In this quarterly report on Form 10-Q, we refer to Hatteras Financial Corp. as "we," "us,""our company," or "our," unless we specifically state otherwise or the context indicates otherwise. The following defines certain of the commonly used terms in this quarterly report on Form 10-Q: RMBS refers to residential mortgage-backed securities; agency securities refers to our RMBS that are issued or guaranteed by a federally chartered corporation, such as Fannie Mae or Freddie Mac, or an agency of the U.S. government, such as Ginnie Mae; hybrids refers to hybrid mortgage loans that have interest rates that are fixed for a specified period of time and, thereafter, generally adjust annually to an increment over a specified interest rate index; and ARMs refers to hybrids and adjustable-rate mortgage loans which typically have interest rates that adjust annually to an increment over a specified interest rate index.

The following discussion should be read in conjunction with our financial statements and accompanying notes included in Item 1 of this quarterly report on Form 10-Q as well as our registration statement on Form S-11 filed February 20, 2008, as amended.

Forward Looking Statements

When used in this quarterly report on Form 10-Q, in future filings with the SEC or in press releases or other written or oral communications, statements which are not historical in nature, including those containing words such as "believe," "expect," "anticipate," "estimate," "plan," "continue," "intend," "should," "may" or similar expressions, are intended to identify "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and, as such, may involve known and unknown risks, uncertainties and assumptions.

Forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. The following factors could cause actual results to vary from our forward-looking statements:
changes in interest rates and the market value of our agency securities; changes in the prepayment rates on the mortgage loans securing our agency securities; our ability to borrow to finance our assets; changes in government regulations affecting our business; our ability to maintain our qualification as a REIT for federal income tax purposes; our ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended (the "Investment Company Act"); and risks associated with investing in real estate assets, including changes in business conditions and the general economy. These and other risks, uncertainties and factors, including those described in the annual, quarterly and current reports that we file with the SEC, could cause our actual results to differ materially from those projected in any forward-looking statements we make. All forward-looking statements speak only as of the date on which they are made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

We are an externally-managed mortgage REIT incorporated in Maryland in September 2007 to invest in adjustable-rate and hybrid adjustable-rate single-family residential mortgage pass-through securities guaranteed by a U.S. Government agency (such as the Government National Mortgage Association, or Ginnie Mae), or issued by a U.S. Government-sponsored entity (such as the Federal National Mortgage Association, or Fannie Mae, and the Federal Home Loan Mortgage Corporation, or Freddie Mac). Our principal goal is to generate net income for distribution to our shareholders through regular quarterly dividends and protect and grow our shareholders' equity (which we also refer to as our "book value") through prudent interest rate risk management. Our net income is determined primarily by the difference between the interest income we earn on our agency securities less premium

amortization and the cost of our borrowings and hedging activities, which we also refer to as our net interest spread or net interest margin. We utilize substantial borrowings in financing our investment portfolio, which can enhance potential returns but exacerbate losses. In general, our book value is most affected by our issuance of shares of our common stock, our retained earnings or losses, and changes in the value of our investment portfolio or our hedging instruments.

In November 2007, we completed our initial private offering of 8,203,937 shares of our common stock for $20.00 per share and commenced operations. We received approximately $157.1 million in net proceeds from our initial private offering after offering expenses. In February 2008, we completed a second private offering in which we sold an aggregate of 6,900,000 shares of our common stock for $24.00 per share. We received approximately $158.7 million in net proceeds from our second private offering after offering expenses. We have invested substantially all the net proceeds of our private offerings and related repurchase borrowings in agency securities in accordance with our investment strategy. In April 2008 we completed our initial public offering in which we sold an aggregate of 11,500,000 shares of our common stock at $24 per share for net proceeds of approximately $255.7 million after offering expenses.

As of June 30, 2008 and December 31, 2007, our portfolio consisted of approximately $5.1 billion and $1.6 billion, respectively, in market value, of agency hybrid ARM securities with fixed-interest rate periods of three years, five years or seven years.

The following table represents key data regarding our company since the beginning of operations on November 5, 2007:

(in thousands except per                                               Shares of                         Weighted
share amounts)                  Agency      Repurchase                Common Stock    Book Value     Average Earnings
As of                         Securities    Agreements     Equity     Outstanding     Per Share         Per Share
June 30, 2008                 $ 5,097,189   $ 4,387,739   $ 561,176         26,777   $      20.96   $             0.88
March 31, 2008                $ 3,036,826   $ 2,739,631   $ 329,400         15,268   $      21.57   $             0.71
December 31, 2007             $ 1,619,290   $ 1,475,512   $ 165,356          8,368   $      19.76   $             0.15

Factors that Affect our Results of Operations and Financial Condition

Our results of operations and financial condition are affected by various factors, many of which are beyond our control, including, among other things, our net interest income, the market value of our assets and the supply of and demand for such assets. Our net interest income varies primarily as a result of changes in interest rates, borrowing costs and prepayment speeds, the behavior of which involves various risks and uncertainties. Prepayment speeds, as reflected by the constant prepayment rate, or CPR, and interest rates vary according to the type of investment, conditions in financial markets, competition and other factors, none of which can be predicted with any certainty. In general, as prepayment speeds on our agency securities owned at a premium increase, related purchase premium amortization increases, thereby reducing the net yield on such assets. Because changes in interest rates may significantly affect our activities, our operating results depend, in large part, upon our ability to manage interest rate risks and prepayment risks effectively while maintaining our status as a REIT.

We anticipate that, for any period during which changes in the interest rates earned on our assets do not coincide with interest rate changes on our borrowings, such assets will reprice more slowly than the corresponding liabilities. Consequently, changes in interest rates, particularly short-term interest rates, may significantly influence our net interest income. Increases in these rates will tend to decrease our net interest income and the market value of our assets (and therefore our book value), and could possibly result in operating losses or adversely affect our ability to make distributions to our shareholders.

Prepayments on agency securities and the underlying mortgage loans may be influenced by changes in market interest rates and a variety of economic, geographic and other factors beyond our control, and consequently such prepayment rates cannot be predicted with certainty. To the extent we have acquired agency securities at a premium

or discount to par, or face, value, changes in prepayment rates may impact our anticipated yield. In periods of declining interest rates, prepayments on our agency securities will likely increase. If we are unable to reinvest the proceeds of such prepayments at comparable yields, our net interest income may suffer.

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

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

• our degree of leverage;

• our access to funding and borrowing capacity;

• our hedging activities;

• the REIT requirements, the requirements to qualify for an exemption under the Investment Company Act and other regulatory and accounting policies related to our business.

Our manager is entitled to receive a management fee that is based on our equity (as defined in our management agreement), regardless of the performance of our portfolio. Accordingly, the payment of our management fee may not decline in the event of a decline in our profitability and may cause us to incur losses.

For a discussion of additional risks relating to our business see "Risk Factors" in our registration statement on Form S-11 (File No. 333-149314) filed on February 20, 2008, as amended.

Market and Interest Rate Trends and the Effect on our Portfolio

Credit Market Disruption

In recent months, the residential housing and mortgage markets in the United States have experienced a variety of difficulties and changed economic conditions including loan defaults, credit losses and decreased liquidity. These conditions have resulted in volatility in the value of the agency securities in our portfolio and an increase in the average collateral requirements under our repurchase agreements. Liquidating sales by several large institutions have increased the volatility of many financial assets, including agency securities and other high-quality RMBS. As a result, values for RMBS, including some agency securities and AAA-rated RMBS, have been negatively impacted. Further increased volatility and deterioration in the broader residential mortgage and RMBS markets may adversely affect the performance and market value of the agency securities in which we invest. In addition, we rely on the availability of financing to acquire agency securities on a leveraged basis. Our lenders may have owned or financed RMBS that have declined in value and caused them to incur losses. If these market conditions persist, our lenders may be forced to exit the repurchase market, become insolvent or further tighten lending standards or increase the amount of equity capital or haircut required to obtain financing, any of which could make it more difficult or costly for us to obtain financing.

Developments at Fannie Mae and Freddie Mac

Payments on the agency securities in which we invest are guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. Because of the guarantee and the underwriting standards associated with mortgages underlying agency securities, agency securities historically have had high stability in value and been considered to present low credit risk. The recent turmoil in the residential mortgage sector, however, and concerns over the financial condition of

Fannie Mae and Freddie Mac have increased credit spreads and decreased price stability of agency securities. Freddie Mac and Fannie Mae have recently reported substantial losses. Any failure of Freddie Mac or Fannie Mae to honor their guarantees of agency securities would cause a significant decline in the value and cash flow of the agency securities in our portfolio.

In March 2008, in response to the credit market disruption, the Office of Federal Housing Enterprise Oversight, which oversees Fannie Mae and Freddie Mac, announced a reduction in the mandatory capital reserve Fannie Mae and Freddie Mac must maintain in respect of bad loans. Other recent government actions involving Fannie Mae and Freddie Mac included an increase in the maximum conforming mortgage size (the maximum individual mortgage size that Freddie Mac or Fannie Mae may purchase) from the previous cap of $417,000 to a new cap based on the average home prices in various markets, up to $729,750 in certain high-cost markets.

We believe that the above actions reflect the intention of the federal government to stabilize agency security prices, support the mortgage and housing markets and increase the general liquidity of the agency securities market. However, the general market perception of the strength of Fannie Mae and Freddie Mac continued to decline, with their common stock price falling substantially since early June 2008 on speculation that these agencies would be unable to meet their future financial commitments. In response the Federal Reserve and the Department of the Treasury have recently confirmed their commitment to support Fannie Mae and Freddie Mac with a variety of proposed measures, including increasing their line of credit with each organization and getting approval for the Treasury to buy common shares of each company. We believe this will further stabilize their financial status and market confidence.

Credit Spreads

The credit market disruption of March 2008 and its aftermath caused the yields on U.S. Treasury securities to decline more than yields on our agency securities, resulting in historically wide differences between the two yields, or spread relationship (also called the credit spread). On March 13, 2008, for example, the yield difference between a hybrid ARM and a like duration U.S. Treasury security was in excess of 3.0%. As a result, the value of our agency securities had declined in value as of such date (as compared to the period when the spread relationship was narrower). Since March 13, 2008, the spread relationship has narrowed and the value of our agency securities has increased proportionately. If credit market concerns grow and agency security yield spreads increase, the value of our portfolio may decline. Moreover, most institutions from which we obtain repurchase financing have increased their capital requirements, or haircut, from approximately 3.0% on average to approximately 5.0% on average, which requires us to post additional collateral for our loans. If credit market conditions worsen, and our lending institutions increase haircuts further, we may be required to sell our agency securities at a loss to reduce our leverage.

Interest Rates

The overall credit market deterioration since August 2007 has also affected prevailing interest rates. For example, interest rates have been unusually volatile since the third quarter of 2007. Since September 18, 2007, the U.S. Federal Reserve has lowered the target for the Federal Funds Rate seven times from 5.25% to 2.0%. Because of continued uncertainty in the credit markets and U.S. economic conditions, we expect that interest rates are likely to experience continued volatility, which will likely affect our financial results since our cost of funds is largely dependent on short-term rates.

Historically, the 30-day London Interbank Offered Rate, or LIBOR, has closely tracked movements in the Federal Funds Rate. Our borrowings in the repurchase market have also historically closely tracked LIBOR. However, since July 2007 (prior to our commencement of operations) LIBOR and repurchase market rates were significantly higher than the target Federal Funds Rate. The difference between these rates has remained volatile, alternately returning to more normal levels and then widening out again. The volatility in these rates and divergence from the historical relationship among these rates could negatively impact our ability to manage our portfolio and our net interest margin and the value of our portfolio might suffer as a result. The following table shows the 30-day LIBOR as compared to the Federal Funds rate at each period end:

                                           30 Day     Federal
                                           LIBOR       Funds
                       June 30, 2008         2.46 %      2.00 %
                       March 31, 2008        2.70 %      2.25 %
                       December 31, 2007     4.60 %      4.25 %

Investing the Proceeds of our Offerings

We began investing the proceeds of our initial private offering following closing on November 5, 2007. Although market conditions were volatile at the time, we believed that conditions were conducive to investing in agency securities backed by hybrid ARMs. Relative spreads between agency securities and U.S. Treasury securities were historically wide, and short-term interest rates had fallen faster than long-term rates. Accordingly, we undertook to build a portfolio of three-, five and seven-year hybrid ARMS and at December 31, 2007 we had a portfolio of approximately $1.619 billion with a portfolio average coupon of 5.74%, purchased at an average price of $101.14 per $100 of current face, adjusted for amortization of scheduled and unscheduled principal pay-downs. We financed approximately $1.376 billion of our December 31, 2007 portfolio with borrowings pursuant to 90-day or shorter repurchase agreements with eight counterparties. Based on our view of market conditions, we did not enter into any interest rate swaps prior to December 31, 2007 and limited borrowings with maturities greater than 90 days to $100.0 million. The limited hedging of interest rate risk prior to December 31, 2007 exposed us to the risk of a significant reduction in net interest margin and the value of our portfolio if interest rates had increased before re-pricing of our repurchase borrowings.

We began investing the proceeds of our second private offering following closing on February 5, 2008. Based on our view of the market for agency securities at that time, we believed that conditions were conducive to additional investment in agency securities. Agency securities were still attractive even though interest rate cuts by the Federal Reserve had resulted in lower yields on these securities as compared to yields from late 2007. Accordingly, we continued to add to our portfolio by acquiring additional three-, five- and seven-year hybrid ARMS; and at March 31, 2008, we had a portfolio of approximately $3.037 billion with a portfolio average coupon of 5.39%, purchased at an average price of $101.29 per $100 of current face, adjusted for amortization of scheduled and unscheduled principal pay-downs. As of March 31, 2008, we had financed approximately $2.440 billion of our March 31, 2008 portfolio with borrowings pursuant to 90-day or shorter repurchase agreements with 10 counterparties. During the quarter ended March 31, 2008, we also entered into $300.0 million of longer term repurchase borrowings with a weighted average maturity of 21 months. We use long-term repurchase agreements, interest rate swaps and interest rate caps, as part of our plan to limit our exposure to changes in interest rates. As part of that plan, we entered into interest rate swaps with three different counterparties for a total notional amount of $300.0 million during the quarter ended March 31, 2008.

We began investing the proceeds of our initial public offering following closing on April 30, 2008. Despite additional rate cuts by the Federal Reserve, agency securities remained attractively priced. Accordingly, we continued to add to our portfolio by acquiring additional three-, five- and seven-year hybrid ARMS; and at June 30, 2008, we had a portfolio of approximately $5.1 billion with a portfolio average coupon of 5.29%, purchased at a weighted average price of $101.25 per $100 of current face, adjusted for amortization of scheduled and unscheduled principal pay-downs. As of June 30, 2008, we had financed approximately $4.0 billion of our June 30, 2008 portfolio with borrowings pursuant to 90-day or shorter repurchase agreements with 12 counterparties. We also had financed $0.4 billion with longer dated repurchase agreements with an average term of 19 months. In addition, we have entered into a total of $1.0 billion of interest rate swaps.

Book Value per Share

As of June 30, 2008, our book value per common share (total shareholders' equity divided by shares outstanding) was $20.96, an increase of $1.20 from December 31, 2007. Both of our follow-on equity offerings were accretive to our initial equity offering. However, this accretion was somewhat offset by lower quarter-end fair values of the Company's residential mortgage securities portfolio primarily as a result of changes in interest rate expectations and the continued credit market turmoil. While nearly all of the Company's investments and all of its interest rate swap positions are reflected at fair value on the Company's balance sheet and therefore included in the calculation of book value per common share, unrealized gains or losses on longer-term committed borrowings supporting investments in longer-to-reset ARM securities are not reflected in book value. As of June 30, 2008, these longer-term borrowings consisted of a series of repurchase arrangements with remaining terms of from 11 to 29 months.

Investments

Agency Securities

As of June 30, 2008 and December 31, 2007, our agency securities portfolio was purchased at a net premium to par, or face, value, with a weighted-average amortized cost of 101.25% and 101.14%, respectively, of face value, due to the average interest rates on these securities being higher than prevailing market rates. As of June 30, 2008 and December 31, 2007, we had approximately $59.9 million and $18.2 million, respectively, of unamortized premium included in the cost basis of our investments.

As of June 30, 2008, our investment portfolio consisted of agency securities as follows:

                                                                                   Weighted Avg.                                 Weighted
(Dollars in thousands)                          Current        Weighted Avg.         Amortized                                   Average
Months to Reset          % of Portfolio      Face value (1)     Coupon (2)       Purchase Price (3)    Amortized Cost (4)    Market Price (5)    Market Value (6)
0-36                               6.90 %   $        347,512            5.16 %               101.19   $            351,650             101.28   $          351,951
37-60                             62.79 %   $      3,167,706            5.31 %               101.29   $          3,208,438             101.03   $        3,200,437
61-85                             30.31 %   $      1,538,844            5.29 %               101.20   $          1,557,289             100.39   $        1,544,801

                                 100.00 %   $      5,054,061            5.29 %               101.25   $          5,117,377             100.85   $        5,097,189

As of December 31, 2007, our investment portfolio consisted of agency securities as follows:

                                                                                   Weighted Avg.                                Weighted
(Dollars in thousands)                          Current        Weighted Avg.         Amortized                                  Average
Months to Reset          % of Portfolio      Face value (1)     Coupon (2)       Purchase Price (3)    Amortized Cost(4)    Market Price (5)    Market Value (6)
0-36                              11.51 %   $        184,327            5.40 %               100.99   $           186,149             101.14   $          186,436
37-60                             61.13 %   $        973,221            5.77 %               101.21   $           984,954             101.70   $          989,804
61-85                             27.36 %   $        436,690            5.83 %               101.06   $           441,335             101.46   $          443,050

                                 100.00 %   $      1,594,238            5.75 %               101.14   $         1,612,438             101.57   $        1,619,290

(1) The current face is the current monthly remaining dollar amount of principal of a mortgage security. We compute current face by multiplying the original face value of the security by the current principal balance factor. The current principal balance factor is essentially a fraction, where the numerator is the current outstanding balance and the denominator is the original principal balance.

(2) For a pass-through certificate, the coupon reflects the weighted average nominal rate of interest paid on the underlying mortgage loans, net of fees paid to the servicer and the agency. The coupon for a pass-through certificate may change as the underlying mortgage loans are prepaid. The percentages indicated in this column are the nominal interest rates that will be effective through the interest rate reset date and have not been adjusted to reflect the purchase price we paid for the face amount of security.

(3) Amortized purchase price is the dollar amount, per $100 of current face, of our purchase price for the security, adjusted for amortization as a result of scheduled and unscheduled principal paydowns.

(4) Amortized cost is our total purchase price for the mortgage security, adjusted for amortization as a result of scheduled and unscheduled principal paydowns.

(5) Market price is the dollar amount of market value, per $100 of nominal, or face, value, of the mortgage security. We compute market value by obtaining three valuations for the mortgage security from three separate and independent securities dealers and averaging the three valuations.

(6) Market value is the total market value for the mortgage security. We compute market value by obtaining valuations for the mortgage security from three . . .