Cautionary Statement

You should read the following discussion and analysis in conjunction with the unaudited consolidated financial statements and related notes thereto contained elsewhere in this Quarterly Report on Form 10-Q, or Report. The information contained in this Report is not a complete description of our business or the risks associated with an investment in our stock. We urge you to carefully review and consider the various disclosures made by us in this Report and in our other reports filed with the United States Securities and Exchange Commission, or SEC, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, that discuss our business and financial results in greater detail.

This Report contains forward-looking statements. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words "will," "believe," "expect," "anticipate," "intend," "estimate," "assume" or other similar expressions. You should not rely on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. These forward-looking statements are subject to assumptions and to various risks and uncertainties. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, some of which are listed under Item 1A, "Risk Factors," in our 2007 Annual Report on Form 10-K and under Item 1A, "Risk Factors," in this Report. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

As used in this Report, "company," "we," "us," "our," and "Anworth" refer to Anworth Mortgage Asset Corporation.

General

We were formed in October 1997 and commenced operations on March 17, 1998. We are in the business of investing primarily in United States agency mortgage-backed securities, or MBS, which are obligations guaranteed by the United States government, such as Ginnie Mae, or federally sponsored enterprises such as Fannie Mae or Freddie Mac. Our principal business objective is to generate net income for distribution to stockholders based upon the spread between the interest income on our mortgage-related assets and the costs of borrowing to finance our acquisition of these assets.

We are organized for tax purposes as a real estate investment trust, or REIT. Accordingly, we generally distribute substantially all of our earnings to stockholders without paying federal or state income tax at the corporate level on the distributed earnings. At September 30, 2008, our qualified REIT assets (real estate assets, as defined in the Internal Revenue Code, or Code, cash and cash items and government securities) were greater than 90% of our total assets, as compared to the Code requirement that at least 75% of our total assets must be qualified REIT assets. Greater than 99% of our 2007 revenue qualifies for both the 75% source of income test and the 95% source of income test under the REIT rules. We believe we currently meet all REIT requirements regarding the ownership of our common stock and the distributions of our net income. Therefore, we believe that we continue to qualify as a REIT under the provisions of the Code.

During the past several months, the credit and liquidity problems surrounding the mortgage markets and impacting the U.S. economy generally have deepened, placing severe pressure on liquidity and asset values. Several large U.S. financial and investment institutions were either seized by federal regulators (Bear Stearns, IndyMac Bancorp and Washington Mutual) or, after experiencing financial difficulties, were acquired by other large companies (Wachovia Corporation was acquired by Wells Fargo & Company). Lehman Brothers Holdings Inc., a

major investment bank, experienced a major liquidity crisis and declared bankruptcy. On September 16, 2008, the U.S. government announced that it would lend approximately $85 billion to American International Group to avert a similar liquidity crisis and potential bankruptcy. At the end of September 2008 and in early October 2008, several large European banks all received either assistance from their respective governments or were acquired by other large global banks.

In response, the U.S. government and other governments have taken various actions. On September 7, 2008, the U.S. government placed Fannie Mae and Freddie Mac under its conservatorship as part of the recent enactment of the Housing and Economic Recovery Act of 2008, or the Act. The Act also seeks to forestall home foreclosures for distressed borrowers and assist communities with foreclosure problems. The Emergency Economic Stabilization Act of 2008, or EESA, was also recently enacted. The EESA provides the U.S. Secretary of the Treasury with various authority including to establish a Troubled Asset Relief Program, or TARP, to purchase from financial institutions up to $700 billion of residential and commercial mortgages; to inject capital first into the country's largest banks and potentially to thousands of the country's smaller banks, if needed; and increases FDIC deposit insurance limits temporarily (until December 2009) from $100 thousand to $250 thousand. Other global governments have injected capital into troubled institutions in their countries, made loans, made promises of continued liquidity funding and have also worked with large institutions to acquire troubled institutions. Recently, the U.S. government and other governments of more economically developed countries (such as New Zealand, Australia, Japan and Saudi Arabia) have all instituted interest rate cuts to help stimulate their economies.

Although these various actions by both the U.S. government and other governments are intended to protect financial institutions, their respective economies and their housing markets, we continue to operate under very difficult market conditions. There can be no assurance that these various actions will have a beneficial impact on the global financial markets. We cannot predict whether or when these actions or future actions by both the U.S. government and other governments could have on our business, results of operations and financial conditions.

Our continuing operations consist of the following portfolios: Agency mortgage-backed securities, or Agency MBS, and Non-Agency mortgage-backed securities, or Non-Agency MBS.

At September 30, 2008, we had total assets of $5.5 billion. Our Agency MBS portfolio, consisting of $5.4 billion, was distributed as follows: 16% adjustable-rate Agency MBS, 65% hybrid adjustable-rate Agency MBS, 19% fixed-rate Agency MBS and less than 1% floating-rate Agency CMOs. Our Non-Agency MBS portfolio consisted of $11.4 million of floating-rate CMOs. Stockholders' equity available to common stockholders at the fiscal quarter ended September 30, 2008 was approximately $550 million, or $6.16 per share, based on 89.3 million shares of common stock outstanding at quarter end. The $550 million equals total stockholders' equity of $599 million less the Series A Preferred Stock liquidating value of $46.9 million and less the difference between the Series B Preferred Stock liquidating value of $30.1 million and the proceeds from its sale of $28.1 million. For the three months ended September 30, 2008, we reported a net loss of $1.3 million. Our net loss to common stockholders was $2.8 million, or $(0.03) per diluted share. This consisted of our net loss of $1.3 million and the payment of preferred stock dividends of approximately $1.5 million. This net loss includes an approximately $34.1 million impairment charge on Non-Agency MBS, a net loss on derivative instruments of approximately $0.9 million and a gain on the disposition of discontinued operations of approximately $7.7 million. Net income excluding the impairment charge on Non-Agency MBS and the gain on the disposition of discontinued operations would have been $23.6 million or $0.27 per diluted share, based on an average of 89.4 million shares outstanding.

Results of Operations

Three Months Ended September 30, 2008 Compared to September 30, 2007

For the three months ended September 30, 2008, our net loss was $1.3 million. Our net loss to common stockholders was $2.8 million, or $(0.03) per diluted share, based on an average of 86.4 million shares outstanding. This consisted of our net loss of $1.3 million and the payment of preferred stock dividends of approximately $1.5 million. This net loss includes an approximately $34.1 million impairment charge on Non-Agency MBS, a net loss on derivative instruments of approximately $0.9 million and a gain on the disposition of discontinued operations of approximately $7.7 million. Net income excluding the impairment charge on Non-Agency MBS and the gain on the disposition of discontinued operations would have been $23.6 million or $0.27 per diluted share, based on an average of 89.4 million shares outstanding.

For the three months ended September 30, 2007, our net loss was $157.0 million. Our net loss to common stockholders was $158.5 million, or $(3.47) per diluted share, based on an average of 45.6 million shares outstanding. The loss for the three months ended September 30, 2007 included a loss from continuing operations of $20.3 million, which includes a loss of approximately $23.4 million on the sale of $904 million of our Agency MBS and Non-Agency MBS. The 2007 loss also included a loss from discontinued operations of $136.7 million due primarily to losses on sales and an impairment charge on Belvedere Trust's assets.

Net interest income for the three months ended September 30, 2008 was $29.2 million, or 38% of gross income from continuing operations, compared to $4.5 million, or 6.7% of gross income from continuing operations, for the three months ended September 30, 2007. Net interest income is comprised of the interest income earned on mortgage investments less interest expense from borrowings. Interest income net of premium amortization expense for the three months ended September 30, 2008 was $73.6 million, compared to $62.1 million for the three months ended September 30, 2007, an increase of 19%. The increase in interest income is due primarily to the increase in our investments in Agency MBS (based on the leverage on approximately $243 million in capital raised during the nine months ended September 30, 2008). Interest expense for the three months ended September 30, 2008 was $44.4 million, compared to $57.7 million for the three months ended September 30, 2007, a decrease of 23%. This decrease was due primarily to the decrease in short-term interest rates.

During the three months ended September 30, 2008, premium amortization expense decreased $2.6 million, or 47%, from $5.5 million during the three months ended September 30, 2007 to $2.9 million, which was due primarily to the decrease in the constant prepayment rate of our MBS investments.

The table below shows the approximate constant prepayment rate of our MBS for each of the following quarters:

                                                   2008                                      2007
                                     First        Second         Third         First        Second         Third
Portfolio                           Quarter       Quarter       Quarter       Quarter       Quarter       Quarter
Agency MBS and Non-Agency MBS            18 %          18 %          14 %          24 %          25 %          23 %

For the three months ended September 30, 2008, there was a net loss on derivative instruments of approximately $0.9 million due to hedge ineffectiveness, compared to a net loss on derivative instruments of approximately $147 thousand for the three months ended September 30, 2007.

Total expenses were $3.2 million for the three months ended September 30, 2008, compared to $1.2 million for the three months ended September 30, 2007. The increase of $2.0 million in total expenses was due to an increase in compensation and benefits of $1.541 million (due primarily to increases in executives' and other employees' salaries of $291 thousand and an accrual for year-end 2008 additional compensation of $1.250 million), the write-off or common stock offering costs of $108 thousand, an increase in "Other expenses" of $93 thousand, and an increase in amortization of restricted stock of $249 thousand.

Nine Months Ended September 30, 2008 Compared to September 30, 2007

For the nine months ended September 30, 2008, our net income was $41.0 million. Our net income available to common stockholders was $36.6 million, or $0.46 per diluted share, based on an average of 82.5 million shares outstanding. This consisted of our net income of $41.0 million less the preferred dividends of approximately $4.4 million. This net loss includes an approximately $34.1 million impairment charge on Non-Agency MBS, a net loss on derivative instruments of approximately $0.9 million and a gain on the disposition of discontinued operations of approximately $7.7 million. Net income excluding the impairment charge on Non-Agency MBS and the gain on the disposition of discontinued operations would have been approximately $62.9 million, or $0.78 per diluted share, based on an average of 82.5 million shares outstanding. For the nine months ended September 30, 2007, our net loss was $150.7 million. Our net loss to common stockholders was $154.0 million, or $(3.37) per diluted share, based on an average of 45.7 million shares outstanding. The loss for the nine months ended September 30, 2007 included a loss from continuing operations of $14.6 million, which includes a loss of approximately $23.4 million on the sale of $904 million of our Agency MBS and Non-Agency MBS. The 2007 loss also included a loss from discontinued operations of $136.1 due primarily to losses on sales and an impairment charge on Belvedere Trust's assets.

Net interest income for the nine months ended September 30, 2008 was $77.3 million, or 34% of gross income from continuing operations, compared to $13.3 million, or 6.4% of gross income from continuing operations, for the nine months ended September 30, 2007. Net interest income is comprised of the interest income earned on mortgage investments less interest expense from borrowings. Interest income net of premium amortization expense for the nine months ended September 30, 2008 was $216.4 million, compared to $190.2 million for the nine months ended September 30, 2007, an increase of 14%. The increase in interest income is due primarily to the increase in our investments in Agency MBS (based on the leverage on approximately $243 million in capital raised during the nine months ended September 30, 2008). Interest expense for the nine months ended September 30, 2008 was $139.1 million, compared to $177 million for the nine months ended September 30, 2007, a decrease of 21%. This decrease was due primarily to the decrease in short-term interest rates.

For the nine months ended September 30, 2008, there was a net loss on derivative instruments of approximately $0.9 million due to hedge ineffectiveness, compared to a net loss on derivative instruments of approximately $147 thousand for the nine months ended September 30, 2007.

During the nine months ended September 30, 2008, premium amortization expense decreased $7.6 million, or 43%, from $17.7 million during the nine months ended September 30, 2007 to $10.1 million, which was due primarily to the decrease in the constant prepayment rate of our MBS investments.

Total expenses were $9.0 million for the nine months ended September 30, 2008, compared to $4.3 million for the nine months ended September 30, 2007. The increase of $4.7 million in total expenses was due to an increase in compensation and benefits of $4.26 million (due primarily to increases in executives' and other employees' salaries of $835 thousand and an accrual for year-end 2008 additional compensation of $3.425 million), the write-off or common stock offering costs of $108 thousand, an increase in "Other expenses" of $282 thousand and an increase in amortization of restricted stock of $51 thousand.

Reconciliation of Non-GAAP Financial Measures

The results of operations for the three months and nine months ended September 30, 2008 contains disclosure relating to net income available to common stockholders excluding two items: (1) a $34.1 million impairment charge on Non-Agency MBS and (2) a $7.7 million gain on the disposition of discontinued operations. This disclosure may constitute a non-GAAP financial measure within the meaning of Regulation G promulgated by the SEC. The table below presents the reconciliation of net loss to common stockholders to net income excluding the impairment charge on Non-Agency MBS and the gain on disposition of discontinued operations. The Company's management believes

that this financial measure, when considered together with our GAAP financial measures, provides information that is useful to investors in understanding period-over-period operating results. Management also believes that this financial measure enhances the ability of investors to analyze the Company's operating trends and to better understand its operating performance. This financial measure should not be used as a substitute in assessing the Company's results of operations and financial condition at September 30, 2008. An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP.

A reconciliation of the Company's earnings excluding the impairment charge on Non-Agency MBS and the gain on disposition of discontinued operations for the three months and nine months ended September 30, 2008 with the most directly comparable financial measure calculated in accordance with GAAP is as follows:
(in thousands of dollars, except for per share amounts):

                                               Three Months Ended                     Nine Months Ended
                                               September 30, 2008                     September 30, 2008
                                                            (Per Share)                            (Per Share)
Net income (loss) to common
stockholders                             $    (2,773 )     $       (0.03 )     $    36,552        $        0.46
Add: impairment charge on Non-Agency
MBS                                           34,083                                34,083
Less: gain on disposition of
discontinued operations                       (7,728 )                              (7,728 )

Net income excluding impairment
charge on Non-Agency MBS and gain on
disposition of discontinued
operations                               $    23,582                           $    62,907

Basic earnings per share after
exclusions                                                 $        0.27                          $        0.79
Diluted earnings per share after
exclusions                                                 $        0.27                          $        0.78
Basic weighted average number of
shares outstanding                            86,381                                79,452
Diluted weighted average number of
shares outstanding(1)                         89,451                                82,523

(1) During the three and nine months ended September 30, 2008, diluted earnings per common share include the assumed conversion of 1.206 million shares of Series B Preferred Stock at the conversion rate of 2.5464 shares of common stock and adding back the Series B Preferred Stock dividend.

Financial Condition

Agency MBS Portfolio

At September 30, 2008, we held agency mortgage assets whose amortized cost was approximately $5.42 billion, consisting primarily of $4.36 billion of adjustable-rate Agency MBS, $1.05 billion of fixed-rate Agency MBS and $8.2 million of floating-rate Agency CMOs. This amount represents an approximately 17% increase from the $4.63 billion in amortized cost held at December 31, 2007. Of the adjustable-rate Agency MBS owned by us, approximately 20% were adjustable-rate pass-through certificates whose coupons reset within one year. The remaining 80% consisted of hybrid adjustable-rate Agency MBS whose coupons will reset between one year and five years. Hybrid adjustable-rate Agency MBS have an initial interest rate that is fixed for a certain period, usually three to five years, and thereafter adjust annually for the remainder of the term of the loan.

The following table presents a schedule of our Agency MBS at fair value owned at September 30, 2008 and December 31, 2007, classified by type of issuer (dollar amounts in thousands):

                                September 30, 2008           December 31, 2007
                                           Portfolio                    Portfolio
       Agency                Fair Value    Percentage     Fair Value    Percentage
       Fannie Mae (FNM)      $ 4,027,883         74.7 %   $ 3,412,030         73.2 %
       Freddie Mac (FHLMC)     1,334,640         24.8       1,215,291         26.1
       Ginnie Mae (GNMA)          27,102          0.5          35,226          0.7

       Total Agency MBS:     $ 5,389,625        100.0 %   $ 4,662,547        100.0 %

The following table classifies our portfolio of Agency MBS owned at September 30, 2008 and December 31, 2007 by type of interest rate index (dollar amounts in thousands):

                                             September 30, 2008               December 31, 2007
                                                         Portfolio                        Portfolio
Index                                    Fair Value      Percentage       Fair Value      Percentage
One-month LIBOR                          $     7,971            0.2 %     $     9,369            0.2 %
Six-month LIBOR                               46,097            0.9            52,366            1.1
One-year LIBOR                             3,756,197           69.7         3,203,408           68.7
Six-month Certificate of Deposit               1,737             -              2,101            0.1
Six-month Constant Maturity Treasury             687             -                766             -
One-year Constant Maturity Treasury          489,924            9.1           530,614           11.4
Cost of Funds Index                           39,549            0.7            44,516            0.9
Fixed-rate                                 1,047,463           19.4           819,407           17.6

Total Agency MBS:                        $ 5,389,625          100.0 %     $ 4,662,547          100.0 %

The fair values indicated above do not include interest earned but not yet paid. With respect to our hybrid adjustable-rate Agency MBS, the fair value of these securities appears on the line associated with the index based on which the security will eventually reset once the initial fixed interest rate period has expired.

At September 30, 2008, our total Agency MBS portfolio had a weighted average coupon of 5.58%. The average coupon of the adjustable-rate securities was 5.44%, the hybrid securities average coupon was 5.56%, the fixed-rate securities average coupon was 5.80% and the floating-rate CMOs average coupon was 3.30%. At December 31, 2007, our total Agency MBS portfolio had a weighted average coupon of 5.91%. The average coupon of the adjustable-rate securities was 6.10%, the hybrid average coupon was 5.85%, the fixed-rate securities average coupon was 5.92% and the floating-rate CMOs average coupon was 5.84%.

At September 30, 2008, the average amortized cost of our Agency MBS was 101.22%, the average amortized cost of our adjustable-rate MBS was 101.35% and the average amortized cost of our fixed-rate MBS was 100.69%. Relative to our Agency MBS portfolio at September 30, 2008, the average interest rate on our outstanding repurchase agreements was 2.93% and the average days to maturity was 35 days. After adjusting for interest rate swap transactions, the average interest rate on outstanding repurchase agreements was 3.78% and the weighted average term to next rate adjustment was 467 days.

At December 31, 2007, the average amortized cost of our Agency MBS was 101.23%, the average amortized cost of our adjustable-rate MBS was 101.30% and the average amortized cost of our fixed-rate MBS was 100.88%. Relative to our Agency MBS portfolio, at December 31, 2007, the average interest rate on outstanding repurchase agreements was 4.91% and the average days to maturity was 49 days. After adjusting for interest rate swap transactions, the average interest rate on outstanding repurchase agreements was 4.77% and the weighted average term to next rate adjustment was 418 days.

At September 30, 2008 and December 31, 2007, the unamortized net premium paid for our Agency MBS was $66 million and $56 million, respectively.

At September 30, 2008, the current yield on our Agency MBS portfolio was 5.51%, based on a weighted average coupon of 5.58% divided by the average amortized cost of 101.22%. At December 31, 2007, the current yield on our Agency MBS portfolio was 5.84%, based on a weighted average coupon of 5.91% divided by the average amortized cost of 101.23%.

We analyze our MBS and the extent to which prepayments impact the yield of the securities. When the rate of prepayments exceeds expectations, we amortize the premiums paid on mortgage assets over a shorter time period, resulting in a reduced yield to maturity on our mortgage assets. Conversely, if actual prepayments are less

than the assumed constant prepayment rate, the premium would be amortized over a longer time period, resulting in a higher yield to maturity.

Non-Agency MBS Portfolio

At September 30, 2008, our Non-Agency MBS portfolio consisted of floating-rate collateralized mortgage obligations (option-adjusted ARMs based on one-month LIBOR), or CMOs, with an average coupon of 3.45%, which were acquired at par value. Non-Agency MBS are securities not issued by the government or government-sponsored enterprises and are secured primarily by first-lien residential mortgage loans.

During the quarter ended September 30, 2008, the fair value of our Non-Agency MBS portfolio declined to approximately $11.4 million from a fair value of approximately $24.2 million at June 30, 2008. While our Non-Agency MBS portfolio has experienced no realized losses to date, credit performance on the underlying mortgage loan collateral deteriorated during the quarter ended September 30, 2008. It is currently our assessment that our Non-Agency MBS portfolio is likely to experience realized losses at some point in the future if current difficult conditions in the mortgage finance and residential real estate markets do not improve significantly.

At September 30, 2008, the securities in our Non-Agency MBS portfolio continued to be rated AAA by Standard & Poor's and Moody's. On October 6, 2008, a security . . .