Corp. in New York. Mr. McAdams is
also a Chartered Financial Analyst charterholder.

Option To Become Internally Managed

Our management company has granted us an option, exercisable on or before
April 30, 2003, to acquire our management company by merger for consideration
consisting of 240,000 shares of our common stock. If this option is exercised,
we would become an internally managed company and the employees of the
management company would become our employees. The closing of the merger would
be subject to a number of conditions, including the approval of our
stockholders and receipt by our board of directors of a fairness opinion
regarding the fairness of the consideration payable by us in the merger. We
have agreed, as a condition to exercising the option, to enter into direct
employment contracts with Lloyd McAdams and the other key executives of the
management company designated by Mr. McAdams, adopt an incentive compensation
plan for our key executives and increase and maintain the size of our 1997
Stock Option and Awards Plan. If the merger is consummated, the management
agreement would be terminated.

Our board of directors has formed a special committee, made up solely of
independent members of the board, to consider the exercise of the option. We
will exercise the option only if the special committee determines that
consummating the merger and becoming internally managed would be fair to and in
the best interests of our stockholders.

General Information

We were incorporated on October 20, 1997 under Maryland law. Our office is
located at 1299 Ocean Avenue, 2nd Floor, Santa Monica, California 90401. Our
telephone number is (310) 394-0115.

Recent Developments

On February 28, 2002, we completed a public offering of 4,830,000 shares of
our common stock and received approximately $40 million in net proceeds after
deducting underwriting discounts and commissions and expenses of that offering.

RISK FACTORS

An investment in our common stock involves various risks. You should
carefully consider the following risk factors in conjunction with the other
information contained and incorporated by reference in this prospectus before
purchasing our common stock. If any of the risks discussed in this prospectus
actually occur, our business, operating results, prospects and financial
condition could be harmed. This could cause the market price of our common
stock to decline and could cause you to lose all or part of your investment.

Risks Related to Our Business

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

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

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

The interest rates on our borrowings generally adjust more frequently than
the interest rates on our adjustable-rate mortgage-backed securities. For
example, on December 31, 2001, our adjustable-rate mortgage-backed securities
had a weighted average term to next rate adjustment of approximately 16 months,
while our borrowings had a weighted average term to next rate adjustment of 179
days. Accordingly, in a period of rising interest rates, we could experience a
decrease in net income or a net loss because the interest rates on our
borrowings adjust faster than the interest rates on our adjustable-rate
mortgage-backed securities.

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

We generally fund our acquisition of fixed-rate mortgage-backed securities
with short-term borrowings. During periods of rising interest rates, our costs
associated with borrowings used to fund acquisition of fixed-rate assets are
subject to increases while the income we earn from these assets remains
substantially fixed. This reduces the net interest spread between the
fixed-rate mortgage-backed securities that we purchase and our borrowings used
to purchase them, which could lower our net interest income or cause us to
suffer a loss. On December 31, 2001, 16.4% of our mortgaged-backed securities
were fixed-rate securities.

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

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

. We often purchase mortgage-backed securities that have a higher interest
rate than the market interest rate at the time. In exchange for this
higher interest rate, we must pay a premium over the market value to

acquire the security. In accordance with accounting rules, we amortize
this premium over the term of the mortgage-backed security. If the
mortgage-backed security is prepaid in whole or in part prior to its
maturity date, however, we must expense the premium that was prepaid at
the time of the prepayment. On December 31, 2001, approximately 87.0% of
our mortgage-backed securities were acquired at a premium.

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

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

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

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

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

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

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

. the movement of interest rates;

. the availability of financing in the market; and

. the value and liquidity of our mortgage-backed securities.

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

Our adjustable-rate mortgage-backed securities are typically subject to
periodic and lifetime interest rate caps. Periodic interest rate caps limit the
amount an interest rate can increase during any given period. Lifetime interest
rate caps limit the amount an interest rate can increase through maturity of a
mortgage-backed security. Our borrowings are not subject to similar
restrictions. Accordingly, in a period of rapidly increasing interest rates,
the interest rates paid on our borrowings could increase without limitation
while caps would limit the interest rates on our adjustable-rate
mortgage-backed securities. This problem is magnified for our adjustable-rate
mortgage-backed securities that are not fully indexed. Further, some
adjustable-rate mortgage-backed securities may be subject to periodic payment
caps that result in a portion of the interest being deferred and added to the
principal outstanding. As a result, we could receive less cash income on
adjustable-rate mortgage-backed securities than we need to pay interest on our
related borrowings. On Decembr 31, 2001, approximately 83.6%

of our mortgage-backed securities were adjustable-rate securities. These
factors could lower our net interest income or cause us to suffer a net loss
during periods of rising interest rates.

Our leveraging strategy increases the risks of our operations.

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

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

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

. A default of a mortgage-related asset that constitutes collateral for a
loan could also result in an involuntary liquidation of the
mortgage-related asset, including any cross-collateralized mortgage-backed
securities. This would result in a loss to us of the difference between
the value of the mortgage-related asset upon liquidation and the amount
borrowed against the mortgage-related asset.

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

We have not used derivatives to mitigate our interest rate and prepayment risks
and this leaves us exposed to certain risks.

Our policies permit us to enter into interest rate swaps, caps and floors
and other derivative transactions to help us reduce our interest rate and
prepayment risks described above. However, so far we have determined that the
costs of these transactions outweigh their benefits. This strategy saves us the
additional costs of such hedging transactions, but it leaves us exposed to the
types of risks that such hedging transactions would be designed to reduce. If
we decide to enter into derivative transactions in the future, these
transactions may mitigate our interest rate and prepayment risks but cannot
eliminate these risks. Additionally, the use of derivative transactions could
have a negative impact on our earnings.

An increase in interest rates may adversely affect our book value.

Increases in interest rates may negatively affect the market value of our
mortgage-related assets. Our fixed-rate securities are generally more
negatively affected by these increases. In accordance with accounting rules, we
reduce our book value by the amount of any decrease in the market value of our
mortgage-related assets.

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

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

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 could decline.

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

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

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

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

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

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

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

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

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

We depend on the diligence, experience and skill of our officers and the
people working on behalf of our management company for the selection,
structuring and monitoring of our mortgage-related assets and associated
borrowings. Our key officers include Lloyd McAdams, President, Chairman of our
board of directors and Chief Executive Officer, Pamela J. Watson, Chief
Financial Officer and Treasurer, Evangelos Karagiannis, Vice President and
Joseph McAdams, Vice President. We have not entered into employment agreements
with our senior officers, nor do we require the management company to employ
specific personnel or to dedicate employees solely to our business. These
individuals are free to engage in competitive activities in our industry. The
loss of any key person could harm our entire business, financial condition,
cash flow and results of operations.

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

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

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

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

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

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

Risks Related to Our Management Company

Our management company and its affiliates may allocate mortgage-related
opportunities to other entities, and thus may divert attractive investment
opportunities away from us.

Our management company is Anworth Mortgage Advisory Corporation. Lloyd
McAdams, Joseph McAdams and Evangelos Karagiannis work on behalf of our
management company to manage our funds. Affiliates of our management company
and some of our officers manage mortgage-backed securities for other parties.
Messrs. L. McAdams, J. McAdams and Karagiannis are actively involved in
managing approximately $4 billion in mortgage-backed securities and other fixed
income assets for institutional clients and individual investors

through Pacific Income Advisers, which is under common control with our
management company. Messrs. L. McAdams, J. McAdams and Karagiannis intend to
continue to perform services for Pacific Income Advisers.

These multiple responsibilities may create conflicts of interest for these
officers if they are presented with opportunities that may benefit us and the
clients of Pacific Income Advisers. These officers allocate investments among
our portfolio and the clients of Pacific Income Advisers by determining the
entity or account for which the investment is most suitable. In making this
determination, these officers consider the investment strategy and guidelines
of each entity or account with respect to acquisition of assets, leverage,
liquidity and other factors that our officers determine appropriate. However,
our management company and those working on its behalf have no obligation to
make any specific investment opportunities available to us and the above
mentioned conflicts of interest may result in decisions or allocations of
securities that are not in our best interests.

The compensation structure for our management company creates an incentive for
our management company to increase the riskiness of our mortgage portfolio in
an attempt to increase its compensation.

In addition to its base management compensation, our management company
earns incentive compensation for each fiscal year equal to 20% of the amount by
which our return on equity each year exceeds a return based on the ten-year
United States treasury rate plus 1%. As a result, our management company shares
in our profits but not in our losses. Consequently, as our management company
evaluates different mortgage-backed securities for our investment and other
investments, there is a risk that our management company will cause us to
assume more risk than is prudent in an attempt to increase its incentive
compensation. Other key criteria related to determining appropriate investments
and investment strategies, including the preservation of capital, may be unduly
ignored at the expense of our management company's emphasis on maximizing its
income.

Since our management company may receive a significant fee if we terminate the
management agreement, we may not be able to economically terminate the
management agreement in the event that our management company fails to meet our
expectations.

If we terminate the management agreement, or if we decide not to renew it,
then we may have to pay a significant fee to our management company. The actual
amount of the fee is not known because the fair market value of the management
agreement cannot be determined in advance with certainty. Paying this fee would
reduce the cash available for distribution to stockholders and may cause us to
suffer a net operating loss. Consequently, we may not be able to terminate the
management agreement economically even if we are dissatisfied with our
management company's performance, or if we determine that it would be more
efficient to operate with an internal management structure.

We have recently entered into an option agreement with the stockholder of
our management company pursuant to which we have been granted an option to
acquire our management company, subject to several conditions being met,
including the negotiation of employment agreements with members of our
management, establishment of and increases to new and existing benefit plans
and extension of our services agreement with Pacific Income Advisors. Although
we have no obligation to exercise the option, as noted above, if we are
dissatisfied with the performance of our management company and desire to
terminate the management agreement, we could be forced to pay a termination
fee. Under such circumstances, it is highly unlikely we would desire to fulfill
the conditions necessary to exercise our option and, even if we desired to do
so, the termination fee relating to our management contract could exceed the
agreed-upon option price under the option agreement. Consequently, investors in
our common stock should not view our ability to exercise the option to purchase
our management company as providing any economic advantage to us in the event
we are dissatisfied with the performance of our management company.

Because our management company may render services to other mortgage investors,
this could reduce the amount of time and effort that our management company
devotes to us and, consequently, our profitability and overall management could
suffer.

Our agreement with our management company does not restrict the right of our
management company, any persons working on its behalf or any of its affiliates
from doing business, including the rendering of advice in the

purchase of mortgage-backed securities that meet our investment criteria, with
any other person or entity. In addition to our management company's ability to
do business with any other third party, the management agreement does not
specify a minimum time period that our management company and its personnel
must devote to us. The ability of our management company to engage in these
other business activities could reduce the time and effort it spends managing
us.

Prior to its association with us, our management company had not managed a REIT.

Our management company has now managed us since our initial public offering
in March of 1998. Prior to its association with us, our management company had
not previously managed a REIT. In particular, our management company had not
managed a highly leveraged pool of mortgage assets or utilized hedging
instruments, nor did our management company have experience in complying with
the asset limitations imposed by the REIT provisions of the United States
Internal Revenue Code (referred to throughout this prospectus as the "tax
code"). Although our management company now has more than three years of
experience in managing our company, there can be no assurance that the
experience of our executive officers and our management company is appropriate
to our business. Further, the experience of the officers of our management
company should not be viewed as a reliable gauge of our continued success.

We may not become an internally managed REIT.

The option agreement that we entered into with our management company is
subject to several conditions, including the conditions that: (1) the
independent members of our board of directors have determined that a merger
with our management company is in the best interests of our stockholders; (2)
we have received a fairness opinion from a reputable investment banking firm
regarding the fairness of the consideration for the merger; and (3) our
stockholders have approved the merger. As a result, there cannot be any
assurance that a merger with our management company will be completed. If a
merger with our management company does not occur, we expect to continue to
operate as an externally-advised company under our existing management
agreement with our management company. This would prevent us from realizing the
possible benefits of internal management.

Our net income per share may decrease if we become internally managed.

If we become internally managed, we cannot assure you that any anticipated
cost savings from no longer paying the base management fee to our management
company would offset the additional expenses that we would incur as an
internally managed REIT. These additional expenses would include all of the
salaries and benefits of our executive officers and the other employees that we
would need to operate as an internally managed company. In addition, we have
agreed to adopt an incentive compensation plan for key executives if we become
internally managed. Even if our earnings are not adversely affected, our
earnings per share may decrease because we would be issuing additional shares
of our common stock as merger consideration. These additional shares would
represent approximately 2% of the total number of shares outstanding after the
merger. If we remain externally managed, the amount of the base and incentive
management fees payable to our management company would depend on a number of
factors, including the amount of additional equity, if any, that we are able to
raise and the profitability of our business. Therefore, the exact amount of
future fees that we would pay to our management company cannot be predicted
with complete accuracy. If the expenses we assume as an internally managed
company are higher than we anticipate or the fees we would pay in the future to
our management company as an externally managed company would have been lower
than we anticipate, our net income per share may decrease as a result of
becoming internally managed.

The number of shares we issue in the merger with our management company will
not change to reflect changes in the relative value of our company and our
management company after the date the option agreement was signed.

The number of shares of our common stock that would be issued in a merger
with our management company is fixed. Therefore, it will not be reduced even if
the market price of our common stock increases after the date the option
agreement was signed. Likewise, it will not be reduced even if the value of our
management

company goes down after that date. Our value may change because of our
financial results or other results of operations, changes in the economic
sector in which we operate, changes in economic conditions generally and other
factors that might affect our business, condition and prospects.

The merger with our management company may cause us to lose our REIT status for
tax purposes.

In order to maintain our status as a REIT for federal income tax purposes,
we are not permitted to have current or accumulated earnings and profits
carried over from our management company. If the IRS successfully asserts that
we acquired current or accumulated earnings and profits from our management
company and failed to distribute, during the taxable year in which the merger
occurs, all of such earnings and profits, we would lose our REIT qualification
for the year of the merger, as well as any other taxable years during which we
held such acquired earnings and profits, unless, in the year of such
determination, we make an additional distribution of the amount of earnings and
profits determined to be acquired from our management company. In order to make
such an additional distribution, we could be required to borrow funds or sell
assets even if prevailing market conditions were not generally favorable. For
any taxable year that we fail to qualify as a REIT, we would not be entitled to
a deduction for dividends paid to our stockholders in calculating our taxable
income. Consequently, our net assets and distributions to our stockholders
would be substantially reduced because of our increased tax liability.
Furthermore, to the extent that distributions have been made in anticipation of
our qualification as a REIT, we might also be required to borrow additional
funds or to liquidate certain of our investments in order to pay the applicable
tax on our income.

After a merger we will be subject to potential liability as an employer.

We do not directly employ any employees or maintain any benefit or
retirement plans. However, if we become internally managed, we expect to
directly employ the persons who are currently employees of our management
company. In addition to their salaries and other cash compensation, we would
need to establish certain health, retirement and other employee benefit plans,
and we would bear the costs of the establishment and maintenance of these
plans. As an employer, we would be subject to potential liabilities that are
commonly faced by employers, such as workers' disability and compensation
claims, potential labor disputes and other employee-related liabilities and
grievances.

Risks Related to REIT Compliance and Other Matters

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

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

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

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

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

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 property. Any of these
taxes would decrease cash available for distribution to our stockholders.

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

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

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

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

Complying with REIT requirements may force us to liquidate otherwise attractive
investments.

In order to qualify as a REIT, we must also ensure that at the end of each
calendar quarter at least 75% of the value of our assets consists of cash, cash
items, government securities and qualified REIT real estate assets. The
remainder of our investment in securities generally cannot include more than
10% of the outstanding voting securities of any one issuer or more than 10% of
the total value of the outstanding securities of any one issuer. In addition,
in general, no more than 5% of the value of our assets can consist of the
securities of any one issuer. If we fail to comply with these requirements, we
must dispose of a portion of our assets within 30 days after the end of the
calendar quarter in order to avoid losing our REIT status and suffering adverse
tax consequences.

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

As a REIT, we must distribute 90% (95% with respect to taxable years
beginning before January 1, 2001) of our annual taxable income (subject to
certain adjustments) to our stockholders. From time to time, we may generate
taxable income greater than our net income for financial reporting purposes
from, among other things, amortization of capitalized purchase premiums, or our
taxable income may be greater than our cash flow available for distribution to
stockholders. If we do not have other funds available in these situations, we
may be unable to distribute substantially all of our taxable income as required
by the REIT provisions of the tax code. Thus, we could be required to borrow
funds, sell a portion of our mortgage-backed securities at disadvantageous
prices or find another alternative source of funds. These alternatives could
increase our costs or reduce our equity.

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

We believe that we conduct our business in a manner that allows us to avoid
being regulated as an investment company under the Investment Company Act of
1940, as amended. The Investment Company Act exempts

entities that are primarily engaged in the business of purchasing or otherwise
acquiring "mortgages and other liens on and interests in real estate." Under
the SEC's current interpretation, qualification for this exemption generally
requires us to maintain at least 55% of our assets directly in qualifying real
estate interests. In order to constitute a qualifying real estate interest
under this 55% requirement, a real estate interest must meet various criteria.
If we fail to continue to qualify for an exemption from registration as an
investment company, our ability to use leverage would be substantially reduced
and we would be unable to conduct our business as planned.

Additional Risk Factors

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

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

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

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

Excess inclusion income could result if we held a residual interest in a
REMIC. Excess inclusion income also would be generated if we were to issue debt
obligations with two or more maturities and the terms of the payments on these
obligations bore a relationship to the payments that we received on our
mortgage-backed securities securing those debt obligations. We generally
structure our borrowing arrangements in a manner designed to avoid generating
significant amounts of excess inclusion income. We do, however, enter into
various repurchase agreements that have differing maturity dates and afford the
lender the right to sell any pledged mortgage securities if we default on our
obligations. The IRS may determine that these borrowings give rise to excess
inclusion income that should be allocated among stockholders. Furthermore, some
types of tax-exempt entities, including, without limitation, voluntary employee
benefit associations and entities that have borrowed funds to acquire their
shares of our common stock, may be required to treat a portion of or all of the
dividends they may receive from us as unrelated business taxable income. We
also invest in equity securities of other REITs. If we were to receive excess
inclusion income from another REIT, we may be required to distribute the excess
inclusion income to our shareholders, which may result in the recognition of
unrelated business taxable income.

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

For the purpose of preserving our REIT qualification and for other reasons,
our charter prohibits direct or constructive ownership by any person of more
than 9.8% of the lesser of the total number or value of the outstanding shares
of our common stock or more than 9.8% of the outstanding shares of our
preferred stock. Our charter's constructive ownership rules are complex and may
cause the outstanding stock owned by a group of related individuals or entities
to be deemed to be constructively owned by one individual or entity. As a
result, the acquisition of less than 9.8% of the outstanding stock by an
individual or entity could cause that individual or entity to own
constructively in excess of 9.8% of the outstanding stock, and thus be subject
to our charter's ownership limit. Any attempt to own or transfer shares of our
common or preferred stock in excess of the ownership limit without the consent
of the board of directors shall be void, and will result in the shares being
transferred by operation of law to a charitable trust. Our board of directors
has granted Lloyd McAdams, our Chairman and Chief Executive Officer, and his
family members an exemption from the 9.8% ownership limitation as set forth in
our charter documents. This exemption permits Mr. McAdams, Heather Baines and
Joseph E. McAdams collectively to hold up to 19% of our outstanding shares.

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

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

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

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

. Maryland business combination statute. Maryland law restricts the ability
of holders of more than 10% of the voting power of a corporation's shares
to engage in a business combination with the corporation. See page 25 for
a description of these provisions.

. Maryland control share acquisition statute. Maryland law limits the
voting rights of "control shares" of a corporation in the event of a
"control share acquisition." See page 26 for a description of these
provisions.

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

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

OUR COMPANY

Overview

We were incorporated in Maryland on October 20, 1997 and commenced our
operations on March 17, 1998. We acquire various types of mortgage-related
assets and seek to generate income based on the difference between the yield on
our assets and the cost of our borrowings. We utilize leverage to seek an
attractive rate of return on stockholders' equity. We finance our asset
purchases in the capital markets. We have elected to be taxed as a REIT under
the tax code and, thus, will not generally be subject to federal or state taxes
on our income to the extent that we distribute substantially all of our net
income to our stockholders.

Our Strategy

Investment Strategy

Our strategy is to invest primarily in United States agency and other highly
rated single-family adjustable-rate and fixed-rate mortgage-backed securities
that we acquire in the secondary market. We seek to acquire assets that will
produce competitive returns after considering the amount and nature of the
anticipated returns from the investment, our ability to pledge the investment
to secure collateralized borrowings and the costs associated with financing,
managing, securitizing and reserving for these investments. For a description
of our Asset Acquisition Policy see "Our Operating Policies and Programs--Asset
Acquisition Policy" on page 18 below. We do not currently originate mortgage
loans or provide other types of financing to the owners of real estate.

At December 31, 2001, we had $424.6 million in total assets and all of our
mortgages assets were secured by single-family residential mortgage loans. As
of that date, approximately 99% of our assets consisted of mortgage-backed
securities guaranteed by Fannie Mae or Freddie Mac.

Financing Strategy

We finance the acquisition of mortgage-backed securities with short-term
borrowings and, to a lesser extent, equity capital. The amount of short-term
borrowings we employ depends on, among other factors, the amount of our equity
capital. We use leverage to attempt to increase potential returns to our
stockholders. Pursuant to our capital and leverage policy, we seek to strike a
balance between the under-utilization of leverage, which reduces potential
returns to stockholders, and the over-utilization of leverage, which could
reduce our ability to meet our obligations during adverse market conditions.

We usually borrow at short-term rates using repurchase agreements.
Repurchase agreements are generally short-term in nature. We actively manage
the adjustment periods and the selection of the interest rate indices of our
borrowings against the adjustment periods and the selection of indices on our
mortgage-related assets in order to limit our liquidity and interest rate
related risks. We generally seek to diversify our exposure by entering into
repurchase agreements with multiple lenders. In addition, we enter into
repurchase agreements only with institutions we believe are financially sound
and which meet credit standards approved by our board of directors.

Growth Strategy

In addition to the strategies described above, we intend to pursue other
strategies to further grow our earnings and our dividends per share, which may
include the following:

. increasing the size of our balance sheet at a rate faster than the rate of
increase in our operating expenses;

. issuing new common stock when market opportunities exist to profitably
increase the size of our balance sheet through the use of leverage; and

. lowering our effective borrowing costs over time by seeking direct funding
with collateralized lenders, rather than using financial intermediaries,
and possibly using commercial paper, medium term note programs, preferred
stock and other forms of capital.

Management

We are an externally managed REIT and have no employees. We have entered
into a management agreement with Anworth Mortgage Advisory Corporation, which
is owned by a trust controlled by Lloyd McAdams and Heather U. Baines. Our
management company manages our investments and performs administrative services
for us. Our executive officers are employees of our management company. A
majority of our board of directors is unaffiliated with either our management
company or Pacific Income Advisers. Pursuant to the management agreement, the
management company primarily provides:

. asset and liability management, including acquisition, financing,
management and disposition of mortgage-related assets, and credit and
prepayment risk management;

. capital management, including oversight of our structuring, analysis,
capital raising and investor relations activities; and

. administrative services, including secretarial, data processing,
operations and settlement, employee benefit and research services.

We pay our management company a management fee equal to 1% per year of the
first $300 million of stockholders' equity, plus 0.8% per year of the portion
of our stockholders' equity above $300 million. This management fee is paid on
a monthly basis. We also pay our management company, on a quarterly basis, an
incentive compensation fee of 20% of the amount by which our return on our
equity for each quarter exceeds a return based on the ten-year U.S. Treasury
Rate plus 1%.

Our agreement with our management company has a five-year term ending in
April 2003. This agreement will be extended automatically for additional
one-year terms unless terminated by our board of directors. If we elect to
terminate or not renew our agreement with our management company for reasons
other than our management company's breach of the agreement or due to
bankruptcy or similar proceedings affecting our management company, we must pay
our management company a termination fee. The amount of this fee will be the
fair value of the management agreement as determined by an appraisal from an
independent party and could be substantial.

No family relationships exist between any of our executive officers or
directors, except that Lloyd McAdams and Heather Baines are husband and wife
and Lloyd McAdams and Joseph E. McAdams are father and son.

Option To Become Internally Managed

Our operations are managed externally by our management company, Anworth
Mortgage Advisory Corporation. We adopted this structure when we began
operations in 1998 because the size and scope of our business operations at
that time were not sufficient to support the overhead costs associated with an
internally managed structure. Our management company has granted us an option,
exercisable on or before April 30, 2003, to acquire our management company by
merger for consideration consisting of 240,000 shares of our common stock. If
exercised, we would become an internally managed company and the employees of
the management company would become our employees. The closing of the merger
would be subject to a number of conditions, including the approval of our
stockholders and receipt by our board of directors of a fairness opinion
regarding the fairness of the consideration payable by us in the merger. We
have agreed, as a condition to exercising the option, to enter into direct
employment contracts with Lloyd McAdams and the other key executives of the
management company designated by Mr. McAdams, adopt an incentive compensation
plan for our key executives and increase and maintain the size of our 1997
Stock Option and Awards Plan. If the merger is consummated, the management
agreement would be terminated.

Our Operating Policies and Programs

We have established the following four primary operating policies to
implement our business strategies:

. our Asset Acquisition Policy;

. our Capital and Leverage Policy;

. our Credit Risk Management Policy; and

. our Asset/Liability Management Policy.

Asset Acquisition Policy

Our asset acquisition policy provides guidelines for acquiring investments
and contemplates that we will acquire a portfolio of investments that can be
grouped into specific categories. Each category and our respective investment
guidelines are as follows:

Under our Category III investment criteria, we may acquire other types of
mortgage derivative securities, including, but not limited to, interest only,
principal only or other mortgage-backed securities that receive a
disproportionate share of interest income or principal, but only on a limited
basis due to the greater risk of loss associated with mortgage derivative
securities. However, we have not acquired and generally will not acquire
inverse floaters, REMIC residuals or first loss subordinated bonds.

Capital and Leverage Policy

We employ a leverage strategy to increase our investment assets by borrowing
against existing mortgage-related assets and using the proceeds to acquire
additional mortgage-related assets. We generally borrow between eight to twelve
times the amount of our equity, although our borrowings may vary from time to
time depending on market conditions and other factors deemed relevant by our
management company and our board of directors. We believe that this will leave
an adequate capital base to protect against interest rate environments in which
our borrowing costs might exceed our interest income from mortgage-related
assets. We enter into collateralized borrowings only with institutions we
believe are financially sound and which meet credit standards approved by our
board of directors.

Depending on the different cost of borrowing funds at different maturities,
we vary the maturities of our borrowed funds to attempt to produce lower
borrowing costs. Our borrowings are short-term and we manage actively, on an
aggregate basis, both the interest rate indices and interest rate adjustment
periods of our borrowings against the interest rate indices and interest rate
adjustment periods on our mortgage-related assets.

Our mortgage-related assets are financed primarily at short-term borrowing
rates through repurchase agreements and dollar-roll agreements. In the future
we may also employ borrowings under lines of credit and other collateralized
financings that we may establish with approved institutional lenders.

Credit Risk Management Policy

We review credit risk and other risks of loss associated with each of our
potential investments. In addition, we may diversify our portfolio of
mortgage-related assets to avoid undue geographic, insurer, industry and
certain other types of concentrations. We may reduce certain risks from sellers
and servicers through representations and warranties. Our board of directors
monitors the overall portfolio risk and determines appropriate levels of
provision for loss.

Compliance with our credit risk management policy guidelines is determined
at the time of purchase of mortgage assets, based upon the most recent
valuation utilized by us. Such compliance is not affected by events subsequent
to such purchase, including, without limitation, changes in characterization,
value or rating of any specific mortgage assets or economic conditions or
events generally affecting any mortgage-related assets of the type held by us.

Asset/Liability Management Policy

Interest-Rate Risk Management. To the extent consistent with our election
to qualify as a REIT, we follow an interest rate risk management program
intended to protect our portfolio of mortgage-related assets and related debt
against the effects of major interest rate changes. Specifically, our interest
rate management program is formulated with the intent to offset to some extent
the potential adverse effects resulting from rate adjustment limitations on our
mortgage-related assets and the differences between interest rate adjustment
indices and interest rate adjustment periods of our adjustable-rate
mortgage-related assets and related borrowings.

Our interest rate risk management program encompasses a number of
procedures, including the following:

. monitoring and adjusting, if necessary, the interest rate sensitivity of
our mortgage-related assets compared with the interest rate sensitivities
of our borrowings;

. attempting to structure our borrowing agreements relating to
adjustable-rate mortgage-related assets to have a range of different
maturities and interest rate adjustment periods (although substantially
all will be less than a year); and

. actively managing, on an aggregate basis, the interest rate indices and
interest rate adjustment periods of our mortgage-related assets compared
to the interest rate indices and adjustment periods of our borrowings.

As a result, we expect to be able to adjust the average maturity/adjustment
period of our borrowings on an ongoing basis by changing the mix of maturities
and interest rate adjustment periods as borrowings come due or are renewed.
Through the use of these procedures, we attempt to reduce the risk of
differences between interest rate adjustment periods of our adjustable-rate
mortgage-related assets and our related borrowings.

Depending on market conditions and the cost of the transactions, we may
conduct certain hedging activities in connection with the management of our
portfolio, although we have not yet done so. To the extent consistent with our
election to qualify as a REIT, we may adopt a hedging strategy intended to
lessen the effects of interest rate changes and to enable us to earn net
interest income in periods of generally rising, as well as declining or static,
interest rates. Specifically, if we implement a hedging program, it would be
formulated with the intent to offset some of the potential adverse effects of
changes in interest rate levels relative to the interest rates on the
mortgage-related assets held in our investment portfolio, and differences
between the interest rate adjustment indices and periods of our
mortgage-related assets and our borrowings. If we implement a hedging strategy,
we must monitor carefully, and may have to limit, our asset/liability
management program to assure that we do not realize excessive hedging income,
or hold hedges having excess value in relation to mortgage-related assets,
which would result in our disqualification as a REIT or, in the case of excess
hedging income, if the excess is due to reasonable cause and not willful
neglect, the payment of a penalty tax for failure to satisfy certain REIT
income tests under the tax code. In addition, asset/liability management
involves transaction costs that increase dramatically as the period covered by
hedging protection increases and that may increase during periods of
fluctuating interest rates.

Prepayment Risk Management. We also seek to lessen the effects of
prepayment of mortgage loans underlying our securities at a faster or slower
rate than anticipated. We accomplish this by structuring a diversified
portfolio with a variety of prepayment characteristics, investing in
mortgage-related assets with prepayment prohibitions and penalties, investing
in certain mortgage security structures that have prepayment protections, and
purchasing mortgage-related assets at a premium and at a discount. We invest in
mortgage-related assets that on a portfolio basis do not have significant
purchase price premiums. Under normal market conditions, we seek to keep the
aggregate capitalized purchase premium of the portfolio to 3% or less. In
addition, we may in the future purchase principal only derivatives to a limited
extent as a hedge against prepayment risks. We monitor prepayment risk through
periodic review of the impact of a variety of prepayment scenarios on our
revenues, net earnings, dividends, cash flow and net balance sheet market value.

We believe that we have developed cost-effective asset/liability management
policies to mitigate prepayment risks. However, no strategy can completely
insulate us from prepayment risks. Further, as noted above, certain of the
federal income tax requirements that we must satisfy to qualify as a REIT limit
our ability to fully hedge our prepayment risks. Therefore, we could be
prevented from effectively hedging our interest rate and prepayment risks.

Our Investments

Mortgage-Backed Securities

Pass-Through Certificates. We principally invest in pass-through
certificates, which are securities representing interests in pools of mortgage
loans secured by residential real property in which payments of both interest
and principal on the securities are generally made monthly, in effect, passing
through monthly payments made by the individual borrowers on the mortgage loans
which underlie the securities, net of fees paid to the issuer or guarantor of
the securities. Early repayment of principal on some mortgage-backed
securities, arising from prepayments of principal due to sale of the underlying
property, refinancing or foreclosure, net of fees and costs which may be
incurred, may expose us to a lower rate of return upon reinvestment of
principal. This is generally referred to as prepayment risk. Additionally, if a
security subject to prepayment has been purchased at a premium, the value of
the premium would be lost in the event of prepayment. Like other fixed-income
securities, when interest rates rise, the value of a mortgage-backed security
generally will decline.

When interest rates are declining, however, the value of mortgage-backed
securities with prepayment features may not increase as much as other
fixed-income securities. The rate of prepayments on underlying mortgages will
affect the price and volatility of a mortgage-backed securities and may have
the effect of shortening or extending the effective maturity of the security
beyond what was anticipated at the time of purchase. When interest rates rise,
our holdings of mortgage-backed securities may experience reduced returns if
the owners of the underlying mortgages pay off their mortgages later than
anticipated. This is generally referred to as extension risk.

Payment of principal and interest on some mortgage pass-through securities,
although not the market value of the securities themselves, may be guaranteed
by the full faith and credit of the federal government, including securities
backed by Ginnie Mae, or by agencies or instrumentalities of the federal
government, including Fannie Mae and Freddie Mac. Mortgage-backed securities
created by non-governmental issuers, including commercial banks, savings and
loan institutions, private mortgage insurance companies, mortgage bankers and
other secondary market issuers, may be supported by various forms of insurance
or guarantees, including individual loan, title, pool and hazard insurance and
letters of credit, which may be issued by governmental entities, private
insurers or the mortgage poolers.

Collateralized Mortgage Obligations. Collateralized mortgage obligations,
or CMOs, are hybrid mortgage-backed securities. Interest and principal on a CMO
are paid, in most cases, on a monthly basis. CMOs may be collateralized by
whole mortgage loans, but are more typically collateralized by portfolios of
mortgage pass-through securities guaranteed by Ginnie Mae, Freddie Mac or
Fannie Mae. CMOs are structured into

multiple classes, with each class bearing a different stated maturity. Monthly
payments of principal, including prepayments, are first returned to investors
holding the shortest maturity class; investors holding the longer maturity
classes receive principal only after the first class has been retired. We will
consider CMOs that are issued or guaranteed by the federal government or by any
of its agencies or instrumentalities to be United States government securities.

Other Mortgage-Backed Securities

Mortgage Derivative Securities. We may acquire mortgage derivative
securities in an amount not to exceed 10% of our total assets. Mortgage
derivative securities provide for the holder to receive interest only,
principal only, or interest and principal in amounts that are disproportionate
to those payable on the underlying mortgage loans. Payments on mortgage
derivative securities are highly sensitive to the rate of prepayments on the
underlying mortgage loans. In the event of faster or slower than anticipated
prepayments on these mortgage loans, the rates of return on interests in
mortgage derivative securities representing the right to receive interest only
or a disproportionately large amount of interest, or interest only derivatives,
would be likely to decline or increase, respectively. Conversely, the rates of
return on mortgage derivative securities representing the right to receive
principal only or a disproportionate amount of principal, or principal only
derivatives, would be likely to increase or decrease in the event of faster or
slower prepayments, respectively.

We may also invest in inverse floaters, a class of CMOs with a coupon rate
that resets in the opposite direction from the market rate of interest to which
it is indexed, including LIBOR or the 11th District Cost of Funds Index, or
COFI. Any rise in the index rate, which can be caused by an increase in
interest rates, causes a drop in the coupon rate of an inverse floater while
any drop in the index rate causes an increase in the coupon of an inverse
floater. An inverse floater may behave like a leveraged security since its
interest rate usually varies by a magnitude much greater than the magnitude of
the index rate of interest. The leverage-like characteristics inherent in
inverse floaters are associated with greater volatility in their market prices.

We may also invest in other mortgage derivative securities that may be
developed in the future.

Subordinated Interests. We may also acquire subordinated interests, which
are classes of mortgage-backed securities that are junior to other classes of
the same series of mortgage-backed securities in the right to receive payments
from the underlying mortgage loans. The subordination may be for all payment
failures on the mortgage loans securing or underlying such series of mortgage
securities. The subordination will not be limited to those resulting from
particular types of risks, including those resulting from war, earthquake or
flood, or the bankruptcy of a borrower. The subordination may be for the entire
amount of the series of mortgage-related securities or may be limited in amount.

Mortgage Warehouse Participations. We may also occasionally acquire
mortgage warehouse participations as an additional means of diversifying our
sources of income. We anticipate that these investments, together with our
investments in other Category III assets, will not in the aggregate exceed 10%
of our total mortgage-related assets. These investments are participations in
lines of credit to mortgage loan originators that are secured by recently
originated mortgage loans that are in the process of being sold to investors.
Our investments in mortgage warehouse participations are limited because they
are not qualified REIT assets under the tax code.

Other Mortgage-Related Assets

Mortgage Loans. We may acquire and accumulate mortgage loans as part of our
investment strategy until a sufficient quantity has been accumulated for
securitization into high-quality mortgage-backed securities in order to enhance
their value and liquidity. We anticipate that any mortgage loans that we
acquire and do not immediately securitize, together with our investments in
other mortgage-related assets that are not Category I assets, will not
constitute more than 30% of our total mortgage-related assets at any time. All
mortgage loans, if

any, will be acquired with the intention of securitizing them into high-credit
quality mortgage securities. Despite our intentions, however, we may not be
successful in securitizing these mortgage loans. To meet our investment
criteria, mortgage loans acquired by us will generally conform to the
underwriting guidelines established by Fannie Mae, Freddie Mac or other credit
insurers. Applicable banking laws generally require that an appraisal be
obtained in connection with the original issuance of mortgage loans by the
lending institution. We do not intend to obtain additional appraisals at the
time of acquiring mortgage loans.

Mortgage loans may be originated by or purchased from various suppliers of
mortgage-related assets throughout the United States, including savings and
loans associations, banks, mortgage bankers and other mortgage lenders. We may
acquire mortgage loans directly from originators and from entities holding
mortgage loans originated by others. Our board of directors has not established
any limits upon the geographic concentration of mortgage loans that we may
acquire or the credit quality of suppliers of the mortgage-related assets that
we acquire.

Other Investments. We may acquire other investments that include equity and
debt securities issued by other primarily mortgage-related finance companies,
interests in mortgage-related collateralized bond obligations, other
subordinated interests in pools of mortgage-related assets, commercial mortgage
loans and securities, and residential mortgage loans other than high-credit
quality mortgage loans. Although we expect that our other investments will be
limited to less than 10% of total assets, we have no limit on how much of our
stockholders' equity will be allocated to other investments. There may be
periods in which other investments represent a large portion of our
stockholders' equity.

Competition

When we invest in mortgage-backed securities and other investment assets, we
compete with a variety of institutional investors including other REITs,
insurance companies, mutual funds, pension funds, investment banking firms,
banks and other financial institutions that invest in the same types of assets.
Many of these investors have greater financial resources and access to lower
costs of capital than we do.

Legal Proceedings

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

DESCRIPTION OF SECURITIES

The description of our capital stock set forth below does not purport to be
complete and is qualified in its entirety by reference to our charter, as
amended and restated, and our bylaws, copies of which are exhibits to the
registration statement of which this prospectus is a part.

General

Our authorized capital stock consists of 100 million shares of common stock,
$0.01 par value, and 20 million shares of preferred stock, $0.01 par value,
issuable in one or more series. Each share of common stock is entitled to
participate equally in dividends when and as declared by our board of directors
and in the distribution of our assets upon liquidation. Each share of common
stock is entitled to one vote and will be fully paid and non-assessable by us
upon issuance. Shares of our common stock have no preference, conversion,
exchange, preemptive, or cumulative voting rights. Our authorized capital stock
may be increased and altered from time to time as permitted by Maryland law.

Our preferred stock may be issued from time to time in one or more classes
or series, with such distinctive designations, rights and preferences as shall
be determined by our board of directors. Preferred stock would be available for
possible future financing of, or acquisitions by, us and for general corporate
purposes without any legal requirement that further stockholder authorization
for issuance is obtained. The issuance of preferred stock could have the effect
of making an attempt to gain control more difficult by means of a merger,
tender offer or proxy contest. The preferred stock, if issued, could have a
preference on dividend payments that could affect our ability to make dividend
distributions to the common stockholders.

Meetings of our stockholders are to be held annually and special meetings
may be called by a majority of our board of directors, our Chairman of the
board or our President. Special meetings shall be called by the Secretary at
the written request of our stockholders entitled to cast at least a majority of
all the votes entitled to be cast at the meeting. Our charter reserves to us
the right to amend any provision thereof in the manner prescribed by law.

Restrictions on Transfer

Two of the requirements of qualification for the tax benefits accorded by
the REIT provisions of the tax code are that (1) during the last half of each
taxable year not more than 50% in value of the outstanding shares may be owned
directly or indirectly by five or fewer individuals, and (2) there must be at
least 100 stockholders on 335 days of each taxable year of 12 months.

In order that we may meet these requirements at all times, our charter
prohibits any person from owning, acquiring or holding, directly or indirectly,
without prior approval by our board of directors, shares of common stock in
excess of 9.8% in value of the aggregate of the outstanding shares of common
stock or in excess of 9.8% (in value or in number of shares, whichever is more
restrictive) of the aggregate of the outstanding shares of our common stock.
For this purpose, ownership includes both beneficial ownership and constructive
ownership. Beneficial ownership is defined in our charter to include interests
that would be treated as owned through the application of Section 544 of the
tax code, as modified by Section 856(h)(1)(B) of the tax code. Constructive
ownership is defined in our charter to include interests that would be treated
as owned through the application of Section 318(a) of the tax code, as modified
by Section 856(d)(5) of the tax code. Subject to certain limitations, our board
of directors may increase or decrease the ownership limitations or waive the
limitations for individual investors.

For purposes of the 50% stockholder test discussed above, the constructive
ownership provisions applicable under Section 544 of the tax code attribute
ownership of securities owned by a corporation, partnership, estate or trust
proportionately to its stockholders, partners or beneficiaries, attribute
ownership of securities owned by

family members to other members of the same family, treat securities with
respect to which a person has an option to purchase as actually owned by that
person, and set forth rules for application of such attribution provisions
(e.g., reattribution of stock that is constructively owned). Thus, for purposes
of determining whether a person holds shares of common stock in violation of
the ownership limitations set forth in our charter, many types of entities may
own directly more than the 9.8% limit because such entities' shares are
attributed to its individual stockholders. On the other hand, a person will be
treated as owning not only shares of common stock actually or beneficially
owned, but also any shares of common stock attributed to such person under the
attribution rules described above. Accordingly, under certain circumstances,
shares of common stock owned by a person who individually owns less than 9.8%
of the shares outstanding may nevertheless be in violation of the ownership
limitations set forth in our charter. Ownership of shares of common stock
through such attribution is generally referred to as constructive ownership.

If any transfer of shares of common stock would result in any person
beneficially or constructively owning capital stock in violation of our
transfer or ownership limitations, then the number of shares of capital stock
causing the violation (rounded to the nearest whole shares) shall be
automatically transferred to a trustee of a trust for the exclusive benefit of
one or more charitable beneficiaries. The intended transferee shall not acquire
any rights in such shares. Shares of common stock held by the trustee shall be
issued and outstanding shares of common stock. The intended transferee shall
not benefit economically from ownership of any shares held in the trust, shall
have no rights to dividends, and shall not possess any rights to vote or other
rights attributable to the shares held in the trust. The trustee shall have all
voting rights and rights to dividends or other distributions with respect to
shares held in the trust, which rights shall be exercised for the exclusive
benefit of the charitable beneficiary. Any dividend or other distribution paid
to the intended transferee prior to the discovery by us that shares of common
stock have been transferred to the trustee shall be paid with respect to such
shares to the trustee by the intended transferee upon demand and any dividend
or other distribution authorized but unpaid shall be paid when due to the
trustee. Our board of directors may, in its discretion, waive these
requirements on owning shares in excess of the ownership limitations.

Within 20 days of receiving notice from us that shares of common stock have
been transferred to the trust, the trustee shall sell the shares held in the
trust to a person, designated by the trustee, whose ownership of the shares
will not violate the ownership limitations set forth in our charter. Upon such
sale, the interest of the charitable beneficiary in the shares sold shall
terminate and the trustee shall distribute the net proceeds of the sale to the
intended transferee and to the charitable beneficiary as follows. The intended
transferee shall receive the lesser of (1) the price paid by the intended
transferee for the shares or, if the intended transferee did not give value for
the shares in connection with the event causing the shares to be held in the
trust (e.g., in the case of a gift, devise or other such transaction), the
market price (as defined below) of the shares on the day of the event causing
the shares to be held in the trust, and (2) the price per share received by the
trustee from the sale or other disposition of the shares held in the trust. Any
net sales proceeds in excess of the amount payable to the intended transferee
shall be immediately paid to the charitable beneficiary. In addition, shares of
common stock transferred to the trustee shall be deemed to have been offered
for sale to us, or our designee. This offer shall be at a price per share equal
to the lesser of (1) the price per share in the transaction that resulted in
such transfer to the trust (or, in the case of a devise or gift, the market
price at the time of such devise or gift), and (2) the market price on the date
we, or our designee, accepts such offer. We shall have the right to accept such
offer until the trustee has sold shares held in the trust. Upon such a sale to
us, the interest of the charitable beneficiary in the shares sold shall
terminate and the trustee shall distribute the net proceeds of the sale to the
intended transferee.

The market price shall mean the last sale price for such shares. In case no
such sale takes place on such day, the market price shall be the average of the
closing bid and asked prices on the American Stock Exchange. In the event that
no trading price is available for such shares, the fair market value of the
shares shall be as determined in good faith by our board of directors.

Under the REIT provisions of the tax code, every owner of 5% or more in the
case of 2,000 or more stockholders of record, of 1% or more in the case of more
than 200 but fewer than 2,000 stockholders of record

and of 0.5% or more in the case of 200 or fewer stockholders of record, of all
classes or series of our stock, is required to give written notice to us in
response to our written demand for such notice, which request must be made
within 30 days after the end of each taxable year. They shall state their name
and address, the number of shares of each class and series of our stock
beneficially owned and a description of the manner in which such shares are
held. Each such owner shall provide to us such additional information as we may
request in order to determine the effect, if any, of such beneficial ownership
on our status as a REIT and to ensure compliance with the ownership limitations.

Removal of Directors

Our charter provides that a director may be removed from office at any time
for cause but only by the affirmative vote of the holders of at least
two-thirds of the votes of the shares entitled to be cast in the election of
directors.

Indemnification

As permitted by Maryland law, our charter obligates us to indemnify our
present and former directors and officers to the maximum extent permitted by
Maryland law. Maryland law permits a corporation to indemnify its present and
former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities, unless it is established that:

. the act or omission of the director or officer was material to the matter
giving rise to such proceeding and was committed in bad faith or was the
result of active and deliberate dishonesty;

. the director or officer actually received an improper personal benefit in
money, property or services;

. in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful; or

. the proceeding, other than a proceeding brought to enforce
indemnification, is brought by the director or officer against us.

Limitation of Liability

As permitted by Maryland law, our charter limits the liability of our
directors and officers to us and our stockholders for money damages, except to
the extent that:

. the person actually received an improper benefit or profit in money,
property or services; or

. a judgment or other final adjudication is entered in a proceeding based on
a finding that the person's action, or failure to act, was the result of
active and deliberate dishonesty and was material to the cause of action
adjudicated in the proceeding.

As a result of these provisions, we and our stockholders may be unable to
obtain monetary damages from a director or officer for breach of his or her
duty of care.

Maryland Business Combination Act

Maryland law prohibits specified "business combinations" between a Maryland
corporation and an "interested stockholder." These business combinations
include a merger, consolidation, share exchange, an asset transfer or issuance
or reclassification of equity securities. Interested stockholders are either:

. anyone who beneficially owns 10% or more of the voting power of the
corporation's shares; or

. an affiliate or associate of the corporation who was an interested
stockholder or an affiliate or an associate of the interested stockholder
at any time within the two-year period prior to the date in question.

Business combinations with a past interested stockholder are prohibited for
five years after the most recent date on which the stockholder became an
interested stockholder. Thereafter, any business combinations with the
interested stockholder must be recommended by the board of directors of the
corporation and approved by the vote of:

. at least 80% of the votes entitled to be cast by all holders of voting
shares of the corporation's voting shares; and

. at least 66 2/3% of the votes entitled to be cast by all holders of the
corporation's voting other than voting shares held by the interested
stockholder or an affiliate or associate of the interested stockholder.

However, these special voting requirements do not apply if the corporation's
stockholders receive a minimum price for their shares, as specified in the
statute, and the consideration is received in cash or in the same form
previously paid by the interested stockholder for its shares.

This business combination statute does not apply to business combinations
that are approved or exempted by the corporation's board of directors prior to
the time that the interested stockholder becomes an interested stockholder. The
statute also does not apply to stockholders that acquired 10% or more of the
corporation's voting shares in a transaction approved by the corporation's
board of directors. A Maryland corporation may adopt an amendment to its
charter electing not to be subject to these special voting requirements. Any
amendment would have to be approved by at least 80% of the votes entitled to be
cast by all holders of outstanding shares of voting stock and 66 2/3% of the
votes entitled to be cast by holders of outstanding shares of voting stock who
are not interested stockholders.

The business combination statute could have the effect of discouraging
offers to acquire us and of increasing the difficulty of consummating such
offers, even if our acquisition would be in our stockholders' best interests.

Maryland Control Share Acquisition Act

Maryland law provides that "control shares" of a Maryland corporation
acquired in a "control share acquisition" have no voting rights unless approved
by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares owned by the acquirer or by the corporation's officers or
directors who are employees of the corporation. Control shares are shares of
voting stock which, if aggregated with all other shares of stock previously
acquired, would entitle the acquirer to exercise voting power in electing
directors within one of the following ranges of voting power:

. 10% or more but less than 33 1/3%;

. 33 1/3% or more but less than a majority; or

. a majority of all voting power.

Control shares do not include shares of stock an acquiring person is
entitled to vote as a result of having previously obtained stockholder
approval. A control share acquisition generally means the acquisition of,
ownership of or the power to direct the exercise of voting power with respect
to, control shares.

A person who has made or proposes to make a "control share acquisition,"
under specified conditions, including an undertaking to pay expenses, may
require the board of directors to call a special stockholders' meeting to
consider the voting rights of the shares. The meeting must be held within 50
days of the demand. If no request for a meeting is made, the corporation may
itself present the question at any stockholders' meeting.

If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as permitted by the statute, the
corporation generally may redeem any or all of the control shares, except those
for which voting rights have previously been approved. This redemption of
shares must be

for fair value, determined without regard to voting rights as of the date of
the last control share acquisition or of any stockholders' meeting at which the
voting rights of the shares are considered and not approved. If voting rights
for "control shares" are approved at a stockholders' meeting and the acquirer
becomes entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the stock
determined for purposes of appraisal rights may not be less than the highest
price per share paid in the control share acquisition. The limitations and
restrictions otherwise applicable to the exercise of dissenters' rights do not
apply in the context of a "control share acquisition."

The control share acquisition statute would not apply to stock acquired in a
merger, consolidation or share exchange if we were a party to the transaction,
or to acquisitions previously approved or exempted by a provision in our
charter or bylaws.

Presently our bylaws contain a provision exempting from the control share
acquisition statute any and all acquisitions by any person of our common stock.
However, our board of directors may decide to amend or eliminate this provision
at any time in the future.

Amendment to Our Charter

We reserve the right from time to time to make any amendment to our charter
including any amendment that alters the contract rights as expressly set forth
in our charter of any shares of outstanding stock, subject to certain
limitations. Our charter may be amended only by the affirmative vote of holders
of shares entitled to cast not less than a majority of all the votes entitled
to be cast on the matter. The provisions in our charter on removal of directors
may be amended only by the affirmative vote of holders of shares entitled to
cast not less than two-thirds of all the votes entitled to be cast in the
election of directors.

Transfer Agent and Registrar

Our transfer agent and registrar is Continental Stock Transfer & Trust
Company.

CERTAIN FEDERAL INCOME TAX CONSIDERATIONS

The following discussion summarizes particular United States federal income
tax considerations regarding our qualification and taxation as a REIT and
particular United States federal income tax consequences resulting from the
acquisition, ownership and disposition of our common stock. This discussion is
based on current law and assumes that we have qualified at all times throughout
our existence, and will continue to qualify, as a REIT for United States
federal income tax purposes. The tax law upon which this discussion is based
could be changed, and any such change could have retroactive effect. The
following discussion is not exhaustive of all possible tax considerations. This
summary neither gives a detailed discussion of any state, local or foreign tax
considerations nor discusses all of the aspects of United States federal income
taxation that may be relevant to you in light of your particular circumstances
or to particular types of stockholders which are subject to special tax rules,
such as insurance companies, tax-exempt entities, financial institutions or
broker-dealers, foreign corporations or partnerships, and persons who are not
citizens or residents of the United States, stockholders that hold our stock as
a hedge, part of a straddle, conversion transaction or other arrangement
involving more than one position, or stockholders whose functional currency is
not the United States dollar. This discussion assumes that you will hold our
common stock as a "capital asset," generally property held for investment,
under the tax code.

You are urged to consult with your own tax advisor regarding the specific
consequences to you of the purchase, ownership and sale of stock in an entity
electing to be taxed as a REIT, including the federal, state, local, foreign
and other tax considerations of such purchase, ownership, sale and election and
the potential changes in applicable tax laws.

General

Our qualification and taxation as a REIT depends upon our ability to
continue to meet the various qualification tests imposed under the tax code and
discussed below relating to our actual annual operating results, asset
diversification, distribution levels and diversity of stock ownership.
Accordingly, the actual results of our operations for any particular taxable
year may not satisfy these requirements.

We have made an election to be taxed as a REIT under the tax code commencing
with our taxable year ended December 31, 1998. We currently expect to continue
operating in a manner that will permit us to maintain our qualification as a
REIT. All qualification requirements for maintaining our REIT status, however,
may not have been or will not continue to be met.

So long as we qualify for taxation as a REIT, we generally will be permitted
a deduction for dividends we pay to our stockholders. As a result, we generally
will not be required to pay federal corporate income taxes on our net income
that is currently distributed to our stockholders. This treatment substantially
eliminates the "double taxation" that ordinarily results from investment in a
corporation. Double taxation means taxation once at the corporate level when
income is earned and once again at the stockholder level when this income is
distributed. We will be required to pay federal income tax, however, as follows:

. we will be required to pay tax at regular corporate rates on any
undistributed "real estate investment trust taxable income," including
undistributed net capital gain;

. we may be required to pay the "alternative minimum tax" on our items of
tax preference; and

. if we have (a) net income from the sale or other disposition of
"foreclosure property" which is held primarily for sale to customers in
the ordinary course of business, or (b) other nonqualifying income from
foreclosure property, we will be required to pay tax at the highest
corporate rate on this income. Foreclosure property is generally defined
as property acquired through foreclosure or after a default on a loan
secured by the property or on a lease of the property.

We will be required to pay a 100% tax on any net income from prohibited
transactions. Prohibited transactions are, in general, sales or other taxable
dispositions of property, other than foreclosure property, held

primarily for sale to customers in the ordinary course of business. Under
existing law, whether property is held as inventory or primarily for sale to
customers in the ordinary course of a trade or business depends on all the
facts and circumstances surrounding the particular transaction.

If we fail to satisfy the 75% gross income test or the 95% gross income test
discussed below, but nonetheless maintain our qualification as a REIT because
certain other requirements are met, we will be subject to a tax equal to:

. the greater of (i) the amount by which 75% of our gross income exceeds the
amount qualifying under the 75% gross income test described below, and
(ii) the amount by which 90% of our gross income exceeds the amount
qualifying under the 95% gross income test described below, multiplied by

. a fraction intended to reflect our profitability.

We will be required to pay a 4% excise tax on the excess of the required
distribution over the amounts actually distributed if we fail to distribute
during each calendar year at least the sum of:

. 85% of our real estate investment trust ordinary income for the year;

. 95% of our real estate investment trust capital gain net income for the
year; and

. any undistributed taxable income from prior periods.

This distribution requirement is in addition to, and different from the
distribution requirements discussed below in the section entitled "Annual
Distribution Requirements."

If we acquire any asset from a corporation which is or has been taxed as a C
corporation under the tax code in a transaction in which the basis of the asset
in our hands is determined by reference to the basis of the asset in the hands
of the C corporation, and we subsequently recognize gain on the disposition of
the asset during the ten-year period beginning on the date on which we acquired
the asset, then we will be required to pay tax at the highest regular corporate
tax rate on this gain to the extent of the excess of:

. the fair market value of the asset, over

. our adjusted basis in the asset, in each case determined as of the date on
which we acquired the asset.

A C corporation is generally defined as a corporation required to pay full
corporate-level tax. The results described in this paragraph with respect to
the recognition of gain will apply unless we make an election under Treasury
Regulation Section 1.337(d)-7T(c).

Finally, we could be subject to an excise tax if our dealings with any
taxable REIT subsidiaries (defined below) are not at arm's length.

Requirements for Qualification as a REIT

The tax code defines a REIT as a corporation, trust or association:

. that is managed by one or more trustees or directors;

. that issues transferable shares or transferable certificates to evidence
beneficial ownership;

. that would be taxable as a domestic corporation but for tax code Sections
856 through 859;

. that is not a financial institution or an insurance company within the
meaning of the tax code;

. that is beneficially owned by 100 or more persons;

. not more than 50% in value of the outstanding stock of which is owned,
actually or constructively, by five or fewer individuals, including
specified entities, during the last half of each taxable year; and

. that meets other tests, described below, regarding the nature of its
income and assets and the amount of its distributions.

The tax code provides that all of the first four conditions stated above
must be met during the entire taxable year and that the fifth condition must be
met during at least 335 days of a taxable year of twelve months, or during a
proportionate part of a taxable year of less than twelve months. The fifth and
sixth conditions do not apply until after the first taxable year for which an
election is made to be taxed as a REIT.

For purposes of the sixth condition, pension trusts and other specified
tax-exempt entities generally are treated as individuals, except that a
"look-through" exception generally applies with respect to pension funds.

Stock Ownership Tests

Our stock must be beneficially held by at least 100 persons, the "100
Stockholder Rule," and no more than 50% of the value of our stock may be owned,
directly or indirectly, by five or fewer individuals at any time during the
last half of the taxable year, the "5/50 Rule." For purposes of the 100
Stockholder Rule only, trusts described in Section 401(a) of the tax code and
exempt under Section 501(a) of the tax code, are generally treated as persons.
These stock ownership requirements must be satisfied in each taxable year other
than the first taxable year for which an election is made to be taxed as a
REIT. We are required to solicit information from certain of our record
stockholders to verify actual stock ownership levels, and our charter provides
for restrictions regarding the transfer of our stock in order to aid in meeting
the stock ownership requirements. If we were to fail either of the stock
ownership tests, we would generally be disqualified from REIT status.

Income Tests

We must satisfy two gross income requirements annually to maintain our
qualification as a REIT:

. We must derive directly or indirectly at least 75% of our gross income,
excluding gross income from prohibited transactions, from specified real
estate sources, including rental income, interest on obligations secured
by mortgages on real property or on interests in real property, gain from
the disposition of "qualified real estate assets," i.e., interests in real
property, mortgages secured by real property or interests in real
property, and some other assets, and income from certain types of
temporary investments (the "75% gross income test"); and

. We must derive at least 95% of our gross income, excluding gross income
from prohibited transactions, from (a) the sources of income that satisfy
the 75% gross income test, (b) dividends, interest and gain from the sale
or disposition of stock or securities, including some interest rate swap
and cap agreements, options, futures and forward contracts entered into to
hedge variable rate debt incurred to acquire qualified real estate assets,
or (c) any combination of the foregoing (the "95% gross income test").

For purposes of the 75% and 95% gross income tests, a REIT is deemed to have
earned a proportionate share of the income earned by any partnership, or any
limited liability company treated as a partnership for federal income tax
purposes, in which it owns an interest, which share is determined by reference
to its capital interest in such entity, and is deemed to have earned the income
earned by any qualified REIT subsidiary (in general, a 100% owned corporate
subsidiary of a REIT).

Interest earned by a REIT ordinarily does not qualify as income meeting the
75% or 95% gross income tests if the determination of all or some of the amount
of interest depends in any way on the income or profits of any

person. Interest will not be disqualified from meeting such tests, however,
solely by reason of being based on a fixed percentage or percentages of
receipts or sales.

If we fail to satisfy one or both of the 75% or 95% gross income tests for
any taxable year, we may nevertheless qualify as a REIT for the year if we are
entitled to relief under the tax code. Generally, we may avail ourselves of the
relief provisions if:

. our failure to meet these tests was due to reasonable cause and not due to
willful neglect;

. we attach a schedule of the sources of our income to our federal income
tax return; and

. any incorrect information on the schedule was not due to fraud with intent
to evade tax.

If we are entitled to avail ourselves of the relief provisions, we will
maintain our qualification as a REIT but will be subject to certain penalty
taxes as described above. We may not, however, be entitled to the benefit of
these relief provisions in all circumstances. If these relief provisions do not
apply to a particular set of circumstances, we will not qualify as a REIT.

Asset Tests

At the close of each quarter of our taxable year, we must satisfy four tests
relating to the nature and diversification of our assets:

. at least 75% of the value of our total assets must be represented by
qualified real estate assets (including mortgage loans), cash, cash items
and government securities;

. not more than 25% of our total assets may be represented by securities,
other than those securities included in the 75% asset test;

. of the investments included in the 25% asset class, the value of any one
issuer's securities may not exceed 5% of the value of our total assets,
and we generally may not own more than 10% by vote or value of any one
issuer's outstanding securities, in each case except with respect to stock
of any "taxable REIT subsidiaries"; and

. the value of the securities we own in any taxable REIT subsidiaries may
not exceed 20% of the value of our total assets.

A "taxable REIT subsidiary" is any corporation in which we own stock and as
to which we and such corporation jointly elect to treat such subsidiary as a
taxable REIT subsidiary. For purposes of the asset tests, we will be deemed to
own a proportionate share of the assets of any partnership, or any limited
liability company treated as a partnership for federal income tax purposes, in
which we own an interest, which share is determined by reference to our capital
interest in the entity, and will be deemed to own the assets owned by any
qualified REIT subsidiary and any other entity that is disregarded for federal
income tax purposes.

After initially meeting the asset tests at the close of any quarter, we will
not lose our status as a REIT for failure to satisfy the asset tests at the end
of a later quarter solely by reason of changes in asset values. If we fail to
satisfy the asset tests because we acquire securities or other property during
a quarter, we can cure this failure by disposing of sufficient nonqualifying
assets within 30 days after the close of that quarter. For this purpose, an
increase in our interests in any partnership or limited liability company in
which we own an interest will be treated as an acquisition of a portion of the
securities or other property owned by that partnership or limited liability
company.

Annual Distribution Requirements

To maintain our qualification as a REIT, we are required to distribute
dividends, other than capital gain dividends, to our stockholders in an amount
at least equal to the sum of:

. 90% of our "REIT taxable income," and

. 90% of our after tax net income, if any, from foreclosure property, minus

. the excess of the sum of specified items of our non-cash income items over
5% of "REIT taxable income," as described below.

For purposes of these distribution requirements, our "REIT taxable income"
is computed without regard to the dividends paid deduction (described below)
and net capital gain. In addition, for purposes of this test, non-cash income
means income attributable to leveled stepped rents, certain original issue
discount, certain like-kind exchanges that are later determined to be taxable
and income from cancellation of indebtedness. In addition, if we disposed of
any asset we acquired from a corporation which is or has been a C corporation
in a transaction in which our basis in the asset is determined by reference to
the basis of the asset in the hands of that C corporation and we elected not to
recognize gain currently in connection with the acquisition of such asset, we
would be required to distribute at least 90% of the after-tax gain, if any, we
recognize on a disposition of the asset within the ten-year period following
our acquisition of such asset, to the extent that such gain does not exceed the
excess of:

. the fair market value of the asset on the date we acquired the asset, over

. our adjusted basis in the asset on the date we acquired the asset.

Only distributions that qualify for the "dividends paid deduction" available
to REITs under the tax code are counted in determining whether the distribution
requirements are satisfied. We must make these distributions in the taxable
year to which they relate, or in the following taxable year if they are
declared before we timely file our tax return for that year, paid on or before
the first regular dividend payment following the declaration and we elect on
our tax return to have a specified dollar amount of such distributions treated
as if paid in the prior year. For these and other purposes, dividends declared
by us in October, November or December of one taxable year and payable to a
stockholder of record on a specific date in any such month shall be treated as
both paid by us and received by the stockholder during such taxable year,
provided that the dividend is actually paid by us by January 31 of the
following taxable year.

In addition, dividends distributed by us must not be preferential. If a
dividend is preferential, it will not qualify for the dividends paid deduction.
To avoid being preferential, every stockholder of the class of stock to which a
distribution is made must be treated the same as every other stockholder of
that class, and no class of stock may be treated other than according to its
dividend rights as a class.

To the extent that we do not distribute all of our net capital gain, or we
distribute at least 90%, but less than 100%, of our "REIT taxable income," as
adjusted, we will be required to pay tax on this undistributed income at
regular ordinary and capital gain corporate tax rates.

Failure to Qualify as a REIT

If we fail to qualify for taxation as a REIT in any taxable year, and the
relief provisions of the tax code do not apply, we will be required to pay tax,
including any applicable alternative minimum tax, on our taxable income in that
taxable year and all subsequent taxable years at regular corporate rates.
Distributions to stockholders in any year in which we fail to qualify as a REIT
will not be deductible by us and we will not be required to distribute any
amounts to our stockholders. As a result, we anticipate that our failure to
qualify as a REIT would reduce the cash available for distribution to our
stockholders. In addition, if we fail to qualify as a REIT, all distributions
to stockholders will be taxable at ordinary income rates to the extent of our
current and

accumulated earnings and profits. In this event, corporate distributees may be
eligible for the dividends-received deduction. Unless entitled to relief under
specific statutory provisions, we will also be disqualified from taxation as a
REIT for the four taxable years following the year in which we lose our
qualification.

Taxation Of Taxable United States Stockholders

For purposes of the discussion in this prospectus, the term "United States
stockholder" means a holder of our stock that is, for United States federal
income tax purposes:

. a citizen or resident of the United States;

. a corporation, partnership, or other entity created or organized in or
under the laws of the United States or of any state thereof or in the
District of Columbia, unless Treasury regulations provide otherwise;

. an estate the income of which is subject to United States federal income
taxation regardless of its source; or

. a trust whose administration is subject to the primary supervision of a
United States court and which has one or more United States persons who
have the authority to control all substantial decisions of the trust.

Distributions Generally

Distributions out of our current or accumulated earnings and profits, other
than capital gain dividends, will be taxable to United States stockholders as
ordinary income. Provided that we continue to qualify as a REIT, dividends paid
by us will not be eligible for the dividends received deduction generally
available to United States stockholders that are corporations. To the extent
that we make distributions in excess of current and accumulated earnings and
profits, the distributions will be treated as a tax-free return of capital to
each United States stockholder, and will reduce the adjusted tax basis which
each United States stockholder has in our stock by the amount of the
distribution, but not below zero. Distributions in excess of a United States
stockholder's adjusted tax basis in its stock will be taxable as capital gain,
and will be taxable as long-term capital gain if the stock has been held for
more than one year. If we declare a dividend in October, November, or December
of any calendar year which is payable to stockholders of record on a specified
date in such a month and actually pay the dividend during January of the
following calendar year, the dividend is deemed to be paid by us and received
by the stockholder on December 31st of the previous year. Stockholders may not
include in their own income tax returns any of our net operating losses or
capital losses.

Capital Gain Distributions

Distributions designated by us as capital gain dividends will be taxable to
United States stockholders as capital gain income. We can designate
distributions as capital gain dividends to the extent of our net capital gain
for the taxable year of the distribution. This capital gain income will
generally be taxable to non-corporate United States stockholders at a 20% or
25% rate based on the characteristics of the asset we sold that produced the
gain. United States stockholders that are corporations may be required to treat
up to 20% of certain capital gain dividends as ordinary income.

A recently enacted 18% capital gains rate applies to certain assets acquired
after December 31, 2000, and to certain assets held on January 1, 2001, as to
which an election is made to treat such assets as having been sold and then
reacquired on the same date. If the election is made, the asset will be deemed
to be sold at its fair market value and any gain, but not loss, will be
recognized. Although the IRS has yet to issue any official guidance on how the
18% rate would apply to distributions made by us, the IRS has indicated in
income tax forms that the lower rate will apply to designated capital gain
distributions we make to the extent that the gain is derived from the
disposition of a capital asset acquired by us after December 31, 2000 and held
for more than five years at the time of disposition.

Retention of Net Capital Gains

We may elect to retain, rather than distribute as a capital gain dividend,
our net capital gains. If we were to make this election, we would pay tax on
such retained capital gains. In such a case, our stockholders would generally:

. include their proportionate share of our undistributed net capital gains
in their taxable income;

. receive a credit for their proportionate share of the tax paid by us in
respect of such net capital gain; and

. increase the adjusted basis of their stock by the difference between the
amount of their share of our undistributed net capital gain and their
share of the tax paid by us.

Passive Activity Losses, Investment Interest Limitations and Other
Considerations of Holding Our Stock

Distributions we make and gains arising from the sale or exchange of our
stock by a United States stockholder will not be treated as passive activity
income. As a result, United States stockholders will not be able to apply any
"passive losses" against income or gains relating to our stock. Distributions
by us, to the extent they do not constitute a return of capital, generally will
be treated as investment income for purposes of computing the investment
interest limitation under the tax code. Further, if we, or a portion of our
assets, were to be treated as a taxable mortgage pool, any excess inclusion
income that is allocated to you could not be offset by any losses or other
deductions you may have.

Dispositions of Stock

A United States stockholder that sells or disposes of our stock will
recognize gain or loss for federal income tax purposes in an amount equal to
the difference between the amount of cash or the fair market value of any
property the stockholder receives on the sale or other disposition and the
stockholder's adjusted tax basis in the stock. This gain or loss will be
capital gain or loss and will be long-term capital gain or loss if the
stockholder has held the stock for more than one year. In general, any loss
recognized by a United States stockholder upon the sale or other disposition of
our stock that the stockholder has held for six months or less will be treated
as long-term capital loss to the extent the stockholder received distributions
from us which were required to be treated as long-term capital gains.

Information Reporting and Backup Withholding

We report to our United States stockholders and the IRS the amount of
dividends paid during each calendar year, and the amount of any tax withheld.
Under the backup withholding rules, a stockholder may be subject to backup
withholding with respect to dividends paid and redemption proceeds unless the
holder is a corporation or comes within other exempt categories and, when
required, demonstrates this fact, or provides a taxpayer identification number
or social security number, certifying as to no loss of exemption from backup
withholding, and otherwise complies with applicable requirements of the backup
withholding rules. A United States stockholder that does not provide us with
its correct taxpayer identification number or social security number may also
be subject to penalties imposed by the IRS. A United States stockholder can
meet this requirement by providing us with a correct, properly completed and
executed copy of IRS Form W-9 or a substantially similar form. Backup
withholding is not an additional tax. Any amount paid as backup withholding
will be creditable against the stockholder's income tax liability, if any, and
otherwise be refundable. In addition, we may be required to withhold a portion
of capital gain distributions made to any stockholders who fail to certify
their non-foreign status.

Pursuant to the Economic Growth and Tax Relief Reconciliation Act of 2001,
signed into law on June 7, 2001, the backup withholding tax rate is 30% for
amounts distributed after December 31, 2001 and on or before December 31, 2003.
After 2003, the backup withholding tax rate will be gradually reduced until
2006, when the backup-withholding rate will be 28%.

Taxation of Tax-Exempt Stockholders

The IRS has ruled that amounts distributed as a dividend by a REIT will be
treated as a dividend by the recipient and excluded from the calculation of
unrelated business taxable income when received by a tax-exempt entity. Based
on that ruling, provided that a tax-exempt stockholder has not held our stock
as "debt financed property" within the meaning of the tax code, i.e., property
the acquisition or holding of which is financed through a borrowing by the
tax-exempt United States stockholder, the stock is not otherwise used in an
unrelated trade or business, and we do not hold a residual interest in a real
estate mortgage investment conduit, REMIC, that gives rise to "excess
inclusion" income, as defined in Section 860E of the tax code, dividend income
on our stock and income from the sale of our stock should not be unrelated
business taxable income to a tax-exempt stockholder. However, if we were to
hold residual interests in a REMIC, or if we or a pool of our assets were to be
treated as a "taxable mortgage pool," a portion of the dividends paid to a
tax-exempt stockholder may be subject to tax as unrelated business taxable
income. Although we do not believe that we, or any portion of our assets, will
be treated as a taxable mortgage pool, no assurance can be given that the IRS
might not successfully maintain that such a taxable mortgage pool exists.

For tax-exempt stockholders that are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under Sections
501(c)(7), (c)(9), (c)(17) and (c)(20) of the tax code, respectively, income
from an investment in our stock will constitute unrelated business taxable
income unless the organization is able to properly claim a deduction for
amounts set aside or placed in reserve for certain purposes so as to offset the
income generated by its investment in our stock. Any prospective investors
should consult their tax advisors concerning these "set aside" and reserve
requirements.

Notwithstanding the above, however, a substantial portion of the dividends
you receive may constitute UBTI, if we are treated as a "pension-held REIT" and
you are a pension trust which:

. is described in Section 401(a) of the tax code; and

. holds more than 10%, by value, of the interests in the REIT.

Tax-exempt pension funds that are described in Section 401(a) of the tax
code and exempt from tax under Section 501(a) of the tax code are referred to
below as "qualified trusts."

A REIT is a "pension-held REIT" if:

. it would not have qualified as a REIT but for the fact that Section
856(h)(3) of the tax code provides that stock owned by a qualified trust
shall be treated, for purposes of the 5/50 Rule, described above, as owned
by the beneficiaries of the trust, rather than by the trust itself; and

. either at least one qualified trust holds more than 25%, by value, of the
interests in the REIT, or one or more qualified trusts, each of which owns
more than 10%, by value, of the interests in the REIT, holds in the
aggregate more than 50%, by value, of the interests in the REIT.

The percentage of any REIT dividend treated as unrelated business taxable
income is equal to the ratio of:

. the unrelated business taxable income earned by the REIT, less directly
related expenses, treating the REIT as if it were a qualified trust and
therefore subject to tax on unrelated business taxable income, to

. the total gross income, less directly related expenses, of the REIT.

A de minimis exception applies where the percentage is less than 5% for any
year. As a result of the limitations on the transfer and ownership of stock
contained in our charter, we do not expect to be classified as a "pension-held
REIT."

Taxation of Non-United States Stockholders

The rules governing federal income taxation of "non-United States
stockholders" are complex and no attempt will be made herein to provide more
than a summary of these rules. "Non-United States stockholders" mean beneficial
owners of shares of our stock that are not United States stockholders (as such
term is defined in the discussion above under the heading entitled "Taxation of
Taxable United States Stockholders").

PROSPECTIVE NON-UNITED STATES STOCKHOLDERS SHOULD CONSULT THEIR TAX ADVISORS
TO DETERMINE THE IMPACT OF FOREIGN, FEDERAL, STATE, AND LOCAL INCOME TAX LAWS
WITH REGARD TO AN INVESTMENT IN OUR STOCK AND OF OUR ELECTION TO BE TAXED AS A
REAL ESTATE INVESTMENT TRUST, INCLUDING ANY REPORTING REQUIREMENTS.

Distributions to non-United States stockholders that are not attributable to
gain from our sale or exchange of United States real property interests and
that are not designated by us as capital gain dividends or retained capital
gains will be treated as dividends of ordinary income to the extent that they
are made out of our current or accumulated earnings and profits. These
distributions will generally be subject to a withholding tax equal to 30% of
the distribution unless an applicable tax treaty reduces or eliminates that
tax. However, if income from an investment in our stock is treated as
effectively connected with the non-United States stockholder's conduct of a
United States trade or business, the non-United States stockholder generally
will be subject to federal income tax at graduated rates in the same manner as
United States stockholders are taxed with respect to those distributions, and
also may be subject to the 30% branch profits tax in the case of a non-United
States stockholder that is a corporation. We expect to withhold tax at the rate
of 30% on the gross amount of any distributions made to a non-United States
stockholder unless:

. a lower treaty rate applies and any required form, for example IRS Form
W-8BEN, evidencing eligibility for that reduced rate is filed by the
non-United States stockholder with us; or

. the non-United States stockholder files an IRS Form W-8ECI with us
claiming that the distribution is effectively connected income.

Any portion of the dividends paid to non-United States stockholders that is
treated as excess inclusion income will not be eligible for exemption from the
30% withholding tax or a reduced treaty rate.

Distributions in excess of our current and accumulated earnings and profits
will not be taxable to non-United States stockholders to the extent that these
distributions do not exceed the adjusted basis of the stockholder's stock, but
rather will reduce the adjusted basis of that stock. To the extent that
distributions in excess of current and accumulated earnings and profits exceed
the adjusted basis of a non-United States stockholder's stock, these
distributions will give rise to tax liability if the non-United States
stockholder would otherwise be subject to tax on any gain from the sale or
disposition of its stock, as described below. Because it generally cannot be
determined at the time a distribution is made whether or not such distribution
may be in excess of current and accumulated earnings and profits, the entire
amount of any distribution normally will be subject to withholding at the same
rate as a dividend. However, amounts so withheld are creditable against United
States tax liability, if any, or refundable by the IRS to the extent the
distribution is subsequently determined to be in excess of our current and
accumulated earnings and profits. We are also required to withhold 10% of any
distribution in excess of our current and accumulated earnings and profits if
our stock is a United States real property interest because we are not a
domestically controlled REIT, as discussed below. Consequently, although we
intend to withhold at a rate of 30% on the entire amount of any distribution,
to the extent that we do not do so, any portion of a distribution not subject
to withholding at a rate of 30% may be subject to withholding at a rate of 10%.

Distributions attributable to our capital gains which are not attributable
to gain from the sale or exchange of a United States real property interest
generally will not be subject to income taxation, unless (1) investment in

our stock is effectively connected with the non-United States stockholder's
U.S. trade or business (or, if an income tax treaty applies, is attributable to
a U.S. permanent establishment of the non-United States stockholder), in which
case the non-United States stockholder will be subject to the same treatment as
United States stockholders with respect to such gain (except that a corporate
non-United States stockholder may also be subject to the 30% branch profits
tax), or (2) the non-United States stockholder is a non-resident alien
individual who is present in the United States for 183 days or more during the
taxable year and certain other conditions are satisfied, in which case the
non-resident alien individual will be subject to a 30% tax on the individual's
capital gains.

For any year in which we qualify as a REIT, distributions that are
attributable to gain from the sale or exchange of a United States real property
interest, which includes some interests in real property, but generally does
not include an interest solely as a creditor in mortgage loans or
mortgage-backed securities, will be taxed to a non-United States stockholder
under the provisions of the Foreign Investment in Real Property Tax Act of
1980, or FIRPTA. Under FIRPTA, distributions attributable to gain from sales of
United States real property interests are taxed to a non-United States
stockholder as if that gain were effectively connected with the stockholder's
conduct of a United States trade or business. Non-United States stockholders
thus would be taxed at the normal capital gain rates applicable to
stockholders, subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals.
Distributions subject to FIRPTA also may be subject to the 30% branch profits
tax in the hands of a non-United States corporate stockholder. We are required
to withhold 35% of any distribution that we designate (or, if greater, the
amount that we could designate) as a capital gains dividend. The amount
withheld is creditable against the non-United States stockholder's FIRPTA tax
liability.

Gains recognized by a non-United States stockholder upon a sale of our stock
generally will not be taxed under FIRPTA if we are a domestically controlled
REIT, which is a REIT in which at all times during a specified testing period
less than 50% in value of the stock was held directly or indirectly by
non-United States stockholders. Because our stock is publicly traded, we cannot
assure our investors that we are or will remain a domestically controlled REIT.
Even if we are not a domestically-controlled REIT, however, a non-United States
stockholder that owns, actually or constructively, 5% or less of our stock
throughout a specified testing period will not recognize taxable gain on the
sale of our stock under FIRPTA if the shares are traded on an established
securities market.

If gain from the sale of the stock were subject to taxation under FIRPTA,
the non-United States stockholder would be subject to the same treatment as
United States stockholders with respect to that gain, subject to applicable
alternative minimum tax, a special alternative minimum tax in the case of
nonresident alien individuals, and the possible application of the 30% branch
profits tax in the case of non-United States corporations. In addition, the
purchaser of the stock could be required to withhold 10% of the purchase price
and remit such amount to the IRS.
Gains not subject to FIRPTA will be taxable to a non-United States
stockholder if:

. the non-United States stockholder's investment in the stock is effectively
connected with a trade or business in the United States, in which case the
non-United States stockholder will be subject to the same treatment as
United States stockholders with respect to that gain; or

. the non-United States stockholder is a nonresident alien individual who
was present in the United States for 183 days or more during the taxable
year and other conditions are met, in which case the nonresident alien
individual will be subject to a 30% tax on the individual's capital gains.

Information Reporting and Backup Withholding

If the proceeds of a disposition of our stock are paid by or through a U.S.
office of a broker-dealer, the payment is generally subject to information
reporting and to backup withholding (currently at a rate of 30%, subject to
reduction in years after 2003) unless the disposing non-United States
stockholder certifies as to his

name, address and non-U.S. status or otherwise establishes an exemption.
Generally, U.S. information reporting and backup withholding will not apply to
a payment of disposition proceeds if the payment is made outside the U.S.
through a foreign office of a foreign broker-dealer. If the proceeds from a
disposition of our stock are paid to or through a foreign office of a U.S.
broker-dealer or a non-U .S. office of a foreign broker-dealer that is (i) a
"controlled foreign corporation" for federal income tax purposes, (ii) a
foreign person 50% or more of whose gross income from all sources for a
three-year period was effectively connected with a U.S. trade or business,
(iii) a foreign partnership with one or more partners who are U.S. persons and
who in the aggregate hold more than 50% of the income or capital interest in
the partnership, or (iv) a foreign partnership engaged in the conduct of a
trade or business in the United States, then (i) backup withholding will not
apply unless the broker-dealer has actual knowledge that the owner is not a
foreign stockholder, and (ii) information reporting will not apply if the
non-United States stockholder satisfies certification requirements regarding
its status as a foreign stockholder.

State, Local and Foreign Taxation

We may be required to pay state, local and foreign taxes in various state,
local and foreign jurisdictions, including those in which we transact business
or make investments, and our stockholders may be required to pay state, local
and foreign taxes in various state, local and foreign jurisdictions, including
those in which they reside. Our state, local and foreign tax treatment may not
conform to the federal income tax consequences summarized above. In addition, a
stockholder's state, local and foreign tax treatment may not conform to the
federal income tax consequences summarized above. Consequently, prospective
investors should consult their tax advisors regarding the effect of state,
local and foreign tax laws on an investment in our stock.

USE OF PROCEEDS

We will not receive any proceeds from the sale of the shares of our common
stock offered under this prospectus. All proceeds from the sale of the shares
will be for the account of FBR Asset Investment Corporation ("FBR Asset").

SELLING STOCKHOLDER

We entered into a Purchase Agreement dated December 20, 2001 with FBR Asset,
under which FBR Asset purchased 500,000 shares of our common stock. In selling
those shares to FBR Asset, we relied on registration exemptions in Section 4(2)
of the Securities Act of 1933 and Rule 506 of Regulation D. In connection with
that transaction, we agreed to file a registration statement with the
Securities and Exchange Commission to register those shares. FBR Asset has not
held any position or office or had any material relationship with us or any of
our predecessors or affiliates within the past three years.

The following table sets forth certain information with respect to FBR
Asset's beneficial ownership of shares of our common stock as of April 1, 2002
and the number of shares FBR Asset may offer under this prospectus. Upon
completion of the offering, assuming FBR Asset sells all shares registered
hereby and that FBR Asset acquires no additional shares of our common stock
prior to completion of this offering, FBR Asset will not beneficially own any
shares of our common stock.

Percentage of
Common Stock Common Stock Common Stock Common Stock
Owned Prior Being Offered Owned Upon Owned Upon
to the Pursuant to Completion of Completion of
Name of Selling Stockholder Offering(1) this Prospectus this Offering this Offering
--------------------------- ------------ --------------- ------------- -------------

FBR Asset Investment Corporation 500,000 500,000 0 *

--------

* Less than 1%
(1)To our knowledge, the number of shares of our common stock which FBR Asset
owned prior to this offering consists solely of those shares of our common
stock issued in connection with the December 20, 2001 Purchase Agreement
between us and FBR Asset.

PLAN OF DISTRIBUTION

The shares of our common stock offered pursuant to this prospectus may be
offered and sold from time to time by FBR Asset, or its donees, transferees,
pledgees or other successors in interest that receive such shares as a gift or
other non-sale related transfer. FBR Asset will act independently of us in
making decisions with respect to the timing, manner and size of each sale. All
or a portion of the common stock offered by this prospectus may be offered for
sale from time to time on the American Stock Exchange or on one or more other
exchanges, or otherwise at prices and terms then obtainable, or in negotiated
transactions. The distribution of these securities may be effected in one or
more transactions that may take place on the over-the-counter market,
including, among others, ordinary brokerage transactions, privately negotiated
transactions or through sales to one or more dealers for resale of such
securities as principals, at market prices prevailing at the time of sale, at
prices related to such prevailing market prices or at negotiated prices. Usual
and customary or specifically negotiated brokerage fees or commissions may be
paid by FBR Asset. In addition, any shares covered by this prospectus that
qualify for sale under Rule 144 might be sold under Rule 144 rather than under
this prospectus.

We will not receive any part of the proceeds from the sale of common stock.
FBR Asset and intermediaries through whom such securities are sold may be
deemed "underwriters" within the meaning of the Securities Act, in which event
commissions received by such intermediary may be deemed to be underwriting
commissions under the Securities Act. We will pay all expenses of the
registration of securities covered by this prospectus. FBR Asset will pay any
applicable underwriters' commissions and expenses, brokerage fees or transfer
taxes.

EXPERTS

The financial statements as of December 31, 2001 and 2000, and for each of
the three years in the period ended December 31, 2001, incorporated in this
prospectus by reference to the Annual Report on Form 10-K of Anworth Mortgage
Asset Corporation for the year ended December 31, 2001, have been so
incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.

LEGAL MATTERS

The validity of our securities offered in this prospectus and selected
federal tax matters will be passed upon for us by Allen Matkins Leck Gamble &
Mallory LLP, Century City, California. Selected legal matters related to
Maryland law will be passed upon for us by Piper Marbury Rudnick & Wolfe LLP.

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
the materials we file at the Commission's Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549. Please call the Commission at
1-800-SEC-0330 for further information on the operation of the Public Reference
Rooms. Our Commission filings are also available to the public from the
Commission's World Wide Web site on the Internet at http://www.sec.gov. This
site contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Commission. You may also
read and copy this information at the National Association of Securities
Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.

We maintain a site on the Internet at http://www.anworth.com. The
information contained in our website is not part of this prospectus and you
should not rely on it in deciding whether to invest in our common stock.

We have filed a registration statement, of which this prospectus is a part,
covering the offered securities. As allowed by Commission rules, this
prospectus does not include all of the information contained in the
registration statement and the included exhibits, financial statements and
schedules. We refer you to the registration statement, the included exhibits,
financial statements and schedules for further information. This prospectus is
qualified in its entirety by such other information.

INFORMATION INCORPORATED BY REFERENCE

The SEC allows us to "incorporate by reference" the information that we file
with the SEC. This means that we can disclose important information to you by
referring you to another document filed separately with the SEC under the
Securities Exchange Act of 1934 (the "Exchange Act"). The information
incorporated by reference is deemed to be part of this prospectus, except for
any information superseded by information in this prospectus. We have filed
with the SEC and incorporate by reference:

. our annual report on Form 10-K for the fiscal year ended December 31, 2001;

. our current report on Form 8-K dated January 23, 2002; and

. the description of our common stock included in our registration statement
on Form 8-A dated December 12, 1997.

Any documents we file pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act after the date of this prospectus and prior to the termination of
the offering of the securities to which this prospectus relates will
automatically be deemed to be incorporated by reference in this prospectus and
to be part hereof from the date of filing those documents. Any statement
contained in this prospectus or in a document incorporated by reference shall
be deemed to be modified or superseded for all purposes to the extent that a
statement contained in this prospectus or in any other document which is also
incorporated by reference modifies or supersedes that statement.

We will provide without charge to each person to whom a copy of this
prospectus is delivered, upon such person's written or oral request, a copy of
any and all of the information incorporated by reference in this prospectus,
other than exhibits to such documents, unless such exhibits are specifically
incorporated by reference into the information that this prospectus
incorporates. Requests should be directed to the Secretary at Anworth Mortgage
Asset Corporation, 1299 Ocean Avenue, 2nd Floor, Santa Monica, CA 90401,
telephone: (310) 394-0115.

================================================================================

500,000 Shares

[LOGO] LOGO OF ANWORTH MORTGAGE ASSET CORPORATION

Anworth Mortgage Asset Corporation

Common Stock

-----------------

PROSPECTUS

-----------------

April 3, 2002

================================================================================

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 14. Other Expenses of Issuance and Distribution.

The following table sets forth our costs and expenses in connection with the
registration of our securities being registered. All amounts are estimates
except the Securities and Exchange Commission registration fee and the National
Association of Securities Dealers fee.

Description Amount
----------- -------

Securities and Exchange Commission Registration Fee........ $ 435
National Association of Securities Dealers Fee............. 973
Printing and Engraving..................................... 5,000
Legal Fees and Expenses.................................... 15,000
Accountants' Fees and Expenses............................. 5,000
Miscellaneous.............................................. 3,592
-------
Total................................................... $30,000
=======

Item 15. Indemnification of Directors and Officers.

Section 2-418 of the Maryland General Corporation Law permits us to
indemnify, subject to the exceptions set forth therein, any director or officer
of our company who is made a party to any proceeding by reason of service in
that capacity to the company, or who is or was, serving as such with respect to
another entity at the request of our company. The Maryland General Corporation
Law also provides that we may purchase insurance on behalf of our directors,
officers, employees or agents.

Our charter and bylaws require us to provide for indemnification of our
officers and directors substantially identical in scope to that permitted under
Section 2-418 of the Maryland General Corporation Law. Our bylaws also provide
that we must pay the expenses of our officers and directors (acting in their
capacity as such) incurred in defending any action, suit or proceeding, whether
civil, criminal, administrative or investigative, as they are incurred and in
advance of the final disposition of the action, suit or proceeding, upon
receipt of a written undertaking by or on behalf of the director or officer to
repay all amounts so advanced if it is ultimately determined by a court of
appropriate jurisdiction that the officer or director is not entitled to be
indemnified by us.

Our charter limits the liability of our directors and officers for money
damages to us and our stockholders to the fullest extent permitted from time to
time by Maryland law. Maryland law presently permits the liability of directors
and officers to a corporation or its stockholders for money damages to be
limited, except:

. to the extent that it is proved that the director or officer actually
received an improper benefit or profit in money, property or services; or

. if a judgment or other final adjudication adverse to the director or
officer is entered in a proceeding based on a finding that the director's
or officer's action, or failure to act, was the result of active and
deliberate dishonesty and was material to the cause of action adjudicated
in the proceeding.

This provision does not limit our ability or our stockholders' ability to
obtain other relief, such as an injunction or rescission.

II-1

Item 16. Exhibits.

The following exhibits are part of this Registration Statement on Form S-3
and are numbered in accordance with Item 601 of Regulation S-K.

Exhibit
Number Description
------ -----------

2.1+ Purchase Agreement dated December 20, 2001 between the Company and FBR Asset Investment
Corporation.

5.1+ Opinion of Piper Marbury Rudnick & Wolfe LLP as to legality of the shares being registered.

8.1+ Opinion of Allen Matkins Leck Gamble & Mallory LLP as to selected federal income tax matters.

23.1* Consent of PricewaterhouseCoopers LLP.

23.3+ Consent of Piper Marbury Rudnick & Wolfe LLP (included within the opinion previously filed as
Exhibit 5.1).

23.4+ Consent of Allen Matkins Leck Gamble and Mallory LLP (included within the opinion previously
filed as Exhibit 8.1).

24.1+ Powers of Attorney.

--------

* Filed herewith.

+ Previously filed.

Item 17. Undertakings.

A. The Registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;

(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement; and

II-2

(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or
any material change to such information in this Registration Statement;

provided, however, that paragraphs (A)(1)(i) and (A)(1)(ii) do not apply if
the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the Registrant
pursuant to Section 13 or Section 15(d) of the Exchange Act that are
incorporated by reference in this Registration Statement;

(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof; and

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

B. The Registrant hereby undertakes that, for the purposes of determining
any liability under the Securities Act, each filing of the annual report
pursuant to Section 13(a) or Section 15(d) of the Exchange Act that is
incorporated by reference in this Registration Statement shall be deemed to be
a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.

C. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.

II-3

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Santa Monica, State of California, as of April 3,
2002.

ANWORTH MORTGAGE ASSET CORPORATION

/s/ JOSEPH LLOYD MCADAMS
By:
------------------------------------------
Joseph Lloyd McAdams President and Chief Executive
Officer

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated below as of April 3, 2002.

Signature Title
--------- -----

/s/ JOSEPH LLOYD MCADAMS President, Chief Executive Officer and
------------------------- Chairman of the Board of Directors
Joseph Lloyd McAdams

* Chief Financial Officer
------------------------- and Controller
Pamela J. Watson

* Director
-------------------------
Joe E. Davis

* Director
-------------------------
Charles H. Black

* Director
-------------------------
Charles F. Smith

*By: /s/ JOSEPH LLOYD MCADAMS
-------------------------
Joseph Lloyd McAdams
Attorney-in-Fact

II-4

Exhibit Index

Pursuant to Item 601(a)(2) of Regulation S-K, this exhibit index immediately
precedes the exhibits.

Exhibit
Number Description
------ -----------

2.1+ Purchase Agreement dated December 20, 2001 between the Company and FBR Asset Investment
Corporation.

5.1+ Opinion of Piper Marbury Rudnick & Wolfe LLP as to legality of the shares being registered.

8.1+ Opinion of Allen Matkins Leck Gamble & Mallory LLP as to selected federal income tax matters.

23.1* Consent of PricewaterhouseCoopers LLP.

23.3+ Consent of Piper Marbury Rudnick & Wolfe LLP (included within the opinion previously filed as
Exhibit 5.1).

23.4+ Consent of Allen Matkins Leck Gamble and Mallory LLP (included within the opinion previously filed
as Exhibit 8.1).

24.1+ Powers of Attorney.

--------

* Filed herewith.

+ Previously filed.