In this quarterly report on Form 10-Q, or this "report," we refer to Invesco Mortgage Capital Inc. as "we," "us," "our company," or "our," unless we specifically state otherwise or the context indicates otherwise. We refer to our external manager, Invesco Institutional (N.A.), Inc., as our "Manager," and we refer to the indirect parent company of our Manager, Invesco Ltd., together with its consolidated subsidiaries (other than us), as "Invesco."

The following discussion should be read in conjunction with our consolidated financial statements and the accompanying notes to our consolidated financial statements, which are included in Item 1 of this report, as well as the information contained in our registration statement on Form S-11, initially filed on June 16, 2008, and as subsequently amended, in connection with our recent initial public offering, which we refer to as our "IPO registration statement."

Forward-Looking Statements

We make forward-looking statements in this report that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. When we use the words "believe," "expect," "anticipate," "estimate," "plan," "continue," "intend," "should," "may" or similar expressions, we intend to identify forward-looking statements.

These forward-looking statements are based upon information presently available to our management and are inherently subjective, uncertain and subject to change. There can be no assurance that actual results will not differ materially from our expectations. We caution investors not to rely unduly on any forward-looking statements and urge you to carefully consider the risks identified under the captions "Risk Factors," "Forward-Looking Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our registration statement on Form S-11 (Commission File No. 333-151665), as amended, which is available on the Securities and Exchange Commission's website at www.sec.gov.

All written or oral forward-looking statements that we make, or that are attributable to us, are expressly qualified by this cautionary notice. We expressly disclaim any obligation to update the information in any public disclosure if any forward-looking statement later turns out to be inaccurate, except as may otherwise be required by law.

Overview

We are a newly-formed Maryland corporation focused on investing in, financing and managing residential and commercial mortgage-backed securities. We are externally managed and advised by our Manager, Invesco Institutional (N.A.), Inc., which is an indirect wholly-owned subsidiary of Invesco Ltd. or "Invesco." We intend to elect and qualify to be taxed as a REIT commencing with our current taxable year ending December 31, 2009. Accordingly, we generally will not be subject to U.S. federal income taxes on our taxable income to the extent that we annually distribute all of our net taxable income to shareholders and maintain our intended qualification as a REIT. We also intend to operate our business in a manner that will permit us to maintain our exemption from registration under the Investment Company Act of 1940, as amended.

Our objective is to provide attractive risk adjusted returns to our investors over the long term, primarily through dividends and secondarily through capital appreciation. To achieve this objective, we invest in the following securities:

• "Agency RMBS," which are residential mortgage-backed securities ("RMBS") for which a U.S. Government agency such as the Government National Mortgage Association ("Ginnie Mae") or a federally chartered corporation such as the Federal National Mortgage Association ("Fannie Mae") or

the Federal Home Loan Mortgage Corporation ("Freddie Mac") guarantees payments of principal and interest on the securities;

• "Non-Agency RMBS," which are RMBS that are not issued or guaranteed by a U.S. Government agency;

• "CMBS," which are commercial mortgage-backed securities; and

• Residential and commercial mortgage loans.

We generally finance our Agency RMBS through repurchase agreement financing. In addition, to the extent available to us, we may seek to finance our investments in CMBS and Non-Agency RMBS with financings under the TALF or with private financing sources. If available, we may also finance our investments in certain CMBS and Non-Agency RMBS by contributing capital to one or more of the legacy securities public-private investment programs ("Legacy Securities PPIFs,") that receive financing under the U.S. Government's Public-Private Investment Program ("PPIP") and our investments in certain legacy commercial and residential mortgage loans by contributing capital to one or more legacy loan public-private investment programs("Legacy Loan PPIFs,") that receive such funding or through private financing sources. Legacy Securities PPIFs and Legacy Loan PPIFs may be established and managed by our Manager or one of its affiliates or by unaffiliated third parties.

On July 1, 2009, we successfully completed our initial public offering, or IPO, pursuant to which we sold 8,500,000 shares of our common stock to the public at a price of $20.00 per share for net proceeds of $165.0 million. Concurrent with our IPO, we completed a private placement in which we sold 75,000 shares of our common stock to our Manager at a price of $20.00 per share. In addition, our Operating Partnership sold 1,425,000 units of limited partnership interest in our operating partnership to Invesco Investments (Bermuda) Ltd., a wholly-owned subsidiary of Invesco, at a price of $20.00 per unit. The net proceeds to us from these private placements were $30.0 million. We did not pay any underwriting discounts or commissions in connection with the private placements.

On July 27, 2009, the underwriters in our IPO exercised their over-allotment option to purchase an additional 311,200 shares of our common stock at a price of $20.00 per share for net proceeds of $6.1 million. Collectively, we received net proceeds from our IPO and the related private placements of approximately $201.1 million.

Following our IPO, we have been actively working to deploy our IPO proceeds and to generally commence our operations, as described in our IPO registration statement. As of July 17, 2009, we had completed the following transactions:

• We have invested the net proceeds from our IPO and private placements, as well as monies that we borrowed under repurchase agreements and TALF, to purchase a $829.4 million investment portfolio, which consisted of $711.9 million in Agency RMBS, $67.8 million in Non-Agency RMBS, and $49.7 million in CMBS;

• We have entered into master repurchase agreements with twelve counterparties. As of July 17, 2009, we had borrowed $630.6 million under those master repurchase agreements at a weighted average rate of 0.36% to finance our purchases of Agency RMBS;

• We entered into two interest rate swap agreements, for a notional amount of $275.0 million, designed to mitigate the effects of increases in interest rates under a portion of our repurchase agreements; and

• We secured borrowings of $40.1 million under the TALF at a weighted average interest rate of 3.91%.

Factors Impacting Our Operating Results

See the caption "Risk Factors" in our registration statement on Form S-11 (Commission File No. 333-151665), as amended, which is available on the Securities and Exchange Commission's website at www.sec.gov.

Market Conditions

Beginning in the summer of 2007, significant adverse changes in financial market conditions have resulted in a deleveraging of the entire global financial system. As part of this process, residential and commercial mortgage markets in the United States have experienced a variety of difficulties including loan defaults, credit losses and reduced liquidity. As a result, many lenders have tightened their lending standards, reduced lending capacity, liquidated significant portfolios or exited the market altogether, and therefore, financing with attractive terms is generally unavailable. In response to these unprecedented events, the U.S. Government has taken a number of actions to improve stability in the financial markets and encourage lending.

We began investing the proceeds of our IPO and our private placements immediately following the pricing of our IPO and our related private placements. Our strategy is to invest approximately 50% of our equity in Non-Agency RMBS, approximately 10% in CMBS that we could finance under TALF and the remaining 40% of our equity is allocated to Agency RMBS. We focused on the Non-Agency RMBS assets at the top of the capital structure that provided attractive risk adjusted yields. We observed that spreads tightened on these securities after the Treasury announced the PPIP managers.

For our investments in Agency RMBS, we focused on securities we believed provided attractive returns when levered approximately 7 times with repurchase agreements. As of July 17, 2009, we had purchased approximately $268.7 million in 30 year fixed rate securities that offered higher coupons and call protection based on the collateral attributes. We balanced this with approximately $280.9 million in 15 year fixed rate and approximately $162.3 million in hybrid ARMs we believed to have similar durations based on prepayment speeds.

Our investment in CMBS was limited to securities for which we could obtain financing under TALF. Our primary focus was on AAA rated securities issued in 2005. We observed spreads on these assets tightening significantly when the TALF auction was announced. As of July 17, 2009, we had purchased approximately $49.7 million in CMBS and financed the purchase with $40.1 million TALF loan.

Investment Activities



Investment Portfolio. The following table summarizes certain characteristics of
our investment portfolio as of June 30, 2009:



                                                                             Net
                                                                           Weighted
                                                       Unrealized          Average  Average
                              Premium                    Gain/      Fair    Coupon   Yield
$ in thousands     Principal (Discount) Amortized Cost   (Loss)    Value     (1)      (2)
Agency RMBS:
15 year fixed-rate 67,646    2,593      70,239         (140)      70,099   5.00%    3.67%
30 year fixed-rate 106,891   6,259      113,150        (495)      112,655  6.21%    4.47%
Non-Agency MBS     1,551     (636)      915            41         956      5.49%    19.71%
Total              176,088   8,216      184,304        (594)      183,710  5.74%    4.25%


_____________________

(1) WAC is presented net of servicing and other fees.
(2) Average yield incorporates future prepayment assumptions.

The following table summarizes certain characteristics of our investment portfolio, at fair value, according to their estimated weighted average life classifications as of June 30, 2009:

$ in thousands                                 June 30, 2009
Less than one year                                         -
Greater than one year and less than five years       139,938
Greater than or equal to five years                   44,772
Total                                                183,710

$ in thousands                      June 30, 2009
Principal balance                   176,088
Unamortized premium                 8,852
Unamortized discount                (636)
Gross unrealized gains              42
Gross unrealized losses             (636)

Following the closing of our IPO, we completed a number of other investment activities. The following table summarizes certain characteristics of our investment portfolio as of July 17, 2009 to reflect the effect of those activities as of that date:

Mortgage-Backed Securities
                                                              Weighted
                                   Premium                    Average       Average
$ in thousands      Principal    (Discount)       Cost       Coupon(1)     Yield(2)

Agency RMBS:
15 year fixed-rate    270,730    10,166           280,896    4.84%         3.74%
30 year fixed-rate    251,735    16,981           268,716    6.45%         4.43%
Hybrid ARMs           155,038    7,258            162,296    4.93%         3.15%
Total Agency RMBS     677,503    34,405           711,908

Non-Agency RMBS       114,205    (46,388)          67,817    5.14%         18.17%

CMBS                   52,402    (2,693)           49,709    4.89%         6.04%

Total/Average         844,110    (14,676)         829,434    5.40%          5.17%


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(1) WAC is presented net of servicing and other fees.

(2) Average yield incorporates future prepayment assumptions.

Financing and Other Liabilities. As of June 30, 2009, we were not a party to any repurchase agreements or other financial liabilities, except that we incurred deferred offering costs of $2.4 million. Deferred offering costs consist of legal and other costs that are related to the IPO and were charged to capital upon the completion of the IPO. Following the closing of our IPO, we entered into repurchase agreements to finance the majority of our Agency RMBS. These agreements are secured by our Agency RMBS and bear interest at rates that have historically moved in close relationship to LIBOR. As of July 17, 2009, we had entered into repurchase agreements totaling $630.6 million. In addition, we funded our CMBS portfolio with $40.1 million under TALF. This loan is non-recourse and matures in June 2014.

Hedging Instruments. We generally intend to hedge as much of our interest rate risk as we deem prudent in light of market conditions. No assurance can be given that our hedging activities will have the desired beneficial impact on our results of operations or financial condition. Our investment policies do not contain specific requirements as to the percentages or amount of interest rate risk that we are required to hedge.

Interest rate hedging may fail to protect or could adversely affect us because, among other things:

• available interest rate hedging may not correspond directly with the interest rate risk for which protection is sought;

• the duration of the hedge may not match the duration of the related liability;

• the party owing money in the hedging transaction may default on its obligation to pay;

• the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and

• the value of derivatives used for hedging may be adjusted from time to time in accordance with accounting rules to reflect changes in fair value. Downward adjustments ("mark-to-market losses") would reduce our shareholder's equity.

As of June 30, 2009, we had not engaged in any hedging activity. However, as of July 17, 2009, we had entered into two interest rate swap agreements designed to mitigate the effects of increases in interest rates under a portion of our repurchase agreements. These swap agreements provide for fixed interest rates indexed off of one-month LIBOR and effectively fix the floating interest rates on $275.0 million of borrowings under our repurchase agreements. We intend to continue to add interest rate hedge positions according to our hedging strategy.

The following table summarizes our hedging activity as of July 17, 2009:

Swap Transactions


                                                                          Fixed
$ in thousands                                                        Interest Rate
Counterparty                      Notional Amount    Maturity Date     in Contract
The Bank of New York Mellon               175,000      08/05/12       2.065%
SunTrust Bank                             100,000      07/15/14       2.785%
Total/Weighted Average                    275,000                     2.327%

Book Value per Share

As of June 30, 2009, our book value per common share was not meaningful.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with GAAP, which requires the use of estimates and assumptions that involve the exercise of judgment and use of assumptions as to future uncertainties. Our most critical accounting policies involve decisions and assessments that could affect our reported assets and liabilities, as well as our reported revenues and expenses. We believe that all of the decisions and assessments upon which our consolidated financial statements are based are reasonable at the time made and based upon information available to us at that time. We rely upon independent pricing of our assets at each quarter's end to arrive at what we believe to be reasonable estimates of fair market value. For a discussion of our critical accounting policies, see "Notes to Consolidated Financial Statements" beginning on page 7 of this report.

Results of Operations

The table below presents certain information from our Consolidated Statement of Operations for the three month periods ending June 30, 2009 and March 31, 2009:

For the Three Months Ended June 30, 2009 March 31, 2009

$ in thousands               (unaudited)
Revenue              -             -
Expenses:
Operating Expenses   59            45

Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to pay dividends, fund investments and other general business needs. Our primary sources of funds for liquidity consists of the net proceeds from our IPO and the concurrent private placements, net cash provided by operating activities, cash from repurchase agreements and other financing arrangements and future issuances of common equity, preferred equity, convertible securities and/or equity or debt securities. We also have sought, and may continue to seek, to also finance our assets under, and may otherwise participate in, programs established by the U.S. Government.

We generally maintain liquidity to pay down borrowings under repurchase arrangements to reduce borrowing costs and otherwise efficiently manage our long-term investment capital. Because the level of these borrowings can be adjusted on a daily basis, the level of cash and cash equivalents carried on the balance sheet is significantly less important than our potential liquidity available under borrowing arrangements. We currently believe that we have sufficient liquidity and capital resources available for the acquisition of additional investments, repayments on borrowings and the payment of cash dividends as required for continued qualification as a REIT.

As of June 30, 2009, we were not a party to any repurchase agreements. However, as of July 17, 2009, we had entered into repurchase agreements with various counterparties for total borrowings of $630.6 million at a weighted average rate of 0.36% to finance our purchases of MBS. The following table presents certain information regarding our risk exposure on our repurchase agreements as of July 17, 2009:

                                                    Percent of
                                                       Total
$ in thousands                         Amount         Amount
Purchase Agreement Counterparties    Outstanding    Outstanding
Credit Suisse                             87,735            14%
Barclay's Bank                           164,200            26%
Cantor Fitzgerald                         44,800             7%
Deutche Bank                             129,847            21%
Goldman Sachs                            204,033            32%
Total                                    630,615           100%

As of July 17, 2009, the weighted average margin requirement, or the percentage amount by which the collateral value must exceed the loan amount, which we also refer to as the "haircut," under all of our repurchase agreements was approximately 6% (weighted by borrowing amount). Across all of our repurchase facilities, the haircuts range from a low of 4% to a high of 6%. Declines in the value of our securities portfolio can trigger margin calls by our lenders under our repurchase agreements. An event of default or termination event would give our counterparty the option to terminate all repurchase transactions existing with us and require any amount due by us to the counterparty to be payable immediately.

As discussed above under "Market Conditions," the residential mortgage market in the United States has experienced difficult economic conditions including:

• increased volatility of many financial assets, including agency securities and other high-quality RMBS assets, due to news of potential security liquidations;

• increased volatility and deterioration in the broader residential mortgage and RMBS markets; and

• significant disruption in financing of RMBS.

If these conditions persist, then our lenders may be forced to exit the repurchase market, become insolvent or further tighten lending standards or increase the amount of required equity capital or haircut, any of which could make it more difficult or costly for us to obtain financing.

We generally seek to borrow (on a recourse basis) between three and seven times the amount of our shareholder's equity.

Effects of Margin Requirements, Leverage and Credit Spreads

Our securities have values that fluctuate according to market conditions and, as discussed above, the market value of our securities will decrease as prevailing interest rates or credit spreads increase. When the value of the securities pledged to secure a repurchase loan decreases to the point where the positive difference between the collateral value and the loan amount is less than the haircut, our lenders may issue a "margin call," which means that the lender will require us to pay the margin call in cash or pledge additional collateral to meet that margin call. Under our repurchase facilities, our lenders have full discretion to determine the value of the securities we pledge to them. Most of our lenders will value securities based on recent trades in the market. Lenders also issue margin calls as the published current principal balance factors change on the pool of mortgages underlying the securities pledged as collateral when scheduled and unscheduled paydowns are announced monthly.

We experience margin calls in the ordinary course of our business. In seeking to manage effectively the margin requirements established by our lenders, we maintain a position of cash and unpledged securities. We refer to this position as our "liquidity." The level of liquidity we have available to meet margin calls is directly affected by our leverage levels, our haircuts and the price changes on our securities. If interest rates increase as a result of a yield curve shift or for another reason or if credit spreads widen, then the prices of our collateral (and our unpledged assets that constitute our liquidity) will decline, we will experience margin calls, and we will use our liquidity to meet the margin calls. There can be no assurance that we will maintain sufficient levels of liquidity to meet any margin calls. If our haircuts increase, our liquidity will proportionately decrease. In addition, if we increase our borrowings, our liquidity will decrease by the amount of additional haircut on the increased level of indebtedness.

We intend to maintain a level of liquidity in relation to our assets that enables us to meet reasonably anticipated margin calls but that also allows us to be substantially invested in securities. We may misjudge the appropriate amount of our liquidity by maintaining excessive liquidity, which would lower our investment returns, or by maintaining insufficient liquidity, which would force us to liquidate assets into unfavorable market conditions and harm our results of operations and financial condition.

Forward-Looking Statements Regarding Liquidity

Based upon our current portfolio, leverage rate and available borrowing arrangements, we believe that the net proceeds of our common equity offerings and private placements, combined with cash flow from operations and available borrowing capacity, will be sufficient to enable us to meet anticipated short-term (one year or less) liquidity requirements such as to fund our investment activities, pay fees under our management agreement, fund our distributions to stockholders and general corporate expenses.

Our ability to meet our long-term (greater than one year) liquidity and capital resource requirements will be subject to obtaining additional debt financing and equity capital. We may increase our capital resources by obtaining long-term credit facilities or making public or private offerings of equity or debt securities, possibly including classes of preferred stock, common stock, and senior or subordinated notes. Such financing will depend on market conditions for capital raises and for the investment of any proceeds. If we are unable to renew, replace or expand our sources of financing on substantially similar terms, it may have an adverse effect on our business and results of operations.

As of June 30, 2009, we had two contractual obligations. On June 25, 2009, the Company entered into (i) a binding underwriting agreement with a group of underwriters to sell 8,500,000 shares of the Company's common stock for $20.00 per share for an aggregate offering price of $170 million, (ii) a share purchase agreement with the Manager to purchase 75,000 shares of the Company's common stock at $20.00 per share or for an aggregate offering price of $1.5 million. Concurrently, Invesco Investments (Bermuda) Ltd. entered into a securities purchase agreement with the Operating Partnership to purchase 1,425,000 OP Units at $20.00 per OP Unit for an aggregate offering price of $28.5 million.

. . .