Annaly Capital Management Annual Report 2002

FY2002 Annual Report · Annaly Capital Management

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Annaly Mortgage Management, Inc.

Annual Report 2002

Workers on Wall Street
Celebrating the
End of WWII

Jubilant financial district workers swarm the
intersection of Wall and Broad, clambering
over the statue of George Washington in front
of the Sub-Treasury building.

Corporate Profile

Letter from the President

The Annaly Team

Selected Financial Data

Financial Review

Management’s Discussion and Analysis of Financial Condition

and Results of Operations

Independent Auditors’ Report

Statements of Financial Condition

Statements of Operations

Statements of Stockholders’ Equity

Statements of Cash Flows

Notes to Financial Statements

Common Stock and Market Information

Corporate Information

Annaly
Mortgage
Management,
Inc.

Annual Report
2002

Our family crest and its motto “Prodesse non Nocere” are the
trademarks of the Company. The description figuratively means
‘Proceed without fear.’ That symbolizes the confidence we try
to instill in our investors. It is reinforced by years of reliable,
consistent investment performance.

Annaly Mortgage Management, Inc.

he year 2002 demonstrated Annaly’s ability to
generate consistent returns for shareholders.
Our proven model of investing in liquid, high
quality assets and accessing the capital markets
through sequential, accretive stock offerings resulted in a
year of record earnings and dividends.

Stockholders’ Equity (dollars in thousands)

2000

2001

2002

$135,642

$667,357

$1,080,066

Earnings Per Share

2000

2001

2002

$1.18

$2.23

$2.68

Corporate Profile

nnaly Mortgage Management, Inc. owns and manages a
portfolio of mortgage-backed securities. Our principal
business objective is to generate net income for

distribution to our stockholders from the spread

between the interest income on our mortgage-backed securities
and the costs of borrowing to finance them. We have elected to
be taxed as a real estate investment trust (or REIT) under the
Internal Revenue Code. We commenced operations on February
18, 1997. We are self-advised and self-managed.

Michael A. J. Farrell

Wellington Denahan

Kathryn Fagan

Jennifer Stephens

Chairman,
President &
CEO

Vice Chairman &
Chief Investment
Officer

Chief Financial
Officer &
Treasurer

Executive VP &
Corporate
Secretary

Victory
Gardens

Everyone on the home front was encouraged to do their part to ease
wartime economic hardships through simple, symbolic and patriotic
messages. The call to plant a Victory Garden was answered by nearly
20 million Americans.

Michael A. J. Farrell

To Our Fellow Shareholders

s we mark the end of another successful year, I think about
the world of difference that exists from just two years ago.
Looking back now, the United States was somewhat naïve
about its vulnerability in the world, as well as the future

prospects for globalization and the conflicts it would create. In
many ways we were not unlike the U.S. in the late 1930s.

A year has passed since last year’s annual meeting, and upon
reflection I am struck by the contrast from other annual meetings.
At the close of last year’s annual meeting, a stately “greatest gener-
ation” veteran stood up at the last call for questions and nominat-
ed the entire Annaly management team for the “Distinguished
Service Cross” for meritorious service. This gentleman, a retired
officer of World War II who served under General Patton and a
veteran of the “financial services wars” for the past 50 years, spoke
eloquently of the discipline he noticed in our management style,
our execution and our dedication to providing strong shareholder
value through extremely difficult markets. As he spoke, it occurred
to me that while it is easy for us to get caught up in the day-to-day
battles in the commercial marketplace, we should stop to consider
the lesson of this man who, in his eighties now, had a spark and
appreciation for life derived from the uniquely broad experience
of his generation.

I took his remarks back to the team that day, but his mark was left
on me. During the course of the year we meet or speak with liter-
ally thousands of investors, and I like to think that we earn the
respect of investors one at a time. This Annaly shareholder,
Colonel Julian Risken, has a great deal to teach us all. I met with
him for lunch a couple of times after the annual meeting—mostly
because the “greatest generation” holds a special place in my
heart—and here’s what I learned from him: Appreciate what you
have and live life to the fullest, regardless of the present hurdles.
He recently retired from a large financial services firm after many
years. Upon retiring, his first phone call was to the police com-
missioner of New York City to offer his services for the “home
guard,” to help protect the country from “those scoundrels” who
would do harm to his beloved country and city. I don’t think that
we will see the Colonel watching daytime television from the front
porch. After the terrible tragedy experienced on September 11,
2001, this man, in my mind, exemplifies the American spirit. His
zeal and determination to take personal responsibility for making
the world a better place clearly affect everything from his
demeanor to his view of life.

The theme of this year’s annual report is the celebration that was felt
at the end of the Second World War. It is appropriate that we under-
stand the relief that is expressed in the faces from the past. It is also
important to listen to the voices of those who did their part, experi-
enced so much in their lives and taught perspective to all of us.

In today’s world there are many challenges. The political front has
us involved in an ideological war with roots dating back over 20
years; this war will not end with a celebration in Times Square
or with a signed declaration of peace on the deck of an aircraft
carrier. The economic front is mired in cleaning up the excesses
created in the late 1990s when everyone was “rich” and going to
retire early, perhaps to the front porch that Colonel Risken
eschewed. We believe we have carefully positioned the company to
meet the expected and the unexpected global, political and eco-
nomic challenges going forward. There is no doubt in my mind
that America—and our company—will overcome and survive the
many challenges it faces. When I walk into the office each day I feel
the same energy that Colonel Risken exudes. It is a testament to
the women and men that represent Annaly in its daily business
affairs that our business model is as successful as it is. While many
may question the resolve of today’s Americans, I don’t. We are
a resourceful people, with a wonderful blend of diversity and
heritage inside of us, unlike any other in history. Individuals like
the Colonel remind me of it continually.

The highlights of 2002 will reflect record earnings of $2.68 per
share, a doubling in market capitalization to $1.6 billion, the
entry of the company into the Russell 1000 index and avoidance
of many of the pitfalls that plague our competitors in the sector.

As regards Annaly, it is the ongoing relationship with investors
that binds our commitment to the diligent pursuit of a sound
business strategy. We work hard every day to fulfill this commit-
ment, one shareholder at a time. Against the background of
turbulence, terrorism, corporate governance issues, volatile
interest rates and economic uncertainty,the NLY team deserved
the symbolism of the Distinguished Service Medal offered by
Colonel Risken.

Yes, America may have been naïve and distracted two years ago or
60 years ago, but it is not now. As evidenced by 2002’s results,
neither is the NLY team.

March 17, 2003

The Annaly Team

nnaly’s team is experienced in Wall Street trading, manage-
ment and operations, with a specialization in investing in
mortgage-backed securities on a leveraged basis. Senior

management founded and capitalized Annaly Mortgage
Management in November 1996. Successfully completing a private
placement in February 1997, an IPO in October 1997 and four
secondary offerings from January 2001 through January 2002,
Annaly has consistently generated double-digit returns for its share-
holders. Annaly Mortgage Management’s success and future growth
prospects are based on the proven ability of its strong and seasoned
management team to deliver excellent results in volatile markets.

The
Annaly
team

Left to right, seated: Wellington Denahan, Jennifer
Stephens, Kathryn Fagan, Michael Farrell. Standing: Nancy
Murtha, Annie Montoya, Isabel Gordillo, Konstantin Pavlov,
Rose-Marie Lyght, Ronald Kazel, Alexandra Denahan,
Jeremy Diamond, Martha Cobo, James Fortescue.

Rosie
The
Riveter

Helping to win the war were the 6 million women who worked at indus-
trial jobs, ensuring American productivity and challenging traditional
notions of women’s capabilities. The sight of women outfitted in over-
alls and wielding industrial tools became an icon that was popularized in
the 1942 song, “Rosie the Riveter,” providing a nickname for all women
who worked in wartime industries. “All the day long, whether rain or
shine/ She’s a part of the assembly line./ She’s making history, working
for victory/ Rosie the Riveter.”

Selected Financial Data

Annaly Mortgage Management, Inc.

(dollars in thousands, except for per share data)

For the Year Ended
December 31, 2002

For the Year Ended
December 31, 2001

For the Year Ended
December 31, 2000

For the Year Ended
December 31, 1999

For the Year Ended
December 31, 1998

Statement of Operations Data:

Interest income

Interest expense

Net interest income

Gain on sale of mortgage-backed securities

General and administrative expenses

(G&A expense)

Net income

Basic net income per average share

Diluted net income per average share

Dividends declared per share

Balance Sheet Data:

Mortgage-Backed Securities, net

Total assets

Repurchase agreements

Total liabilities

Stockholders’ equity

Number of common shares outstanding

Other Data:

Average total assets

Average earning assets

Average borrowings

Average equity

Yield on interest earning assets

Cost of funds on interest bearing liabilities

Interest rate spread

Annualized Financial Ratios:

Net interest margin (net interest
income/average total assets)

G&A expense as a percentage of average assets

G&A expense as a percentage of average equity

Return on average assets

Return on average equity

$ 404,165

191,758

212,407

21,063

13,963

$ 219,507

2.68

2.67

$11,551,857

11,659,084

10,163,174

10,579,018

1,080,066

84,569,206

$10,486,423

9,575,365

9,128,933

978,107

4.22%

2.10%

2.12%

2.03%

0.13%

1.43%

2.09%

22.44%

263,058

168,055

95,003

4,586

7,311

92,278

2.23

2.21

1.75

109,750

92,902

16,848

2,025

2,286

16,587

1.18

1.15

89,812

69,846

19,966

454

2,281

18,139

1.41

1.35

1.38

89,986

75,735

14,251

3,344

2,106

15,489

1.22

1.19

1.21

$ 7,575,379

$ 1,978,219

$ 1,437,793

$ 1,520,289

7,717,314

6,367,710

7,049,957

667,357

59,826,975

2,035,029

1,628,359

1,899,386

135,642

14,522,978

1,491,322

1,338,296

1,388,050

103,272

1,527,352

1,280,510

1,401,481

125,871

13,581,316

12,648,424

$ 5,082,852

$ 1,652,459

$ 1,473,765

$ 1,499,875

4,682,780

4,388,900

437,376

5.62%

3.83%

1.79%

1.87%

0.14%

1.67%

1.82%

21.10%

1,564,491

1,449,999

117,727

7.02%

6.41%

0.61%

1.02%

0.14%

1.94%

1.00%

14.09%

1,461,254

1,350,230

117,685

6.15%

5.17%

0.98%

1.35%

0.15%

1.94%

1.23%

15.41%

1,461,791

1,360,040

131,265

6.16%

5.57%

0.59%

0.95%

0.14%

1.60%

1.03%

11.80%

Financial Review

Annaly Mortgage Management, Inc.
Annaly Mortgage Management, Inc.

Management’s Discussion and Analysis of Financial Condition

and Results of Operations

Independent Auditors’ Report

Statements of Financial Condition

Statements of Operations

Statements of Stockholders’ Equity

Statements of Cash Flows

Notes to Financial Statements

Common Stock and Market Information

Corporate Information

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Annaly Mortgage Management, Inc.

Overview

e are a real estate investment trust that owns and manages
a portfolio of mortgage-backed securities. Our principal
business objective is to generate net income for distribution
to our stockholders from the spread between the interest income on
our mortgage-backed securities and the costs of borrowing to
finance our acquisition of mortgage-backed securities.

Special Note Regarding Forward-Looking Statements

Certain statements contained in this annual report, and certain statements contained in our future
filings with the Securities and Exchange Commission (the “SEC” or the “Commission”), in our press
releases or in our other public or shareholder communications may not be, based on historical facts
and are “forward-looking statements” within the meaning of the Private Securities Litigation Reform
Act of 1995. Forward-looking statements which are based on various assumptions, (some of which
are beyond our control) may be identified by reference to a future period or periods, or by the use
of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “anticipate,” “continue,” or
similar terms or variations on those terms, or the negative of those terms. Actual results could dif-

fer materially from those set forth in forward-looking statements due to a variety of factors, includ-
ing, but not limited to, changes in interest rates, changes in yield curve, changes in prepayment
rates, the availability of mortgage backed securities for purchase, the availability of financing and, if
available, the terms of any financing. For a discussion of the risks and uncertainties that could cause
actual results to differ from those contained in the forward-looking statements, see “Risk Factors.”
We do not undertake, and specifically disclaim any obligation, to publicly release the result of any
revisions that may be made to any forward-looking statements to reflect the occurrence of antici-
pated or unanticipated events or circumstances after the date of such statements.

Critical Accounting Policies

Management’s discussion and analysis of financial condition and results of operations is based on
the amounts reported in our financial statements. These financial statements are prepared in accor-
dance with accounting principles generally accepted in the United States of America. In preparing
the financial statements, management is required to make various judgments, estimates and
assumptions that affect the reported amounts. Changes in these estimates and assumptions could
have a material effect on our financial statements. The following is a summary of our policies that
is the most affected by management’s judgments, estimates and assumptions.

Results of Operations

Net Income Summary
For the year ended December 31, 2002, our net income was $219.5 million or $2.68 basic earn-
ings per average share, as compared to $92.3 million or $2.23 basic earnings per average share
for the year ended December 31, 2001. For the year ended December 31, 2000, our net income
was $16.6 million, or $1.18 basic earnings per average share. Net income per average share
increased by $0.45 and total net income increased by $127.2 million. The increase in 2002 net
income over 2001 is attributable to our acquisition of additional mortgage-backed securities using
proceeds raised from our January 2002 public offering and Equity Shelf Program during the year
and the increase in the interest rate spread between our interest-earning assets and our interest-
bearing liabilities. The same is true for the increase in net income for the year 2001, when com-
pared to the year 2000. We consummated three public offerings in the year 2001 and the interest
rate spread increased. We compute our net income per share by dividing net income by the weighted

Market Valuation of Securities: All assets classified as available-for-sale are reported at fair value,
based on market prices. Our policy is to obtain market values from three independent sources and
record the market value of the securities based on the average of the three.

Amortization of premiums and accretion of discounts: Premiums and discounts associated with the
purchase of the Mortgage-Backed Securities are amortized into interest income over the lives of the
securities using the interest method. Our policy for estimating prepayment speeds for calculating the
effective yield is to evaluate historical performance, street consensus prepayment speeds, and cur-
rent market conditions.

average number of shares of outstanding common stock during the period, which was 82,044,141
for the year ended December 31, 2002, 41,439,631 for the year ended December 31, 2001, and
14,089,436 for the year ended December 31, 2000. Dividends per share for the year ended
December 31, 2002 were $2.67, or an aggregate of $223.6 million. Dividends per share for the year
ended December 31, 2001 were $1.75 per share, or $88.4 million in total. Dividends per share for
the year ended December 31, 2000 were $1.15 per share, or $16.3 million in total. Our return on
average equity was 22.44% for the year ended December 31, 2002, 21.10% for the year ended
December 31, 2001, and 14.09% for the year ended December 31, 2000. The increase in return
on equity in 2002 compared to 2001 is primarily due to the favorable interest rate environment. The
table on the following page presents the net income summary for the years ended December 31,
2002, 2001, 2000, 1999, and 1998.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Annaly Mortgage Management, Inc.

Net Income Summary

(dollars in thousands, except for per share data)

Interest Income

Interest Expense

Net Interest Income

Gain on Sale of Mortgage-Backed Securities

General and Administrative Expenses

Year Ended
December 31, 2002

Year Ended
December 31, 2001

Year Ended
December 31, 2000

Year Ended
December 31, 1999

Year Ended
December 31, 1998

$ 404,165

191,758

212,407

21,063

13,963

263,058

168,055

95,003

4,586

7,311

109,750

92,902

16,802

2,025

2,286

89,812

69,846

19,966

454

2,281

89,986

75,735

14,251

3,344

2,106

Net Income

219,507

92,278

16,587

18,139

15,489

Average Number of Basic Shares Outstanding

Average Number of Diluted Shares Outstanding

Basic Net Income Per Share

Diluted Net Income Per Share

Average Total Assets
Average Equity

Annualized Return on Average Assets

Annualized Return on Average Equity

82,044,141

82,282,883

2.68

2.67

$10,486,423
978,107

1.43%

22.44%

41,439,631

41,857,498

2.23

2.21

$ 5,082,852
437,376

1.82%

21.10%

14,089,436

14,377,459

1.18

1.15

$ 1,652,459
117,727

1.00%

14.09%

12,889,510

13,454,007

1.41

1.35

$ 1,473,765
117,685

1.23%

15.41%

12,709,116

13,020,648

1.22

1.19

$ 1,499,875
131,265

1.03%

11.80%

Interest Income and Average Earning Asset Yield
We had average earning assets of $9.6 billion for the year ended December 31, 2002. We had aver-
age earning assets of $4.7 billion for the year ended December 31, 2001. We had average earning
assets of $1.6 billion for the year ended December 31, 2000. Our primary source of income for the
years ended December 31, 2002, 2001, and 2000 was interest income. A portion of our income
was generated by gains on the sales of our mortgage-backed securities. Our interest income was
$404.2 million for the year ended December 31, 2002, $263.1 million for the year ended December
31, 2001, and $109.8 million for the year ended December 31, 2000. Our yield on average earn-
ing assets was 4.22%, 5.62%, and 7.02% for the same respective periods. Our yield on average
earning assets decreased by 1.40% and our average earning asset balance increased by $4.9 bil-

lion for the year ended December 31, 2002, when compared to the prior year. Due to the increase
in the asset base resulting from the inflow of capital from our public offering and Equity Shelf
Program during the year ended December 31, 2002, interest income increased by $141.1 million.
Our yield on average earning assets decreased by 1.40% and our average earning asset balance
increased by $3.1 billion for the year ended December 31, 2001, when compared to the prior year.
Due to the increase in assets resulting from the three public offerings during the year ended
December 31, 2001, interest income increased by $153.3 million. The table below shows our aver-
age balance of cash equivalents and mortgage-backed securities, the yields we earned on each type
of earning assets, our yield on average earning assets and our interest income for the years ended
December 31, 2002, 2001, 2000, and 1999, and 1998 the four quarters in 2002.

Average Earning Asset Yield

(dollars in thousands)

For the Year Ended December 31, 2002

For the Year Ended December 31, 2001

For the Year Ended December 31, 2000

For the Year Ended December 31, 1999

For the Year Ended December 31, 1998
For the Quarter Ended December 31, 2002

For the Quarter Ended September 30, 2002

For the Quarter Ended June 30, 2002

For the Quarter Ended March 31, 2002

(ratios for the four quarters in 2002 are annualized)

Average
Cash
Equivalents

$ 2

$263

$221

$ 2
$ 2

$ 2

Average
Mortgage-
Backed
Securities

Average
Earning
Assets

$ 9,575,365

$ 9,575,367

$ 4,682,778

$ 1,564,228

$ 1,461,033

$ 1,461,789
$10,400,894

$10,661,228

$ 9,629,332

$ 7,610,006

$ 4,682,780

$ 1,564,491

$ 1,461,254

$ 1,461,791
$10,400,896

$10,661,230

$ 9,629,334

$ 7,610,008

Yield on
Average
Cash
Equivalents

1.14%

3.25%

4.18%

4.10%

4.32%
0.88%

1.14%

1.23%

1.29%

Yield on
Average
Mortgage-
Backed
Securities

4.22%

5.62%

7.02%

6.15%

6.16%
3.56%

4.10%

4.55%

4.88%

Yield on
Average
Earning
Assets

4.22%

5.62%

7.02%

6.15%

6.16%
3.56%

4.10%

4.55%

4.88%

Interest
Income

$404,165

$263,058

$109,750

$ 89,812

$ 89,986
$ 92,641

$109,201

$109,423

$ 92,900

The constant prepayment rate (“CPR”) on our mortgage-backed securities for the year ended
December 31, 2002 was 33%, for the year ended December 31, 2001 was 26%, and for the year
ended December 31, 2000 was 11%. CPR is an assumed rate of prepayment for our mortgage-
backed securities, expressed as an annual rate of prepayment relative to the outstanding principal
balance of our mortgage-backed securities. CPR does not purport to be either a historical descrip-
tion of the prepayment experience of our mortgage-backed securities or a prediction of the antici-
pated rate of prepayment of our mortgage-backed securities.

Principal prepayments had a negative effect on our earning asset yield for the years ended December
31, 2002, 2001, and 2000 because we adjust our rates of premium amortization and discount
accretion monthly based upon the effective yield method, which takes into consideration changes in
prepayment speeds.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Annaly Mortgage Management, Inc.

Interest Expense and the Cost of Funds
Our largest expense is the cost of borrowed funds, primarily through repurchase agreements. We
had average borrowed funds of $9.1 billion for the year ended December 31, 2002, $4.4 billion for
the year ended December 31, 2001, and $1.4 billion for the year ended December 31, 2000. Interest
expense totaled $191.8 million, $168.1 million, and $92.9 million for the years ended December 31,
2002, 2001, and 2000, respectively. Our average cost of funds was 2.10% for the year ended
December 31, 2002, 3.83% for the year ended December 31, 2001, and 6.41% for the year ended
December 31, 2000. The cost of funds rate decreased by 1.73% and the average borrowed funds
increased by $4.7 billion for the year ended December 31, 2002. Interest expense for the year ended
December 31, 2002 increased $23.7 million, from $168.1 million to $191.8 million. We increased
our asset base by raising approximately $379.5 million of additional capital in 2002. As a result, we
increased the amounts borrowed under repurchase agreements. Consequently, the increased inter-
est expense for the year 2002 is the result of our growth. The cost of funds rate decreased by 2.58%
and the average borrowed funds increased by $3.0 billion for the year ended December 31, 2001.
Interest expense for the year ended December 31, 2001 increased $75.2 million. We increased our
asset base by raising approximately $474.2 million of additional capital in 2001. Consequently, the
increased interest expense for the year 2001 is the result of our growth.

Average Cost of Funds

(dollars in thousands)

Average
Borrowed
Funds

Interest
Expense

For the Year Ended December 31, 2002

$ 9,128,933

$191,758

For the Year Ended December 31, 2001

$ 4,388,900

$168,055

For the Year Ended December 31, 2000

$ 1,449,999

$ 92,902

For the Year Ended December 31, 1999

$ 1,350,230

$ 69,846

For the Year Ended December 31, 1998
For the Quarter Ended December 31, 2002

$ 1,360,040
$ 10,097,676

$ 75,735
$ 49,874

For the Quarter Ended September 30, 2002 $10,122,840

$ 54,012

For the Quarter Ended June 30, 2002

$ 9,102,992

$ 47,860

For the Quarter Ended March 31, 2002

$ 7,192,222

$ 40,012

(Ratios for the four quarters in 2002 have been annualized)

Changes in our short-term cost of funds are expected to be closely correlated with changes in short-
term LIBOR, although we have chosen to extend the maturity on a portion of our liabilities to three
years. Our average cost of funds was 0.33% greater than average one-month LIBOR for the year
ended December 31, 2002, and 0.22% greater than average six-month LIBOR. Our average cost of
funds was 0.05% less than average one-month LIBOR for the year ended December 31, 2001, and
0.10% greater than average six-month LIBOR. Our average cost of funds was equal to average one-
month LIBOR for the year ended December 31, 2000, and 0.25% less than average six-month
LIBOR. During the year ended December 31, 2002, average one-month LIBOR, which was 1.77%,
was 0.11% less than average six-month LIBOR, which was 1.88%. During the year ended December
31, 2001, average one-month LIBOR, which was 3.88%, was 0.15% greater than average six-month
LIBOR, which was 3.73%. During the year ended December 31, 2000, average one-month LIBOR,
which was 6.41%, was 0.25% lower than average six-month LIBOR, which was 6.66%. The table
below shows our average borrowed funds and average cost of funds as compared to average one-
month and average six-month LIBOR for the years ended December 31, 2002, 2001, 2000, 1999,
1998, and the four quarters in 2002.

Average
Cost of
Funds

2.10%

3.83%

6.41%

5.17%

5.57%
1.98%

2.13%

2.10%

2.23%

Average One-
Month LIBOR

1.77%

3.88%

6.41%

5.25%

5.57%
1.57%

1.82%

1.85%

Average One-
Month LIBOR
Relative to
Average Six-
Month LIBOR

(0.11%)

0.15%

(0.25%)

(0.28%)

0.03%
0.02%

—

(0.26%)

(0.21%)

Average Cost
of Funds
Relative to
Average One-
Month LIBOR

0.33%

(0.05%)

—

(0.08%)

—
0.41%

0.31%

0.25%

0.38%

Average Cost
of Funds
Relative to
Average Six-
Month LIBOR

0.22%

0.10%

(0.25%)

(0.36%)

0.03%
0.43%

0.31%

(0.01%)

0.17%

Average
Six-Month
LIBOR

1.88%

3.73%

6.66%

5.53%

5.54%
1.55%

1.82%

2.11%

2.06%

Net Interest Income
Our net interest income, which equals interest income less interest expense, totaled $212.4 million
for the year ended December 31, 2002, $95.0 million for the year ended December 31, 2001, $16.8
million for the year ended December 31, 2000. Our net interest spread, which equals the yield on our
average assets for the period less the average cost of funds for the period, was 2.12% for the year
ended December 31, 2002, which is a 0.33% increase over the prior year. The net interest spread
for the year ended December 31, 2001 was 1.79%, as compared to 0.61% for the year ended
December 31, 2000. Our net interest income increased by $117.4 million for the year ended December
31, 2002 over the prior year. The increase in our balance sheet which resulted from our raising addi-
tional capital in 2002, along with the 0.33% increase in the interest rate spread. The substantial
increase in our balance sheet in 2001 which resulted from our raising additional capital in that year,

along with the 1.18% increase in the interest rate spread, caused the $78.2 million increase in net
interest income. Net interest margin, which equals net interest income divided by average interest
earning assets, was 2.03% for the year ended December 31, 2002, 1.87% for the year ended
December 31, 2001, and 1.02% for the year ended December 31, 2000. The principal reason that
net interest margin exceeded net interest spread is that average interest earning assets exceeded
average interest bearing liabilities. A portion of our assets is funded with equity rather than borrowings.

The table on the following page shows our interest income by earning asset type, average earning
assets by type, total interest income, interest expense, average repurchase agreements, average cost
of funds, and net interest income for the years ended December 31, 2002, 2001, 2000, 1999, 1998,
and the four quarters in 2002.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Annaly Mortgage Management, Inc.

Net Interest Income

For the Year Ended

Average
Mortgage-
Backed
Securities
Held

Interest
Income on
Mortgage-
Backed
Securities

Average
Cash
Equivalents

Total
Interest
Income

Yield on
Average
Interest
Earning
Assets

Average
Balance of
Repurchase
Agreements

Interest
Expense

Average
Cost of
Funds

Net
Interest
Income

December 31, 2002

$ 9,575,365

$404,165

$ 2

$404,165

4.22% $ 9,128,933

$191,758

2.10%

$212,407

For the Year Ended

December 31, 2001

$ 4,682,778

$263,058

$ 2

$263,058

5.62%

$ 4,388,900

$168,055

3.83%

$ 95,003

For the Year Ended

December 31, 2000

$ 1,564,228

$109,739

$263

$109,750

7.02%

$ 1,449,999

$ 92,902

6.41%

$ 16,848

For the Year Ended

December 31, 1999

$ 1,461,033

$ 89,801

$221

$ 89,812

6.15% $ 1,350,230

$ 69,846

5.17%

$ 19,966

For the Year Ended

December 31, 1998
For the Quarter Ended
December 31, 2002

For the Quarter Ended
September 30, 2002

For the Quarter Ended

$ 1,461,789

$ 89,986

$ 2

$ 89,986

6.16%

$ 1,360,040

$ 75,735

5.57%

$ 14,251

$10,400,894

$ 92,641

$ 2

$ 92,641

3.56% $ 10,097,676

$ 49,874

1.98%

$ 42,767

$10,661,228

$109,201

$ 2

$109,201

4.10% $10,122,840

$ 54,012

2.13%

$ 55,189

June 30, 2002

$ 9,629,332

$109,423

$ 2

$109,423

4.55% $ 9,102,992

$ 47,860

2.10%

$ 61,563

For the Quarter Ended
March 31, 2002

$ 7,610,006

$ 92,900

$ 2

$ 92,900

4.88% $ 7,192,222

$ 40,012

2.23%

$ 52,888

(Ratios for the four quarters in 2002 have been annualized)

Gains and Losses on Sales of Mortgage-Backed Securities
For the year ended December 31, 2002, we sold mortgage-backed securities with an aggregate
historical amortized cost of $2.1 billion for an aggregate gain of $21.1 million. For the year ended
December 31, 2001, we sold mortgage-backed securities with an aggregate historical amortized
cost of $1.2 billion for an aggregate gain of $4.6 million. For the year ended December 31, 2000,
we sold mortgage-backed securities with an aggregate historical amortized cost of $487.8 million
for an aggregate gain of $2.0 million. The gain on sale of assets for the year ended December 31,
2002 increased by $16.5 million over the prior year. We were able to take advantage to the appre-
ciation in our portfolio, while maintaining a book value of $12.77. The gain on sale of assets for the
year ended December 31, 2001 increased by $2.6 million over the prior year. Even though the gain
for the year 2001 increased over the prior year, as a percentage of total income it declined. We do
not expect to sell assets on a frequent basis, but may from time to time sell existing assets to move
into new assets, which our management believes might have higher risk-adjusted returns, or to
manage our balance sheet as part of our asset/liability management strategy.

Credit Losses
We have not experienced credit losses on our mortgage-backed securities to date. We have limited
our exposure to credit losses on our mortgage-backed securities by purchasing only securities,
issued or guaranteed by Federal Home Loan Mortgage Corporation, the Federal National Mortgage
Association, or the Government National Mortgage Association, which, although not rated, carry an
implied “AAA” rating. Under our capital investment policy, however, up to 25% of our securities could
be rated “BBB” or better or if unrated, securities we deem to be of a quality “BBB” or better.

General and Administrative Expenses
General and administrative expenses (“G&A”) were $14.0 million for the year ended December 31,
2002, $7.3 million for the year ended December 31, 2001, and $2.3 million for the year ended
December 31, 2000. G&A expenses as a percentage of average assets was 0.13%, 0.14%, and
0.14% for the years ended December 31, 2002, 2001, and 2000, respectively. G&A expense has
increased proportionately with our increased capital base. Increases in salaries were the primary
reason for the overall increase in G&A. In 2002, we paid aggregate salaries and bonuses of $10.8
million compared to $4.7 million in 2001. The staff increased to 15 employees by the end of 2002
from 10 employees at the end of 2001. G&A expenses in total were materially unchanged for the
years ended December 31, 2001, and 2000. The table on the following page shows our total G&A
expenses as compared to average assets and average equity for the years ended December 31,
2002, 2001, 2000, 1999, 1998, and the four quarters in 2002.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Annaly Mortgage Management, Inc.

G&A Expenses and Operating Expense Ratios

(dollars in thousands)

For the Year Ended December 31, 2002

For the Year Ended December 31, 2001

For the Year Ended December 31, 2000

For the Year Ended December 31, 1999

For the Year Ended December 31, 1998
For the Quarter Ended December 31, 2002

For the Quarter Ended September 30, 2002

For the Quarter Ended June 30, 2002

For the Quarter Ended March 31, 2002

(Ratios for the four quarters in 2002 have been annualized)

Total G&A
Expenses

$13,963

$ 7,311

$ 2,286

$ 2,281

$ 2,106
$ 3,904

$ 3,268

$ 3,536

$ 3,255

Total G&A
Expenses/Average
Assets

Total G&A
Expenses/Average
Equity

0.13%

0.14%

0.15%

0.14%
0.13%

0.12%

0.13%

0.14%

1.43%

1.67%

1.94%

1.60%
1.44%

1.22%

1.37%

1.55%

Net Income and Return on Average Equity
Our net income was $219.5 million for the year ended December 31, 2002, $92.3 million for the
year ended December 31, 2001, and $16.6 million for the year ended December 31, 2000. Our
return on average equity was 22.44% for the year ended December 31, 2002, 21.1% for the year
ended December 31, 2001, and 14.1% for the year ended December 31, 2000. Net income
increased by $127.2 million in the year 2002 over the previous year, due to the increased asset base
and the increase in the average interest rate spread. The increase in net income for the year ended
December 2001, as compared to the year ended December 31, 2000, is a direct result of growth

in our balance sheet following our three public offerings in 2001, as well as the favorable interest
rate environment during the year 2001.

We were able to take advantage of appreciation in asset value in 2001. The gain on sale of securi-
ties increased by $2.6 million for the year ended December 31, 2001, as compared to the prior year.
The table below shows our net interest income, gain on sale of mortgage-backed securities and G&A
expenses each as a percentage of average equity, and the return on average equity for the years
ended December 31, 2002, 2001, 2000, 1999, and 1998, and for the four quarters in 2002.

Components of Return on Average Equity

For the Year Ended December 31, 2002

For the Year Ended December 31, 2001

For the Year Ended December 31, 2000

For the Year Ended December 31, 1999

For the Year Ended December 31, 1998
For the Quarter Ended December 31, 2002
For the Quarter Ended September 30, 2002

For the Quarter Ended June 30, 2002

For the Quarter Ended March 31, 2002

(Ratios for the four quarters in 2002 have been annualized)

Financial Condition

Net Interest
Income/Average
Equity

Gain on Sale of
Mortgage-Backed
Equity

G&A
Expenses/Average
Equity

21.72%

14.31%

16.97%

10.85%
15.80%
20.68%

23.93%

25.24%

2.15%

1.05%

1.72%

0.38%

2.55%
4.27%
1.78%

0.52%

1.63%

1.43%

1.67%

1.94%

1.60%
1.44%
1.22%

1.37%

1.55%

Return on
Average
Equity

22.44%

21.10%

14.09%

15.41%

11.80%
18.63%
21.24%

23.08%

25.32%

Mortgage-Backed Securities
All of our mortgage-backed securities at December 31, 2002, 2001, and 2000 were adjustable-rate
or fixed-rate mortgage-backed securities backed by single-family mortgage loans. All of the mort-
gage assets underlying these mortgage-backed securities were secured with a first lien position on
the underlying single-family properties. All our mortgage-backed securities were FHLMC, FNMA or
GNMA mortgage pass-through certificates or CMOs, which carry an implied “AAA” rating. We mark-
to-market all of our earning assets at liquidation value.

We accrete discount balances as an increase in interest income over the life of discount mortgage-
backed securities and we amortize premium balances as a decrease in interest income over the life
of premium mortgage-backed securities. At December 31, 2002, 2001, and 2000, we had on our
balance sheet a total of $664,000, $2.1 million, and $989,000, respectively, of unamortized dis-

count (which is the difference between the remaining principal value and current historical amor-
tized cost of our mortgage-backed securities acquired at a price below principal value) and a total
of $274.6 million, $139.4 million, and $24.3 million, respectively, of unamortized premium (which
is the difference between the remaining principal value and the current historical amortized cost of
our mortgage-backed securities acquired at a price above principal value).

We received mortgage principal repayments of $4.7 billion for the year ended December 31, 2002,
$1.7 billion for the year ended December 31, 2001, and $168.5 million for the year ended December
31, 2000. The overall prepayment speed for the year ended December 31, 2002, 2001, 2000 was
33%, 27%, and 11%, respectively. During the quarter ended December 31, 2002, the prepayment
speeds were the highest in our history at 43%. The result was record returns of principal for the
year, relative to the asset size. The increase in prepayments in 2001 from 2000 was primarily

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Annaly Mortgage Management, Inc.

because we acquired more mortgage-backed securities following our three public offerings. Given
our current portfolio composition, if mortgage principal prepayment rates were to increase over the
life of our mortgage-backed securities, all other factors being equal, our net interest income would
decrease during the life of these mortgage-backed securities as we would be required to amortize
our net premium balance into income over a shorter time period. Similarly, if mortgage principal pre-
payment rates were to decrease over the life of our mortgage-backed securities, all other factors

being equal, our net interest income would increase during the life of these mortgage-backed secu-
rities as we would amortize our net premium balance over a longer time period.

The table below summarizes certain characteristics of our mortgage-backed securities at December
31, 2002, 2001, 2000, 1999, and 1998, September 30, 2002, June 30, 2002, and March 31, 2002.

Mortgage-Backed Securities

(dollars in thousands)

At December 31, 2002

At December 31, 2001

At December 31, 2000

At December 31, 1999

At December 31, 1998
At September 30, 2002

At June 30, 2002

At March 31, 2002

Principal Value

$11,202,384

$ 7,399,941

$ 1,967,967

$ 1,452,917

$ 1,502,414
$ 11,170,379

$10,833,374

$ 9,982,678

Net
Premium

$273,963

$137,269

$ 23,296

$ 22,444

$ 24,278
$ 244,777

$224,114

$193,048

Amortized
Cost

Amortized
Cost/Principal
Value

Estimated Fair
Value

$11,476,347

102.45%

$11,551,857

$ 7,537,210

$ 1,991,263

$ 1,475,361

$ 1,526,692
$11,415,156

$ 11,057,488

$ 10,175,726

101.86%

101.18%

101.54%

101.62%
102.19%

102.07%

101.93%

$ 7,575,379

$ 1,978,219

$ 1,437,793

$ 1,520,289
$11,489,538

$ 11,124,771

$10,206,228

Estimated Fair
Value/Principal
Value

103.12%

102.37%

100.52%

98.96%

101.19%
102.86%

102.69%

102.24%

Weighted
Average
Yield

3.25%

4.41%

7.09%

6.77%

6.43%
3.67%

3.90%

4.31%

The tables below set forth certain characteristics of our mortgage-backed securities. The index level for adjustable-rate mortgage-backed securities is the weighted average rate of the various short-term
interest rate indices, which determine the coupon rate.

Adjustable-Rate Mortgage-Backed Security Characteristics

(dollars in thousands)

At December 31, 2002

At December 31, 2001

At December 31, 2000

At December 31, 1999
At December 31, 1998
At September 30, 2002

At June 30, 2002

At March 31, 2002

Principal
Value

$ 7,007,062

$5,793,250

$1,454,356

$ 951,839
$1,030,654
$ 7,583,147

$ 7,939,126

$ 7,248,832

Weighted
Average
Coupon
Rate

4.10%

5.90%

7.61%

7.33%
6.84%
4.37%

4.57%

4.94%

Weighted
Average
Index Level

Weighted
Average Net
Margin

2.51%

3.95%

5.76%

5.84%
5.18%
2.80%

2.96%

3.25%

1.59%

1.95%

1.85%

1.49%
1.66%
1.57%

1.61%

1.69%

Weighted
Average Term
to Next
Adjustment

11 months

24 months

15 months

11 months
12 months
10 months

12 months

16 months

Weighted
Average
Lifetime Cap

10.37%

11.49%

11.47%

10.30%
10.63%
10.36%

10.46%

10.73%

Weighted
Average
Asset
Yield

2.33%

3.87%

7.24%

7.64%
6.42%
2.90%

3.17%

3.52%

Fixed-Rate Mortgage-Backed Security Characteristics

(dollars in thousands)

At December 31, 2002

At December 31, 2001

At December 31, 2000

At December 31, 1999

At December 31, 1998
At September 30, 2002

At June 30, 2002

At March 31, 2002

Principal
Value

$4,195,322

$1,606,691

$513,611

$501,078

$471,760
$3,587,232

$2,894,248

$2,733,846

Weighted
Average
Coupon Rate

6.76%

6.92%

6.62%

6.58%

6.55%
6.95%

7.09%

7.01%

Weighted
Average
Asset Yield

4.78%

6.33%

6.68%

7.01%

6.47%
5.29%

5.91%

6.40%

Principal Value
at Period End as
% of Total
Mortgage-
Backed
Securities

62.55%

78.29%

73.90%

65.51%
68.60%
67.89%

73.28%

72.61%

Principal Value as
% of Total
Mortgage-Backed
Securities

37.45%

21.71%

26.10%

34.49%

31.40%
32.11%

26.72%

27.39%

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Annaly Mortgage Management, Inc.

At December 31, 2002 we held mortgage-backed securities with coupons linked to the one-year,
two-year, three-year, and five-year Treasury indices, one-month and one-year LIBOR, six-month
Auction Average, twelve-month moving average and the six-month CD rate. At December 31, 2001

we held mortgage-backed securities with coupons linked to the one-year, three-year, and five-year
Treasury indices, one-month and six-month LIBOR, six-month Auction Average, twelve-month moving
average and the six-month CD rate.

Adjustable-Rate Mortgage-Backed Securities by Index

December 31, 2002

Weighted Average Adjustment Frequency

Weighted Average Term to Next Adjustment

Weighted Average Annual Period Cap

Weighted Average Lifetime Cap at

December 31, 2002

Mortgage Principal Value as Percentage
of Mortgage-Backed Securities at
December 31, 2002

One-Month
LIBOR

1mo.

None

1-Year
LIBOR

12 mo.

41 mo.

2.00%

Six-Month
Auction
Average

6 mo.

2 mo.

2.00%

12-Month
Moving
Average

1 mo.

None

Six-Month
CD Rate

6 mo.

2 mo.

1.00%

1-Year
Treasury
Index

2-Year
Treasury
Index

3-Year
Treasury
Index

5-Year
Treasury
Index

12 mo.

22 mo.

1.93%

24 mo.

10 mo.

2.00%

36 mo.

20 mo.

2.00%

60 mo.

31 mo.

2.00%

9.01%

11.31%

13.00%

10.37%

11.60%

11.83%

11.93%

12.83%

12.57%

32.43%

0.33%

0.03%

0.58%

0.14%

27.67%

0.03%

0.92%

0.42%

Adjustable-Rate Mortgage-Backed Securities by Index

December 31, 2001

Weighted Average Adjustment Frequency

Weighted Average Term to Next Adjustment

Weighted Average Annual Period Cap

One-Month
LIBOR

Six-Month
LIBOR

1mo.

None

6 mo.

55 mo.

2.00%

Six-Month
Auction
Average

6 mo.

2 mo.

0.50%

12-Month
Moving
Average

12 mo.

11 mo.

None

Six-Month
CD Rate

6 mo.

2 mo.

1.00%

1-Year
Treasury
Index

12 mo.

33 mo.

1.98%

3-Year
Treasury
Index

36 mo.

16 mo.

2.00%

5-Year
Treasury
Index

60 mo.

33 mo.

1.96%

Weighted Average Lifetime Cap at December 31, 2001

9.09%

11.50%

12.53%

10.63%

11.40%

12.22%

13.08%

12.92%

Mortgage Principal Value as Percentage of Mortgage-Backed

Securities at December 31, 2001

18.32%

0.13%

0.12%

1.06%

0.22%

56.20%

1.35%

0.89%

Adjustable-Rate Mortgage-Backed Securities by Index

December 31, 2000

Weighted Average Adjustment Frequency

Weighted Average Term to Next Adjustment

Weighted Average Annual Period Cap

Weighted Average Lifetime Cap at December 31, 2000

Mortgage Principal Value as Percentage of Mortgage-Backed

Securities at December 31, 2000

One-Month
LIBOR

Six-Month
CD Rate

1 mo.

None

6 mo.

2 mo.

1.00%

1-Year
Treasury
Index

12 mo.

23 mo.

1.98%

3-Year
Treasury
Index

36 mo.

20 mo.

2.00%

5-Year
Treasury
Index

60 mo.

40 mo.

1.76%

9.11%

11.37%

12.61%

13.24%

12.42%

24.08%

1.21%

44.52%

2.97%

1.12%

Borrowings
To date, our debt has consisted entirely of borrowings collateralized by a pledge of our mortgage-
backed securities. These borrowings appear on our balance sheet as repurchase agreements. At
December 31, 2002, we had established uncommitted borrowing facilities in this market with 25
lenders in amounts, which we believe, are in excess of our needs. We believe that we have used
approximately 57% of our uncommitted borrowing line. All of our mortgage-backed securities are
currently accepted as collateral for these borrowings. However, we limit our borrowings, and thus our
potential asset growth, in order to maintain unused borrowing capacity and thus increase the liquidity
and strength of our balance sheet. At December 31, 2002, we had collateral in excess of the required
haircut on our repurchase agreements in the amount of $677.7 million.

For the year ended December 31, 2002, the term to maturity of our borrowings ranged from one
day to three years, with a weighted average original term to maturity of 166 days at December 31,
2002. For the years ended December 31, 2001 and 2000, the term to maturity of our borrowings
ranged from one day to three years, with a weighted average original term to maturity of 119 days
at December 31, 2001, and 56 days at December 31, 2000. At December 31, 2002, the weighted
average cost of funds for all of our borrowings was 1.72% and the weighted average term to next
rate adjustment was 124 days. At December 31, 2001, the weighted average cost of funds for all
of our borrowings was 2.18% and the weighted average term to next rate adjustment was 85 days.
At December 31, 2000, the weighted average cost of funds for all of our borrowings was 6.55%
and the weighted average term to next rate adjustment was 29 days. At December 31, 2001, the
weighted average original term increased because of the use of three year repurchase agreements.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Annaly Mortgage Management, Inc.

Liquidity
Liquidity, which is our ability to turn non-cash assets into cash, allows us to purchase additional
mortgage-backed securities and to pledge additional assets to secure existing borrowings should the
value of our pledged assets decline. Potential immediate sources of liquidity for us include cash
balances and unused borrowing capacity. Unused borrowing capacity will vary over time as the
market value of our mortgage-backed securities varies. Our balance sheet also generates liquidity
on an on-going basis through mortgage principal repayments and net earnings held prior to payment
as dividends. Should our needs ever exceed these on-going sources of liquidity plus the immediate
sources of liquidity discussed above, we believe that our mortgage-backed securities could in most
circumstances be sold to raise cash. The maintenance of liquidity is one of the goals of our capital
investment policy. Under this policy, we limit asset growth in order to preserve unused borrowing
capacity for liquidity management purposes.

Stockholders’ Equity
We use “available-for-sale” treatment for our mortgage-backed securities; we carry these assets on
our balance sheet at estimated market value rather than historical amortized cost. Based upon this
“available-for-sale” treatment, our equity base at December 31, 2002 was $1.1 billion, or $12.77
per share. If we had used historical amortized cost accounting, our equity base at December 31,
2002 would have been $1.0 billion, or $11.88 per share. Our equity base at December 31, 2001
was $667.4 million, or $11.15 per share. If we had used historical amortized cost accounting, our
equity base at December 31, 2001 would have been $629.2 million, or $10.52 per share. Our equity
base at December 31, 2000 was $135.6 million, or $9.34 per share. If we had used historical
amortized cost accounting, our equity base at December 31, 2000 would have been $148.6 million,
or $10.24 per share.

Unrealized Gains and Losses

Through the Equity Shelf Program, in which we sell shares from time-to-time at market prices, we
raised approximately $28.1 million in net proceeds and issued 1,484,100 shares during 2002. Also
in 2002, 165,480 shares were purchased through our dividend reinvestment and share purchase
plan, totaling approximately $3.0 million. We also completed an offering of common stock in the
first quarter issuing 23,000,000 shares, with aggregate net proceeds of approximately $347.4 million.
We completed three public offerings during the year ended December 31, 2001 in which we issued
a total of 45,060,100 shares of common stock, and received aggregate net proceeds of
approximately $474.2 million.

With our “available-for-sale” accounting treatment, unrealized fluctuations in market values of assets
do not impact our GAAP or taxable income but rather are reflected on our balance sheet by changing
the carrying value of the asset and stockholders’ equity under “Accumulated Other Comprehensive
Income (Loss).” By accounting for our assets in this manner, we hope to provide useful information
to stockholders and creditors and to preserve flexibility to sell assets in the future without having to
change accounting methods.

As a result of this mark-to-market accounting treatment, our book value and book value per share
are likely to fluctuate far more than if we used historical amortized cost accounting. As a result,
comparisons with companies that use historical cost accounting for some or all of their balance sheet
may not be meaningful.

The table below shows unrealized gains and losses on the mortgage-backed securities in our portfolio.

(dollars in thousands)

2002

2001

Unrealized Gain

Unrealized Loss
Net Unrealized Gain (Loss)

Net Unrealized Gain (Loss) as % of Mortgage-

Backed Securities Principal Value

Net Unrealized Gain (Loss) as % of Mortgage-

Backed Securities Amortized Cost

$ 90,507

(14,997)
$ 75,510

$ 53,935

(15,766)
$ 38,169

At December 31,
2000

$ 3,020

(16,064)
($13,044)

1999

1998

$ 1,531

(39,100)
($37,569)

$ 3,302

(9,706)
($6,404)

0.67%

0.52%

0.51%

(0.66%)

(2.59%)

(0.43%)

(0.66%)

(2.54%)

(0.42%)

Unrealized changes in the estimated net market value of mortgage-backed securities have one direct
effect on our potential earnings and dividends: positive marked-to-market changes increase our
equity base and allow us to increase our borrowing capacity while negative changes tend to limit
borrowing capacity under our capital investment policy. A very large negative change in the net
market value of our mortgage-backed securities might impair our liquidity position, requiring us to
sell assets with the likely result of realized losses upon sale. The net unrealized gains (loss) on
available for sale securities was $75.5 million, or 0.67% or the amortized cost of our mortgage-
backed securities as of December 31, 2002, $38.2 million, or 0.51% or the amortized cost of our

mortgage-backed securities as of December 31, 2001, and $13.0 million, or 0.66% of the amortized
cost of our mortgage-backed securities at December 31, 2000.

The table on the following page shows our equity capital base as reported and on a historical amor-
tized cost basis at December 31, 2002, 2001, 2000, 1999, and 1998, and September 30, 2002,
June 30, 2002 and March 31,2002. Issuances of common stock, the level of earnings as compared
to dividends declared, and other factors influence our historical cost equity capital base. The reported
equity capital base is influenced by these factors plus changes in the “Net Unrealized Losses on
Assets Available for Sale” account.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Annaly Mortgage Management, Inc.

Stockholders’ Equity

(dollars in thousands, except per share data)

At December 31, 2002

At December 31, 2001

At December 31, 2000

At December 31, 1999

At December 31, 1998
At September 30, 2002

At June 30, 2002

At March 31, 2002

Historical
Amortized Cost
Equity Base

$1,004,555

$ 629,188

$ 148,686

$ 140,841

$ 132,275
$1,010,623

$ 982,348

$ 978,186

Net Unrealized
Gains on Assets
Available for Sale

$ 75,511

$ 38,169

($13,044)

($37,569)

($ 6,404)
$ 74,382

$ 67,283

$ 30,502

Reported
Equity Base
(Book Value)

Historical
Amortized Cost
Equity Per Share

Reported Equity
(Book Value)
Per Share

$1,080,066

$ 667,357

$ 135,642

$ 103,272

$ 125,871
$1,085,005

$1,049,631

$1,008,688

$11.88

$10.52

$10.24

$10.37

$10.46
$11.96

$11.84

$11.80

$12.77

$11.15

$ 9.34

$ 7.60

$ 9.95
$12.84

$12.65

$12.17

Leverage
Our debt-to-equity ratio at December 31, 2002, 2001, and 2000 was 9.4:1, 9.5:1, and 12.0:1,
respectively. We generally expect to maintain a ratio of debt-to-equity of between 8:1 and 12:1,
although the ratio may vary from this range from time-to-time based upon various factors, including
our management’s opinion of the level of risk of our assets and liabilities, our liquidity position, our
level of unused borrowing capacity and over-collateralization levels required by lenders when we
pledge assets to secure borrowings.

Inflation
Virtually all of our assets and liabilities are financial in nature. As a result, interest rates and other
factors drive our performance far more than does inflation. Changes in interest rates do not neces-
sarily correlate with inflation rates or changes in inflation rates. Our financial statements are pre-
pared in accordance with GAAP and our dividends based upon our net income as calculated for tax
purposes; in each case, our activities and balance sheet are measured with reference to historical
cost or fair market value without considering inflation.

Our target debt-to-equity ratio is determined under our capital investment policy. Should our actual
debt-to-equity ratio increase above the target level due to asset acquisition or market value fluctu-
ations in assets, we will cease to acquire new assets. Our management will, at that time, present a
plan to our board of directors to bring us back to our target debt-to-equity ratio; in many
circumstances, this would be accomplished over time by the monthly reduction of the balance of
our mortgage-backed securities through principal repayments.

Asset/Liability Management and Effect of Changes in Interest Rates
We continually review our asset/liability management strategy with respect to interest rate risk,
mortgage prepayment risk, credit risk and the related issues of capital adequacy and liquidity. Our
goal is to provide attractive risk-adjusted stockholder returns while maintaining what we believe is
a strong balance sheet.

We seek to manage the extent to which our net income changes as a function of changes in interest
rates by matching adjustable-rate assets with variable-rate borrowings. In addition, although we have
not done so to date, we may seek to mitigate the potential impact on net income of periodic and
lifetime coupon adjustment restrictions in our portfolio of mortgage-backed securities by entering
into interest rate agreements such as interest rate caps and interest rate swaps.

Changes in interest rates may also affect the rate of mortgage principal prepayments and, as a result,
prepayments on mortgage-backed securities. We will seek to mitigate the effect of changes in the
mortgage principal repayment rate by balancing assets we purchase at a premium with assets we
purchase at a discount. To date, the aggregate premium exceeds the aggregate discount on our mort-
gage-backed securities. As a result, prepayments, which result in the expensing of unamortized pre-
mium, will reduce our net income compared to what net income would be absent such prepayments.

Other Matters
We calculate that our qualified Real Estate Investment Trust (“REIT”) assets, as defined in the Internal
Revenue Code, are 100.0% of our total assets at December 31, 2002, 2001, and 2000 as compared
to the Internal Revenue Code requirement that at least 75% of our total assets be qualified REIT
assets. We also calculate that 100% of our revenue qualifies for the 75% source of income test,
and 100% of its revenue qualifies for the 95% source of income test, under the REIT rules for the
years ended December 31, 2002, 2001, and 2000. We also met all REIT requirements regarding
the ownership of our common stock and the distribution of our net income. Therefore, as of
December 31, 2002, 2001, and 2000 we believe that we qualified as a REIT under the Internal
Revenue Code.

We at all times intend to conduct our business so as not to become regulated as an investment
company under the Investment Company Act of 1940, as amended (the “Investment Company Act”).
If we were to become regulated as an investment company, then our use of leverage would be sub-
stantially reduced. 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” (qualifying interests). Under current interpretation of the staff of the SEC, in order to qualify
for this exemption, we must maintain at least 55% of our assets directly in qualifying interests. In
addition, unless certain mortgage securitites represent all the certificates issued with respect to an
underlying pool of mortgages, the mortgage-backed securities may be treated as securities separate
from the underlying mortgage loans and, thus, may not be considered qualifying interests for
purposes of the 55% requirement. We calculate that as of December 31, 2002, 2001, and 2000
we were in compliance with this requirement.

Independent Auditors’ Report

Annaly Mortgage Management, Inc.

19
19

To the Board of Directors and Stockholders of
Annaly Mortgage Management, Inc.

We have audited the accompanying statements of financial condition of Annaly Mortgage
Management, Inc. (the “Company”) as of December 31, 2002 and 2001, and the related statements
of operations, changes in stockholders’ equity, and cash flows for each of the three years in the
period ended December 31, 2002. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements based on our
audits.

We conducted our audits in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the finan-
cial statements. An audit also includes assessing the accounting principles used and significant esti-
mates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material respects, the financial posi-
tion of the Company at December 31, 2002 and 2001, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.

New York, New York
February 26, 2003

Statements of Financial Condition

(dollars in thousands)

Annaly Mortgage Management, Inc.

December 31,

Assets

Cash and Cash Equivalents

Mortgage-Backed Securities — At fair value

Receivable for Mortgage-Backed Securities Sold
Accrued Interest Receivable

Other Assets

Total Assets

Liabilities and Stockholders’ Equity

Liabilities:

Repurchase agreements

Payable for Mortgage-Backed Securities purchased

Accrued interest payable

Dividends payable

Other liabilities
Accounts payable

Total liabilities

Stockholders’ Equity:

Common stock: par value $.01 per share;

500,000,000 authorized, 84,569,206 and 59,826,975
shares issued and outstanding, respectively

Additional paid-in capital

Accumulated other comprehensive income

Retained earnings

Total stockholders’ equity

Total Liabilities and Stockholders’ Equity

See notes to financial statements.

2002

2001

726

11,551,857

55,954
49,707

840

$11,659,084

$10,163,174

338,691

14,935

57,499

2,812
1,907

10,579,018

846

1,003,200

75,511

509

1,080,066

429

7,575,379

94,503
46,804

199

$7,717,314

$6,367,710

627,064

16,043

35,896

2,010
1,234

7,049,957

598

623,986

38,169

4,604

667,357

$11,659,084

$ 7,717,314

Statements of Operations

(dollars in thousands, except for per share data)

Years Ended December 31,

Interest Income:

Annaly Mortgage Management, Inc.

2002

2001

2000

Mortgage-Backed Securities and cash equivalents

404,165

263,058

109,751

Interest Expense:

Repurchase agreements

Net Interest Income

Gain on Sale of Mortgage-Backed Securities

General and Administrative Expenses

Net Income

Other Comprehensive Gain:

Unrealized gain on available-for-sale securities

Less reclassification adjustment for gains included in net income

Other comprehensive gain

Total Comprehensive Income

Net Income Per Share:

Basic

Diluted

Average Number of Shares Outstanding:

Basic

Diluted

See notes to financial statements.

191,758

212,407

21,063

13,963

219,507

58,405

(21,063)

37,342

168,055

95,003

4,586

7,311

92,278

55,800

(4,586)

51,214

92,902

16,849

2,025

2,287

16,587

26,549

(2,025)

24,524

256,849

143,492

41,111

2.68

2.67

2.23

2.21

1.18

1.15

82,044,141

82,282,883

41,439,631

41,857,498

14,089,436

14,377,459

Statements of Stockholders’ Equity

(dollars in thousands)

Annaly Mortgage Management, Inc.

Balance, December 31, 1999

Net income

Other comprehensive income:

Unrealized net gains on securities,

net of reclassification adjustment

Comprehensive income

Exercise of stock options

Proceeds from direct purchase

Dividends declared for the year ended
December 31, 2000, $1.15 per share

Balance, December 31, 2000

Net income

Other comprehensive income:

Unrealized net gains on securities,

net of reclassification adjustment

Comprehensive income

Exercise of stock options
Shares exchanged upon exercise of stock options

Proceeds from direct purchase

Proceeds from secondary offerings

Dividends declared for the year ended
December 31, 2001, $1.75 per share

Balance, December 31, 2001

Net income

Other comprehensive income:

Unrealized net gains on securities,

net of reclassification adjustment

Comprehensive income

Exercise of stock options

Shares exchanged upon exercise of stock options

Proceeds from direct purchase

Proceeds from secondary offerings

Proceeds from equity shelf program

Dividends declared for the year ended
December 31, 2002, $2.67 per share

Balance, December 31, 2002

See notes to financial statements

Comprehensive
Income

$ 16,587

24,524

$ 41,111

$ 92,278

51,214

$143,492

$219,507

37,342

$256,849

Common
Stock
Par Value

135

—

144

—

Additional
Paid-in
Capital

140,263

—

198

7,384

—

147,845

—

2,972
(587)

142

451

473,614

—

$598
—

—

230
15

—

$623,986
—

—

1,089

(76)

3,007

347,106
28,088

—

Retained
Earnings

443

16,587

—

(16,333)

697

92,278

—

(88,371)

4,604
219,507

—

(223,602)

Accumulated
Other
Comprehensive
Income (Loss)

Total

(37,569)

103,272

—

24,524

—

41,111

198

7,393

(16,333)

(13,045)

135,641

—

51,214

—

—
—

—

38,169
—

37,342

—

143,492

2,975
(587)

142

474,065

(88,371)

667,357

256,849

1,090

(76)

3,009

347,336
28,103

(223,602)

$846

$1,003,200

$509

$75,511

$1,080,066

Statement of Cash Flows

(dollars in thousands)

Annaly Mortgage Management, Inc.

Years Ended December 31,

2002

2001

2000

219,507

92,278

16,587

Cash Flows From Operating Activities:

Net income

Adjustments to reconcile net income to

net cash provided by operating activities:

Amortization of mortgage premiums and discounts, net

Market value adjustment on long term repurchase agreement

Gain on sale of Mortgage-Backed Securities

Stock option expense

Increase in accrued interest receivable

(Increase) decrease in other assets

(Decrease) increase in accrued interest payable

Increase in other liabilities and accounts payable

Net cash provided by operating activities

Cash Flows From Investing Activities:

Purchase of Mortgage-Backed Securities

Proceeds from sale of Mortgage-Backed Securities

Principal payments on Mortgage-Backed Securities

Net cash used in investing activities

Cash Flows From Financing Activities:

Proceeds from repurchase agreements

Principal payments on repurchase agreements

Proceeds from exercise of stock options

Proceeds from direct equity offering

Proceeds from secondary offerings

Dividends paid

Net cash provided by financing activities

Net Increase in Cash and Cash Equivalents

Cash and Cash Equivalents, Beginning of Year

106,198

1,204
(21,063)
240

(2,903)

(641)

(1,109)

673

302,106

(11,079,561)

2,076,800

4,728,666
(4,274,095)

87,463,924

(83,668,862)

774

3,010

375,439

(201,999)

3,972,286

297

429

726

36,865

986

(4,587)

790

(35,301)

7,729

950

99,771

(8,194,215)

1,248,812

1,685,874
(5,259,529)

49,773,650

(45,033,275)

1,597

142

474,065

(56,105)

5,160,074

316

113

429

2,647

—

(2,025)

—

(4,645)

(62)

1,631

120

14,253

(952,738)

489,810

168,517
(294,411)

14,196,953

(13,906,890)

199

7,393

(17,456)

280,199

113

91,270

(24,524)

3,631

Cash and Cash Equivalents, End of Year

Supplemental Disclosure of Cash Flow Information:

Interest paid

Noncash Financing Activities:

Net change in unrealized loss on available-for-sale securities

Dividends declared, not yet paid

See notes to financial statements.

190,650

160,327

37,342

57,499

51,214

35,896

24
24

Notes to Financial Statements
Notes to Financial Statements
Notes to Financial Statements

Annaly Mortgage Management, Inc.
Annaly Mortgage Management, Inc.

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Annaly Mortgage Management, Inc. (the “Company”) was incorporated in Maryland on November 25,
1996. The Company commenced its operations of purchasing and managing an investment portfo-
lio of Mortgage-Backed Securities on February 18, 1997, upon receipt of the net proceeds from the
private placement of equity capital. An initial public offering was completed on October 14, 1997.

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

Cash and Cash Equivalents– Cash and cash equivalents includes cash on hand and money market
funds. The carrying amount of cash equivalents approximates their value.

Mortgage-Backed Securities– The Company invests primarily in mortgage pass-through certificates,
collateralized mortgage obligations and other mortgage-backed securities representing interests in
or obligations backed by pools of mortgage loans (collectively, “Mortgage-Backed Securities”).

Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt
and Equity Securities, requires the Company to classify its investments as either trading investments,
available-for-sale investments or held-to-maturity investments. Although the Company generally
intends to hold most of its Mortgage-Backed Securities until maturity, it may, from time to time, sell
any of its Mortgage-Backed Securities as part of its overall management of its balance sheet.
Accordingly, this flexibility requires the Company to classify all of its Mortgage-Backed Securities as
available-for-sale. All assets classified as available-for-sale are reported at fair value, based on mar-
ket prices provided by certain dealers who make markets in these financial instruments, with unre-
alized gains and losses excluded from earnings and reported as a separate component of stock-
holders’ equity.

Unrealized losses on Mortgage-Backed Securities that are considered other than temporary, as
measured by the amount of decline in fair value attributable to factors other than temporary, are
recognized in income and the cost basis of the Mortgage-Backed Securities is adjusted. There were
no such adjustments for the years ended December 31, 2002, 2001, and 2000.

Interest income is accrued based on the outstanding principal amount of the Mortgage-Backed
Securities and their contractual terms. Premiums and discounts associated with the purchase of the
Mortgage-Backed Securities are amortized into interest income over the lives of the securities using
the interest method.

Mortgage-Backed Securities transactions are recorded on the trade date. Purchases of newly issued
securities are recorded when all significant uncertainties regarding the characteristics of the secu-
rities are removed, generally shortly before settlement date. Realized gains and losses on Mortgage-
Backed Securities transactions are determined on the specific identification basis.

Credit Risk– At December 31, 2002 and 2001, the Company has limited its exposure to credit loss-
es on its portfolio of Mortgage-Backed Securities by only purchasing securities issued by Federal
Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”), or
Government National Mortgage Association (“GNMA”). The payment of principal and interest on the
FHLMC and FNMA Mortgage-Backed Securities are guaranteed by those respective agencies and
the payment of principal and interest on the GNMA Mortgage-Backed Securities are backed by the
full-faith-and-credit of the U.S. government. At December 31, 2002 and 2001, all of the Company’s
Mortgage-Backed Securities have an implied “AAA” rating.

Repurchase Agreements– The Company finances the acquisition of its Mortgage-Backed Securities
through the use of repurchase agreements. Repurchase Agreements are treated as collateralized
financing transactions and are carried at their contractual amounts, including accrued interest, as
specified in the repurchase agreements. Accrued interest is recorded as a seperate line item.

Income Taxes– The Company has elected to be taxed as a Real Estate Investment Trust (“REIT”) and
intends to comply with the provisions of the Internal Revenue Code of 1986, as amended (the
“Code”) with respect thereto. Accordingly, the Company will not be subjected to federal income tax
to the extent of its distributions to shareholders and as long as certain asset, income and stock own-
ership tests are met.

Use of Estimates– The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

New Accounting Pronouncement– In December 2002, the FASB issued Statement of Financial
Accounting Standard (SFAS) No. 148, “Accounting for Stock-Based Compensation-Transition and
Disclosures, an Amendment of FASB Statement No. 123.” This Statement provides alternative meth-
ods of transition for companies who voluntarily change to the fair value-based method of accounting
for stock-based employee compensation in accordance with SFAS No. 123, “Accounting for Stock-
Based Compensation.” (SFAS 123). SFAS No. 148 does not permit the use of the original SFAS No.
123 prospective method of transition for changes to the fair value based method made in fiscal years
beginning after December 15, 2003. The Statement also requires prominent disclosures in both annu-
al and interim financial statements about the method of accounting for stock-based compensation
and the effect of the method used on reported results. This Statement is effective upon issuance

2. MORTGAGE-BACKED SECURITIES
The following table pertains to the Company’s Mortgage-Backed Securities classified as available-
for-sale as of December 31, 2002, which are carried at their fair value:

(dollars in thousands)

Mortgage-Backed Securities, gross

Unamortized discount

Unamortized premium
Amortized cost

Gross unrealized gains

Gross unrealized losses

Estimated fair value

Adjustable Rate

Fixed Rate

Total

Federal
Home Loan
Mortgage
Corporation

$ 5,120,929

(544)

105,872
5,226,257

31,731

(9,554)

$ 5,248,434

Amortized Cost

$ 7,144,741

4,331,606

$11,476,347

Federal
National
Mortgage
Association

$5,860,987

(120)

164,071
6,024,938

58,239

(5,318)

$ 6,077,859

Gross Unrealized Gain

$ 35,349

55,158

$ 90,507

Government
National
Mortgage
Association

$220,468

—

4,684
225,152

537

(125)

Total
Mortgage-
Backed
Securities

$11,202,384

(664)

274,627
11,476,347

90,507

(14,997)

$225,564

$11,551,857

Gross Unrealized Loss

$(12,424)

(2,573)

$(14,997)

Estimated Fair Value

$ 7,167,666

4,384,191

$11,551,857

Notes to Financial Statements

Annaly Mortgage Management, Inc.

The following table pertains to the Company’s Mortgage-Backed Securities classified as available-
for-sale as of December 31, 2001, which are carried at their fair value:

(dollars in thousands)

Federal
Home Loan
Mortgage
Corporation

Federal
National
Mortgage
Association

Government
National
Mortgage
Association

Total
Mortgage-
Backed
Securities

Mortgage-Backed Securities, gross

$ 4,426,195

$2,894,026

$ 79,720

$ 7,399,941

Unamortized discount

Unamortized premium

Amortized cost

Gross unrealized gains

Gross unrealized losses

Estimated fair value

Adjustable Rate

Fixed Rate

Total

(1,346)

83,775

4,508,624

32,636

(7,986)

(755)

54,118

2,947,389

21,224

(7,314)

—

1,477

81,197

(466)

(2,101)

139,370

7,537,210

53,935

(15,766)

$ 4,533,274

$2,961,299

$ 80,806

$ 7,575,379

Amortized Cost

$5,908,236

1,628,974

$ 7,537,210

Gross Unrealized Gain

$ 44,469

9,466

53,935

Gross Unrealized Loss

$(10,049)

(5,717)

$ (15,766)

Estimated Fair Value

$5,942,656

1,632,723

$ 7,575,379

The adjustable rate Mortgage-Backed Securities are limited by periodic caps (generally interest rate
adjustments are limited to no more than 1% every six months) and lifetime caps. The weighted
average lifetime cap was 8.8% and 11.5% at December 31, 2002 and 2001, respectively.

During the year ended December 31, 2002, the Company realized $21.1 million in gains from sales
of Mortgage-Backed Securities. During the year ended December 31, 2001, the Company realized
$6.8 million in gains from sales of Mortgage-Backed Securities. Losses totaled $2.2 million for the
year ended December 31, 2001. During the year ended December 31, 2000, the Company realized
$2.0 million in gains from sales of Mortgage-Backed Securities.

3. REPURCHASE AGREEMENTS
The Company had outstanding $10,163,174,000 and $6,367,710,000 of repurchase agreements with
a weighted average borrowing rate of 1.72% and 2.18% and a weighted average remaining matu-
rity of 124 days and 85 days as of December 31, 2002 and 2001, respectively. At December 31,
2002 and 2001, Mortgage-Backed Securities pledged had an estimated fair value of
$10,517,558,000 and $6,564,250,000, respectively.

At December 31, 2002 and 2001 the repurchase agreements had the following remaining maturities:

(dollars in thousands)

Within 30 days

30 to 59 days

60 to 89 days

90 to 119 days

Over 120 days

2002

$ 7,778,003

816,906

104,500

—
1,463,765

$10,163,174

2001

$5,380,006

206,947

66,202

65,037

649,518

$ 6,367,710

4. OTHER LIABILITIES
In 2001, the Company entered into a repurchase agreement maturing in July 2004, at which time,
the repurchase agreement gives the buyer the right to extend, in whole or in part, in three-month
increments up to July 2006. The repurchase agreement has a principal value of $100,000,000. The
Company accounts for the extension option as a separate interest rate floor liability carried at fair
value. The initial fair value of $1,200,000 allocated to the extension option resulted in a similar dis-
count on the repurchase agreement borrowings that is being amortized over the initial term of 3
years using the effective yield method. At December 31, 2002, the fair value of this interest rate
floor was a $2,812,000 and was classified as other liabilities. The aggregate charge of $1,204,000
and $986,000 is included in interest expense for 2002 and 2001, respectively.

5. COMMON STOCK
During the Company’s year ending December 31, 2002, the Company declared dividends to share-
holders totaling $223,602,000, or $2.67 per share, of which $166,102,000 was paid during the year

and $57,499,000 was paid on January 29, 2003. During the year ended December 31, 2002, 97,095
options were exercised at $1,090,000. Total shares exchanged upon exercise of the stock options
were 4,444 at a value of $76,000. Through the Equity Shelf Program, the Company raised
$28,103,000 in net proceeds and issued 1,481,000 shares. Also, 165,480 shares were purchased
in dividend reinvestment and share purchase plan, totaling $3,009,000. The Company completed an
offering of common stock in the first quarter issuing 23,000,000 shares, with aggregate net pro-
ceeds of $347.3 million.

During the Company’s year ending December 31, 2001, the Company declared dividends to share-
holders totaling $88,370,451, or $1.75 per share, of which $52,474,266 was paid during the year
and $35,896,185 was paid on January 30, 2002. During the year ended December 31, 2001,
274,231 options were exercised at $2,974,666. Total shares exchanged upon exercise of the stock
options were 41,620 at a value of $588,068. Also, 10,856 shares were purchased in dividend
reinvestment and share purchase plan, totaling $142,456. The Company completed an offering of

Notes to Financial Statements

Annaly Mortgage Management, Inc.

common stock in the third quarter issuing 14,991,600 shares, with aggregate net proceeds of $179.6
million. An offering of common stock during the second quarter of 2001 was completed issuing
18,918,500 shares, with aggregate net proceeds of $195.3 million. Additional offerings for 11,150,000
shares were completed during the first quarter for aggregate net proceeds of $99.3 million.

During the Company’s year ending December 31, 2000, the Company declared dividends to share-
holders totaling $16,333,252, or $1.15 per share, of which $12,702,507 was paid during the year

and $3,630,745 was paid on January 30, 2001. During the year ended December 31, 2000, 47,499
options were exercised at $198,762. Also, 894,163 shares were purchased in direct offerings, total-
ing $7,392,859.

6. EARNINGS PER SHARE (EPS)
For the year ended December 31, 2002, the reconciliation is as follows:

For the Year Ended December 31, 2002 (dollars in thousands, except for per share data)

Income (Numerator)

Shares (Denominator)

Per Share Amount

Net income

Basic EPS

Effect of dilutive securities:

Dilutive stock options

Diluted EPS

$219,507

219,507

—

$219,507

82,044,141

$2.68

238,742

82,282,883

$2.67

Options to purchase 6,250 shares of stock were outstanding and considered anti-dillutive as their
exercise price exceeded the average stock price for the year.

For the year ended December 31, 2001, the reconciliation is as follows:

For the Year Ended December 31, 2001 (dollars in thousands, except for per share data)

Income (Numerator)

Shares (Denominator)

Per Share Amount

Net income

Basic EPS

Effect of dilutive securities:

Dilutive stock options

Diluted EPS

$92,278

92,278

—

$92,278

41,439,631

$2.23

417,867

41,857,498

$2.21

Options to purchase 6,250 shares of stock were outstanding and considered anti-dilutive as their
exercise price exceeded the average stock price for the year.

For the year ended December 31, 2000, the reconciliation is as follows:

For the Year Ended December 31, 2000 (dollars in thousands, except for per share data)

Income (Numerator)

Shares (Denominator)

Per Share Amount

Net income

Basic EPS

Effect of dilutive securities:

Dilutive stock options

Diluted EPS

$16,587

16,587

—

$16,587

14,089,436

$1.18

288,023

14,377,459

$1.15

Options to purchase 568,926 shares of stock were outstanding and considered anti-dilutive. The
exercise price exceeded the average stock price for the year.

Notes to Financial Statements

Annaly Mortgage Management, Inc.

7. LONG-TERM STOCK INCENTIVE PLAN
The Company has adopted a long term stock incentive plan for executive officers, key employ-
ees and nonemployee directors (the “Incentive Plan”). The Incentive Plan authorizes the
Compensation Committee of the board of directors to grant awards, including incentive stock
options as defined under Section 422 of the Code (“ISOs”) and options not so qualified

(“NQSOs”). The Incentive Plan authorizes the granting of options or other awards for an aggre-
gate of the greater of 500,000 shares or 9.5% of the fully diluted outstanding shares of the
Company’s common stock.

The following table sets forth activity relating to the Company’s stock options awards

2002

2001

2000

Options outstanding at the beginning of period

Granted

Exercised

Expired

Options outstanding at the end of period

Options exercisable at end of period

Number of
Shares

635,826

6,250

(97,095)

(32,275)

512,706

393,076

Weighted
Average
Exercise
Price

$ 8.48

20.35

8.75

8.28

$ 8.59

$ 8.67

The following table summarizes information about stock options outstanding at December 31, 2002:

Range of Exercise Price

$7.94-$19.99

$20.00-$29.99

Number of
Shares

903,807

6,250

(274,231)

635,826

335,328

Options
Outstanding

506,456

6,250

512,706

Weighted
Average
Exercise
Price

$ 8.28

13.69

7.95

$ 8.48

$ 8.63

Number of
Shares

844,056

122,500

(47,499)

(15,250)

903,807

341,226

Weighted
Average
Exercise
Price

8.44

20.35

8.59

Weighted
Average
Exercise
Price

$ 8.03

8.00

4.18

9.17

$ 8.28

$ 8.72

Weighted
Average
Remaining
Contractual
Life (Yrs.)

6.5

4.5

6.5

The Company accounts for the incentive plan under the intrinsic value method in accordance with
APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-
based employee compensation cost is reflected in net income, as all options granted under those
plans had an exercise price equal to the market value of the underlying common stock on the date

of grant. The following table illustrates the effect on net income and earnings per share if the com-
pany had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.

For the Year Ended December 31, (dollars in thousands, except per share data)

2002

2001

2000

Net income, as reported

Deduct: Total stock-based employee compensation expense determined

under fair value based method

Pro-forma net income

Net income per share, as reported

Basic

Diluted

Pro-forma net income per share

Basic
Diluted

$219,507

(33)

$219,474

$
$

2.68

2.67

2.68
2.67

$92,278

(266)

$92,012

$ 2.23

$ 2.21

$ 2.22
$ 2.20

$16,587

(118)

$16,469

$ 1.18

$ 1.17

$ 1.17
$ 1.15

Notes to Financial Statements

Annaly Mortgage Management, Inc.

The weighted average fair value at date of grant for stock options granted during the year ended
December 31, 2002, 2001 and 2000 was $0.83, $0.89 and $0.43 per option, respectively. The fair
value of stock options at date of grant was estimated using the Black-Scholes option pricing model
utilizing the following weighted average assumptions:

For the Year Ended December 31,

2002

2001

2000

Risk-free interest rate

Expected option life in years

Expected stock price volatility

Expected dividend yield

4.02%

26%

13.57%

4.21%

28%

15.32%

5.16%

28%

12.69%

8. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income. Statement No. 130 requires the reporting of comprehensive income in addi-
tion to net income from operations. Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of certain financial information that historically has not been
recognized in the calculation of net income. The Company at December 31, 2002 and 2001 held
securities classified as available-for-sale. At December 31, 2002, the net unrealized gains totaled
$75,511,000 and at December 31, 2001, the net unrealized losses totaled $38,169,000.

9. LEASE COMMITMENTS
The Corporation has a noncancelable lease for office space, which commenced in May 2002 and
expires in December 2009.

The Corporation’s aggregate future minimum lease payments are as follows:

(dollars in thousands)

10. RELATED PARTY TRANSACTION
Included in “Other Assets” on the Balance sheet as of December 31, 2001 is an investment in Annaly
International Money Management, Inc. On June 24, 1998, the Company acquired 99,960 nonvoting
shares, at a cost of $49,980. Annaly International Money Management, Inc. was liquidated during
the year, resulting in a $44,000 loss, which is reflected in “Gain on Sale of Securities,” in the
Statement of Operations. The officers and directors of Annaly International Money Management Inc.
are also officers and directors of the Company. Officers and employees of the Company are active-
ly involved in managing Mortgage-Backed Securities and other fixed income assets for institutional
clients through Fixed Income Discount Advisory Company (“FIDAC”). FIDAC is a registered invest-
ment adviser, which is owned 100% by the Chief Executive Officer of Annaly Mortgage Management,
Inc. Our management currently allocates rent and other general and administrative expenses 90%
to Annaly and 10% to FIDAC.

11. INTEREST RATE RISK
The primary market risk to the Company is interest rate risk. Interest rates are highly sensitive to
many factors, including governmental monetary and tax policies, domestic and international eco-
nomic and political considerations and other factors beyond the Company’s control. Changes in the
general level of interest rates can affect net interest income, which is the difference between the
interest income earned on interest-earning assets and the interest expense incurred in connection
with the interest-bearing liabilities, by affecting the spread between the interest-earning assets and
interest-bearing liabilities. Changes in the level of interest rates also can affect the value of the mort-
gage-backed securities and the Company’s ability to realize gains from the sale of these assets.

The Company seeks to manage the extent to which net income changes as a function of changes
in interest rates by matching adjustable-rate assets with variable-rate borrowings. In addition,
although the Company has not done so to date, the Company may seek to mitigate the potential
impact on net income of periodic and lifetime coupon adjustment restrictions in the portfolio of mort-
gage-backed securities by entering into interest rate agreements such as interest rate caps and inter-
est rate swaps.

Total per Year

2003

2004

2005

2006

2007

thereafter

Total remaining lease payments

500

530

532

1,064

$3,626

Changes in interest rates may also have an effect on the rate of mortgage principal prepayments
and, as a result, prepayments on mortgage-backed securities. The Company will seek to mitigate
the effect of changes in the mortgage principal repayment rate by balancing assets purchased at a
premium with assets purchased at a discount. To date, the aggregate premium exceeds the aggre-
gate discount on the mortgage-backed securities. As a result, prepayments, which result in the
expensing of unamortized premium, will reduce net income compared to what net income would be
absent such prepayments.

Notes to Financial Statements

Annaly Mortgage Management, Inc.

12. SUMMARIZED QUARTERLY RESULTS (UNAUDITED)
The following is a presentation of the quarterly results of operations for the year ended December 31, 2002.

Quarters Ending (dollars in thousands)

Interest income from Mortgage-Backed Securities and cash $

Interest expense on repurchase agreements

Net interest income

Gain on sale of Mortgage-Backed Securities

General and administrative expenses

Net income

Net income per share:

Basic

Diluted

Average number of shares outstanding:

Basic

Diluted

March 31,
2002

92,900

40,012

52,888

3,410

3,255

53,043

0.69

June 30,
2002

September 30,
2002

$ 109,423

$ 109,201

47,860

61,563

1,343

3,536

59,370

0.72

0.71

54,012

55,189

4,747

3,268

56,668

0.68

December 31,
2002

92,641

49,874

42,767

11,563

3,904

50,426

0.60

76,709,836

77,017,431

82,910,206

83,186,865

83,668,422

83,939,870

84,525,171

84,766,747

Quarters Ending (dollars in thousands)

Interest income from Mortgage-Backed Securities and cash

Interest expense on repurchase agreements

Net interest income

Gain on sale of Mortgage-Backed Securities

General and administrative expenses
Net income

Net income per share:

Basic

Diluted

Average number of shares outstanding:

Basic

Diluted

Interest expense on repurchase agreements

Net interest income

Gain on sale of Mortgage-Backed-Securities

General and administrative expenses

Net income

Net income per share:

Basic
Diluted

Average number of shares outstanding:

Basic

Diluted

Quarters Ending (dollars in thousands)

Interest income from Mortgage-Backed Securities and cash

$
$

March 31,
2000

24,617

19,293

5,324

107

582

4,849

0.35
0.35

13,660,539

13,971,112

March 31,
2001

42,434

33,453

8,981

269

921
8,329

0.38

0.37

June 30,
2001

September 30,
2001

64,790

45,284

19,506

482

1,393
18,595

0.48

75,775

48,620

27,155

1,184

1,993
26,346

0.58

0.57

December 31,
2001

80,059

40,698

39,361

2,651

3,004
39,008

0.65

21,851,481

22,535,210

38,473,928

39,054,488

45,503,179

45,959,693

59,776,777

60,155,994

June 30,
2000

25,735

21,453

4,282

507

3,840

$
$

0.27
0.26

14,039,741

14,631,940

September 30,
2000

December 31,
2000

28,239

31,160

24,779

3,460

873

527

3,806

0.27
0.26

$
$

27,377

3,783

981

670

4,094

0.28
0.28

$
$

14,238,680

14,529,142

14,413,578

14,702,189

Common Stock and Market Information

Annaly Mortgage Management, Inc.

The following table sets forth, for the periods indicated, the high, low, and closing sales prices per
share of common stock as reported on the New York Stock Exchange composite tape and the cash
dividends declared per share of our common stock.

Stock Prices

First Quarter ended March 31, 2002

Second Quarter ended June 30, 2002

Third Quarter ended September 30, 2002

Fourth Quarter ended December 31, 2002

First Quarter ended March 31, 2001

Second Quarter ended June 30, 2001

Third Quarter ended September 30, 2001

Fourth Quarter ended December 31, 2001

We intend to pay quarterly dividends and to distribute to our stockholders all or substantially all of
our taxable income in each year (subject to certain adjustments). This will enable us to qualify for
the tax benefits accorded to a REIT under the Code. We have not established a minimum dividend
payment level and our ability to pay dividends may be adversely affected for the reasons described
under the caption “Risk Factors” in the 2002 Form 10-k. All distributions will be made at the dis-
cretion of our Board of Directors and will depend on our earnings, our financial condition, mainte-
nance of our REIT status and such other factors as our Board of Directors may deem relevant from
time to time.

High

Low

Cash Dividends
Declared Per Share

$17.62

$21.50

$20.40

$19.55

$11.50

$13.76

$14.93

$17.01

$15.30

$16.20

$14.00

$15.25

$ 8.75

$10.50

$12.70

$13.20

$16.98

$19.40

$18.45

$18.80

$11.26

$13.71

$14.45

$16.00

$0.63

$0.68

$0.30

$0.40

$0.45

$0.60

Corporate Information

Annaly Mortgage Management, Inc.

Corporate Officers

Board of Directors

Corporate Headquarters

Michael A. J. Farrell
Chairman of the Board,
President &
Chief Executive Officer

Wellington J. Denahan
Vice Chairman &
Chief Investment Officer

Kathryn F. Fagan
Chief Financial Officer
& Treasurer

Kevin P. Brady
Founder & Principal
KPB Associates

Jennifer A. Stephens
Executive Vice President
& Corporate Secretary

Spencer I. Browne
Former President & Chief
Executive Officer
Asset Investors Corporation

James P. Fortescue
Senior Vice President

Kristopher R. Konrad
Senior Vice President

Rose-Marie Lyght
Vice President

Jeremy Diamond
Executive Vice President

Jonathan D. Green
President & Chief
Financial Officer
Rockefeller Group
International, Inc.

John A. Lambiase
Former Managing
Director
Salomon Brothers, Inc.

Ronald D. Kazel
Senior Vice President

Donnell A. Segalas
Phoenix Investment Partners, Ltd.

Annaly Mortgage Management, Inc.
1211 Avenue of the Americas, Suite 2902
New York, New York 10036

Legal Counsel

McKee Nelson LLP
1919 M. Street, NW
Suite 800
Washington, D.C. 20036

Auditors

Deloitte & Touche L.L.P.
Two World Financial Center
New York, New York 10281-1434

Stock Transfer Agent

Shareholder inquiries concerning dividend payments, lost certificates,
change of address:

Mellon Investors Services, L.L.C
PO Box 3315
South Hackensack, New Jersey
07606-1163
www.mellon-investor.com

Stock Exchange Listing

The common stock is listed on the New York Stock Exchange
(symbol: NLY).

Annual Meeting

The Annual Meeting of Stockholders will be held Thursday, May 15, 2003
at 10:30 am at:
The Union League Club
38 East 37th Street
New York, New York 10178

Shareholder Communications

Copies of the Company’s Annual Report and Financials may be obtained
by writing the Corporate Secretary, by calling the investor relations
hot line at 888-8ANNALY, or by visiting our website www.annaly.com.

Cover: Workers on Wall Street © Bettman / CORBIS
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Design: Langton Cherubino Group / NYC

Annaly
Mortgage
Management,
Inc.

1211Avenue of theAmericas
Suite 2902
New York, New York 10036

1.888.8ANNALY
www.annaly.com