10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x            QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003

Commission File Number: 001-13709

ANWORTH MORTGAGE ASSET

CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

MARYLAND	52-2059785
(State or other jurisdiction of Incorporation or organization)	(I.R.S. Employer Identification No.)
1299 Ocean Avenue, #250, Santa Monica, California	90401
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (310) 255-4493

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  x    No  ¨

As of November 12, 2003, the Registrant had 39,190,050 shares of Common Stock outstanding.

ANWORTH MORTGAGE ASSET CORPORATION

FORM 10-Q

INDEX

			Page
Part I.		FINANCIAL INFORMATION	1
	Item 1.	Financial Statements	1
		Balance Sheets as of September 30, 2003 and December 31, 2002	1
		Statements of Operations for the three and nine months ended September 30, 2003 and 2002	2
		Statements of Stockholders’ Equity for the three months ended March 31, 2003, June 30, 2003 and September 30, 2003	3
		Statements of Cash Flows for the three and nine months ended September 30, 2003 and 2002	4
		Notes To Unaudited Financial Statements	5
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
	Item 3.	Qualitative and Quantitative Disclosures About Market Risk	34
	Item 4.	Controls and Procedures	37
Part II.		OTHER INFORMATION	38
	Item 1.	Legal Proceedings	38
	Item 2.	Changes in Securities and Use of Proceeds	38
	Item 3.	Defaults Upon Senior Securities	38
	Item 4.	Submission of Matters to a Vote of Security Holders	38
	Item 5.	Other Information	38
	Item 6.	Exhibits and Reports on Form 8-K	38
	Signatures		41

i

Part I.    FINANCIAL INFORMATION

Item 1.    Financial Statements

ANWORTH MORTGAGE ASSET CORPORATION

BALANCE SHEETS

(in thousands)

(unaudited)

	September 30, 2003			December 31, 2002
ASSETS
Mortgage-backed securities:
Mortgage-backed securities pledged to counterparties at fair value	$	3,440,600		$	2,338,405
Mortgage-backed securities at fair value		269,263			91,698
		3,709,863		$	2,430,103
Cash and cash equivalents		116			906
Interest receivable		14,932			11,673
Prepaid expenses and other		347			1,202
	$	3,725,258		$	2,443,884
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Reverse repurchase agreements	$	3,291,734		$	2,153,870
Payable for purchase of mortgage-backed securities		14			—
Accrued interest payable		10,095			9,944
Dividends payable		—			12,673
Accrued expenses and other		996			1,875
		3,302,839			2,178,362
Stockholders’ Equity
Preferred stock, par value $.01 per share; authorized 20,000 shares; no shares issued and outstanding		—			—
Common stock, par value $.01 per share; authorized 100,000 shares; 38,274 and 25,396 issued and 38,274 and 25,346 outstanding respectively		383			253
Additional paid in capital		430,014			256,610
Accumulated other comprehensive (loss) income consisting of unrealized (losses) gains on available-for-sale securities		(10,510	)		14,860
Retained earnings (deficit)		3,227			(5,218	)
Unearned restricted stock		(695	)		(754	)
Treasury stock at cost (50 shares) at December 31, 2002		0			(229	)
		422,419			265,522
	$	3,725,258		$	2,443,884

See accompanying notes to financial statements.

1

ANWORTH MORTGAGE ASSET CORPORATION

STATEMENTS OF OPERATIONS

(in thousands, except for per share amounts)

(unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2003			2002			2003			2002
Interest income net of amortization of premium and discount	$	22,774		$	23,134		$	70,471		$	43,276
Interest expense		(11,647	)		(10,469	)		(32,660	)		(18,590	)
Net interest income		11,127			12,665			37,811			24,686
Gain on sale of securities		706			1,838			3,497			3,493
Expenses:
External base management fee		—			—			—			(400	)
External incentive fee		—			—			—			(1,741	)
Compensation and benefits		(348	)		(189	)		(1,095	)		(207	)
Incentive compensation		(622	)		(1,428	)		(3,028	)		(1,751	)
Cost incurred in acquiring external manager (Note 4)		—			(295	)		—			(3,475	)
Other expenses		(496	)		(490	)		(1,424	)		(700	)
Total expenses		(1,466	)		(2,402	)		(5,547	)		(8,274	)
Net income	$	10,367		$	12,101		$	35,761		$	19,905
Basic earnings per share	$	0.29		$	0.52		$	1.18		$	1.32
Average number of shares outstanding		35,368			23,336			30,381			15,112
Diluted earnings per share	$	0.29		$	0.52		$	1.17		$	1.31
Average number of diluted shares outstanding		35,618			23,433			30,591			15,192
Dividends declared per share	$	0.45		$	0.50		$	0.90		$	1.50

See accompanying notes to financial statements.

2

ANWORTH MORTGAGE ASSET CORPORATION

STATEMENT OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

	Common Stock Shares		Common Stock Par Value		Additional Paid-in Capital			Accum. Other Compre- hensive Income (Loss)			Retained Earnings (Deficit)			Unearned Restricted Stock			Treasury Stock at Cost			Compre- hensive Income		Total
Balance, December 31, 2002		25,346	$	253	$	256,610		$	14,860		$	(5,218	)	$	(754	)	$	(299	)			$	265,522
Issuance of common stock		1,213		12		14,623																	14,635
Available-for-sale securities, fair value adjustment									836											836			836
Net income												11,822								11,822			11,822
Total comprehensive income																				12,658
Amortization of restricted stock															20								20
Balance, March 31, 2003		26,559		265		271,233			15,696			6,604			(734	)		(229	)				292,835
Issuance of common stock		6,269		63		83,106																	83,169
Available-for-sale securities, fair value adjustment									(9,327	)										(9,327	)		(9,327	)
Net income												13,572								13,572			13,572
Total comprehensive income																				4,245
Amortization of restricted stock															19								19
Dividends declared – 0.45/share												(12,358	)										(12,358	)
Balance, June 30, 2003		32,828		328		354,339			6,369			7,818			(715	)		(229	)				367,910
Issuance of common stock		5,446		55		75,904																	75,959
Retired Treasury Stock						(229	)											229					—
Available-for-sale securities, fair value adjustment									(16,879	)										(16,879	)		(16,879	)
Net income												10,367								10,367			10,367
Total comprehensive loss																				(6,512	)
Amortization of restricted stock															20								20
Dividends declared – 0.45/share												(14,958	)										(14,958	)
Balance, September 30, 2003	$	38,274	$	383	$	430,014		$	(10,510	)	$	3,227		$	(695	)	$	—				$	422,419

See accompanying notes to financial statements.

3

ANWORTH MORTGAGE ASSET CORPORATION

STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	For the three months ended September 30,						For the nine months ended September 30,
	2003			2002			2003			2002
Operating Activities:
Net income	$	10,367		$	12,101		$	35,761		$	19,905
Adjustments to reconcile net income to net cash provided by operating activities
Amortization of premiums and discounts		13,439			4,314			29,459			8,179
Gain on sales		(706	)		(1,838	)		(3,497	)		(3,493	)
Non-cash portion of cost incurred in acquiring exernal manager		—			249			—			3,429
Amortization of restricted stock		20			—			59			—
Increase in interest receivable		(1,054	)		(3,185	)		(3,259	)		(10,008	)
Decrease (Increase) in prepaid expenses and other		329			(136	)		856			(170	)
(Decrease) Increase in accrued interest payable		(753	)		3,515			151			6,404
(Decrease) Increase in accrued expenses and other		(558	)		(1	)		(879	)		1,007
Net cash provided by operating activities		21,084			15,019			58,651			25,253
Investing Activities:
Available-for-sale securities:
Purchases		(904,595	)		(1,022,745	)		(2,632,180	)		(2,546,974	)
Proceeds from sales		31,272			161,683			174,879			270,744
Principal payments		507,362			161,882			1,126,222			293,690
Net cash used in investing activities		(365,961	)		(699,180	)		(1,331,079	)		(1,982,540	)
Financing Activities:
Net borrowings from reverse repurchase agreements		283,726			663,810			1,137,864			1,788,040
Proceeds from common stock issued, net		75,759			13,980			173,763			182,938
Dividends paid		(14,958	)		(6,269	)		(39,989	)		(13,697	)
Net cash provided by financing activities		344,727			671,521			1,271,638			1,957,281
Net decrease in cash and cash equivalents		(150	)		(12,640	)		(790	)		(6	)
Cash and cash equivalents at beginning of period		266			12,924			906			290
Cash and cash equivalents at end of period	$	116		$	284		$	116		$	284
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest	$	12,400		$	4,388		$	32,509		$	12,186
Supplemental Disclosure of Investing and Financing Activities:
Mortgage securities purchased, not yet settled	$	—		$	—		$	—		$	—
Common stock issued to acquire external manager	$	—		$	—		$	—		$	3,180
Restricted stock issued	$	—		$	—		$	—		$	794
Retirement of Treasury Stock	$	229		$	—		$	229		$	—

See accompanying notes to financial statements.

4

ANWORTH MORTGAGE ASSET CORPORATION

NOTES TO UNAUDITED FINANCIAL STATEMENTS

NOTE 1.    ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Anworth Mortgage Asset Corporation (the “Company”) was incorporated in Maryland on October 20, 1997. The Company commenced its operations of purchasing and managing an investment portfolio of primarily mortgage-backed securities (“MBS”) on March 17, 1998, upon completion of its initial public offering of the Company’s common stock.

The Company has elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes. Pursuant to current federal tax regulations, one of the requirements of maintaining its status as a REIT is that the Company must distribute at least 90% of its annual taxable net income to its stockholders, subject to certain adjustments.

From the time of its inception through June 13, 2002, the Company was externally managed by Anworth Mortgage Advisory Company (the “Manager”), pursuant to a management agreement between the parties (the “Management Agreement”). As an externally managed company, the Company had no employees of its own and relied on the Manager to conduct its business and operations.

On June 13, 2002, the Manager merged with and into the Company (the “Merger”). The Merger was approved by a special committee consisting solely of the Company’s independent directors, the Company’s full board of directors and the vote of a majority of the Company’s stockholders. Upon the closing of the Merger, the Management Agreement terminated.

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

Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Therefore, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

In the opinion of management, all material adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. The operating results for the quarter ended September 30, 2003 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2003.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and highly liquid investments with original maturities of three months or less. The carrying amount of cash equivalents approximates their fair value.

Mortgage-Backed Securities (“MBS”)

The Company has invested primarily in fixed-rate and adjustable-rate mortgage (“ARM”) pass-through certificates and hybrid ARM securities. Hybrid ARM securities have an initial interest rate that is fixed for a certain period, usually three to five years, and then adjust annually for the remainder of the term of the loan.

The Company classifies its investments as either trading investments, available-for-sale investments or held-to-maturity investments. Management determines the appropriate classification of the securiteis at the time they

5

ANWORTH MORTGAGE ASSET CORPORATION

NOTES TO UNAUDITED FINANCIAL STATEMENTS—(Continued)

are acquired and evaluates the appropriateness of such classifications at each balance sheet date. The Company currently classifies all of its securities as available-for-sale. All assets that are classified as available-for-sale are carried at fair value and unrealized gains or losses are included in other comprehensive income or loss as a component of stockholders’ equity. Losses on securities classified as available-for-sale which are determined by management to be other than temporary in nature are reclassified from accumulated other comprehensive income to current operations.

Interest income is accrued based on the outstanding principal amount of MBS and their contractual terms. Premiums and discounts associated with the purchase of MBS are amortized into interest income over the estimated lives of the asset, adjusted for estimated prepayments, using the effective yield method.

Securities are recorded on the date the securities are purchased or sold (the trade date). Realized gains or losses from securities transactions are determined based on the specific identified cost of the securities.

Derivative Financial Instruments

The Company periodically enters into derivative transactions, in the form of forward purchase commitments, which are intended to hedge its exposure to rising interest rates on funds borrowed to finance its investments in securities. The Company has designated these transactions as cash flow hedges. The Company also enters into derivative transactions also in the form of forward purchase commitments, which are not designated as hedges.

When the Company enters into hedging transactions, it formally documents the relationship between the hedging instruments and the hedged items. The Company also documents its risk-management policies, including objectives and strategies, as it relates to its hedging activities. The Company assesses, both at inception of the hedging activity and on an on-going basis, whether or not the hedging activity is highly effective. When it is determined that a hedge is not highly effective, the Company discontinues hedge accounting prospectively. As of September 30, 2003, the Company had no derivative instruments outstanding.

Credit Risk

At September 30, 2003, the Company had limited its exposure to credit losses on its portfolio of mortgage-backed securities by purchasing primarily securities from Federal Home Loan Mortgage Corporation (“FHLMC”) and Federal National Mortgage Association (“FNMA”). The payment of principal and interest on the FHLMC and FNMA MBS securities are guaranteed by those respective agencies. At September 30, 2003, over 99.9% of the Company’s mortgage-backed securities had an implied “AAA” rating.

Income Taxes

The Company has elected to be taxed as a REIT and 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 subject to Federal income tax to the extent that its distributions to stockholders satisfy the REIT requirements and certain asset, income and stock ownership tests are met.

Stock Based Compensation

The Company accounts for stock-based compensation using the intrinsic method prescribed by Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“FAS 123”). The Company follows the disclosure requirements of FAS 123 in “Note 5”.

6

ANWORTH MORTGAGE ASSET CORPORATION

NOTES TO UNAUDITED FINANCIAL STATEMENTS—(Continued)

Earnings Per Share

Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS assumes the conversion, exercise or issuance of all potential common stock equivalents unless the effect is to reduce a loss or increase the income per share.

The computation of EPS is as follows (amounts in thousands, except per share data):

	Income		Average Shares	Earnings Per Share
For the three months ended September 30, 2003
Basic EPS	$	10,367	35,368	$	0.29
Effect of dilutive securities: Stock options			250
Diluted EPS	$	10,367	35,618	$	0.29
For the three months ended September 30, 2002
Basic EPS	$	12,101	23,336	$	0.52
Effect of dilutive securities: Stock options			97
Diluted EPS	$	12,101	23,433	$	0.52
	Income		Average Shares	Earnings Per Share
For the nine months ended September 30, 2003
Basic EPS	$	35,761	30,381	$	1.18
Effect of dilutive securities: Stock options			210		(0.01	)
Diluted EPS	$	35,761	30,591	$	1.17
For the nine months ended September 30, 2002
Basic EPS	$	19,905	15,112	$	1.32
Effect of dilutive securities: Stock options			80		(0.01	)
Diluted EPS	$	19,905	15,192	$	1.31

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America 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.

Recent Accounting Pronouncement

In November 2002, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. FIN No. 45 clarifies the requirements relating to the guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. The disclosure provisions of FIN No. 45 were effective for financial statements of periods that end after December 15, 2002, and the required disclosures are included in these notes to consolidated financial statements. The provisions for initial recognition

7

ANWORTH MORTGAGE ASSET CORPORATION

NOTES TO UNAUDITED FINANCIAL STATEMENTS—(Continued)

and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002. Adoption has not had a material impact on the Company’s results of operations and financial position.

In December 2002, the FASB issued Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure” (“FAS 148”). FAS 148 amends FAS 123 by providing alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, FAS 148 amends the disclosure requirements of FAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. FAS 148 is not expected to have a significant impact on the Company.

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities–an interpretation of ARB No. 51” (“FIN 46”) in an effort to improve financial reporting by achieving more consistent application of consolidation policies to variable interest entities (“VIEs”). VIEs, as defined in FIN 46, were often referred to as special purpose entities in the past. In general, VIEs lack substantial equity or substance as an equity. Their risks and returns generally inure to those other than the holders of the VIE’s equity (who are referred to as “primary beneficiaries”). VIEs are required to be consolidated by their primary beneficiaries. As of September 30, 2003, the Company did not have any interests in VIEs and does not believe that the provisions of FIN 46 will have a material effect on the Company’s financial statements.

In May 2003, the FASB issued Financial Accounting Standards No.150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” in an effort to establish standards for classification and measurements of those financial instruments. It requires that an issuer classify a financial instrument within its scope as a liability. Many of those instruments, as stated in FAS 150, were previously classified as equity. This statement is effective at the beginning of the first interim period commencing after June 15, 2003. The provisions of FAS 150 did not have a material effect on the Company’s financial statements.

NOTE 2.    MORTGAGE-BACKED SECURITIES

The following table summarizes the Company’s mortgage-backed securities classified as available-for-sale as of September 30, 2003, which are carried at their fair value (amounts in thousands):

	Government National Mortgage Corporation			Federal Home Loan Mortgage Corporation			Federal National Mortgage Association			Total MBS Assets
Amortized cost	$	203,050		$	797,288		$	2,690,815		$	3,691,153
Paydowns receivable		—			29,220			—			29,220
Unrealized gains		287			1,437			5,773			7,497
Unrealized losses		(1,279	)		(3,487	)		(13,241	)		(18,007	)
Fair value	$	202,058		$	824,458		$	2,683,347		$	3,709,863

8

ANWORTH MORTGAGE ASSET CORPORATION

NOTES TO UNAUDITED FINANCIAL STATEMENTS—(Continued)

The following table summarizes the Company’s securities at their fair value as of September 30, 2003 and December 31, 2002 (amounts in thousands):

September 30, 2003

	ARMs			Hybrids			Fixed			Floating Rate CMO			Total
Amortized cost	$	1,016,074		$	2,232,683		$	406,822		$	35,574		$	3,691,153
Paydowns receivable		8,091			21,129			—			—			29,220
Unrealized gains		1,289			4,056			2,123			29			7,497
Unrealized losses		(4,132	)		(9,629	)		(4,010	)		(236	)		(18,007	)
Fair value	$	1,021,322		$	2,248,239		$	404,935		$	35,367		$	3,709,863

December 31, 2002

	ARMs			Hybrids			Fixed		Floating Rate CMO		Total
Amortized cost	$	954,505		$	1,110,088		$	333,381	$	—	$	2,397,974
Paydowns receivable		8,960			8,309			—		—		17,269
Unrealized gains		2,235			8,420			5,393		—		16,048
Unrealized losses		(1,030	)		(158	)		—		—		(1,188	)
Fair value	$	964,670		$	1,126,659		$	338,774	$	—	$	2,430,103

During the three months ended September 30, 2003, the Company sold approximately $30.5 million of its available-for-sale MBS for a net realized gain of approximately $0.7 million.

During the three months ended September 30, 2002, the Company sold approximately $107 million of its available-for-sale MBS for a net realized gain of approximately $1.8 million.

NOTE 3.    REVERSE REPURCHASE AGREEMENTS

The Company has entered into reverse repurchase agreements to finance most of its MBS. The reverse repurchase agreements are short-term borrowings that are secured by the market value of the Company’s MBS and bear interest rates that have historically moved in close relationship to London Interbank Offer Rate (“LIBOR”). At September 30, 2003, the Company’s reverse repurchase agreements had a weighted average term to maturity of 276 days and a weighted average borrowing rate of 1.48%. At September 30, 2003, MBS with a carrying value of approximately $3.44 billion have been pledged as collateral under the reverse repurchase agreements.

At September 30, 2003, the repurchase agreements had the following remaining maturities:

Less than 3 months	7.1	%
3 months to less than 1 year	77.3	%
1 year to less than 2 years	15.6	%
2 years to less than 3 years	—	%
Greater than 3 years	—	%
	100	%

9

ANWORTH MORTGAGE ASSET CORPORATION

NOTES TO UNAUDITED FINANCIAL STATEMENTS—(Continued)

NOTE 4.    TRANSACTIONS WITH AFFILIATES

Management Fees and Merger with the Manager

From the time of its inception through June 13, 2002, the Company was externally managed by the Manager pursuant to the Management Agreement. As an externally managed company, the Company had no employees of its own and relied on the Manager to conduct its business and operations.

Under the terms of the Management Agreement, the Company paid the Manager an annual base management fee equal to 1% of the first $300 million of average net invested assets (as defined in the Management Agreement), plus 0.8% of the portion above $300 million. In addition to the base management fee, the Manager received as incentive compensation for each fiscal quarter an amount equal to 20% of the amount of taxable net income of the Company, before incentive compensation, for such fiscal quarter in excess of the amount that would produce an annualized return on equity (calculated by multiplying the return on equity for such fiscal quarter by four) equal to the Ten-Year U.S. Treasury Rate for such fiscal quarter plus 1%. For the quarter ended June 30, 2002, the Company paid the Manager $208,000 in base management fees. The Company paid the Manager $728,000 in incentive compensation for the quarter ended June 30, 2002.

On June 13, 2002, the Manager merged with and into the Company pursuant to the Merger. The stockholder of the Manager, a trust controlled by Lloyd McAdams, the Company’s President, Chairman and Chief Executive Officer, and Heather U. Baines, one of the Company’s Executive Vice Presidents, received 240,000 shares of the Company’s common stock as merger consideration, which was worth approximately $3.2 million based on the closing price of the Company’s common stock on June 13, 2002. As a result of the Merger, the Company is now an internally managed company, and certain employees of the Manager have become employees of the Company. As a condition to the Merger, the Company entered into direct employment contracts with Lloyd McAdams, Heather U. Baines and Joseph McAdams, adopted an incentive compensation plan for key employees, increased the size of its 1997 Stock Option and Awards Plan and provided for future automatic increases in the size of that plan. Upon the closing of the Merger, the Management Agreement terminated.

The market value of the Company’s common stock issued, valued as of the consummation of the Merger, in excess of the fair value of the net tangible assets acquired, was accounted for as a non-cash charge to operating income in 2002. Since the Company did not acquire tangible net assets from the Manager in the merger, the non-cash charge equaled the value of the consideration paid in the Merger, which was approximately $3.2 million. This non-cash charge did not reduce the Company’s taxable income of which at least 90% must be paid as dividends to stockholders to maintain the Company’s status as a REIT. It did, however, reduce the Company’s reportable net income in the quarter ended June 30, 2002. In addition, the Company incurred $295,000 in merger related expenses.

2002 Incentive Compensation Plan

The Company adopted its 2002 Incentive Compensation Plan which became effective on the effective date of the Merger. Under the 2002 Incentive Compensation Plan, eligible employees of the Company have the opportunity to earn incentive compensation for each fiscal quarter. The total aggregate amount of compensation that may be earned by all employees equals a percentage of taxable net income, before incentive compensation, in excess of the amount that would produce an annualized return on average net worth equal to the Ten-Year US Treasury Rate plus 1% (the “Threshold Return”).

The 2002 Incentive Compensation Plan contains a “high water mark” provision requiring that in any fiscal quarter in which the Company’s taxable net income is an amount less than the amount necessary to earn the

10

ANWORTH MORTGAGE ASSET CORPORATION

NOTES TO UNAUDITED FINANCIAL STATEMENTS—(Continued)

Threshold Return, the Company will calculate negative incentive compensation for that fiscal quarter which will be carried forward and will offset future incentive compensation earned under the plan, but only with respect to those participants who were participants during the fiscal quarter(s) in which negative incentive compensation was generated.

The percentage of taxable net income in excess of the Threshold Return earned under the plan by all employees is calculated based on the Company’s quarterly average net worth as defined in the Incentive Compensation Plan. The percentage rate used in this calculation is based on a blended average of the following tiered percentage rates:

• 25% for the first $50 million of average net worth;

• 15% for the average net worth between $50 million and $100 million;

• 10% for the average net worth between $100 million and $200 million;

• 5% for the average net worth in excess of $200 million.

The 2002 Incentive Compensation Plan requires that the Company pay all amounts earned thereunder each quarter (subject to offset for accrued negative incentive compensation), and the Company will be required to pay a percentage of such amounts to certain of its executives pursuant to the terms of their employment agreements. For the quarter ended September 30, 2003, eligible employees under the 2002 Incentive Compensation Plan earned $ 0.6 million in incentive compensation.

Employment Agreements

Upon the closing of the Merger, the Company assumed the existing employment agreements of Lloyd McAdams, Heather U. Baines and Joseph McAdams. Such agreements were modified by the addenda entered into between the Company and each of the executives as described below. Pursuant to the terms of the employment agreements, Lloyd McAdams serves as the Company’s President, Chairman and Chief Executive Officer, Joseph McAdams serves as the Company’s Chief Investment Officer and Executive Vice President, and Heather U. Baines serves as the Company’s Executive Vice President . Heather U. Baines receives a $50,000 annual base salary, Lloyd McAdams receives a base salary equal to the greater of (i) $120,000 per annum, or (ii) a per annum amount equal to 0.125% of the Company’s book value, not to exceed $250,000. Joseph McAdams receives a base salary equal to the greater of (i) $100,000 per annum, or (ii) a per annum amount equal to 0.10% of the Company’s book value, not to exceed $250,000.

These employment agreements, as modified by the addenda, also have the following provisions:

• the three executives are entitled to participate in the 2002 Incentive Compensation Plan and each of these individuals are provided a minimum percentage of the amounts earned under such plan. Lloyd McAdams is entitled to 45% of all amounts paid under the plan; Joe McAdams is entitled to 25% of all amounts paid under the plan, and Heather U. Baines is entitled to 5% of all amounts paid under the plan. The three executives may be paid up to 50% of their respective incentive compensation earned under such plan in the form of the Company’s common stock;

• the incentive compensation plan may not be amended without the consent of the three executives;

• in the event of a registered public offering of the Company’s shares, the three executives are entitled to piggyback registration rights in connection with such offering;

• in the event any of the three executives is terminated without “cause”, or if they terminate for “good reason”, or in the case of Lloyd McAdams or Joseph McAdams, their employment agreements are not

11

ANWORTH MORTGAGE ASSET CORPORATION

NOTES TO UNAUDITED FINANCIAL STATEMENTS—(Continued)

renewed, then the executives would be entitled to (1) all base salary due under the contracts, (2) all discretionary bonus due under the contracts, (3) a lump sum payment of an amount equal to three years of the executive’s then-current base salary, (4) payment of COBRA medical coverage for eighteen months, (5) immediate vesting of all pension benefits, (6) all incentive compensation to which the executives would have been entitled to under the contract prorated through the termination date, and (7) all expense reimbursements and benefits due and owing the executives through the termination. In addition, under these circumstances, Lloyd McAdams and Joseph McAdams would each be entitled to a lump sum payment equal to 150% of the greater of (i) the highest amount paid or payable to all employees under the 2002 Incentive Compensation Plan during any one of the three fiscal years prior to their termination, and (ii) the highest amount paid, or that would be payable, under the plan during any of the three fiscal years following their termination. Ms. Baines would also be entitled to a lump sum payment equal to all incentive compensation that Ms. Baines would have been entitled to under the plan during the three year period following her termination;

• the three executives received restricted stock grants of 20,000 shares each, which grants vest in equal, annual installments over ten years following the effective date of the merger; and

• the three executives are each subject to a one-year non-competition provision following termination of their employment.

The value of the 54,000 unvested shares of restricted stock issued to the above executives, in connection with the 2002 Incentive Compensation Plan, is reflected on the Company’s balance sheet as a reduction to stockholders’ equity. This amount is being amortized to expense over the ten year restricted period until such shares vest and is accounted for as unearned restricted stock.

Agreements with Pacific Income Advisers, Inc.

On June 13, 2002, the Company entered into a sublease with Pacific Income Advisers, Inc. (“PIA”), a company owned by a trust controlled by officers of the Company. Under the sublease, the Company leases 5,500 square feet of office space from PIA and pays at a rate equal to PIA’s obligation, currently $45.36 per square foot. The sublease runs through June 30, 2012 unless earlier terminated pursuant to the master lease. During the third quarter of 2003, the Company paid $62,363 rent to PIA under the sublease which is included in “Other Expenses” on the Statements of Operations. During the nine months ended September 30, 2003, the Company paid $228,481 in rent to PIA under the sublease which is included in “Other Expenses” on the Statements of Operations.

The future minimum lease commitment is as follows:

Year	2003		2004		2005		2006		2007		Thereafter		Total Commitment
Commitment Amount	$	65,907	$	256,960	$	264,660	$	272,580	$	280,775	$	1,209,890	$	2,350,772

On October 14, 2002, the Company entered into an administrative agreement with PIA. Under the administrative agreement, PIA provides administrative services and equipment to the Company in the nature of accounting, human resources, operational support and information technology, and the Company pays an annual fee of 7 basis points on the first $225 million of stockholder equity and 3.5 basis points thereafter (paid quarterly in advance) for those services. The administrative agreement is for an initial term of one year and will renew for successive one year terms thereafter unless either party gives notice of termination at least 90 days before the expiration of the then-current annual term. The Company may also terminate the administrative agreement upon 30 days notice for any reason and immediately if there is a material breach by PIA. Included in “Other Expenses” on the Statement of Operations are fees of $51,880 paid to PIA in connection with this agreement during the third quarter and fees of $140,111 for the nine months ended September 30, 2003.

12

ANWORTH MORTGAGE ASSET CORPORATION

NOTES TO UNAUDITED FINANCIAL STATEMENTS—(Continued)

Belvedere Trust Mortgage Corporation

On November 3, 2003, the Company formed a wholly-owned subsidiary called Belvedere Trust Mortgage Corporation, or Belvedere Trust. Belvedere Trust was formed as a qualified REIT subsidiary to acquire and own mortgage loans, with a focus on the high credit-quality jumbo adjustable rate, hybrid and second-lien mortgage markets. Belvedere Trust was also formed with the intent of securitizing the mortgage loans it acquires and selling mortgage-backed securities in the capital markets. The Company has made an initial investment of $25 million in Belvedere Trust to capitalize its initial mortgage operations.

On November 3, 2003, the Company also formed BT Management Company, L.L.C., or BT Management, a Delaware limited liability company that is owned 50% by the Company, 27.5% by Claus Lund, the Chief Executive Officer of Belvedere Trust, 17.5% by Russell J. Thompson, the Chief Financial Officer of Belvedere Trust, and 5% by Lloyd McAdams, the Company’s Chairman and Chief Executive Officer. BT Management has entered into a management agreement with Belvedere Trust pursuant to which BT Management will manage the day-to-day operations of Belvedere Trust in exchange for an annual base management fee and a quarterly incentive fee. The annual base management fee is equal to 1.15% of the first $300 million of average net invested assets (as defined in the management agreement), plus 0.85% of the portion above $300 million. The incentive fee for each fiscal quarter is equal to an amount equal to 20% of the amount of taxable net income of the Company, before incentive compensation, for such quarter in excess of the amount that would produce an annualized return on equity (calculated by multiplying the return on equity for such fiscal quarter by four) equal to the Ten-Year U.S. Treasury Rate for such fiscal quarter plus 1%.

Certain of the Company’s executive officers serve as officers and directors of Belvedere Trust and officers and managers of BT Management. BT Management has also entered into Employment Agreements with Messrs. Lund and Thompson whereby Mr. Lund serves as the President of BT Management and Mr. Russell serves as Executive Vice President and Treasurer of BT Management. The terms of the employment contracts are for three years and automatically renew for one year terms unless written notice is provided by either party ninety days prior to the end of the current term. Messrs. Lund and Russell will be paid a base salary of $75,000 per year, and can earn incentive compensation pursuant to a compensation program to be adopted by BT Management.

NOTE 5.    STOCK OPTION PLAN

The Company has adopted the Anworth Mortgage Asset Corporation 1997 Stock Option and Awards Plan (the “Stock Option Plan”) which authorizes the grant of options to purchase an aggregate of up to 1.8 million of the outstanding shares of the Company’s common stock. The Stock Option Plan authorizes the Board of Directors, or a committee of the Board of Directors, to grant Incentive Stock Options (“ISOs”) as defined under section 422 of the Code, options not so qualified (“NQSOs”), dividend equivalent rights (“DERs”) and stock appreciation rights (“SARs”). The exercise price for any option granted under the Stock Option Plan may not be less than 100% of the fair market value of the shares of common stock at the time the option is granted. As of September 30, 2003, 397,804 shares remained available for future issuance under the Stock Option Plan through any combination of stock options or other awards. The share reserve under the Stock Option Plan automatically increases on the first trading day in January each calendar year by an amount equal to two (2%) percent of the total number of shares of common stock outstanding on the last trading day of December in the prior calendar year, but in no event will this annual increase exceed 300,000 shares and in no event will the total number of shares of common stock in the share reserve (as adjusted for all such annual increases) exceed 3 million shares.

For the quarter ended September 30, 2003, the Company recorded no compensation expense associated with the Stock Option Plan.

13

ANWORTH MORTGAGE ASSET CORPORATION

NOTES TO UNAUDITED FINANCIAL STATEMENTS—(Continued)

The Company accounts for stock options using the intrinsic value method under the provisions of Accounting Principles Board (“APB”) Opinion No. 25 and provides pro forma net income and pro forma earnings per share disclosures for employee stock option grants as if the fair-value-based method, defined in FAS No. 123, had been applied. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under FAS No. 123, the Company’s net income would have been reduced to the pro forma amounts indicated below for the three months ended September 30:

(in thousands except per share amounts)	2003		2002
Net income, as reported	$	10,367	$	12,101
Deduct: Total stock-based compensation expense determined under the fair value based method for all awards, net of related taxes		5		7
Pro forma net income	$	10,362	$	12,094
Basic income per share, as reported	$	0.29	$	0.52
Pro forma basic income per share	$	0.29	$	0.52
Diluted income per share, as reported	$	0.29	$	0.52
Pro forma diluted income per share	$	0.29	$	0.52

NOTE 6.    FAIR VALUES OF FINANCIAL INSTRUMENTS

MBS and other marketable securities are reflected in the financial statements at estimated fair value. Management bases its fair value estimates for MBS and other marketable securities primarily on third-party bid price indications provided by dealers who make markets in these financial instruments when such indications are available. The fair value reported, however, reflects estimates and may not necessarily be indicative of the amounts the Company could realize in a current market exchange. Cash and cash equivalents, interest receivable, reverse repurchase agreements and payables for securities purchased are reflected in the financial statements at their costs, which approximates their fair value because of the short-term nature of these instruments.

NOTE 7.    COMMON STOCK

On August 30, 2002, the Company filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission offering up to $350 million of the capital stock of the Company. The registration statement was declared effective on September 10, 2002. As of September 30, 2003, $209.3 million remained available for issuance under the registration statement.

On August 18, 2003, the Company completed a follow-on offering of our common stock. The Company issued 4,025,000 shares of common stock pursuant to a public offering at a price of $14.30 per share and received net proceeds of $54.7 million, net of underwriting discount and other offering expenses of $0.7197 per share.

In December 2002, the Company entered into a sales agreement with Cantor Fitzgerald & Co. (“Cantor”) to sell up to 4.8 million shares of common stock from time to time through a controlled equity offering program under which Cantor acts as sales agent. Sales of the shares have been and will be made by means of ordinary brokers’ transactions on the American Stock Exchange at market prices and through privately negotiated transactions. Commencing February 10, 2003 through the quarter ended September 30, 2003, the Company sold 1.85 million shares under the controlled equity offering program, which provided net proceeds to the Company of approximately $24.6 million. Cantor received an aggregate of approximately $759,000, which represents a commission of 3% on the gross sales price per share of the sales under the sales agreement through September 30, 2003.

14

ANWORTH MORTGAGE ASSET CORPORATION

NOTES TO UNAUDITED FINANCIAL STATEMENTS—(Continued)

In September 1999, the Company filed with the Securities and Exchange Commission its Dividend Reinvestment and Direct Stock Purchase Plan. The plan allows shareholders and non-shareholders to purchase shares of the Company’s common stock and to reinvest dividends in additional shares of the Company’s common stock. The plan was amended in June 2002 and December 2002 to increase the number of shares available thereunder. During the three month period ended September 30, 2003, the Company issued 1,168,000 shares of common stock under the plan, resulting in proceeds to the Company of approximately $17.6 million.

NOTE 8.    SUBSEQUENT EVENTS

On October 15, 2003, the Company declared a dividend of $0.33 per share which is payable on November 10, 2003 to holders of record as of the close of business on October 30, 2003. The ex-dividend date was October 28, 2003.

15

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement

You should read the following discussion and analysis in conjunction with the financial statements and related notes thereto contained elsewhere in this report. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common 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 Securities and Exchange Commission, or SEC, including our Annual Report on Form 10-K for the year ended December 31, 2002 and our Registration Statement on Form S-3 filed with the SEC on August 30, 2002, as amended, that discuss our business 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 that are difficult to predict 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 the section “Risk Factors.” We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

Critical Accounting Policies

Management has the obligation to ensure that its policies and methodologies are in accordance with generally accepted accounting principles. Management has reviewed and evaluated its critical accounting policies and believes them to be appropriate.

The preparation of financial statements in accordance with generally accepted accounting principles requires management to makes estimates and assumptions in certain circumstances that affect amounts reported in the accompanying financial statements. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We do not believe that there is a great likelihood that materially different amounts would be reported related to accounting policies described below. Nevertheless, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.

Our accounting policies are described in Note 1 to our financial statements. Management believes the more significant of these to be as follows:

Revenue Recognition

The most significant source of our revenue is derived from our investments in mortgage-backed securities. We reflect income using the effective yield method, which, through amortization of premiums and accretion of discounts at an effective yield, recognizes periodic income over the estimated life of the investment on a constant yield basis, as adjusted for estimated prepayment activity. Management believes our revenue recognition policies are appropriate to reflect the substance of the underlying transactions.

Valuation of Investment Securities

We carry our investment securities on the balance sheet at fair value. The fair values of our mortgage-backed securities are generally based on market prices provided by certain dealers who make markets in such

16

securities. The fair values of other marketable securities are obtained from the last reported sale of such securities on its principal exchange or, if no representative sale is reported, the mean between the closing bid and ask prices. If, in the opinion of management, one or more securities prices reported to us are not reliable or unavailable, management estimates the fair value based on characteristics of the security it receives from the issuer and available market information. The fair values reported reflect estimates and may not necessarily be indicative of the amounts we could realize in a current market exchange. Losses on securities classified as available-for-sale which are determined by management to be other than temporary in nature are reclassified from accumulated other comprehensive income to current operations.

Income Taxes

Our financial results do not reflect provisions for current or deferred income taxes. Management believes that we have and intend to continue to operate in a manner that will continue to allow us to be taxed as a REIT and as a result does not expect to pay substantial corporate level taxes. Many of these requirements, however, are highly technical and complex. If we were to fail to meet these requirements, we would be subject to federal income tax.

General

We were formed in October 1997 to invest primarily in mortgage-related assets, including mortgage pass-through certificates, collateralized mortgage obligations, mortgage loans and other securities representing interests in, or obligations backed by, pools of mortgage loans which can be readily financed. We commenced operations on March 17, 1998 upon the closing of our initial public offering. Our principal business objective is to generate net income for distribution to stockholders based upon the spread between the interest income on our mortgage-backed securities and the costs of borrowing to finance our acquisition of mortgage-backed securities.

We are organized for tax purposes as a 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. As of September 30, 2003, our qualified REIT assets (real estate assets, as defined in the Code, cash and cash items and government securities) were greater than 99% of our total assets, as compared to the Code requirement that at least 75% of our total assets must be qualified REIT assets. As of September 30, 2003, greater than 99% of our 2002 revenue qualified for both the 75% source of income test and the 95% source of income test under the REIT rules. We believe we met 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.

Results Of Operations

Three Months Ended September 30, 2003 Compared to September 30, 2002

For the three months ended September 30, 2003, our net income was $10,367,000, or $0.29 per diluted share, based on an average of 35,618,000 shares outstanding. For the three months ended September 30, 2002, our net income was $12,101,000, or $0.52 per diluted share, based on an average of 23,433,000 shares outstanding.

Net interest income for the three months ended September 30, 2003 totaled $11,127,000, or 48.9% of total interest income, compared to $12,665,000, or 54.7% of total interest income, for the three months ended September 30, 2002. Net interest income is comprised of the interest income earned on mortgage investments, net of premium amortization, less interest expense from borrowings and does not include realized capital gains or losses. As a result of investing the proceeds of our common stock offerings, our assets and borrowings have increased significantly during the past year. This has resulted in a large increase in our income and interest expense compared to last year.

The decrease in net interest income both in absolute terms and as a percentage of total interest income during the three months ended September 30, 2003 compared to the three months ended September 30, 2002

17

resulted from an increase in premium amortization expense. The increase in premium amortization expense resulted from an increase in the constant prepayment rate (“CPR”) of our MBS, resulting primarily from an extremely high volume of mortgage refinancings driven by the record-low interest rates. These refinancings occurred mainly in the second quarter, and their net effect was realized through the increase in premium amortization expense in the third quarter. Also, during the three months ended September 30, 2003, we realized gains on the sale of assets in the amount of $706,000, or 3.1% of total interest income, compared to gains on sale of $1,838,000, or 7.9% of total interest income, realized during the three months ended September 30, 2002.

For the three months ended September 30, 2003, our operating expenses decreased to $1,466,000, or 6.4% of total interest income, from $2,402,000, or 10.4% of total interest income, for the three months ended September 30, 2002. This decrease was due primarily to an decrease in the incentive compensation paid under the Company’s 2002 Incentive Compensation Plan. The decrease in incentive compensation resulted from a decrease in our return on equity resulting from a decline in net income, which is tied directly to the amount of incentive compensation that the Company pays under the plan.

For the three months ended September 30, 2003, the CPR of our MBS was 46.0%. The CPR of adjustable-rate MBS was 41.0%, the CPR of adjustable-rate hybrid MBS was 49.4% and the CPR of fixed-rate MBS was 27.4%.

For the three months ended September 30, 2002, the CPR of our MBS was 28%. The CPR of adjustable-rate MBS was 34%, the CPR of adjustable-rate hybrid MBS was 31%, and the CPR of fixed-rate MBS was 8%.

Nine Months Ended September 30, 2003 Compared to September 30, 2002

For the nine months ended September 30, 2003, our net income was $35,761,000, or $1.17 per diluted share, based on an average of 30,591,000 shares outstanding. For the nine months ended September 30, 2002, our net income was $19,905,000, or $1.31 per diluted share, based on an average of 15,192,000 shares outstanding.

Net interest income for the nine months ended September 30, 2003 totaled $37,811,000, or 53.7% of total interest income, compared to $24,686,000, or 57.0% of total interest income, for the nine months ended September 30, 2002. As a result of investing the proceeds of our common stock offerings, our assets and borrowings have increased significantly from last year. This has resulted in an increase in our income and interest expense compared to last year. Also, during the nine months ended September 30, 2003, we realized a gain on the sale of assets in the amount of $3,497,000, or 5.0% of total interest income, compared to a gain on sale of $3,493,000, or 8.1% of total interest income, realized during the nine months ended September 30, 2002.

For the nine months ended September 30, 2003, our operating expenses increased to $5,547,000, or 7.9% of total interest income, from $4,799,000, excluding the cost of $3,475,000, incurred in acquiring the internal manager, or 11.1% of total interest income, for the nine months ended September 30, 2002. This increase, in absolute dollars, was due primarily to an increase in the incentive compensation and general administrative expenses. Operating expenses, however, as a percentage of total interest income, decreased.

Financial Condition

At September 30, 2003, we held mortgage assets of approximately $3.7 billion at amortized cost, consisting primarily of $3.25 billion of adjustable-rate mortgage-backed securities, $36 million of floating rate CMOs and $407 million of fixed-rate mortgage-backed securities. This amount represents an approximate 54% increase over the $2.4 billion held at December 31, 2002. At September 30, 2003, we were well within our asset allocation guidelines, since 100% of total assets were mortgage-backed securities guaranteed by an agency of the United States government such as Fannie Mae or Freddie Mac. Of the adjustable-rate mortgage-backed securities owned by us, 32% were adjustable-rate pass-through certificates whose coupons reset within one year. The remaining 68% consisted of 63.1% of 3/1 hybrid adjustable-rate mortgage-backed securities and approximately 4.9% invested in 5/1 hybrid adjustable-rate mortgage-backed securities. Hybrid adjustable-rate mortgage-backed securities 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.

18

The following table presents a schedule of mortgage-backed securities at fair value owned at September 30, 2003 and December 31, 2002, classified by type of issuer (dollar amounts in thousands):

	At September 30, 2003				At December 31, 2002
Agency	Fair Value		Portfolio Percentage		Fair Value		Portfolio Percentage
FNMA	$	2,683,347	72.3	%	$	1,631,425	67.1	%
FHLMC		824,458	22.2	%		651,645	26.8	%
GNMA		202,058	5.5	%		147,033	6.1	%
Total Portfolio	$	3,709,863	100	%	$	2,430,103	100	%

The following table classifies our portfolio of mortgage-backed securities owned at September 30, 2003 and December 31, 2002, by type of interest rate index (dollar amounts in thousands):

	At September 30, 2003				At December 31, 2002
Index	Fair Value		Portfolio Percentage		Fair Value		Portfolio Percentage
One-month LIBOR	$	35,472	1.0	%	$	77,055	3.2	%
Six-month LIBOR		14,654	0.4	%		17,614	0.7	%
One-year LIBOR		1,405,801	37.9	%		613,325	25.2	%
Six-month Certificate of Deposit		832	0.0	%		1,239	0.1	%
One-year Constant Maturity Treasury		1,733,539	46.7	%		1,370,783	56.4	%
Cost of Funds Index		114,630	3.1	%		11,313	0.5	%
Fixed-rate		404,935	10.9	%		338,774	13.9	%
Total Portfolio	$	3,709,863	100	%	$	2,430,103	100	%

The fair values indicated do not include interest earned but not yet paid. With respect to our hybrid ARMs, 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.

Our mortgage-backed securities portfolio had a weighted average coupon of 4.31% as of September 30, 2003. The average coupon of the adjustable-rate securities was 4.16%, the hybrid average coupon was 4.18%, the CMO floaters average coupon was 1.94% and the average coupon of the fixed-rate securities was 5.53%.

At September 30, 2003, the unamortized net premium paid for our mortgage-backed securities was $96.3 million.

We analyze our mortgage-backed securities 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.

As of September 30, 2003, the average amortized cost of our mortgage-related assets was 102.68%, the average amortized cost of the adjustable-rate securities was 102.66% and the average amortized cost of the fixed-rate securities was 102.81%. As of September 30, 2003, the average interest rate on outstanding repurchase agreements was 1.48% and the average days to maturity was 276 days.

Hedging

We periodically enter into derivative transactions, in the form of forward purchase commitments, which are intended to hedge our exposure to rising rates on funds borrowed to finance our investments in securities. We designate these transactions as cash flow hedges. We also enter into derivative transactions, in the form of forward purchase commitments, which are not designated as hedges.

19

As part of our asset/liability management policy, we may enter into hedging agreements such as interest rate caps, floors or swaps. These agreements would be entered into to try to reduce interest rate risk and would be designed to provide us with income and capital appreciation in the event of certain changes in interest rates. We review the need for hedging agreements on a regular basis consistent with our capital investment policy. We did not enter into any derivative transactions, nor were any outstanding, during the nine month period ending September 30, 2003.

Liquidity and Capital Resources

Our primary source of funds consists of repurchase agreements, which totaled $3.29 million at September 30, 2003. Our other significant source of funds for the nine months ended September 30, 2003 consisted of payments of principal from our mortgage securities portfolio in the amount of $1.126 million.

As of September 30, 2003, all of our repurchase agreements were fixed-rate term repurchase agreements with original maturities ranging from three to twenty–four months. On September 30, 2003, we had borrowing arrangements with 16 different financial institutions and had borrowed funds under repurchase agreements with 14 of these firms. Because we borrow money based on the fair value of our mortgage-backed securities and because increases in short-term interest rates can negatively impact the valuation of mortgage-backed securities, our borrowing ability could be limited and lenders may initiate margin calls in the event short-term interest rates increase or the value of our mortgage-backed securities declines for other reasons. During the quarter ended September 30, 2003, we had adequate cash flow, liquid assets and unpledged collateral with which to meet our margin requirements during the period.

In the future, we expect that our primary sources of funds will continue to consist of borrowed funds under repurchase agreement transactions with one to twenty–four month maturities and of monthly payments of principal and interest on our mortgage-backed securities portfolio. Our liquid assets generally consist of unpledged mortgage-backed securities, cash and cash equivalents.

From time to time, we raise additional equity depending upon market conditions and other factors. We completed a public offering in February 2002 that raised approximately $40 million in net proceeds. We completed an additional public offering in June 2002 that raised approximately $126 million in net proceeds.

We also intend to raise additional equity through the issuance of capital stock as described in our registration statement on Form S-3 that was initially declared effective by the Securities and Exchange Commission in September 2002. The registration statement was subsequently amended and the post-effective amendment was declared effective in January 2003. We completed a public offering, pursuant to that registration statement in May 2003 and August 2003 that raised approximately $113.6 million in net proceeds.

In December 2002, we entered into a sales agreement with Cantor Fitzgerald & Co. to sell up to 4.8 million shares of common stock from time to time through a controlled equity offering program under which Cantor acts as sales agent. Sales of the shares have been made on the American Stock Exchange and more recently on the New York Stock Exchange by means of ordinary brokers’ transactions at market prices and through privately negotiated transactions. We intend to make such sales when we believe the issuance of stock would be accretive to our shareholders. Through September 30, 2003, we sold 1.85 million shares under the controlled equity offering program, which provided net proceeds to us of approximately $24.55 million. The sales agent received an aggregate of approximately $759,000, which represents a commission of 3% on the gross sales price per share under the sales agreement through September 30, 2003.

For the nine months ended September 30, 2003, we had raised approximately $35.7 million in capital under our dividend reinvestment and direct stock purchase plan.

20

Stockholders’ Equity

We use available-for-sale treatment for our mortgage-backed securities. These assets are carried on the balance sheet at fair value rather than historical amortized cost. Based upon such available-for-sale treatment, our equity base at September 30, 2003 was $422.4 million, or $11.04 per share. The impact, however, of the $0.33 per share dividend declared on October 15, 2003 will reduce book value to approximately $10.70 per share.

With our available-for-sale accounting treatment, unrealized fluctuations in fair values of assets do not impact GAAP income or taxable income but rather are reflected on the balance sheet by changing the carrying value of the assets and reflecting the change in stockholders’ equity under “Accumulated other comprehensive income (loss), unrealized gain (loss) on available-for-sale securities.” Accumulated other comprehensive loss, unrealized loss on available-for-sale securities was $10.5 million, or 0.28% less than the amortized cost of mortgage-backed securities at September 30, 2003. This was in contrast to other comprehensive income consisting of unrealized gains of $14.9 million at December 31, 2002. This change was due to an increase in interest rates, which inversely affects the fair value of our MBS.

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.

Unrealized changes in the fair value of mortgage-backed securities have one significant and direct effect on our potential earnings and dividends. Specifically, positive mark-to-market changes will increase our equity base and allow us to increase our borrowing capacity while negative changes will tend to limit borrowing capacity under our capital investment policy. A very large negative change in the fair value of our mortgage-backed securities might reduce our liquidity, requiring us to sell assets with the likely result of realized losses upon sale.

Subsequent Events

On November 3, 2003, the Company formed a wholly-owned subsidiary called Belvedere Trust Mortgage Corporation, or Belvedere Trust. Belvedere Trust was formed as a qualified REIT subsidiary to acquire and own mortgage loans, with a focus on the high credit-quality jumbo adjustable rate, hybrid and second-lien mortgage markets. Belvedere Trust was also formed with the intent of securitizing the mortgage loans it acquires and selling mortgage-backed securities in the capital markets. The Company has made an initial investment of $25 million in Belvedere Trust to capitalize its initial mortgage operations.

On November 3, 2003, the Company also formed BT Management Company, L.L.C., or BT Management, a Delaware limited liability company that is owned 50% by the Company, 27.5% by Claus Lund, the Chief Executive Officer of Belvedere Trust, 17.5% by Russell J. Thompson, the Chief Financial Officer of Belvedere Trust, and 5% by Lloyd McAdams, the Company’s Chairman and Chief Executive Officer. BT Management has entered into a management agreement with Belvedere Trust pursuant to which BT Management will manage the day-to-day operations of Belvedere Trust in exchange for an annual base management fee and a quarterly incentive fee.

21

RISK FACTORS

An investment in our stock involves a number of risks. Before making a decision to purchase our securities, you should carefully consider all of the risks described in this quarterly report. If any of the risks discussed in this quarterly report actually occur, our business, financial condition and results of operations could be materially adversely affected. If this were to occur, the trading price of our securities could decline significantly and you may lose all or part of your investment.

Risk Related to Our Business

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

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

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

The interest rates on our borrowings generally adjust more frequently than the interest rates on our adjustable-rate mortgage-backed securities. For example, on September 30, 2003, our adjustable-rate mortgage-backed securities had a weighted average term to next rate adjustment of approximately 21 months, while our borrowings had a weighted average term to next rate adjustment of 276 days. Accordingly, in a period of rising interest rates, we could experience a decrease in net income or a net loss because the interest rates on our borrowings adjust faster than the interest rates on our adjustable-rate mortgage-backed securities.

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

We generally fund our acquisition of fixed-rate mortgage-backed securities with short-term borrowings. During periods of rising interest rates, our costs associated with borrowings used to fund acquisition of fixed-rate assets are subject to increases while the income we earn from these assets remains substantially fixed. This reduces or could eliminate the net interest spread between the fixed-rate mortgage-backed securities that we purchase and our borrowings used to purchase them, which could lower our net interest income or cause us to suffer a loss. On September 30, 2003, 10.9% of our mortgage-backed securities were fixed-rate securities.

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

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

• We usually purchase mortgage-backed securities that have a higher interest rate than the market interest rate at the time. In exchange for this higher interest rate, we pay a premium over the par value to acquire the security. In accordance with accounting rules, we amortize this premium over the term of the

22

mortgage-backed security. If the mortgage-backed security is prepaid in whole or in part prior to its maturity date, however, we expense the premium that was prepaid at the time of the prepayment. On September 30, 2003, approximately 99.9% of our mortgage-backed securities were acquired at a premium.

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

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

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

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

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

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

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

• the movement of interest rates;

• the availability of financing in the market; and

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

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

Our adjustable-rate mortgage-backed securities are typically subject to periodic and lifetime interest rate caps. Periodic interest rate caps limit the amount an interest rate can increase during any given period. Lifetime interest rate caps limit the amount an interest rate can increase through maturity of a mortgage-backed security. Our borrowings are not subject to similar restrictions. Accordingly, in a period of rapidly increasing interest rates, the interest rates paid on our borrowings could increase without limitation while caps would limit the interest rates on our adjustable-rate mortgage-backed securities. This problem is magnified for our adjustable-rate mortgage-backed securities that are not fully indexed. Further, some adjustable-rate mortgage-backed securities may be subject to periodic payment caps that result in a portion of the interest being deferred and added to the principal outstanding. As a result, we could receive less cash income on adjustable-rate mortgage-backed securities than we need to pay interest on our related borrowings. These factors could lower our net interest income or cause us to suffer a loss during periods of rising interest rates. On September 30, 2003, approximately 89% of our mortgage-backed securities were adjustable-rate securities.

23

Our leveraging strategy increases the risks of our operations.

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

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

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

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

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

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

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

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

Increases in interest rates may negatively affect the market value of our mortgage-related assets. Our fixed-rate securities are generally more negatively affected by these increases. In accordance with accounting rules, we reduce our book value by the amount of any decrease in the market value of our mortgage-related assets. Losses on securities classified as available-for sale which are determined by management to be other than temporary in nature are reclassified from accumulated other comprehensive income to current operations.

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

We may acquire leveraged mortgage derivative securities that may expose us to a high level of interest rate risk. The characteristics of leveraged mortgage derivative securities result in greater volatility in their market

24

prices. Thus, acquisition of leveraged mortgage derivative securities would expose us to the risk of greater price volatility in our portfolio and that could adversely affect our net income and overall profitability.

We depend on borrowings to purchase mortgage-related assets and reach our desired amount of leverage. If we fail to obtain or renew sufficient funding on favorable terms, we will be limited in our ability to acquire mortgage-related assets and our earnings and profitability would decline.

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

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

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

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

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

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

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

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

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

We depend on the diligence, experience and skill of our officers and other employees for the selection, structuring and monitoring of our mortgage-related assets and associated borrowings. Our key officers include

25

Lloyd McAdams, President, Chairman and Chief Executive Officer, Joseph McAdams, Chief Investment Officer, Executive Vice President and Director, Thad Brown, Chief Financial Officer, Evangelos Karagiannis, Vice President, and Bistra Pashamova, Vice President. Our dependence on our key personnel is heightened by the fact that we have a relatively small number of employees, and the loss of any key person could harm our entire business, financial condition, cash flow and results of operations. In particular, the loss of the services of Lloyd McAdams or Joseph McAdams could seriously harm our business.

Our officers devote a portion of their time to another company in capacities that could create conflicts of interest that may adversely affect our investment opportunities; this lack of a full-time commitment could also adversely affect our operating results.

Lloyd McAdams, Joseph McAdams, Evangelos Karagiannis, Bistra Pashamova and others are involved in investing both our assets and approximately $4 billion in mortgage-backed securities and other fixed income assets for institutional clients and individual investors through Pacific Income Advisers, Inc., or PIA. A trust controlled by Lloyd McAdams and Heather U. Baines is the principal stockholder of PIA. These multiple responsibilities may create conflicts of interest if these officers are presented with opportunities that may benefit both us and the clients of PIA. These officers allocate investments among our portfolio and the clients of PIA by determining the entity or account for which the investment is most suitable. In making this determination, these officers consider the investment strategy and guidelines of each entity or account with respect to acquisition of assets, leverage, liquidity and other factors that our officers determine appropriate. These officers, however, have no obligation to make any specific investment opportunities available to us and the above mentioned conflicts of interest may result in decisions or allocations of securities that are not in our best interests.

Each of our officers is also an officer and employee of PIA and devotes a portion of their time to PIA. In addition, several of our officers are officers and managers of BT Management Company, L.L.C., the company that will manage the day-to-day operations of Belvedere Trust Mortgage Corporation, our newly formed mortgage loan subsidiary, and Lloyd McAdams, our Chairman and Chief Executive Officer, is also an owner and officer of Syndicated Capital, a registered broker-dealer. Our officers service to PIA, BT Management Company, L.L.C. and Syndicated Capital allow them to spend only part of their time and effort managing our company as they are required to devote a portion of their time and effort to the management of other companies and this may adversely affect our overall management and operating results.

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

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

Our incentive compensation plan may create an incentive to increase the risk of our mortgage portfolio in an attempt to increase compensation.

In addition to their base salaries, management and key employees are eligible to earn incentive compensation for each fiscal year pursuant to our incentive compensation plan. Under the plan, the aggregate amount of compensation that may be earned by all employees equals a percentage of taxable net income, before incentive compensation, in excess of the amount that would produce an annualized return on average net worth equal to the ten-year US Treasury Rate plus 1%. In any fiscal quarter in which our taxable net income is an amount less than the amount necessary to earn this threshold return, we calculate negative incentive compensation for that fiscal quarter which will be carried forward and will offset future incentive compensation earned under the plan, but only with respect to those participants who were participants during the fiscal

26

quarter(s) in which negative incentive compensation was generated. Although negative incentive compensation is used to offset future incentive compensation, as our management evaluates different mortgage-backed securities for our investment, there is a risk that management will cause us to assume more risk than is prudent.

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

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

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

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

We have not previously engaged in the business of acquiring and securitizing whole mortgage loans and we may not be successful.

We recently formed a new subsidiary called Belvedere Trust Mortgage Corporation, or Belvedere Trust, to engage in the business of acquiring and securitizing whole mortgage loans. Although we hired a management team that we believe has appropriate experience managing the acquisition and securitization of whole loans, we have never engaged in this particular business and we may not be successful. The acquisition of whole loans and the securitization process are inherently complex and involve risks related to the types of mortgages we seek to acquire, interest rate changes, funding sources, delinquency rates, borrower bankruptcies and other factors that we may not be able to manage. Our failure to manage these and other risks could have a material adverse affect on our business and results of operations.

Belvedere Trust’s investment strategy of acquiring, accumulating and securitizing loans involves credit risk.

While Belvedere Trust intends to securitize the loans that it acquires into high quality assets in order to achieve better financing rates and to improve its access to financing, it bears the risk of loss on any loans that its acquires or originates and which it subsequently securitizes. Belvedere Trust will acquire loans that are not credit enhanced and that do not have the backing of Fannie Mae or Freddie Mac. Accordingly, it will be subject to risks of borrower default, bankruptcy and special hazard losses (such as those occurring from earthquakes) with respect to those loans to the extent that there is any deficiency between the value of the mortgage collateral and insurance and the principal amount of the loan. In the event of a default on any such loans that it holds, Belvedere Trust would bear the loss of principal between the value of the mortgaged property and the outstanding indebtedness, as well as the loss of interest.

27

Belvedere Trust will require a significant amount of cash, and if it is not available, the business and financial performance of Belvedere Trust will be significantly harmed.

Belvedere Trust will require substantial cash to fund its loan acquisitions, to pay its loan acquisition expenses and to hold its loans pending sale or securitization. Belvedere Trust will also need cash to meet its working capital and other needs. Pending sale or securitization of a pool of mortgage loans, Belvedere Trust will acquire mortgage loans that it expects to finance through borrowings from warehouse lines of credit and repurchase facilities. It is possible that Belvedere Trust’s future warehouse lenders could experience changes in their ability to advance funds to Belvedere Trust, independent of the performance of Belvedere Trust or its loans. We anticipate that Belvedere Trust’s repurchase facilities will be dependent on the ability of counter-parties to re-sell Belvedere Trust’s obligations to third parties. If there is a disruption of the repurchase market generally, or if one of Belvedere Trust’s counter-parties is itself unable to access the repurchase market, Belvedere Trust’s access to this source of liquidity could be adversely affected. Cash could also be required to meet margin calls under the terms of Belvedere Trust’s borrowings in the event that there is a decline in the market value of the loans that collateralize its debt, the terms of short-term debt become less attractive, or for other reasons. Any of these events would have a material adverse affect on Belvedere Trust.

For some period of time, Belvedere Trust will use the net proceeds of our investment in Belvedere Trust to meet its operating expenses as it acquires new loans for its portfolio. If Belvedere Trust has fully invested all of the net proceeds of our investment in it prior to the point at which Belvedere Trust generates sufficient cash for it to fund its operations, if it ever does, then Belvedere Trust will need to either restructure the securities supporting its portfolio, require additional capital from us or third parties or, if it is unable to sell additional securities on reasonable terms or at all, it will need to either reduce its acquisition business or sell a higher portion of its loans. In the event that Belvedere Trust’s liquidity needs exceed its access to liquidity, it may need to sell assets at an inopportune time, thus reducing its earnings. Adverse cash flow could threaten Belvedere Trust’s ability to satisfy the income and asset tests necessary to maintain its status as a REIT or its solvency.

The use of securitizations with over-collateralization requirements may have a negative impact on Belvedere Trust’s cash flow.

Belvedere Trust expects that its securitizations will restrict its cash flow if the loan delinquencies exceed certain levels. The terms of the securitization will generally provide that, if certain delinquencies and/or losses exceed the specified levels based on rating agencies’ (or the financial guaranty insurer’s, if applicable) analysis of the characteristics of the loans pledged to collateralize the securities, the required level of over-collateralization may be increased or may be prevented from decreasing as would otherwise be permitted if losses and/or delinquencies did not exceed those levels. Other tests (based on delinquency levels or other criteria) may restrict Belvedere Trust’s ability to receive net interest income from a securitization transaction. We cannot assure you that the performance tests will be satisfied. Nor can we assure you, in advance of completing negotiations with the rating agencies or other key transaction parties on our future securitizations, the actual terms of the delinquency tests, over-collateralization terms, cash flow release mechanisms or other significant factors regarding the calculation of net excess income to Belvedere Trust. Failure to obtain the terms on a favorable basis may materially and adversely affect the availability of net excess income to Belvedere Trust.

The success of Belvedere Trust’s loan business will depend upon its ability to ensure that loans to be held in its securitizations are serviced effectively.

The success of Belvedere Trust’s mortgage loan business will depend to a great degree upon its ability to ensure that its loans held for securitization are serviced effectively. In general, it is the intention of Belvedere Trust to acquire loans “servicing retained”, where the loans will be serviced by the originating or selling institution. Belvedere Trust has no experience servicing a portfolio of loans. If Belvedere Trust is required to purchase the servicing of a loan portfolio in order to acquire a portfolio with desirable attributes, Belvedere Trust will be required to implement a servicing function or contract with a third party to service the loans in order for

28

Belvedere Trust to implement its strategy. We cannot assure you that Belvedere Trust will be able to service the loans or effectively supervise a sub-servicing relationship according to industry standards. Failure to service the loans properly will harm Belvedere Trust’s business and operating results. Prior to either building the servicing capabilities that Belvedere Trust may require or acquiring an existing servicing operation that has such capabilities, if ever, Belvedere Trust anticipates contracting with an experienced servicer of non-conforming loans to “sub-service” its loans. The fees paid to a subservicer will reduce to a certain extent the revenue Belvedere Trust is able to retain from its loans, and its net interest income will be reduced by and at risk, depending on the effectiveness of the servicing company.

If actual prepayments or defaults with respect to mortgages serviced occurs more quickly than originally assumed, the value of Belvedere Trust’s mortgage servicing rights would be subject to downward adjustment.

When Belvedere Trust purchases mortgages that include the associated servicing rights, the allocated cost of the servicing rights will be reflected on its financial statements as mortgage servicing rights. To determine the fair value of these servicing rights, Belvedere Trust will use assumptions to estimate future net servicing income including projected discount rates, mortgage loan prepayments and credit losses. If actual prepayments or defaults with respect to loans serviced occur more quickly than Belvedere Trust originally assumed, Belvedere Trust would have to reduce the carrying value of its mortgage servicing rights. Belvedere Trust does not know if its assumptions will prove correct.

Belvedere Trust will be externally managed and this may diminish or eliminate our return on our investment in this line of business.

Belvedere Trust will be externally managed pursuant to a management agreement between Belvedere Trust and BT Management Company, L.L.C., or BT Management. Although we own 50% of BT Management, it is also owned 27.5% by Claus Lund, the Chief Executive Officer of Belvedere Trust, 17.5% by Russell J. Thompson, the Chief Financial Officer of Belvedere Trust and 5% by Lloyd McAdams, our Chairman and Chief Executive Officer. Our ability to generate profits from our ownership of Belvedere Trust, if any, could be greatly diminished due to the fact that we will be required to pay a base management fee to BT Management and we may also be required to pay an incentive fee. An externally managed structure may not optimize our interest in Belvedere Trust and, if we are unable to properly manage fixed costs at Belvedere Trust could, when combined with the base management fee, result in losses at Belvedere Trust.

Our Chairman has an ownership interest in BT Management that creates potential conflicts of interest.

Mr. McAdams, our Chairman and Chief Executive Officer, has a direct ownership interest in BT Management that creates potential conflicts of interest. Mr. McAdams is Chairman of the Board and Chief Executive Officer and a member of the Board of Managers of BT Management and owns an equity interest in BT Management. Under the management agreement between Belvedere Trust and BT Management, BT Management is entitled to earn certain incentive compensation based on the level of Belvedere Trust’s annualized net income. In evaluating mortgage assets for investment and with respect to other management strategies, an undue emphasis on the maximization of income at the expense of other criteria could result in increased risk to the value of our portfolio.

Risks Related to REIT Compliance and Other Matters

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

We believe that since our initial public offering in 1998 we have operated so as to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the Code), and we intend to continue to meet the requirements for taxation as a REIT. Nevertheless, we may not remain qualified as a REIT in the future. Qualification as a

29

REIT involves the application of highly technical and complex Code provisions for which only a limited number of judicial or administrative interpretations exist. Even a technical or inadvertent mistake could jeopardize our REIT status. For example, if Belvedere Trust fails to qualify as a REIT, we could lose our REIT status under certain circumstances. Furthermore, Congress or the IRS might change tax laws or regulations and the courts might issue new rulings, in each case potentially having retroactive effect that could make it more difficult or impossible for us to qualify as a REIT. If we fail to qualify as a REIT in any tax year, then:

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

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

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

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

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

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

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

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

In order to qualify as a REIT, we must also ensure that at the end of each calendar quarter at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets. The remainder of our investment in securities generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets can consist of the securities of any one issuer. The 5% and 10% limitations described above will apply to our investment in Belvedere Trust unless Belvedere Trust is a qualified REIT subsidiary of ours (i.e., we own 100% of Belvedere Trust’s outstanding stock), Belvedere Trust is a qualified REIT, or Belvedere Trust is a taxable REIT subsidiary of ours. If we fail to comply with these requirements, we must dispose of a portion of our assets within 30 days after the end of the calendar quarter in order to avoid losing our REIT status and suffering adverse tax consequences.

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

As a REIT, we must distribute 90% of our annual taxable income (subject to certain adjustments) to our stockholders. From time to time, we may generate taxable income greater than our net income for financial

30

reporting purposes from, among other things, amortization of capitalized purchase premiums, or our taxable income may be greater than our cash flow available for distribution to stockholders. For example, our taxable income would exceed our net income for financial reporting purposes to the extent that compensation paid to our chief executive officer and our other four highest paid officers exceeds $1,000,000 for any such officer for any calendar year under Section 162(m) of the tax code. Since payments under our 2002 Incentive Compensation Plan do not qualify as performance-based compensation under Section 162(m), a portion of the payments made under such plan to certain of such officers would not be deductible for federal income tax purposes under such circumstances. If we do not have other funds available in these situations, we may be unable to distribute substantially all of our taxable income as required by the REIT provisions of the tax code. Thus, we could be required to borrow funds, sell a portion of our mortgage-backed securities at disadvantageous prices or find another alternative source of funds. These alternatives could increase our costs or reduce our equity.

If Belvedere Trust fails to qualify as a REIT, a qualified REIT subsidiary or a taxable REIT subsidiary, we may lose our REIT status.

As long as we own 100% of Belvedere Trust’s outstanding stock, Belvedere Trust will be treated as a qualified REIT subsidiary for federal income tax purposes. As such, for federal income tax purposes, we will not be treated as owning stock in Belvedere Trust and Belvedere Trust’s assets, liabilities and income will generally be treated as our assets, liabilities and income for purposes of the REIT qualification tests described below under “Material Federal Income Tax Considerations.” If, however, we do not own 100% of Belvedere Trust’s outstanding stock, and Belvedere Trust does not qualify as a REIT or a taxable REIT subsidiary, we will lose our REIT status if, at the end of any calendar quarter, the value of our Belvedere Trust securities exceeds 5% of the value of our total assets or we own more than 10% of the value or voting power of Belvedere Trust’s outstanding securities. If we fail to satisfy the 5% test or the 10% test at the end of any calendar quarter, a 30-day “cure” period may apply following the close of the quarter. If we make an election to treat Belvedere Trust as a taxable REIT subsidiary, the total value of any securities we own in Belvedere Trust and all of our other taxable REIT subsidiaries, if any, may not exceed 20% of the value of our total assets at the end of any calendar quarter. Since Belvedere Trust intends that it will elect to be taxed as a REIT, however, we do not intend to make a taxable REIT subsidiary election for Belvedere Trust.

If Belvedere Trust fails to qualify as a REIT, Belvedere Trust will be subject to corporate income taxes on its taxable income, which will reduce the amount available for distribution to us.

Belvedere Trust was formed as a qualified REIT subsidiary and intends that it will meet the requirements for taxation as a REIT in 2004 and make an election to be taxed as a REIT beginning with its taxable year ending December 31, 2004. Although Belvedere Trust expects to operate in a manner to permit it to qualify as a REIT in 2004 and continue to maintain such qualification, the actual results of Belvedere Trust’s operations for any particular taxable year may not satisfy these requirements. If Belvedere Trust fails to qualify for taxation as a REIT in any taxable year, and the relief provisions of the Code do not apply, Belvedere Trust will be required to pay tax on Belvedere Trust’s taxable income in that taxable year and all subsequent taxable years at regular corporate rates. Distributions to us in any year in which Belvedere Trust fails to qualify as a REIT will not be deductible by Belvedere Trust. As a result, we anticipate that Belvedere Trust’s failure to qualify as a REIT would reduce the cash available for distribution to us. Unless entitled to relief under specific statutory provisions, if Belvedere Trust fails to maintain its REIT status, Belvedere Trust will also be disqualified from taxation as a REIT for the four taxable years following the year in which it loses its qualification.

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

We believe that we conduct our business in a manner that allows us to avoid being regulated as an investment company under the Investment Company Act of 1940, as amended. If we fail to continue to qualify for an exemption from registration as an investment company, our ability to use leverage would be substantially

31

reduced and we would be unable to conduct our business as planned. The Investment Company Act exempts entities that are primarily engaged in the business of purchasing or otherwise acquiring “mortgages and other liens on and interests in real estate.” Under the SEC’s current interpretation, qualification for this exemption generally requires us to maintain at least 55% of our assets directly in qualifying real estate interests. Mortgage-backed securities that do not represent all the certificates issued with respect to an underlying pool of mortgages may be treated as securities separate from the underlying mortgage loans and thus may not qualify for purposes of the 55% requirement. Therefore, our ownership of these mortgage-backed securities is limited by the Investment Company Act. In meeting the 55% requirement under the Investment Company Act, we treat as qualifying interests mortgage-backed securities issued with respect to an underlying pool for which we hold all issued certificates. If the SEC or its staff adopts a contrary interpretation, we could be required to sell a substantial amount of our mortgage-backed securities under potentially adverse market conditions. Further, in order to maintain our exemption from registration as an investment company, we may be precluded from acquiring mortgage-backed securities whose yield is somewhat higher than the yield on mortgage-backed securities that could be purchased in a manner consistent with the exemption.

Additional Risk Factors

We may not be able to use the money we raise to acquire investments at favorable prices.

We intend to seek to raise additional capital from time to time if we determine that it is in our best interests and the best interests of our stockholders, including through public offerings of our stock. The net proceeds of any offering could represent a significant increase in our equity. Depending on the amount of leverage that we use, the full investment of the net proceeds of any offering might result in a substantial increase in our total assets. There can be no assurance that we will be able to invest all of such additional funds in mortgage-backed securities at favorable prices. We may not be able to acquire enough mortgage-backed securities to become fully invested after an offering, or we may have to pay more for mortgage-backed securities than we have historically. In either case, the return that we earn on stockholders’ equity may be reduced.

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

We intend to pay quarterly dividends and to make distributions to our stockholders in amounts such that all or substantially all of our taxable income in each year, subject to certain adjustments, is distributed. This, along with other factors, should enable us to qualify for the tax benefits accorded to a REIT under the Code. We have not established a minimum dividend payment level and our ability to pay dividends may be adversely affected by the risk factors described in this quarterly report on Form 10-Q. All distributions will be made at the discretion of our board of directors and will depend on our earnings, our financial condition, maintenance of our REIT status and such other factors as our board of directors may deem relevant from time to time. There are no assurances of our ability to pay dividends in the future.

If we raise additional capital, our earnings per share and dividends per share may decline since we may not be able to invest all of the new capital during the quarter in which additional shares are sold and possibly the entire following calendar quarter.

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

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

32

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

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

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

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

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

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

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

• Maryland business combination statute.    Maryland law restricts the ability of holders of more than 10% of the voting power of a corporation’s shares to engage in a business combination with the corporation.

• Maryland control share acquisition statute.    Maryland law limits the voting rights of “control shares” of a corporation in the event of a “control share acquisition.”

33

Issuances of large amounts of our stock could cause the price of our stock to decline.

We may issue additional shares of common stock or shares of preferred stock that are convertible into common stock. If we issue a significant number of shares of common stock or convertible preferred stock in a short period of time, there could be a dilution of the existing common stock and a decrease in the market price of the common stock.

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

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

Item 3.    Qualitative and Quantitative Disclosures About Market Risk

We seek to manage the interest rate, market value, liquidity, prepayment and credit risks inherent in all financial institutions in a prudent manner designed to insure our longevity while, at the same time, seeking to provide an opportunity for stockholders to realize attractive total rates of return through ownership of our common stock. While we do not seek to avoid risk completely, we do seek, to the best of our ability, to assume risk that can be quantified from historical experience, to actively manage that risk, to earn sufficient compensation to justify taking those risks and to maintain capital levels consistent with the risks we undertake.

Interest Rate Risk

We primarily invest in adjustable-rate, hybrid and fixed-rate mortgage-backed securities. Hybrid mortgages are adjustable-rate mortgages that have a fixed interest rate for an initial period of time (typically three years or greater) and then convert to an adjustable-rate for the remaining loan term. Our debt obligations are generally repurchase agreements of limited duration that are periodically refinanced at current market rates.

Adjustable-rate mortgage-backed assets are typically subject to periodic and lifetime interest rate caps that limit the amount an adjustable-rate mortgage-backed securities’ interest rate can change during any given period. Adjustable-rate mortgage securities are also typically subject to a minimum interest rate payable. Our borrowings are not subject to similar restrictions. Hence, in a period of increasing interest rates, interest rates on our borrowings could increase without limitation, while the interest rates on our mortgage-related assets could be limited. This problem would be magnified to the extent we acquire mortgage-backed securities that are not fully indexed. Further, some adjustable-rate mortgage-backed securities may be subject to periodic payment caps that result in some portion of the interest being deferred and added to the principal outstanding. These factors could lower our net interest income or cause a net loss during periods of rising interest rates, which would negatively impact our liquidity, net income and our ability to make distributions to stockholders.

We fund the purchase of a substantial portion of our adjustable-rate mortgage-backed debt securities with borrowings that have interest rates based on indices and repricing terms similar to, but of somewhat shorter maturities than, the interest rate indices and repricing terms of our mortgage assets. Thus, we anticipate that in most cases the interest rate indices and repricing terms of our mortgage assets and our funding sources will not

34

be identical, thereby creating an interest rate mismatch between assets and liabilities. During periods of changing interest rates, such interest rate mismatches could negatively impact our net interest income, dividend yield and the market price of our common stock.

Most of our adjustable-rate assets are based on the one-year constant maturity treasury rate and our debt obligations are generally based on LIBOR. These indices generally move in the same direction, but there can be no assurance that this will continue to occur.

Our adjustable-rate mortgage-backed securities and borrowings reset at various different dates for the specific asset or obligation. In general, the repricing of our debt obligations occurs more quickly than on our assets. Therefore, on average, our cost of funds may rise or fall more quickly than does our earnings rate on the assets.

Further, our net income may vary somewhat as the spread between one-month interest rates and six- and twelve-month interest rates varies.

As of September 30, 2003, our mortgage-backed securities and borrowings will prospectively reprice based on the following time frames (dollar amounts in thousands):

	Assets				Borrowings
	Amount		Percentage of Total Investments		Amount		Percentage of Total Borrowings
	(amounts in thousands)
Investment Type/Rate Reset Dates:
Fixed-Rate Investments	$	404,935	10.9	%	$	—	—
Adjustable-Rate Investments/ Obligations:
Less than 3 months		239,564	6.5	%		233,880	7.1	%
Greater than 3 months and less than 1 year		816,888	22.0	%		2,543,504	77.3	%
Greater than 1 year and less than 2 years		582,275	15.7	%		514,350	15.6	%
Greater than 2 years and less than 3 years		1,506,249	40.6	%		—	—
Greater than 3 years and less than 5 years		159,952	4.3	%		—	—
Total	$	3,709,863	100	%	$	3,291,734	100	%

Market Value Risk

All of our mortgage-backed securities are classified as available-for-sale assets. As such, they are reflected at fair value (i.e., market value) with the adjustment to amortized costs reflected as part of accumulated other comprehensive income that is included in the equity section of our balance sheet. The market value of our assets can fluctuate due to changes in interest rates and other factors. Losses on securities classified as available-for-sale which are determined by management to be other than temporary in nature are reclassified from accumulated other comprehensive income to general operations.

Liquidity Risk

Our primary liquidity risk arises from financing long-maturity mortgage-backed securities with short-term debt. The interest rates on our borrowings generally adjust more frequently than the interest rates on our adjustable-rate mortgage-backed securities. For example, at September 30, 2003, our adjustable-rate mortgage-backed securities had a weighted average term to next rate adjustment of approximately 21 months, while our borrowings had a weighted average term to next rate adjustment of 276 days. Accordingly, in a period of rising interest rates, our borrowing costs will usually increase faster than our interest earnings from mortgage-backed securities. As a result, we could experience a decrease in net income or a net loss during these periods. Our assets that are pledged to secure short-term borrowings are high-quality, liquid assets. As a result, we have not had difficulty rolling over our short-term borrowings as they mature. There can be no assurance that we will always be able to roll over our short-term debt.

35

At September 30, 2003, we had unrestricted cash of $116,000 available to meet margin calls on short-term borrowings that could be caused by asset value declines or changes in lender collateralization requirements.

Prepayment Risk

Prepayments are the full or partial repayment of principal prior to the original term to maturity of a mortgage loan and typically occur due to refinancing of mortgage loans. Prepayment rates on mortgage-related securities vary from time to time and may cause changes in the amount of our net interest income. Prepayments of adjustable-rate mortgage loans usually can be expected to increase when mortgage interest rates fall below the then-current interest rates on such loans and decrease when mortgage interest rates exceed the then-current interest rate on such loans, although such effects are not predictable. Prepayment experience also may be affected by the conditions in the housing and financial markets, general economic conditions and the relative interest rates on fixed-rate and adjustable-rate mortgage loans underlying mortgage-backed securities. The purchase prices of mortgage-backed securities are generally based upon assumptions regarding the expected amounts and rates of prepayments. Where slow prepayment assumptions are made, we may pay a premium for mortgage-backed securities. To the extent such assumptions differ from the actual amounts of prepayments, we could experience reduced earnings or losses. The total prepayment of any mortgage-backed securities purchased at a premium by us would result in the immediate write-off of any remaining capitalized premium amount and a reduction of our net interest income by such amount. Finally, in the event that we are unable to acquire new mortgage-backed securities to replace the prepaid mortgage-backed securities, our financial condition, cash flows and results of operations could be harmed.

We often purchase mortgage-backed securities that have a higher interest rate than the market interest rate at the time. In exchange for this higher interest rate, we must pay a premium over par value to acquire these securities. In accordance with accounting rules, we amortize this premium over the term of the mortgage-backed security. As we receive repayments of mortgage principal, we amortize the premium balances as a reduction to our income. If the mortgage loans underlying a mortgage-backed security were prepaid at a faster rate than we anticipate, we would amortize the premium at a faster rate. This would reduce our income.

Tabular Presentation

The information presented in the table below projects the impact of sudden changes in interest rates on our annual projected net income and net assets as more fully discussed below based on investments in place on September 30, 2003, and includes all of our interest-rate sensitive assets and liabilities. We acquire interest-rate sensitive assets and fund them with interest-rate sensitive liabilities. We generally plan to retain such assets and the associated interest rate risk to maturity.

Change in Interest Rates	Percentage Change in Net Interest Income	Percentage Change in Net Assets
-2.0%	-89.7%	0.9%
-1.0%	-49.7%	1.1%
0%	—	—
1.0%	21.8%	-1.9%
2.0%	20.0%	-4.4%

Many assumptions are made to present the information in the above table, as such, there can be no assurance that assumed events will occur or that other events will not occur that would affect the outcomes; therefore, the above table and all related disclosures constitute forward-looking statements. The analysis presented utilizes assumptions and estimates based on management’s judgment and experience. Furthermore, future sales, acquisitions and restructuring could materially change our interest rate risk profile.

36

The table quantifies the potential changes in net income and net asset value should interest rates immediately change (are “shocked”). The results of interest rate shocks of plus and minus 100 and 200 basis points are presented. The cash flows associated with the portfolio of mortgage-backed securities for each rate shock are calculated based on a variety of assumptions, including prepayment speeds, time until coupon reset, yield on future acquisitions, slope of the yield curve and size of the portfolio. Assumptions made on the interest-rate sensitive liabilities, which are repurchase agreements, include anticipated interest rates (no negative rates are utilized), collateral requirements as a percent of the repurchase agreement and amount of borrowing. Assumptions made in calculating the impact on net asset value of interest rate shocks include interest rates, prepayment rates and the yield spread of mortgage-backed securities relative to prevailing interest rates.

Our asset/liability structure is generally such that a decrease in interest rates would be expected to result in an increase to net interest income, as our cost of funds are generally shorter term than our interest earning assets. Nevertheless, given the impact of prepayment assumptions and other assumptions, coupled with the low level of interest rates at September 30, 2003, the interest rate shocks presented in the above table would cause net income to decrease under each of the declining interest rate shock scenarios presented. When interest rates are shocked, prepayment assumptions are adjusted based on management’s best estimate of the effects of changes in interest rates on prepayment speeds. For example, under current market conditions, a 100 basis point decline in interest rates is estimated to result in a 65% increase in the prepayment rate of our mortgage-backed securities portfolio. The base interest rate scenario assumes interest rates at September 30, 2003. Actual results could differ significantly from those estimated in the table.

Item 4.    Controls and Procedures

(a) We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-14(c) and Rule 15b-14(c) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us required to be included in our periodic SEC filings.

(b) There has been no change in our internal controls over financial reporting during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

37

Part II.    OTHER INFORMATION

Item 1.    Legal Proceedings

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

Item 2.    Changes in Securities and Use of Proceeds

(a) None

(b) None

(c) None

(d) None

Item 3.    Defaults Upon Senior Securities

None

Item 4.    Submission of Matters to a Vote of Security Holders

None

Item 5.    Other Information

On October 15, 2003, we declared a dividend of $0.33 per share which was paid on November 10, 2003 to holders of record as of the close of business on October 30, 2003.

On August 18, 2003, we completed a follow-on offering of our common stock. We issued 4,025,000 shares of common stock pursuant to a public offering at a price of $14.30 per share and received net proceeds of $54.7 million, net of underwriting discount of $0.715 per share and other offering expenses.

Item 6.    Exhibits and Reports on Form 8-K

(a) Exhibits.    The following exhibits are either filed herewith or incorporated herein by reference:

Exhibit Number		Description
3.1	(1)	Amended Articles of Incorporation
3.2	(2)	Articles of Amendment
3.3	(1)	Bylaws
4.1	(1)	Specimen Common Stock certificate
4.2	(3)	Specimen Preferred Stock certificate
10.1	(2)	1997 Stock Option and Awards Plan, as amended
10.2	(4)	2002 Dividend Reinvestment and Stock Purchase Plan
10.3	(5)	2002 Incentive Compensation Plan
10.4	(5)	Agreement and Plan of Merger dated April 18, 2002 by and among Anworth Mortgage Asset Corporation (“Anworth”), Anworth Mortgage Advisory Corporation (the “Manager”) and the shareholder of the Manager

38

Exhibit Number		Description
10.5	(6)	Employment Agreement dated January 1, 2002, between the Manager and Lloyd McAdams
10.6	(6)	Employment Agreement dated January 1, 2002, between the Manager and Heather U. Baines
10.7	(6)	Employment Agreement dated January 1, 2002, between the Manager and Joseph E. McAdams
10.8	(6)	Addendum to Employment Agreement dated April 18, 2002, among Anworth, the Manager and Lloyd McAdams
10.9	(6)	Addendum to Employment Agreement dated April 18, 2002, among Anworth, the Manager and Heather U. Baines
10.10	(6)	Addendum to Employment Agreement dated April 18, 2002, among Anworth, the Manager and Joseph E. McAdams
10.11	(6)	Second Addendum to Employment Agreement dated as of June 13, 2002 by and among Anworth and Joseph E. McAdams
10.12	(6)	Sublease dated June 13, 2002, between Anworth and Pacific Income Advisers, Inc.
10.13	(7)	Amendment to Sublease dated July 8, 2003 between Anworth and Pacific Income Advisers, Inc.
10.14	(8)	Administrative Agreement dated October 14, 2002, between Anworth and Pacific Income Advisers, Inc.
10.15	(9)	Sales Agreement dated December 30, 2002, between Anworth and Cantor Fitzgerald & Co.
10.16	(10)	Amendment to Sales Agreement dated January 10, 2003, between Anworth and Cantor Fitzgerald & Co.
10.17	(10)	Deferred Compensation Plan
10.18		BT Management Company, L.L.C. (“BT Management”) Operating Agreement dated November 3, 2003
10.19		Management Agreement dated November 3, 2003 between BT Management and Belvedere Trust Mortgage Corporation
10.20		Employment Agreement dated November 3, 2003 between BT Management and Claus Lund
10.21		Employment Agreement dated November 3, 2003 between BT Management and Russell J. Thompson
31.1		Certification of the Chief Executive Officer provided pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of the Chief Financial Officer provided pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certifications of the Chief Executive Officer provided pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certifications of the Chief Financial Officer provided pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

  (1) Incorporated by reference from our Registration Statement on Form S-11, Registration No. 333-38641, which became effective under the Securities Act of 1933, as amended (the “Act”), on March 12, 1998.

  (2) Incorporated by reference from our Definitive Proxy Statement filed pursuant to Section 14(a) of the Securities Exchange Act of 1934, as filed with the Securities and Exchange Commission on May 14, 2003.

  (3) Incorporated by reference from our Registration Statement on Form S-3, Registration No. 333-85036, which became effective under the Act on June 13, 2002.

  (4) Incorporated by reference from our Registration Statement on Form S-3, Registration No. 333-91480, which became effective under the Act on July 3, 2002.

  (5) Incorporated by reference from our Definitive Proxy Statement filed pursuant to Section 14(a) of the Securities Exchange Act of 1934, as filed with the Securities Exchange Commission on May 17, 2002.

39

  (6) Incorporated by reference from our Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, as filed with the Securities and Exchange Commission on August 14, 2002.

  (7) Incorporated by reference from our Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, as filed with the Securities and Exchange Commission on August 8, 2003.

  (8) Incorporated by reference from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2002, as filed with the Securities and Exchange Commission on November 14, 2002.

  (9) Incorporated by reference from our Post-Effective Amendment No. 1 to our Registration Statement on Form S-3, Registration No. 333-99005, which became effective on January 14, 2003.

(10) Incorporated by reference from our Annual Report on Form 10-K for the year ended December 31, 2002, as filed with the Securities and Exchange Commission on March 26, 2003.

(b) Reports on Form 8-K.    We filed the following current reports on Form 8-K during the quarter ended September 30, 2003:

• On July 17, 2003, we furnished, but did not file, a Current Report on Form 8-K to announce the issuance of our press release that addressed our second quarter 2003 results.

• On August 13, 2003, we filed a Current Report on Form 8-K to file an underwriting agreement relating to the sale of 4,025,000 shares of our common stock, including 525,000 shares subject to a 30-day option granted to the underwriters to cover over-allotments.

• On September 19, 2003, we furnished, but did not file, a Current Report on Form 8-K to announce the issuance of our press release that addressed an earnings update for our third quarter 2003 results.

40

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ANWORTH MORTGAGE ASSET CORPORATION
	/s/    JOSEPH LLOYD MCADAMS
	Joseph Lloyd McAdams Chairman of the Board, President and Chief Executive Officer (authorized officer of registrant)
Dated:    November 12, 2003
	/s/    THAD M. BROWN
	Thad M. Brown Chief Financial Officer (principal accounting officer)
Dated:    November 12, 2003

41

INDEX TO EXHIBITS

Exhibit Number		Description
3.1	(1)	Amended Articles of Incorporation
3.2	(2)	Articles of Amendment
3.3	(1)	Bylaws
4.1	(1)	Specimen Common Stock certificate
4.2	(3)	Specimen Preferred Stock certificate
10.1	(2)	1997 Stock Option and Awards Plan, as amended
10.2	(4)	2002 Dividend Reinvestment and Stock Purchase Plan
10.3	(5)	2002 Incentive Compensation Plan
10.4	(5)	Agreement and Plan of Merger dated April 18, 2002 by and among Anworth Mortgage Asset Corporation (“Anworth”), Anworth Mortgage Advisory Corporation (the “Manager”) and the shareholder of the Manager
10.5	(6)	Employment Agreement dated January 1, 2002, between the Manager and Lloyd McAdams
10.6	(6)	Employment Agreement dated January 1, 2002, between the Manager and Heather U. Baines
10.7	(6)	Employment Agreement dated January 1, 2002, between the Manager and Joseph E. McAdams
10.8	(6)	Addendum to Employment Agreement dated April 18, 2002, among Anworth, the Manager and Lloyd McAdams
10.9	(6)	Addendum to Employment Agreement dated April 18, 2002, among Anworth, the Manager and Heather U. Baines
10.10	(6)	Addendum to Employment Agreement dated April 18, 2002, among Anworth, the Manager and Joseph E. McAdams
10.11	(6)	Second Addendum to Employment Agreement dated as of June 13, 2002 by and among Anworth and Joseph E. McAdams
10.12	(6)	Sublease dated June 13, 2002, between Anworth and Pacific Income Advisers, Inc.
10.13	(7)	Amendment to Sublease dated July 8, 2003 between Anworth and Pacific Income Advisers, Inc.
10.14	(8)	Administrative Agreement dated October 14, 2002, between Anworth and Pacific Income Advisers, Inc.
10.15	(9)	Sales Agreement dated December 30, 2002, between Anworth and Cantor Fitzgerald & Co.
10.16	(10)	Amendment to Sales Agreement dated January 10, 2003, between Anworth and Cantor Fitzgerald & Co.
10.17	(10)	Deferred Compensation Plan
10.18		BT Management Company, L.L.C. (“BT Management”) Operating Agreement dated November 3, 2003
10.19		Management Agreement dated November 3, 2003 between BT Management and Belvedere Trust Mortgage Corporation
10.20		Employment Agreement dated November 3, 2003 between BT Management and Claus Lund
10.21		Employment Agreement dated November 3, 2003 between BT Management and Russell J. Thompson
31.1		Certifications of the Chief Executive Officer provided pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit Number	Description
31.2	Certifications of the Chief Financial Officer provided pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certifications of the Chief Executive Officer provided pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certifications of the Chief Financial Officer provided pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1) Incorporated by reference from our Registration Statement on Form S-11, Registration No. 333-38641, which became effective under the Securities Act of 1933, as amended (the “Act”), on March 12, 1998.

(2) Incorporated by reference from our Definitive Proxy Statement filed pursuant to Section 14(a) of the Securities Exchange Act of 1934, as filed with the Securities and Exchange Commission on May 15, 2003.

(3) Incorporated by reference from our Registration Statement on Form S-3, Registration No. 333-85036, which became effective under the Act on June 13, 2002.

(4) Incorporated by reference from our Registration Statement on Form S-3, Registration No. 333-91480, which became effective under the Act on July 3, 2002.

(5) Incorporated by reference from our Definitive Proxy Statement filed pursuant to Section 14(a) of the Securities Exchange Act of 1934, as filed with the Securities Exchange Commission on May 17, 2002.

(6) Incorporated by reference from our Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, as filed with the Securities and Exchange Commission on August 14, 2002.

(7) Incorporated by reference from our Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, as filed with the Securities and Exchange Commission on August 8, 2002.

(7) Incorporated by reference from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2002, as filed with the Securities and Exchange Commission on November 14, 2002.

(8) Incorporated by reference from our Post-Effective Amendment No. 1 to our Registration Statement on Form S-3, Registration No. 333-99005, which became effective on January 14, 2003.

(9) Incorporated by reference from our Annual Report on Form 10-K for the year ended December 31, 2002, as filed with the Securities and Exchange Commission on March 26, 2003.

EX-10.18

EXHIBIT 10.18

BT MANAGEMENT COMPANY, L.L.C.

OPERATING AGREEMENT

TABLE OF CONTENTS

		Page
SECTION 1	THE COMPANY	1
1.1	Name	1
1.2	Purpose; Powers	1
1.3	Principal Place of Business	2
1.4	Qualification in Other Jurisdictions	2
1.5	Filings; Agent for Service of Process	2
1.6	Term	3
1.7	Title to Property	3
SECTION 2	MEMBERS’ CAPITAL CONTRIBUTIONS	3
2.1	Initial Capital Contributions; Percentage Interests	3
2.2	Additional Capital Contributions	3
2.3	Pre-Emptive Right	4
SECTION 3	ALLOCATION	5
3.1	Profits and Losses	5
3.2	Special Allocations	5
3.3	Loss Limitation	7
3.4	Curative Allocations	7
3.5	Other Allocation Rules	7
3.6	Tax Allocations: Code Section 704(c)	8
SECTION 4	DISTRIBUTIONS	8
4.1	Available Cash	8
4.2	Amounts Withheld	9
4.3	Limitations on Distributions	9
SECTION 5	MANAGEMENT	9
5.1	Management; Board of Managers	9
5.2	Meetings of the Board of Managers	10
5.3	Board of Managers Powers	11
5.4	Major Decisions	12
5.5	Duties and Obligations of the Board of Managers	14

(i)

		Page
5.6	Compensation and Reimbursement	15
5.7	Management; Officers	15
SECTION 6	MEMBERS	17
6.1	Authority; Liability to Third Parties	17
6.2	Voting Rights	17
6.3	Withdrawal/Resignation	17
6.4	Member Compensation and Reimbursement	17
6.5	Partition	17
6.6	Confidentiality	17
6.7	Transactions Between a Member and the Company	18
6.8	Other Instruments	18
6.9	Non-Competition; Non-Solicitation	18
6.10	Waiver of Noncompetition Provisions	19
SECTION 7	LIMITATION OF LIABILITY AND INDEMNIFICATION	19
7.1	Limitation of Liability	19
7.2	Indemnification	20
SECTION 8	REPRESENTATIONS AND WARRANTIES	21
8.1	In General	21
8.2	Representations and Warranties	21
SECTION 9	ACCOUNTING, BOOKS AND RECORDS	23
9.1	Accounting, Books and Records	23
9.2	Reports	24
9.3	Tax Matters	25
SECTION 10	RESTRICTIONS ON TRANSFERS	26
10.1	Restrictions on Transfers of Interests by Founding Members	26
10.2	Permitted Transfers of Founding Members' Interests	26
10.3	Transfer of Membership Interests by Holding	26
10.4	Bankruptcy Events	26
10.5	Transfer to Divorced Member's Spouse	27
10.6	Termination of a Member's Employment	29

(ii)

		Page
10.8	Drag-Along Rights	34
10.9	Certain Sales Restricted	35
10.10	Prohibited Transfers	35
10.11	Rights of Unadmitted Assignees	35
10.12	Admission of Substituted Members	35
10.13	Representations Regarding Transfers; Legend; LLC Certification	36
10.14	Distributions and Allocations in Respect of Transferred Interests	38
SECTION 11	DISSOLUTION AND WINDING UP	38
11.1	Dissolution Events	38
11.2	Winding Up	39
11.3	Compliance With Certain Regulatory Requirements; No Obligation to Restore Deficit Capital Accounts	40
11.4	Rights of Members	40
11.5	Notice of Dissolution/Termination	40
11.6	Allocations During Period of Liquidation	41
11.7	The Liquidator	41
11.8	Form of Liquidating Distributions	41
SECTION 12	POWER OF ATTORNEY	41
12.1	Managers as Attorneys-In-Fact	41
12.2	Nature of Special Power	42
SECTION 13	AMENDMENT	43
13.1	Amendment	43
SECTION 14	TRANSACTION DOCUMENTS	43
14.1	Transaction Documents	43
SECTION 15	DEFINITIONS	43
SECTION 16	MISCELLANEOUS	53
16.1	Notices	53
16.2	Binding Effect	53
16.3	Time	53
16.4	Headings	54

(iii)

		Page
16.5	Severability	54
16.6	Variation of Terms	54
16.7	Governing Law	54
16.8	Jurisdiction and Service of Process	54
16.9	Enforcement	54
16.10	Counterpart Execution	55
16.11	Dispute Resolution	55
16.12	Partnership Intended Solely for Tax Purposes	55
16.13	Legal and Tax Advice	55

(iv)

BT MANAGEMENT COMPANY, L.L.C.

OPERATING AGREEMENT

This OPERATING AGREEMENT (the “Agreement”) is entered into and shall be effective as of November 3, 2003 with respect to BT Management Company, L.L.C., a Delaware limited liability company (the “Company”), by and among the Persons who are identified as Members on Schedule 2.1 attached hereto and who have executed a counterpart of this Agreement as Members pursuant to the provisions of the Act. Capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in Section 15.

W I T N E S S E T H:

WHEREAS, Allen Matkins Leck Gamble & Mallory LLP has heretofore filed a Certificate of Formation with the Secretary of State of the State of Delaware to organize the Company under and pursuant to the Act;

WHEREAS, upon the terms and subject to the condition set forth herein, each of BT Management Holding Corporation, a wholly owned subsidiary of Anworth Mortgage Asset Corporation (“Holding”), and such other persons (the “Founding Members”) are concurrently acquiring Interests in the Company, in the percentage amounts set forth on Schedule 2.1.

WHEREAS, the parties hereto wish to enter into this Agreement, which shall constitute its limited liability agreement, as defined under the Act, to provide for the governance of the Company upon the terms and provisions, and subject to the conditions set forth herein.

NOW, THEREFORE, in consideration of the mutual covenants expressed herein, the parties agree as follows:

SECTION 1

THE COMPANY

1.1 Name. The name of the Company is BT Management Company, L.L.C. and all business of the Company shall be conducted in such name. The Board of Managers may change the name of the Company upon 10 Business Days’ notice to the Members.

1.2 Purpose; Powers.

(a) The purposes of the Company are (i) to operate the Business directly or through one or more Persons, (ii) to make such additional investments and engage in such additional activities as are permitted to be conducted by a limited liability company under the Act and as the Board of Managers may approve or as otherwise permitted pursuant to this Agreement and (iii) to engage in any and all activities related or incidental to the purposes set forth in clauses (i) and (ii).

(b) The Company has the power to do any and all acts necessary, appropriate, proper, advisable, incidental or convenient to or in furtherance of the purposes of the Company set forth in Section 1.2(a) hereof and has, without limitation, any and all powers that may be exercised by a limited liability company under the Act.

1.3 Principal Place of Business. The principal place of business of the Company is at 1299 Ocean Avenue, Santa Monica, California. The Board of Managers may change the principal place of business of the Company to any other place within or without the State of Delaware upon 10 Business Days’ notice to the Members, subject to the consent of Holding, which shall not be unreasonably withheld. The registered office of the Company in the State of Delaware initially is located at CT Corporation System, 1209 Orange Street, Wilmington, DE 19801. The Board of Managers may cause the Company to establish other offices or places of business in such jurisdictions and appoint agents for service of process in such jurisdictions as the Board of Managers may determine.

1.4 Qualification in Other Jurisdictions. The Board of Managers may cause the Company to be qualified or registered under applicable laws of any jurisdiction in which the Company transacts business, and the Officers are authorized to execute, deliver and file any certificates and documents necessary to effect such qualification or registration.

1.5 Filings; Agent for Service of Process.

(a) The Board of Managers may take any and all actions it determines to be reasonably necessary to maintain the status of the Company as a limited liability company under the laws of the State of Delaware, including the preparation and filing of such amendments to the Certificate and such other certificates, documents, instruments and publications as may be required by law, including, without limitation, action to reflect:

(i) a change in the Company name;

(ii) a correction of false or erroneous statements in the Certificate or to make a change in any statement therein in order that it shall accurately represent the agreement among the Members; or

(iii) a change in the time for dissolution of the Company as stated in the Certificate and in this Agreement.

(b) The Board of Managers may cause to be executed and filed, original or amended certificates and take any and all other actions as it determines to be reasonably necessary to perfect and maintain the status of the Company as a limited liability company or similar type of entity under the laws of any other jurisdictions in which the Company engages in business.

(c) The registered agent for service of process on the Company in the State of Delaware shall be CT Corporation System or any successor thereto appointed by the Board of Managers in accordance with the Act.

-2-

(d) Upon the dissolution and completion of the winding up and liquidation of the Company in accordance with this Agreement, the Board of Managers shall promptly cause to be executed and filed a certificate of cancellation in accordance with the Act and the laws of any other jurisdictions in which the Board of Managers deems such filing necessary or advisable.

1.6 Term. The term of the Company commenced on the date the Certificate was filed in the office of the Secretary of State of the State of Delaware in accordance with the Act and shall continue until the winding up and liquidation of the Company and its business is completed following a Dissolution Event, as provided in this Agreement and in accordance with the Act.

1.7 Title to Property. All property owned by the Company shall be owned by the Company as an entity, and no Member shall have any ownership interest in such Company property in its individual name, and each Member’s interest in the Company shall be personal property for all purposes. At all times after the Effective Date, the Company shall hold title to all of its property in the name of the Company and not in the name of any Member.

SECTION 2

MEMBERS’ CAPITAL CONTRIBUTIONS

2.1 Initial Capital Contributions; Percentage Interests. Concurrently with the execution of this Agreement, each of the Members shall contribute or cause to be contributed to the initial capital of the Company the assets and amounts set forth as Initial Capital Contributions (the “Initial Capital Contributions”) on Schedule 2.1 in exchange for their Interests. A Capital Account shall be established and maintained for each Member. Upon the payment of their Initial Capital Contributions, the Interests of Holding and Joseph Lloyd McAdams shall be fully vested. Upon the payment of their respective Capital Contributions, the respective Interests of the Belvedere Members shall vest in accordance with the vesting schedule set forth on Schedule 2.1.

2.2 Additional Capital Contributions.

(a) No Member shall be required to contribute additional capital to the Company except to the extent the Board of Managers determines that the Company requires additional capital beyond the Capital Contributions set forth in Section 2.1 hereof, in which case, the Members shall contribute such additional capital to the Company on a pro rata basis. If any Member elects not to contribute such additional capital, such Member’s Percentage Interest shall be subject to dilution.

(b) If the Board of Managers determines that the Company requires additional capital beyond the Capital Contributions set forth in Section 2.1 hereof and in Section 2.2(a) hereof, subject to Section 2.3 of this Agreement, the Board of Managers shall have the power to and is authorized, subject to any limitations prescribed by law, to provide for the issuance of such additional Interests from time to time, and to establish from time to time the powers, preferences and rights with respect to such Interests and any qualifications, limitations or restrictions thereof as the Board of Managers may determine to be appropriate under the circumstances, and the Board of Managers shall have the power and authority to cause this Agreement to be amended to reflect the terms and conditions of such Interests and the issuance

-3-

thereof; provided, however, that the dilution in the Members’ share of the profits, losses and distributions shall be shared, as nearly as practicable, among all of the Members on a pro rata basis.

2.3 Pre-Emptive Right.

(a) Except as contemplated by Section 2.3(g), the Company shall not issue, sell, or exchange, agree or obligate itself to issue, sell or exchange, or reserve or set aside for issuance, sale or exchange, any Interests or any securities convertible into or exercisable or exchangeable for Interests unless in each case the Company shall have first offered to sell to each Member that portion of such Interests or such other securities (the “Offered Securities”) as the Interests then held by such Member bears to the total Interests then held by all Members (the “Pro Rata Share”), at a price and on such other terms as shall have been specified by the Company in writing delivered to the Members, which offer (the “Pre-Emptive Offer”) shall specify the Offered Securities, the terms, including price at which they are to be sold and the Person or Persons to whom they are to be sold, and by its terms shall remain open and irrevocable for a period of 10 days from receipt of the Pre-Emptive Offer; provided that in the event that any Member does not elect to purchase its entire pro rata portion all other Members shall have the right to purchase such unelected portion as among themselves on a pro rata basis for an additional period of five days from receipt of the Pre-Emptive Offer.

(b) Notice of Acceptance. Notice of each Member’s intention to accept, in whole or in part, any offer made pursuant to Section 2.3(a) shall be evidenced by a writing signed by such Member and delivered to the Company prior to the end of the 10-day period or 15-day period with respect to over-allotments of such Pre-Emptive Offer, setting forth the amount of the Offered Securities such Member elects to purchase.

(c) Permitted Sales of Refused Securities. In the event that notices of acceptance are not given by the Members in respect of all the Offered Securities, the Company shall have 90 days from the expiration of the relevant period set forth in Section 2.3(a) to sell the Offered Securities as to which a notice of acceptance has not been given by the Members (the “Refused Securities”) to the Person or Persons specified in the Pre-Emptive Offer, but only upon terms and conditions that are no more favorable in the aggregate to such other Person or Persons or less favorable to the Company than those set forth in the Pre-Emptive Offer.

(d) Reduction in Amount of Offered Securities. In the event the Company shall sell less than all the Refused Securities (any such sale to be in the manner and on the terms specified in Section 2.3(c) above), then each Member may reduce the number of, or other units of the Offered Securities specified in its respective notice of acceptance to an amount which shall be not less than the amount of the Offered Securities which the Member elected to purchase pursuant to Section 2.3(b) multiplied by a fraction, (i) the numerator of which shall be the amount of Offered Securities which the Company actually proposes to sell, and (ii) the denominator of which shall be the amount of all Offered Securities. In the event that any Member so elects to reduce the number or amount of Offered Securities specified in its respective notice of acceptance, the Company may not sell or otherwise dispose of more than the reduced amount of Offered Securities until such Offered Securities have again been offered to the Members in accordance with Section 2.3(a).

-4-

(e) Closing. Upon the closing of the sale to such other Person or Persons of all or less than all of the Refused Securities, the Members shall purchase from the Company, and the Company shall sell to the Members, the number of Offered Securities specified in the notices of acceptance, as reduced pursuant to Section 2.3(d) if the Members shall have so elected, upon the terms and conditions specified in the Pre-Emptive Offer.

(f) Further Sale. In each case, any Offered Securities not purchased by the Members or other Person or Persons in accordance with this Section 2.3 may not be sold or otherwise disposed of until they are again offered to the Members under the procedures specified in this Section 2.3.

(g) Exceptions. The rights of the Members under this Section 2.3 shall not apply to issuances of Interests or other securities (i) pursuant to any manager, advisor, employee or consultant option or purchase plan, or similar benefit program or agreement approved by the Board of Managers, (ii) as consideration for the acquisition by the Company or any Subsidiary of the Company of another business entity or other assets (other than cash or cash equivalents) or the merger of any business entity with or into the Company or any Subsidiary of the Company approved by the Board of Managers, or (iii) in connection with an initial public offering approved by the Board of Managers.

SECTION 3

ALLOCATION

3.1 Profits and Losses.

(a) After giving effect to the special allocations set forth in Sections 3.2 and 3.4, but subject to Sections 3.1(b) and 3.3, Profits and Losses for any Allocation Year shall be allocated to the Members in accordance with their Percentage Interests.

(b) If any portion of a Member’s Percentage Interest is an Unvested Interest and such Member has not timely and validly filed an election with the Internal Revenue Service under Section 83(b) of the Code with respect to such Unvested Interest (an “83(b) Election”) and provided a copy, and proof of timely filing, of such 83(b) Election to the Chief Executive Officer of the Company, then such Member shall not be treated as a “partner” for income tax purposes with respect to such Unvested Interest and Profits and Losses shall not be allocated to such Member pursuant to this Section 3 with respect to such Unvested Interest. To the extent that a Member is not treated as a partner for income tax purposes pursuant to the foregoing, all amounts distributed by the Company to such Member with respect to any such Unvested Interest shall be treated as taxable compensation income to such Member and an expense of the Company.

3.2 Special Allocations.

Subject to Section 3.1 (b), the following special allocations shall be made in the following order:

-5-

(a) Minimum Gain Chargeback. Except as otherwise provided in Section 1.704-2(f) of the Regulations, notwithstanding any other provision of this Section 3, if there is a net decrease in Company Minimum Gain during any Allocation Year, each Member shall be specially allocated items of Company income and gain for such Allocation Year (and, if necessary, subsequent Allocation Years) in an amount equal to such Member’s share of the net decrease in Company Minimum Gain, determined in accordance with Regulations Section 1.704-2(g). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Member pursuant thereto. The items to be so allocated shall be determined in accordance with Sections 1.704-2(f)(6) and 1.704-2(j)(2) of the Regulations. This Section 3.2(a) is intended to comply with the minimum gain chargeback requirement in Section 1.704-2(f) of the Regulations and shall be interpreted consistently therewith.

(b) Member Minimum Gain Chargeback. Except as otherwise provided in Section 1.704-2(i) (4) of the Regulations, notwithstanding any other provision of this Section 3, if there is a net decrease in Member Nonrecourse Debt Minimum Gain attributable to a Member Nonrecourse Debt during any Allocation Year, each Member who has a share of the Member Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse Debt, determined in accordance with Section 1.704-2(i)(5) of the Regulations, shall be specially allocated items of Company income and gain for such Allocation Year (and, if necessary, subsequent Allocation Years) in an amount equal to such Member’s share of the net decrease in Member Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(4). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Member pursuant thereto. The items to be so allocated shall be determined in accordance with Sections 1.704-2(i)(4) and 1.704-2(j)(2) of the Regulations. This Section 3.2(b) is intended to comply with the minimum gain chargeback requirement in Section 1.704-2(i)(4) of the Regulations and shall be interpreted consistently therewith.

(c) Qualified Income Offset. In the event any Member unexpectedly receives any adjustments, allocations, or distributions described in Sections 1.704 -l(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6) of the Regulations, items of Company income and gain shall be specially allocated to such Member in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the Adjusted Capital Account Deficit of the Member as quickly as possible, provided that an allocation pursuant to this Section 3.2(c) shall be made only if and to the extent that the Member would have an Adjusted Capital Account Deficit after all other allocations provided for in this Section 3 have been tentatively made as if this Section 3.2(c) were not in the Agreement.

(d) Gross Income Allocation. In the event any Member has an Adjusted Capital Account Deficit at the end of any Allocation Year, each such Member shall be specially allocated items of Company income and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Section 3.2(d) shall be made only if and to the extent that such Member would have an Adjusted Capital Account Deficit in excess of such sum after all other allocations provided for in this Section 3 have been made as if Section 3.2(c) and this Section 3.2(d) were not in the Agreement.

-6-

(e) Nonrecourse Deductions. Nonrecourse Deductions for any Allocation Year shall be specially allocated to the Members in proportion to their respective Percentage Interests.

(f) Member Nonrecourse Deductions. Any Member Nonrecourse Deductions for any Allocation Year shall be specially allocated to the Member who bears the economic risk of loss with respect to the Member Nonrecourse Debt to which such Member Nonrecourse Deductions are attributable in accordance with Regulations Section 1.704-2(i) (1).

3.3 Loss Limitation.

Losses allocated pursuant to Section 3.1 hereof shall, to the extent possible, not exceed the maximum amount of Losses that can be allocated without causing any Member to have an Adjusted Capital Account Deficit at the end of any Allocation Year. In the event some but not all of the Members would have Adjusted Capital Account Deficits as a consequence of an allocation of Losses pursuant to Section 3.1 hereof, the limitation set forth in this Section 3.3 shall be applied on a Member by Member basis and Losses not allocable to any Member as a result of such limitation shall be allocated to the other Members in accordance with the positive balances in such Member’s Capital Accounts so as to allocate the maximum permissible Losses to each Member under Section 1.704-1(b)(2)(ii)(d) of the Regulations. Any remaining Losses shall be allocated first to the Members in proportion to the extent to which such Members bear the economic risk with respect to such Losses and then to the Members in proportion to their Percentage Interests.

3.4 Curative Allocations.

The allocations set forth in Sections 3.2 and 3.3 (the “Regulatory Allocations”) are intended to comply with certain requirements of the Regulations. It is the intent of the Members that, to the extent possible, all Regulatory Allocations shall be offset either with other Regulatory Allocations or with special allocations of other items of Company income, gain, loss or deduction pursuant to this Section 3.4. Therefore, notwithstanding any other provision of this Section 3 (other than the Regulatory Allocations), to the extent permitted under the Regulations, the Board of Managers shall make such offsetting special allocations of Company income, gain, loss or deduction in whatever manner it determines appropriate so that, after such offsetting allocations are made, each Member’s Capital Account balance is, to the extent possible, equal to the Capital Account balance such Member would have had if the Regulatory Allocations were not part of the Agreement and all Company items were allocated pursuant to Section 3.1.

3.5 Other Allocation Rules.

(a) Subject to Section 10.14 hereof, for purposes of determining the Profits, Losses, or any other items allocable to any period, Profits, Losses, and any such other items shall be determined on a daily, monthly, or other basis, as determined by the Board of Managers using any permissible method under Code Section 706 and the Regulations thereunder.

(b) The Members are aware of the income tax consequences of the allocations made by this Section 3 and hereby agree to be bound by the provisions of this Section 3 in reporting their shares of Company income and loss for income tax purposes.

-7-

(c) Solely for purposes of determining a Member’s proportionate share of the “excess nonrecourse liabilities” of the Company within the meaning of Regulations Section 1.752-3(a) (3), the Members’ interests in Company profits shall be equal to their respective Percentage Interests.

3.6 Tax Allocations: Code Section 704(c).

For tax purposes, all items of income, gain, loss, deduction, expense and credit, other than tax items corresponding to items allocated pursuant to Sections 3.2, 3.3 and 3.4, shall be allocated in the same manner as are Profits and Losses; provided, however, that in accordance with Code Section 704(c) and the Regulations thereunder, income, gain, loss and deductions with respect to any property contributed to the capital of the Company shall, solely for tax purposes, be allocated among the Members so as to take account of any variation between the adjusted basis of such property to the Company for federal income tax purposes and its initial Gross Asset Value (computed in accordance with the definition of Gross Asset Value) using any method or methods permitted by the applicable Regulations that the Board of Managers determines to apply.

In the event the Gross Asset Value of any Company asset is adjusted pursuant to subparagraph (ii) of the definition of Gross Asset Value, subsequent allocations of income, gain, loss and deductions with respect to such asset shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Regulations thereunder using any method or methods permitted by the applicable Regulations that the Board of Managers determines to apply.

Any elections or other decisions relating to such allocations shall be made by the Board of Managers in any manner that reasonably reflects the purpose and intention of this Agreement.

SECTION 4

DISTRIBUTIONS

4.1 Available Cash. Except as provided in Section 11, or as determined by the Board of Managers in accordance with the provisions of Section 5.4 hereof, the Company will, to the extent the Company has sufficient Available Cash, make quarterly distributions to each Member within 15 days following the end of each quarter, in an amount equal to the product of (i) the Assumed Tax Rate multiplied by (ii) the amount of Profits allocable (as determined by the Board of Managers in its reasonable discretion in accordance with the provisions of Section 5.4 hereof) to such Member for that quarter. Except as provided in Section 11, such distributions, if any, will be pro rata among the Members in accordance with their Percentage Interests and will be made without regard to whether or not such Member’s Interests are Vested Interests. All other distributions shall be as determined by the Board of Managers in accordance with the provisions of Section 5.4 hereof. It is the intent of the Company generally to distribute Available Cash after payment of operating and other expenses.

-8-

4.2 Amounts Withheld. The Company is authorized to withhold from payments and distributions, or with respect to allocations to the Members, and to pay over to any federal, state and local government or any foreign government, any amounts required to be so withheld pursuant to the Code or any provisions of any other federal, state or local law or any foreign law. All such amounts withheld shall be treated as amounts paid or distributed, as the case may be, to the Members pursuant to Section 4.1 for all purposes under this Agreement. If the Company itself pays any amount in respect of such withholding on account of a Member, such Member shall on demand reimburse the Company for such amount, plus interest thereon at the applicable Federal short-term rate in effect under Section 1274(d) of the Code, compounding semiannually.

4.3 Limitations on Distributions.

(a) The Company shall make no distributions to the Members except (i) as provided in this Section 4 and in Section 11 hereof, or (ii) as approved by the Board of Managers in accordance with Section 5.4 hereof.

(b) A Member may not receive a distribution from the Company to the extent that, after giving effect to the distribution, all liabilities of the Company would exceed the fair value of the Company’s assets.

SECTION 5

MANAGEMENT

5.1 Management; Board of Managers.

(a) The management of the Company shall be vested in the Board of Managers (the “Board of Managers”) designated by the Members as provided in this Section 5.1 hereof, subject to the limitations of Section 5.4 hereof.

(b) The number of Managers on the Board of Managers shall be five unless otherwise agreed by the Members by Majority Vote. Holding shall be entitled to designate three Managers (the “Holding Designees”), the Belvedere Members, but not any transferees or assignees of the Belvedere Members other than Permitted Transferees, as long as they hold in the aggregate no less than 25% of the outstanding Membership Interests, by Majority Vote, shall be entitled to designate two Managers (the “Management Designees”); provided, that for so long as Claus Lund and Russell Thompson serve as officers of the Company, they shall each be one of the two Management Designees. The Holding Designees initially shall be Joseph Lloyd McAdams, Joseph E. McAdams and Thad M. Brown. The Managers of the Company as of the Effective Date shall be as set forth on Schedule 5.1 hereto, and said Schedule shall be amended from time to time by the Managers to reflect the resignation or removal of any Manager or the appointment of new or additional Managers pursuant to this Agreement.

(c) Each Member, by signing this Agreement, hereby designates the Persons identified on Schedule 5.1 as Managers of the Company until their successors are designated. A Manager shall remain in office until removed by Majority Vote of the Member(s) designating such Manager or until his earlier death, Disability or resignation. Holding and the Founding Members shall each designate Managers it is entitled to designate (other than the Managers listed

-9-

on Schedule 5.1) by delivering to the Company and the other Members written notice designating each Manager and setting forth such Manager’s business address and telephone number.

(d) A Manager may be removed at any time, with or without cause, by Majority Vote of the Members that designated such Manager, upon written notice delivered to the Company and the other Members demanding such removal.

(e) In the event any Manager resigns, dies or is unwilling or unable to serve as such or is removed from office by the Members that designated such Manager, the Members that designated such Manager shall promptly designate a successor to such Manager.

(f) Except as otherwise provided in this Section 5.1(f), each Manager shall have one vote. In the event that the vote of the Board of Managers on a matter results in a tie vote, the Chairman’s vote on the matter shall be determinative. Except as otherwise provided in this Agreement, the Board of Managers shall act by the affirmative vote of a majority of the entire Board of Managers.

(g) Each Manager shall perform his duties as a Manager in good faith, in a manner he reasonably believes to be in the best interests of the Company, and with such care as an ordinarily prudent person in a like position would use under similar circumstances.

(h) The Board of Managers shall have the power in accordance with the provisions of Section 5.4 hereof to delegate authority to such committees of Managers, Officers, employees, agents and representatives of the Company as it may from time to time deem appropriate. Any delegation of authority to take any action must be approved by the same vote of the Board of Managers as would be required for the Board of Managers to approve such action directly.

(i) No Manager or Officer shall be liable under a judgment, decree or order of court, or in any other manner, for any debt, obligation or liability of the Company.

5.2 Meetings of the Board of Managers.

(a) The Board of Managers shall hold regular meetings no less frequently than once every quarter during the Fiscal Year and shall establish meeting times, dates and places and requisite notice requirements (not shorter than those provided in Section 5.2(b)) and adopt rules or procedures consistent with the terms of this Agreement. Each regular meeting of the Board of Managers will be held at the Company’s principal place of business, or at such location as may be determined by the Chairman. At such meetings the Board of Managers shall transact such business as may properly be brought before the meeting, whether or not notice of such meeting referenced the action taken at such meeting.

(b) Special meetings of the Board of Managers may be called by the Chairman or by a majority of the Managers. The call shall state the location of the meeting and the nature of the business to be transacted. Notice of each such meeting shall be given to each Manager by telephone, telecopy, telegram or similar method or sent by reputable overnight delivery service at least 24 hours before the meeting, unless a longer notice period is established

-10-

by the Board of Managers. No actions other than those specified in the notice may be considered at any special meeting unless unanimously approved by the Managers. Any Manager may waive notice of, or the taking of any action at, any meeting in writing before, at, or after such meeting. The attendance of a Manager at a meeting shall constitute a waiver of notice of such meeting, except when a Manager attends a meeting for the express purpose of objecting to the transaction of any business because the meeting was not properly called.

(c) Any one or more members of the Board of Managers or any committee thereof may participate in a meeting of the Board of Managers or such committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation by such means shall constitute presence in person at a meeting.

(d) At any meeting of the Board of Managers, that number of Managers required for action by the Board of Managers shall constitute a quorum. A Manager expecting to be absent from a meeting shall be entitled to designate a proxy to act in his or her stead.

(e) Notwithstanding anything to the contrary in this Section 5.2, any action required or permitted to be taken by the Board of Managers or any committee thereof may be taken without a meeting if a consent or consents in writing, setting forth the action so taken, shall be signed by the number of members of the Board of Managers or such committee, as the case may be, having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all members of the Board of Managers or such committee entitled to vote thereon were present and voted, and the writing or writings are filed with the minutes of the proceedings of the Board of Managers or such committee, as the case may be.

5.3 Board of Managers Powers. Subject to the provisions of this Agreement, the Business and affairs of the Company shall be managed by or under the direction of the Board of Managers, which may exercise all of the powers of the Company that are not otherwise required by this Agreement or the Act to be exercised by the Members. In addition to the powers and authority expressly conferred upon them by statute or by this Agreement, the Board of Managers is empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Company. In addition to, and without limiting the foregoing, the Company shall take all actions necessary to cause the board of directors or board of managers of each of its Subsidiaries (or the general partner of each such Subsidiary) to be comprised of the same Persons who serve as Managers of the Company and that, in such capacity, each such Person shall have the same powers and authority with respect to such Subsidiary as a Manager is entitled to exercise with respect to the Company under this Agreement. Subject to Section 5.1(h) hereof, the Board of Managers shall be entitled to delegate all or any part of its powers as it shall deem appropriate or convenient to such officers of the Company or other persons as it shall select in its discretion, subject to the reservation of authority to approve the major decisions set forth in Section 5.4 and such other matters as shall require its approval under the terms of this Agreement. Initially, the management of the day-to-day operations of the Company shall be delegated, subject to Section 5.1(h) and the terms of the Management Agreement, to the Officers.

-11-

5.4 Major Decisions.

(a) The Company shall not take any of the following actions without the prior written authorization of Holding:

(i) initiating a Capital Event;

(ii) making capital calls;

(iii) admitting new Members (other than in connection with Transfers made in accordance with all applicable terms and provisions of this Agreement);

(iv) amending the Board of Managers designation rights set forth in Section 5.1 of this Agreement or increasing or decreasing the size of the Board of Managers;

(v) making distributions;

(vi) redeeming, purchasing or otherwise acquiring, any Interests or other equity securities (including, without limitation, warrants, options and other rights to acquire any of its Interests or other equity securities directly or indirectly);

(vii) selecting new sites for the Business and entering into, amending or extending any leases of real estate;

(viii) relocating the principal office of the Company outside Santa Monica, California;

(ix) adopting the Annual Budget;

(x) hiring or termination of key management and allocating annual bonuses for key employees;

(xi) entering into, amending, modifying or granting any waiver under any employment or non-competition agreement to which the Company or any of its affiliates is a party or is bound;

(xii) transactions with any Member or any Affiliate of any Member;

(xiii) changing the nature or scope of the Business;

(xiv) purchasing, acquiring or obtaining any capital stock or other proprietary interest, directly or indirectly, in any other entity or all or substantially all of the business or assets of another person;

(xv) entering into or committing to enter any joint ventures or any partnerships or establishing any non-wholly-owned subsidiaries;

-12-

(xvi) purchasing, leasing or otherwise acquiring any asset or group of assets, in an aggregate amount (as to the Company and all of its Subsidiaries), for consideration in excess of $50,000 per year;

(xvii) selling, leasing, transferring or otherwise disposing of any asset or group of assets, in an aggregate amount (as to the Company and all of its Subsidiaries), for consideration in excess of $50,000 per year;

(xviii) creating, incurring, assuming or suffering to exist any indebtedness of the Company or any of its subsidiaries for borrowed money (which shall include for purposes hereof capitalized lease obligations and guarantees or other contingent obligations for indebtedness for borrowed money) in an aggregate amount (as to the Company and all of its subsidiaries) in excess of $25,000, but excluding trade payables;

(xix) initiating or settling litigation involving the Company;

(xx) commencing a voluntary case or similar proceeding under the U.S. Bankruptcy Code or under any other applicable federal or state bankruptcy, insolvency or similar law now or hereafter in effect (collectively “Insolvency Laws”); consenting to or taking any other action that would reasonably be expected to result in the entry of an order for relief under any Insolvency Laws; consenting to the conversion of an involuntary case or similar proceeding to a voluntary case or similar proceeding under any Insolvency Laws; or consenting to the appointment or taking of possession by a receiver, trustee or other custodian of all or a substantial part of the Company’s property or otherwise making any assignment for the benefit of the Company’s creditors;

(xxi) engaging in any reorganization, merger or consolidation of the Company, selling all or substantially all of the assets of the Company, or transferring substantially all of the Interests of the Company;

(xxii) amending or terminating any of the Transaction Documents;

(xxiii) entering into any agreement pursuant to which the Company would provide services;

(xxiv) forming a committee of the Board of Managers;

(xxv) appointing or removing professionals to provide services to the Company or any Affiliate, including, without limitation, the Company’s independent auditors and legal counsel; or

(xxvi) taking any action under Section 10.8.

(b) The Company shall not take any of the following actions without the prior written authorization of at least one Management Designee (as long as the Belvedere Members own no less than 25% of the outstanding Membership Interests):

(i) initiating a Capital Event;

-13-

(ii) making capital calls or accepting additional capital contributions (other than additional capital contributions made by persons selected by the Company to replace one or more of the Belvedere Members as officers of the Company);

(iii) issuing additional Interests pursuant to Section 2.2(b) (other than additional Interests issued to persons selected by the Company to replace one or more of the Belvedere Members as officers of the Company); or

(iv) changing in any material respect the nature and scope of the Business; or

(v) amending or terminating this Agreement; or

(vi) amending the Management Agreement to reduce the rate of compensation payable thereunder or the manner in which such compensation is determined or in a manner that materially and adversely affects the interests of the Manager.

(c) Whenever in this Agreement the authorization, approval or consent of Holding is referred to, such reference shall mean the written authorization, approval or consent, as the case may be, of all of the Holding Designees.

(d) Except as otherwise provided in this Agreement, the Board of Managers may, from time to time, subject to Section 5.1(h) hereof, delegate approval authority over specific categories of matters to officers of the Company or to a committee of the Board of Managers.

5.5 Duties and Obligations of the Board of Managers. Subject to the provisions of Section 5.4 hereof,

(a) The Board of Managers shall cause the Company to conduct its business and operations separate and apart from that of any Member or Manager or any of their respective Affiliates, including, without limitation, (i) segregating Company assets and not allowing funds or other assets of the Company to be commingled with the funds or other assets of, held by, or registered in the name of, any Member or Manager or any of their respective Affiliates, (ii) maintaining books and financial records of the Company separate from the books and financial records of any Member or Manager and their respective Affiliates, and observing all Company procedures and formalities, including, without limitation, maintaining minutes of Company meetings and acting on behalf of the Company only pursuant to due authorization of the Members, (iii) causing the Company to pay its liabilities from assets of the Company, and (iv) causing the Company to conduct its dealings with third parties in its own name and as a separate and independent entity.

(b) The Board of Managers shall take all actions which may be necessary or appropriate (i) for the continuation of the Company’s valid existence as a limited liability company under the laws of the State of Delaware and of each other jurisdiction in which such existence is necessary to protect the limited liability of the Members or to enable the Company to conduct the business in which it is engaged and (ii) for the accomplishment of the Company’s purposes in accordance with the provisions of this Agreement and applicable laws and regulations.

-14-

(c) Each Manager shall be required to devote only such time to the affairs of the Company as may be necessary to attend meetings of the Board of Managers and to provide overall strategic direction in the management and operation of the Company, and shall be free to serve any other Person or enterprise in any capacity that such Manager may deem appropriate in his, her or its discretion. Subject to the confidentiality provisions of Section 6.6, neither this Agreement nor any activity undertaken pursuant hereto shall prevent any Member or Manager or their respective Affiliates from engaging in whatever activities they choose.

(d) Subject to the provisions of this Agreement, the Board of Managers is hereby authorized to cause the Company to conduct commercial business transactions with any Member or Manager, acting on its own behalf, or any Affiliate of any Member or Manager; provided that any such transaction shall be made on terms and conditions that are no less favorable to the Company than if the transaction had been made on an arm’s-length basis with an independent third party; provided, further, that the foregoing shall not in any manner limit the Company’s ability to enter into the Management Agreement concurrently upon the execution of this Agreement.

5.6 Compensation and Reimbursement.

The Company shall reimburse the Managers for all expenses reasonably incurred and paid by any of them as authorized by the Company, in the conduct of the Company’s business. Managers, in their capacity as such, may also receive fixed fees and other compensation for their services as Managers, as may be determined by unanimous resolution of the Board of Managers. Such compensation, if any, and reimbursement shall be treated as expenses of the Company and shall not be deemed to constitute distributions to any Member of profit, loss or capital of the Company.

5.7 Management; Officers.

(a) General. Subject to Section 5.1(h) hereof, the Board of Managers shall have the right to delegate authority to act on behalf of the Company to Officers of the Company. The Company may have as its Officers a Chairman, a President, a Chief Executive Officer, a Chief Financial Officer, one or more Executive Vice Presidents, one or more Vice Presidents, a Secretary, one or more Assistant Secretaries, a Treasurer, one or more Assistant Treasurers and such other Officers as the Board of Managers may determine. Holding shall appoint the Chairman. The initial Chairman and Chief Executive Officer of the Company shall be Joseph Lloyd McAdams and the initial President of the Company shall be Claus Lund. The initial Chief Financial Officer and Secretary of the Company shall be Thad M. Brown and the initial Treasurer and Executive Vice President shall be Russell Thompson. The initial Assistant Secretary shall be Joseph E. McAdams. Except as otherwise provided in this Section 5.7(a), the Officers of the Company shall be elected and may be removed from time to time by the Board of Managers.

-15-

(b) Duties of Officers. Except as may be otherwise provided by the Board of Managers in a writing filed with the records of the Company, a person holding the title of an Officer set forth below shall have the power and the duties set forth below:

(i) Chairman. The Chairman shall perform such duties and possess such powers as are assigned to him by the Board of Managers.

(ii) Chief Executive Officer. The Chief Executive Officer shall, subject to the direction of the Board of Managers, have general charge and supervision of the business of the Company including, without limitation, supervising the management of the locations where the Company is doing business, overseeing the design and implementation of new business concepts and locations. In addition, the Chief Executive Officer shall perform such other duties and shall have such other powers as the Board of Managers may from time to time prescribe.

(iii) President. The President shall, subject to the direction of the Board of Managers, have general charge and supervision of the administration of the Company including, without limitation, preparation of the Annual Budget, and an annual business plan for approval by the Board of Managers. In addition, the President shall perform such other duties and shall have such other powers as the Board of Managers shall from time to time prescribe.

(iv) Chief Financial Officer. The Chief Financial Officer shall, subject to the direction of the Board of Managers, have general charge and supervision of the financial functions of the Company, including, without limitation, oversight of the implementation and maintenance of the Company’s internal financial systems and controls and preparation of the Company’s financial statements. In addition, the Chief Financial Officer shall perform such other duties and shall have such other powers as the Board of Managers shall from time to time prescribe.

(c) Tenure. Each Officer shall hold office until his successor is appointed and qualified, unless a different term is specified by the Board of Managers in appointing him or her, or until his or her earlier death, Disability, resignation or removal.

(d) Resignation and Removal. Any Officer may resign by delivering written resignation to the Board of Managers at the Company’s principal office. Such resignation shall be effective upon receipt, in accordance with the notice provisions in Section 16.1 of this Agreement, unless it is specified to be effective at some other time or upon the happening of some other event. Except as otherwise provided in a separate written agreement between the Company and any Officer, any Officer may be removed at any time, with or without cause, by the Board of Managers, and all Officers shall serve in the sole discretion of the Board of Managers.

(e) Vacancies. The Board of Managers may fill any vacancy occurring in any office (other than the office of Chairman, which vacancy shall be filled by a designee of Holding) for any reason and may, in its discretion, leave any office unfilled for such period as it may determine. Each such successor shall hold office for the unexpired term, if any was specified for his or her predecessor, and until his or her successor is appointed and qualified, or until his or her earlier death, Disability, resignation or removal.

-16-

SECTION 6

MEMBERS

6.1 Authority; Liability to Third Parties. No Member has any authority or power to act for or on behalf of the Company, to do any act that would be binding on the Company, or to incur any expenditures on behalf of the Company. No member shall be liable for the debts, obligations or liabilities of the Company, including under a judgment decree or order of court.

6.2 Voting Rights.

No Member has any voting right except with respect to those matters specifically set forth in this Agreement and as required in the Act.

6.3 Withdrawal/Resignation.

Except as otherwise provided in Sections 4 and 11 hereof, no Member shall demand or receive a return on or of its Capital Contributions without the consent of the Board of Managers; provided, that any Member who sells all of his Interests to the Company pursuant to Sections 10.6 shall be entitled to receive the positive balance, if any, in his Capital Account within 30 days after completion of the Company’s audit for the Fiscal Year in which such Member ceased to own any Interest.

6.4 Member Compensation and Reimbursement.

No Member shall receive any interest, salary or drawing with respect to its Capital Contributions or its Capital Account or for services rendered on behalf of the Company, or otherwise, in its capacity as a Member, except as otherwise provided in this Agreement or approved by the Board of Managers.

6.5 Partition.

Each Member waives any rights to have any Company property partitioned, or to file a complaint or to institute any suit, action or proceeding at law or in equity to have any Company property partitioned, and each Member, on behalf of itself, its successors and its assigns, hereby waives any such right.

6.6 Confidentiality.

Except as contemplated hereby or required by a court of competent authority, each Belvedere Member shall keep confidential and shall not disclose to others and shall use its reasonable efforts to prevent its Affiliates and any of its, or its Affiliates’, present or former employees, agents, and representatives from disclosing to others without the prior written consent of Holding any information that pertains to this Agreement, any negotiations pertaining hereto, any of the transactions contemplated hereby, or the Business of the Company. Without in any manner limiting the foregoing, each Belvedere Member is concurrently entering into a Nonsolicitation Agreement.

-17-

6.7 Transactions Between a Member and the Company.

Except as otherwise provided by applicable law or this Agreement, any Member or its Affiliate may, but shall not be obligated to, lend money to the Company, act as surety for the Company and transact or propose to transact other business with the Company and has the same rights and obligations when transacting business with the Company as a Person who is not a Member. A Member, any Affiliate thereof or an employee, member, stockholder, partner, agent, director or officer of a Member or any Affiliate thereof, may also be an employee or be retained as an agent of the Company. The existence of these relationships and acting in such capacities will not result in the Member being deemed to be participating in the control of the business of the Company or otherwise affect the limited liability of the Member.

6.8 Other Instruments. Each Member hereby agrees to execute and deliver to the Company within five days after receipt of a written request therefor, such other and further documents and instruments, statements of interest and holdings, designations, powers of attorney and other instruments and to take such other action as the Board of Managers deems necessary and appropriate and reasonably requests to comply with any laws, rules or regulations as may be necessary to enable the Company to fulfill its responsibilities under this Agreement; provided, however, that a Member shall not be required to execute and deliver any document or instrument or to take any action that could reasonably be expected to lead to liability or obligation on the part of any Member.

6.9 Non-Competition; Non-Solicitation.

(a) In consideration of the benefits to the Belvedere Members hereunder and in order to induce Holding to enter into this Agreement, each of the Belvedere Members hereby covenants and agrees that for a period commencing on the date hereof and ending one year following the date on which such Belvedere Member ceases to own any Interest in the Company, he shall not, and he will cause his Affiliates to not, directly or indirectly, anywhere as a proprietor, partner, stockholder (other than the holder of 1% or less of the stock of a corporation the securities of which are traded on a securities exchange or in the over-the-counter market), director, officer, employee, joint venturer, investor, lender or in any other capacity own, engage in, conduct, manage, operate or control, or participate in, be associated or connected in any manner whatsoever with the ownership, management, operation or control of, any business which competes with any operation conducted by the Company, within the following geographic areas: North America and Europe. Notwithstanding the foregoing, if on the date that is one year following the termination of such Belvedere Member’s termination of employment with the Company, such Member continues to hold any Interest in the Company, the Company shall take such actions as are reasonably necessary to waive the provisions of this Section 6.9.

(b) For a period commencing on the date hereof and ending two years following the date on which any Belvedere Member ceases to own any Interest in the Company, such Belvedere Member shall not, and shall cause his Affiliates to not, without the prior written approval of Holding, directly or indirectly solicit, encourage, entice or induce any of the employees of the Company to terminate his or her relationship with the Company.

-18-

(c) Each Belvedere Member acknowledges and agrees that if he or any of his Affiliates breaches any provision of this Section 6.9, such breach would subject the Company and Holding to irreparable harm and that any such breach shall entitle the Company and Holding, in addition to any actual damages caused by such breach and other remedies available to the Company and/or Holding, to immediate and permanent injunctive relief against such Member to prevent or mitigate any harm that might be caused to the Company or Holding, as applicable, by such breach of this Section 6.9. In addition, any license granted pursuant to the terms of Section 10.7 shall immediately terminate upon any such breach of this Section 6.9.

(d) It is the desire of the Members and the Company that this Section 6.9 be binding and enforceable to the maximum extent permitted by law. The Members and the Company agree that if, in any action or arbitration relating to this Section 6.9, any provision, term, right, restriction, covenant or promise in this Section 6.9 is found to be invalid, illegal, or unenforceable for any reason, then such provision, right, restriction, covenant or promise shall be deemed modified (and the Members and the Company agree to seek to have the court or arbitrator make such modification) to the minimum extent necessary to make it valid and enforceable.

6.10 Waiver of Noncompetition Provisions.

(a) The parties acknowledge that the performance by Joseph Lloyd McAdams, Joseph E. McAdams and Thad Brown of their duties as officers and/or directors, as applicable, of Anworth Mortgage Asset Corporation shall not be deemed to violate any of the provisions of this Agreement.

(b) Subject to his fiduciary duties as an officer, Member and Manager of the Company, the parties acknowledge and agree that Mr. Lund’s service as a director of E-Loan, Inc., a publicly traded mortgage lender, shall not be deemed to be a violation of any noncompetition or similar provisions contained herein.

SECTION 7

LIMITATION OF LIABILITY AND INDEMNIFICATION

7.1 Limitation of Liability. No Member or Manager (or any Affiliates, agents, officers, partners, employees, representatives, directors or stockholders of any Member or Manager (collectively, “Related Parties”)) shall be personally liable to the Company for expenses, liabilities and losses (including attorneys’ fees, judgments, fines or penalties and amounts paid in settlement) arising out of or in connection with the conduct of the Business by the Company or of an Affiliate of the Company from the date of this Agreement except to the extent that (i) exemption from liability or limitation thereof is not permitted under the Act as in effect at the time such liability or limitation thereof is determined or (ii) such liability arose or resulted from the gross negligence, bad faith, willful misconduct or fraudulent acts of such Person.

-19-

7.2 Indemnification.

(a) Each Person who was or is made a party or is threatened to be made a party to or is otherwise involved (including, without limitation, as a witness) in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such Person is or was a Member or Manager (or a Related Party of either) or is or was serving at the request of the Company as a manager, director, Officer, employee or agent of, or in any other capacity with respect to, another limited liability company, corporation, partnership, joint venture, trust or other enterprise (including service with respect to an employee benefit plan) (an “Indemnitee”) shall be indemnified and held harmless by the Company to the fullest extent authorized by the Act, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than such law permitted the Company to provide prior to such amendment), against all expenses, liabilities and losses (including attorneys’ fees, judgments, fines or penalties and amounts paid in settlement) reasonably incurred or suffered by such Indemnitee in connection with the conduct of the Business by the Company or an Affiliate of the Company from the date of this Agreement, other than in either case expenses, liabilities and losses arising as a result of such Indemnitee’s gross negligence, willful misconduct or fraudulent acts; provided, however, that, except with respect to proceedings to enforce rights to indemnification or as otherwise required by law, the Company shall not be required to indemnify or advance expenses to any such Indemnitee in connection with a proceeding initiated by such Indemnitee unless such proceeding was authorized by the Board of Managers.

(b) The right to indemnification conferred in Section 7.2(a) shall include the right to be paid by the Company the expenses (including attorneys’ fees) incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the Act so requires, an advancement of expenses incurred by an Indemnitee in his capacity as a Member or Manager (and not in any other capacity in which service was or is rendered by such Indemnitee, including without limitation, service to an employee benefit plan) shall be made only upon the delivery to the Company of an undertaking, by or on behalf of such Indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that such Indemnitee is not entitled to indemnification for such expenses under this Section 7.2(b) or otherwise. The rights to indemnification and to advancement of expenses conferred in Section 7.2(a) and this Section 7.2(b) shall continue as to an Indemnitee who has ceased to be a Member or Manager (including any Related Parties) and shall inure to the benefit of the Indemnitee’s heirs, executors and administrators. Any repeal or modification of any of the provisions of this Section 7.2 shall not adversely affect any right of protection of an Indemnitee existing at the time of such repeal or modification.

(c) The rights to indemnification and to the advancement of expenses conferred in this Section 7.2 shall not be exclusive of any other right which any person may have or hereafter acquire under any statute or agreement or any vote of the Board of Managers or Members.

(d) With respect to the initiation, conduct or settlement of litigation or other legal proceedings involving claims for monetary damages or equitable or other relief, or both, from the Company and any Member (or its Affiliates), such Member shall be entitled to both (i)

-20-

approve in advance the legal counsel selected to represent the Company and such Member jointly or to retain at the Company’s expense (subject to the provisions of this Section 7) separate legal counsel and (ii) approve any admissions or acknowledgments of culpability, responsibility or negligence of or otherwise relating to such Member.

(e) The Company may, to the extent authorized by the Board of Managers, grant rights to indemnification and to the advancement of expenses to any employee or agent of the Company not already covered hereby to the fullest extent of the provisions of this Section 7.2 with respect to the indemnification and advancement of expenses of Members or Managers of the Company.

(f) Except as otherwise provided in this Agreement, each Manager and any Affiliate, officer, director, shareholder, partner, member, employee, representative and/or agent of any Manager (each, a “Covered Person”) shall have the standard of care, degree of loyalty and duties (fiduciary or otherwise) similar to those of stockholders, directors and officers, respectively, of business corporations organized under the Delaware General Corporation Law.

(g) A Covered Person shall be fully protected in relying in good faith upon the records of the Company, any information received by the Managers or the Company, and upon such information, opinions, reports or statements presented to the Company by any Person as to matters the Covered Person reasonably believes are within such other Person’s professional or expert competence and who has been selected with reasonable care by or on behalf of the Company, including, without limitation, information, opinions, reports or statements as to the value and amount of the assets, liabilities, Profits, Losses or Cash Flow or any other facts pertinent to the existence and amount of assets from which distributions to Members might properly be paid.

(h) The Company shall have the power to purchase and maintain insurance on behalf of any Person who is or was an Indemnitee against any liability asserted against such Person and incurred by such Person in any such capacity, or arising out of such Person’s status as an Indemnitee, whether or not the Company would have the power and ability to indemnify such Person against such liability under the provisions of Section 7.2 or under applicable law.

SECTION 8

REPRESENTATIONS AND WARRANTIES

8.1 In General. As of the date hereof, each of the Members hereby makes each of the representations and warranties applicable to such Member as set forth in Section 8.2 hereof. All of such warranties and representations shall survive the execution of this Agreement.

8.2 Representations and Warranties.

Each Member hereby severally (and not jointly) represents and warrants as to itself that:

(a) Due Incorporation or Formation; Authorization of Agreement. Such Member is a corporation duly organized or a partnership or limited liability company duly formed, validly existing, and in good standing under the laws of the jurisdiction of its

-21-

incorporation or formation or a competent adult and has the corporate, partnership, company or individual power and authority to own its property and carry on its business as owned and carried on at the date hereof and as contemplated hereby. Such Member is duly licensed or qualified to do business and in good standing in each of the jurisdictions in which the failure to be so licensed or qualified would have a material adverse effect on its financial condition or its ability to perform its obligations hereunder. Such Member has the corporate, partnership, company or individual power and authority to execute and deliver this Agreement and to perform its obligations hereunder and the execution, delivery and performance of this Agreement has been duly authorized by all necessary corporate, partnership or company action, to the extent required. This Agreement constitutes the legal, valid and binding obligation of such Member.

(b) No Conflict with Restrictions; No Default. Neither the execution, delivery, and performance of this Agreement nor the consummation by such Member of the transactions contemplated hereby (i) will conflict with, violate, or result in a breach of any law, regulation, order, writ, injunction, decree, determination, or award of any court, any governmental department, board, agency, or instrumentality, domestic or foreign, or any arbitrator, applicable to such Member, or (ii) will conflict with, violate, result in a breach of, or constitute a default under any of the terms, conditions, or provisions of the articles of incorporation, bylaws, partnership agreement or operating agreement, if any, of such Member or of any material agreement or instrument to which such Member is a party or by which such Member is bound or to which any of its material properties or assets is subject.

(c) Governmental Authorizations. Any registration, declaration, or filing with, or consent, approval, license, permit, or other authorization or order by, any governmental or regulatory authority, domestic or foreign, that is required in connection with the valid execution, delivery, acceptance and performance by such Member under this Agreement or the consummation by such Member of any transaction contemplated hereby has been completed, made, or obtained.

(d) Litigation. There are no actions, suits, proceedings, or investigations pending or, to the knowledge of such Member, threatened against or affecting such Member in any court or before or by any governmental department, board, agency, or instrumentality, domestic or foreign, or any arbitrator which would, if adversely determined (or, in the case of an investigation could lead to any action, suit, or proceeding, which if adversely determined would) reasonably be expected to materially impair such Member’s ability to perform its obligations under this Agreement; and such Member has not received any currently effective notice of any default, and such Member is not in default, under any applicable order, writ, injunction, decree, permit, determination, or award of any court, any governmental department, board, agency, or instrumentality, domestic or foreign, or any arbitrator that would reasonably be expected to materially impair such Member’s ability to perform its obligations under this Agreement or to have a material adverse effect on the financial condition of such Member.

(e) Investigation. Such Member’s acquisition of its Interest is being made for its own account for investment, and not with a view to the sale or distribution thereof. Such Member is a sophisticated investor possessing an expertise in analyzing the benefits and risks associated with acquiring investments that are similar to the acquisition of its Interests. Such Member is financially able to bear the economic risk of an investment in the Company and has

-22-

no need for liquidity in the investment. Furthermore, the financial capacity of such Member is of such a proportion that the total costs of such Member’s investment in the Company is not material when compared with such Member’s total financial capacity. Such Member (i) has received all information that such Member deems necessary to make an informed investment decision with respect to an investment in the Company; (ii) has had the unrestricted opportunity to make such investigation as such Member desires pertaining to the Company and (iii) has had the opportunity to ask questions of representatives of the Company and such Member’s investment.

(f) No Brokers or Finders. No agent, broker, finder, or investment or commercial banker, or other Person or firm engaged by or acting on behalf of such Member or any of their respective Affiliates in connection with the negotiation, execution or performance of this Agreement or the transactions contemplated by this Agreement, is or will be entitled to any brokerage or finder’s or similar fee or other commission as a result of this Agreement or such transactions.

(g) Spousal Consent. Each Member who has a spouse has caused such spouse to sign a Spousal Consent in the form attached hereto as Exhibit A whereby such spouse agrees to be bound by the provisions of this Agreement.

SECTION 9

ACCOUNTING, BOOKS AND RECORDS

9.1 Accounting, Books and Records.

(a) The Company shall keep on site at its principal place of business each of the following:

(i) Separate books of account for the Company that shall show a true and accurate record of all costs and expenses incurred, all charges made, all credits made and received, and all income derived in connection with the conduct of the Company and the operation of the Business in accordance with this Agreement.

(ii) A current list of the full name and last known business, residence or mailing address of each Member and Manager, both past and present;

(iii) A copy of the Certificate and all amendments thereto, together with executed copies of any powers of attorney pursuant to which any amendment has been executed;

(iv) Copies of the Company’s and all of its Subsidiaries’ federal, state, and local income tax returns and reports, if any, for the three most recent years;

(v) Copies of the Transaction Documents and any amendments thereto;

(vi) Copies of any writings permitted or required under Section 18-502 of the Act regarding the obligation of a Member to perform any enforceable promise to contribute cash or property or to perform services as consideration for such Member’s Capital Contribution;

-23-

(vii) The minutes of any meetings or other actions of the Board of Managers or any committee thereof; and

(viii) Any written consents obtained from Members pursuant to Section 18-302 of the Act regarding action taken by Members without a meeting.

(b) The Company shall use the accrual method of accounting in preparation of its financial reports and for tax purposes and shall keep its books and records accordingly. Each Member shall be entitled to inspect and copy the books and records of the Company during normal business hours at such time and in such depth as such Member deems necessary upon reasonable advance notice to the Company, and the Company will provide to such Member such other information in its possession in connection with such materials as may be requested by such Member.

9.2 Reports.

(a) Periodic and Other Reports. The Company shall cause to be delivered to each Member the financial statements listed in clauses (i) and (ii) below, prepared, in each case (other than with respect to Members’ Capital Accounts, which shall be prepared in accordance with this Agreement) in accordance with GAAP consistently applied.

(i) As soon as practicable following the end of each Fiscal Year (and in any event not later than 90 days after the end of such Fiscal Year) and at such time as distributions are made to the Members pursuant to Section 11 hereof following the occurrence of a Dissolution Event, a balance sheet of the Company as of the end of such Fiscal Year and the related statements of operations, Members’ Capital Accounts and changes therein, and cash flows for such Fiscal Year, together with appropriate notes to such financial statements and supporting schedules, all of which shall be audited and certified by the Company’s accountants, and in each case, to the extent the Company was in existence, setting forth in comparative form the corresponding figures for the immediately preceding Fiscal Year end.

(ii) As soon as practicable following the end of each month of each Fiscal Year (and in any event not later than 10 days after the end of each such month), a management report and an unaudited balance sheet of the Company as of the end of such month and the related unaudited statements of operations and cash flows for such month and for the Fiscal Year to date, in each case, to the extent the Company was in existence, setting forth in comparative form the corresponding figures for the prior Fiscal Year’s corresponding month and interim period just completed. Each such unaudited monthly balance sheet and the related unaudited statements of operations and cash flows shall be prepared in a manner consistent with the preparation of the Company’s audited balance sheet and audited statements of operations and cash flows, except for the accompanying notes thereto, pursuant to Section 9.2(a)(i).

-24-

9.3 Tax Matters.

(a) Tax Elections. The Board of Managers shall, without any further consent of the Members being required (except as specifically required herein), make any and all elections for federal, state, local, and foreign tax purposes as it determines are appropriate; provided, however, that, at Holding’s election, the Board of Managers shall make the election to adjust the basis of Company property in connection with Transfers of Interests and Company distributions pursuant to Sections 754, 734(b) and 743(b) of the Code (and shall make all comparable elections under provisions of state, local or foreign law) and shall cause each interest held by the Company which is treated as a partnership for income tax purposes to make comparable elections; provided further, that no election shall be made to treat the Company as other than a partnership for federal, state or local income tax purposes without the unanimous approval of the Members.

(b) Tax Proceedings. Holding is specifically authorized to act as the initial “Tax Matters Partner” under the Code and in any similar capacity under state or local law. The Tax Matters Partner shall, to the extent provided in Code Sections 6221 through 6231 and similar provisions of federal, state, local or foreign law, elect to represent the Company and the Members before taxing authorities or courts of competent jurisdiction in tax matters affecting the Company; provided, however, that the Tax Matters Partner shall not (i) sign any consent, (ii) enter into any settlement agreement or (iii) compromise any dispute with the Internal Revenue Service or any other taxing authority without the approval of the Board of Managers. The Board of Managers shall cause the Company to file any tax returns and execute any agreements or other documents relating to or affecting such tax matters. The Tax Matters Partner shall provide notice (including a copy of all relevant documents) to all Members as follows: (i) within 10 days after it receives notice from the Internal Revenue Service or from any foreign, state or local governmental taxing authority (a “Taxing Authority”) of any administrative proceeding with respect to an examination of or a proposed adjustment to, any item of income, gain, loss, deduction or credit of the Company, (ii) from time to time, within the reasonable discretion of the Tax Matters Partner, of the current status of any administrative proceeding referred to in clause (i) hereof, (iii) with respect to any request filed by the Company with any Taxing Authority for an administrative adjustment to any item of income, gain, loss, deduction or credit of the Company, a copy of such request at least 10 days prior to submission, and (iv) a copy of any other non-ministerial notices or communications received by the Company from any Taxing Authority. All costs incurred by the Tax Matters Partner in performing under this subsection (b) shall be paid by the Company. Nothing in this Section 9.3(b) shall limit the ability of a Member to take any action in his individual capacity in connection with Tax audit matters relating to the Company that are left to the determination of an individual Member under Sections 6221 through 6231 of the Code or any similar state or local provision.

(c) Tax Information. Necessary tax information shall be delivered to each Member as soon as practicable after the end of each Fiscal Year of the Company but not later than March 1 of each Fiscal Year.

-25-

SECTION 10

RESTRICTIONS ON TRANSFERS

10.1 Restrictions on Transfers of Interests by Founding Members. Except as provided in this Agreement, no Founding Member may, directly or indirectly, Transfer such Member’s Interest in the Company without the prior written consent of Holding, which consent may be given or withheld in Holding’s sole and absolute discretion. Any attempted Transfer in violation of the restrictions set forth in this Section 10 shall be null and void ab initio and of no force or effect. Holding may, in its sole and absolute discretion, consent to the Transfer of the economic rights associated with a Member’s Interest and decline to admit the assignee as a Member.

10.2 Permitted Transfers of Founding Members’ Interests. Any Founding Member may transfer all or any portion of such Member’s Interest in the Company to any Permitted Transferee. Any such Permitted Transferee shall receive and hold such Interest or portion thereof subject to the terms of this Agreement and to the obligations hereunder of the transferor. There shall be no further transfer of such Interest or portion thereof except to a person or entity to whom the original transferor could have transferred such ownership interest in accordance with this Section 10.2. Notwithstanding the foregoing, no transfer described in this Section 10.2 shall be permitted if such transfer would result in a technical termination of the Company under Section 708 of the Code.

10.3 Transfer of Membership Interests by Holding. Holding may Transfer all or any part of its Interest in the Company (including any or all of its rights and obligations) without the consent of any other Member. An assignee of all or any portion of the Interest of Holding shall, subject to the provisions of this Agreement, be admitted as a Member of the Company.

10.4 Bankruptcy Events.

(a) Bankruptcy Events. Upon the occurrence of a Bankruptcy Event, the Defaulting Member shall give written notice to the Company no later than ten (10) days following the occurrence of such Bankruptcy Event. At any time following receipt of such notice from the Defaulting Member if the Company reasonably believes that, as a result of such Bankruptcy Event, any Interest held by the Defaulting Member may be sold or transferred in any manner to any Person that is not a Member, the Company shall have the right, but not the obligation, by delivering written notice (a “Repurchase Notice”) to the Defaulting Member and Holding, to repurchase all or any portion of (i) the Vested Interest held by such Defaulting Member for the Purchase Price as determined in accordance with the formula set forth on Schedule 10.4 hereto, and (ii) the Unvested Interest held by such Defaulting Member for the Purchase Price equal to the positive balance, if any, standing in the Defaulting Member’s Capital Account as of the date of the applicable Bankruptcy Event. If the balance standing in the Defaulting Member’s Capital Account is equal to or less than zero, then the Purchase Price for the Defaulting Member’s Unvested Interest shall equal zero.

(b) Other Remedies Associated with a Bankruptcy Event. Regardless of whether the Company elects to repurchase all or any portion of the Interest of the Defaulting Member pursuant to the provisions of this Section 10.4, from and after the occurrence of a

-26-

Bankruptcy Event, the Defaulting Member or any assignee of such Defaulting Member as a result of the Bankruptcy Event (a “Bankruptcy Assignee”) shall have only the rights of an assignee in accordance with the provisions of Section 10.11 (i.e., sharing in any allocations and/or distributions of Profits, Losses (and items thereof), Cash Flow and liquidating distributions to which such Defaulting Member or any Bankruptcy Assignee is entitled to receive under this Agreement), (i) neither the Defaulting Member nor any Bankruptcy Assignee shall be entitled to participate in the management of, or otherwise vote upon, any matter pertaining to the business and affairs of the Company or any other matter that the Defaulting Member is entitled to vote upon under this Agreement, and (ii) neither the Defaulting Member nor any Bankruptcy Assignee shall have any authority to act for or bind the Company. The Defaulting Member and any Bankruptcy Assignee shall continue to be obligated to perform all of such Defaulting Member’s duties and obligations under this Agreement.

(c) Closing of Purchase and Sale and Payment of Purchase Price. If the Company timely and validly elects to repurchase all or any portion of the Interest of the Defaulting Member in accordance with the provisions of Section 10.4(a) above, then the Company or its designee shall pay the Purchase Price (or proportionate amount thereof) for the applicable portion of the Vested Interest and/or Unvested Interest repurchased by the Company on the Bankruptcy Repurchase Date (as defined below), against delivery to the Company of the Defaulting Member’s Vested Interests and or/Unvested Interest being repurchased, as evidenced by the appropriate LLC Certificates, free and clear of all encumbrances, in cash by wire transfer of immediately available funds to such account(s) as are otherwise specified by the Defaulting Member in writing. The closing for the acquisition of the Vested Interest and/or Unvested Interest of the Defaulting Member shall be held at the principal office of the Company in Santa Monica, California on a business day designated by the Company within thirty (30) days after date of the Repurchase Notice given by the Company pursuant to Section 10.4(a) (the “Bankruptcy Repurchase Date”). The Defaulting Member shall deliver to the Company any LLC Certificates representing any Interests being repurchased by such Defaulting Member on the Bankruptcy Repurchase Date.

10.5 Transfer to Divorced Member’s Spouse.

(a) Divorced Member’s Option. If the spouse (“Spouse”) of any Member (“Divorced Member”) is awarded all or any portion of the Divorced Member’s Interest in the Company (the “Awarded Interest”) as the result of the final settlement or entry of a final interlocutory decree of dissolution of marriage or any modification thereof (a “Divorce Event”), then the Divorced Member shall give written notice to the other Members no later than ten (10) days following the occurrence of such Divorce Event. For a period of thirty (30) days following delivery of the Divorced Member’s notice of the Divorce Event to the other Members (the “Divorcing Member Notice”), the Divorced Member shall have the right, but not the obligation, by delivering a Repurchase Notice to the Spouse, the Company and the other Members, to repurchase (i) all unvested Awarded Interests held by such Spouse for a Purchase Price equal to the product of (A) the positive balance, if any, standing in the Divorced Member’s Capital Account as of the date of the Divorce Event and (B) the percentage which such unvested Awarded Interests represent of the entire Unvested Interest of the Divorced Member and (ii) all or any portion of the vested Awarded Interest held by the Spouse for the Purchase Price as determined in accordance with the formula set forth on Schedule 10.4 hereto. If the balance standing in the Divorced Member’s Capital Account is equal to or less than zero, then the Purchase Price for the unvested Awarded Interest held by such Spouse shall equal zero.

-27-

(b) Company Option. If the Divorced Member’s option to purchase the Awarded Interest set forth in Section 10.5(a) above is not timely and validly exercised or the Divorced Member elects to purchase less than all of the Awarded Interest, the Company shall have the right, but not the obligation, for a period of ten (10) days following the earlier of the expiration of the Divorced Member’s option period set forth in Section 10.5(a) above or the date of the Divorcing Member Notice, by delivering a Repurchase Notice to the Spouse, the Divorced Member and the other Members, to repurchase all or any portion of the remaining Awarded Interest from the Spouse for the Purchase Price as determined in accordance with the formula set forth on Schedule 10.4 hereto.

(c) Closing of Purchase and Sale and Payment of Purchase Price. If the Divorced Member or the Company timely and validly elects to purchase all or any portion of the vested and/or unvested Awarded Interest in accordance with the provisions of Sections 10.5(a) and/or 10.5(b) above, then the Divorced Member or the Company or its designee, as applicable, shall pay the Purchase Price (or proportionate amount thereof) for the applicable portion of the vested and/or unvested Awarded Interest purchased by the Divorced Member or the Company, as applicable, on the Divorce Repurchase Date (as defined below), against delivery to the Company of the vested Awarded Interests and/or unvested Awarded Interests being repurchased, as evidenced by the appropriate LLC Certificates, free and clear of all encumbrances, in cash by wire transfer of immediately available funds to such account(s) as are otherwise specified by the Spouse in writing. The closing for the acquisition of the Awarded Interest and/or the unvested Awarded Interests held by such Divorced Member’s Spouse shall be held at the principal office of the Company in Santa Monica, California on a business day designated by the Company within thirty (30) days after the later of (i) the date of the purchase-election notice given by the Divorced Member pursuant to Section 10.5(a), or (ii) the date of the Repurchase Notice given by the Company pursuant to Section 10.5(b) (the “Divorce Repurchase Date”). The Spouse of the Divorced Member shall deliver to the Company any LLC Certificates representing any Awarded Interests being repurchased from such Spouse on the Divorce Repurchase Date.

(d) Admission of Spouse as Assignee. If the Divorced Member and the Company fail to acquire all of the Awarded Interest pursuant to Sections 10.5(a) and 10.5(b) above, then the Spouse shall be admitted into the Company with only the rights of an assignee in accordance with the provisions of Section 10.11 (i.e., sharing in any allocations and/or distributions of Profits, Losses (and items thereof), Cash Flow and liquidating distributions to which a Member is entitled to receive under this Agreement), and (i) the Spouse shall not be entitled to participate in the management of, or otherwise vote upon, any matter pertaining to the business and affairs of the Company or any other matter that the Divorced Member is entitled to vote upon under this Agreement, and (ii) the Spouse shall not have any authority to act for or bind the Company. The Divorced Member shall continue to be obligated to perform all of such Member’s duties and obligations under this Agreement.

-28-

10.6 Termination of a Belvedere Member’s Employment.

(a) Termination by Reason of Death or Disability. If a Belvedere Member’s employment with the Company is terminated by reason of death or Disability at any time after the date of this Agreement, then:

(i) Unvested Interests. The Company shall have the right, by delivering a Repurchase Notice to such Departing Member and Holding at any time following the date of termination, to repurchase such Departing Member’s Unvested Interest for a Purchase Price equal to the positive balance, if any, standing in such Departing Member’s Capital Account as of the date of such Departing Member’s termination of employment due to death or Disability. If the balance standing in such Departing Member’s Capital Account is equal to or less than zero, then the Purchase Price for such Departing Member’s Unvested Interest shall equal zero.

(ii) Vested Interests.

(A) Member Option. Each Member other than the Departing Member and the Departing Member shall have a period of thirty (30) days to negotiate a binding offer and acceptance for the purchase and sale of the Departing Member’s Vested Interests (the “Departing Member’s Vested Interest”). Any offer made by any other Member to the Departing Member shall be a written offer and shall be made by such Member to purchase all, but not part of, the Departing Member’s Vested Interest. During such thirty (30)-day period, the Departing Member shall negotiate in good faith and if it elects to accept an offer of any other Member for all of such Departing Member’s Vested Interest, the Departing Member shall concurrently therewith send to the Company, the other Member whose offer is being accepted (the “Lead Member”) and each other Member, a writing setting forth the acceptance of the offer (subject to each other Members’ right to purchase its Pro Rata Portion of such Departing Member’s Vested Interest as set forth herein), a copy of the offer and an offer by the Departing Member to sell to each other Member its Pro Rata Portion (as defined below) of the Departing Member’s Vested Interest upon equivalent terms as the offer of the Lead Member that has been accepted by the Departing Member. Upon delivering such a notice with respect to any accepted offer, the Departing Member may not thereafter propose, entertain or respond to any offers for or with respect to the Departing Member’s Vested Interest except as required under subsection (B) below. During the five (5)-day period following delivery of the acceptance notice (the “Initial Offer Period”), each Member other than the Lead Member shall have the right, by delivering an irrevocable written offer to the Departing Member and the Company to elect to purchase such Member’s Pro Rata Portion of the Departing Member’s Vested Interest on the terms set forth in the offer made by the Lead Member that has been accepted by the Departing Member. If at the end of the Initial Offer Period not all of the other Members have delivered notices to the Departing Estate and the Company, those Members that have delivered notices (and the Lead Member whose original offer was accepted by the Departing Member) shall have the right during the next five (5) days (the “Second Offer Period”), by delivering a second written offer to the Departing Member and the Company, to elect to purchase all or any portion of the remaining Departing Member’s Vested Interest. If such Members deliver notices covering more than all of the remaining Departing Member’s Vested Interest,

-29-

each Member so delivering such notice shall be entitled to purchase the remaining Departing Member’s Vested Interest in the same proportion that each so electing Member’s Interest then owned bears to all Interests then owned by the Members delivering such notices in the aggregate. The Lead Member shall be obligated to purchase any of the Departing Member’s Vested Interest remaining at the end of the Second Offer Period, if any, together with his/its Pro Rata Portion of the Departing Member’s Vested Interests, upon the terms originally agreed upon by the Departing Member and the Lead Member. The closing of the purchase of the Departing Member’s Vested Interest shall take place no later than forty-five (45) days following the death or Disability of the Departing Member whose Interest is being purchased.

(B) Company Option. If the Departing Member does not reach agreement with any other Member with respect to the purchase of the Departing Member’s Vested Interest during the option period described above, then the other Members shall not be entitled to purchase any of the Departing Member’s Vested Interest and the Company shall thereafter have the right, by delivering a Repurchase Notice to such the Departing Member and Holding at any time following the date of termination, to repurchase such the Departing Member’s Vested Interest for the Purchase Price as determined in accordance with the formula set forth on Schedule 10.4 hereto.

(b) [Intentionally Omitted.]

(c) Termination for Cause. If a Belvedere Member’s employment with the Company is terminated by the Company by means of Termination for Cause (as defined in such Belvedere Member’s Employment Agreement) at any time following the date of this Agreement, the Company shall have the right, but not the obligation, by delivering a Repurchase Notice to such Member and Holding, to repurchase all of such Belvedere Member’s Interests (whether Vested Interests or Unvested Interests) for a purchase price equal to the positive balance, if any, standing in such Belvedere Member’s Capital Account as of the date of such termination. If the balance standing in such Belvedere Member’s Capital Account is equal to or less than zero, then the Purchase Price for such Belvedere Member’s Interests shall equal zero.

(d) Voluntary Termination; Termination for Good Reason; Termination Without Cause. The termination of a Belvedere Member’s employment with the Company by the Belvedere Member by means of Voluntary Termination or Termination for Good Reason, or by the Company by means of Termination Without Cause (as such terms are defined in such Belvedere Member’s Employment Agreement) shall be defined as an “Option Event”.

(i) Unvested Interests. At any time following the occurrence of an Option Event, the Company shall have the right, but not the obligation, by delivering a Repurchase Notice to the Terminating Member and Holding, to repurchase all Unvested Interests held by the Terminating Member for a purchase price equal to the positive balance, if any, standing in such Terminating Member’s Capital Account as of the date of such Option Event. If the balance standing in such Belvedere Member’s Capital Account is equal to or less than zero, then the Purchase Price for such Belvedere Member’s Unvested Interests shall equal zero.

-30-

(ii) Vested Interests: Member Option. Upon the occurrence of an Option Event, each Member other than the Terminating Member (each, an “Other Member”) and the Terminating Member shall have a period of 12 months (the “Option Period”) to negotiate the purchase and sale of the Terminating Member’s Vested Interests (the “Offered Interests”). Any offer made by any Other Member to the Terminating Member shall be a written offer (which may limit the time during which the Terminating Member may accept such offer) and shall be made by such Other Member to purchase that portion of the Offered Interests in the same proportion that such Other Member’s Interests then owned bears to all interests then owned by all Other Members in the aggregate (the “Pro Rata Portion”). During the Option Period, the Terminating Member shall negotiate in good faith and if he elects to accept an offer of any Other Member for such Other Member’s Pro Rata Portion of the Offered Interests (an “Accepted Offer”), the Terminating Member shall concurrently therewith send to the Company, the Other Member whose offer is being accepted and each Other Member a writing (an “Acceptance Notice”) setting forth his acceptance of the Accepted Offer, a copy of the Accepted Offer and his offer to sell to each Other Member its Pro Rata Portion of the Offered Interests upon equivalent terms as the Accepted Offer. Upon delivering an Acceptance Notice with respect to any Accepted Offer, the Terminating Member may not thereafter propose, entertain or respond to any offers for or with respect to the Offered Interests except as set forth below. During the thirty (30)-day period following delivery of the Acceptance Notice, each Other Member (except for the Other Member whose offer is the subject of the Accepted Offer and who shall be deemed bound by the Acceptance Notice) shall have the right, by delivering an irrevocable written offer (an “Option Notice”) to the Terminating Member and the Company to elect to purchase such Other Member’s Pro Rata Portion of the Offered Interests on the terms set forth in the Accepted Offer. If at the end of such thirty (30)-day period not all of the Other Members have delivered Option Notices to the Terminating Member and the Company, those Other Members that have delivered Option Notices shall have the right during the next ten (10) days, by delivering a second irrevocable written offer (a “Secondary Option Notice”) to the Terminating Member and the Company, to elect to purchase all or any portion of the remaining Offered Interests. If the Other Members deliver Secondary Option Notices covering more than all of the remaining Offered Interests, each Other Member so delivering a Secondary Option Notice shall be entitled to purchase the remaining Offered Interests in the same proportion that each so electing Other Member’s Interests then owned bears to all Interests then owned by the Other Members delivering Secondary Option Notices in the aggregate. Upon the closing of the purchase of the Offered Interests subject to Option Notices and/or Secondary Option Notices, the Option Period shall terminate.

(iii) Vested Interests: Company Option. If the Other Members elect not to purchase all of the Offered Interests during the Option Period, the Company shall thereafter have the option to repurchase the remaining Offered Interests (the “Remaining Interests”) from the Terminating Member at any time following the Option Period at the lower of (A) the price set forth in the Accepted Offer and (B) the Appraised Value (as defined below). Such option may be exercised by delivery of a Repurchase Notice by the Company to the Terminating Member. If the Other Members elect not to purchase any of the Offered Interests, the Company shall thereafter have the option to repurchase the Remaining Interests from the Terminating Member at any time following the Option Period for a Purchase Price to be agreed upon between the parties or by appraisal as set forth below; provided, that any exercise of the option by the Company shall be contingent upon the Company’s acceptance of the applicable Purchase Price

-31-

and the option shall renew in accordance with the terms of subsection (iv)(F) below. Subject to the foregoing, such option shall be exercised upon a written offer being delivered by the Company to the Terminating Member setting forth the price upon which the Company would purchase the Remaining Interests (the “Offer Notice”). If the Company and the Terminating Member cannot agree upon the value of the Remaining Interests within thirty (30) days of the date the Company delivers the Offer Notice, the Company shall have the right, but not the obligation, to repurchase the Remaining Interests at the appraised value (as determined below) of such Remaining Interests (the “Appraised Value”) by delivering written notice (the “Appraisal Notice”) to the Terminating Member, subject to the Company’s acceptance of the Appraised Value.

(iv) Determination of Appraised Value. The Appraised Value of the Remaining Interests shall be determined as follows:

(A) The Appraised Value shall be determined by a nationally-recognized business appraiser with at least five (5) years’ experience appraising businesses similar to the Business of the Company. The Company shall select one (1) appraiser and include such selection in the Appraisal Notice. Within ten (10) days following the effective date of such notice, the Terminating Member shall either agree to the appraiser selected by the Company or select a second (2nd) appraiser and give written notice to the Company of the person so selected. In the event of the failure of the Terminating Member to appoint such an appraiser within the time period specified, the appraiser duly appointed by the Company shall proceed to make the appraisal as herein set forth, and the determination of such appraiser shall be conclusive on the Company and the Terminating Member.

(B) The appraiser or two (2) appraisers, as the case may be, shall promptly fix a time for the completion of the appraisal, which shall not be later than thirty (30) days from the effective date of appointment of the last appraiser.

(C) The appraiser(s) shall determine the Appraised Value by taking into account all circumstances, including, but not limited to, the fact that the Remaining Interests are restricted in their transfer and the departure of the Terminating Member from the Company.

(D) Upon submission of the appraisal(s) setting forth the opinions as to the Appraised Value of the Remaining Interests, if the appraisals prepared by the two (2) appraisers are the same or differ by an amount that does not exceed 20% of the higher of the two appraisals, the Appraised Value shall be the average of the two appraisals (the “Average Value”). If the two appraisals differ by more than 20% of the higher of the two appraisals, then such selected appraisers shall appoint a third (3rd) appraiser. If the two (2) selected appraisers fail to appoint a third (3rd) appraiser within ten (10) days following the completion of the two appraisals, then either the Company or the Terminating Member may request that the American Arbitration Association select the third appraiser.

-32-

(E) The third appraiser shall promptly fix a time for the completion of the appraisal, which shall not be later than thirty (30) days from the effective date of appointment of the third appraiser. The appraisal setting forth the opinion of the third appraiser as to the Appraised Value of the Remaining Interests shall be determinative; unless such determined Appraised Value is higher than the higher of the two initial appraisals or lower than the lower of the two initial appraisals, in which case the Average Value shall be the Appraised Value.

(F) Following determination of the Appraised Value pursuant to this Section 10.6(d)(iv), the Company shall have the right, but not the obligation, to purchase the Remaining Interests from the Terminating Member at the Appraised Value by delivering a Repurchase Notice to the Terminating Member at any time within twelve (12) months of such determination (the “Appraisal Expiration Date”). Thereafter, if and to the extent the Company has not repurchased the Remaining Interests from the Terminating Member, its option to purchase the Remaining Interests shall automatically renew and it may re-execute the option by delivering an Offer Notice to the Terminating Member at any time following the termination of such twelve (12)-month period, at which time the provisions of this 10.6(d) shall govern the procedure to be followed by the parties. The Company’s option hereunder shall continuously renew in accordance with this subsection (F) upon each Appraisal Expiration Date unless and until all of the Remaining Interests are purchased by the Company from the Terminating Member.

(G) If the Company purchases any of the Remaining Interests based upon the Appraised Value, all costs related to the appraisal process described in this Section 10.6(d)(iv) shall be shared equally by the Company and the Terminating Member. If the Company does not purchase any of the Remaining Interests based upon the Appraised Value, then the costs related to the appraisal process described in this Section 10.6(d)(iv) with respect to the particular appraisal which determined such Appraised Value shall be borne by the Company.

(v) Payment of Purchase Price. The payment of the purchase price for the Offered Interests pursuant to Section 10.6(d)(ii) or the Remaining Interests pursuant to Section 10.6(d)(iii) may be made either in cash or by means of an unsecured promissory note with a term of 48 months and an interest rate equal to the prevailing Wells Fargo Bank commercial reference (prime) rate.

(e) Closing of Purchase and Sale and Payment of Purchase Price. Except as otherwise set forth in Section 10.6(d)(v), if the Company elects to purchase all or any portion of the Interest of a Belvedere Member in accordance with the provisions of Section 10.6(a)(i), 10.6(a)(ii)(B), 10.6(b), 10.6(c), 10.6(d)(i) or 10.6(d)(iii) or the Other Members timely and validly elect to purchase all or any portion of the Interest of such Belvedere Member in accordance with the provisions of Section 10.6(a)(ii)(A) or 10.6(d)(ii) above, then the Company, the Other Members or their respective designees shall pay the purchase price (or proportionate amount

-33-

thereof) for the applicable portion of the Interest purchased by the Company or the Other Members on the Repurchase Date (as defined below), against delivery to the Company or the Other Members, as applicable, of the Belvedere Member’s Interests, as evidenced by the appropriate LLC Certificates, free and clear of all encumbrances, in cash by wire transfer of immediately available funds to such account(s) as are otherwise specified by the Belvedere Member in writing. The closing for the acquisition of the Interest of the Belvedere Members (or such Member’s Estate) shall be held at the principal office of the Company in Santa Monica, California on a business day designated by the Company within thirty (30) days after date of (i) the Repurchase Notice given by the Company or the purchase-election notice given by the Belvedere Member pursuant to Section 10.6(a)(i), 10.6(a)(ii)(B), 10.6(b) or 10.6(c), the date of the last Option Notice or Secondary Option Notice given by an Other Member pursuant to Section 10.6(d)(ii), or (iii) the Repurchase Notice delivered by the Company pursuant to Section 10.6(d)(iv), as applicable (the “Repurchase Date”).

(f) No Enlargement of Employee Rights. Nothing in this Agreement shall be construed to confer upon the Member (if an employee) any right to continued employment with the Company, or any subsidiary of the Company, or to restrict in any way the right of the Company, or any subsidiary of the Company to terminate his employment. The Members each acknowledge that in the absence of an express written employment agreement to the contrary, their employment with the Company, if any, may be terminated by the Company at any time, with or without cause.

10.7 License Agreement. Pursuant to the terms of Section 2.1 hereof, the Belvedere Members are making their Initial Capital Contributions to the Company which consist, in part, of the assignment of certain intellectual property created on or prior to the date hereof pursuant to an Assignment dated of even date herewith and substantially in the form attached hereto as Exhibit B (the “Assigned Property”). Upon the occurrence of an Option Event with respect to any Belvedere Member, the Company shall by a writing satisfactory to the Company in form and substance, grant a non-exclusive non-royalty bearing license to the Belvedere Member to use the Assigned Property and any Work Product (as such term is defined in Section 3 of that certain Nonsolicitation and Nondisclosure Agreement dated of even date herewith by and between the Company and such Belvedere Member (the “Nonsolicitation Agreement”). Such license shall, however, terminate upon any breach of any of the provisions of Section 6.9 hereof, or of any of the terms or conditions of the Nonsolicitation Agreement, upon written notice thereof by the Company.

10.8 Drag-Along Rights.

If a Drag-Along Initiator determines to Transfer or exchange (in a business combination or otherwise) in one or a series of related bona fide arm’s-length transactions which have been approved by the Board of Managers (collectively, the “Drag-Along Transaction”) to an unrelated and unaffiliated third party all of the Interest held by the Drag-Along Initiator, then, upon 30 days’ written notice from the Drag-Along Initiator to the other Members and the Company (the “Drag-Along Notice”), which notice shall include reasonable details of the proposed transaction, including the proposed time and place of closing and the consideration to be received by the Members, each other Member shall be obligated to, and shall sell, transfer and deliver, or cause to be sold, transferred and delivered, to such third party, all of his Interest in the same transaction at the closing thereof (and will deliver the Interest to be sold at the closing, free and clear of all liens, claims, or encumbrances except this Agreement).

-34-

10.9 Certain Sales Restricted.

Each Member agrees that, notwithstanding any provision of this Agreement to the contrary, it will not, except in a Drag-Along Transaction, Transfer or agree to Transfer Interests to a Person (other than an Affiliate of such Member) that to the knowledge of the transferring party is primarily engaged in the Company’s Business as then conducted.

10.10 Prohibited Transfers. In the case of a Transfer or attempted Transfer of Interests that is not made in accordance with all applicable terms and provisions of this Agreement, the parties engaging or attempting to engage in such Transfer shall be liable to indemnify and hold harmless the Company and the other Members from all cost, liability, and damage that the Company and any of such indemnified Members may incur (including, without limitation, incremental tax liabilities, attorneys’ fees and expenses) as a result of such Transfer or attempted Transfer and efforts to enforce the indemnity granted hereby.

10.11 Rights of Unadmitted Assignees.

A Person who acquires Interests but who is not admitted as a substituted Member pursuant to Section 10.12 hereof shall be entitled only to allocations and distributions with respect to such Interests in accordance with this Agreement, and shall have no right to any information or accounting of the affairs of the Company, shall not be entitled to inspect any books or records of the Company, and shall not have any of the rights of a Member under the Act or this Agreement.

10.12 Admission of Substituted Members.

Subject to the other provisions of this Section 10, a transferee of Interests may be admitted to the Company as a substituted Member only upon satisfaction of the conditions set forth in this Section 10.12:

(a) The Interests with respect to which the transferee is being admitted was acquired by means of a Transfer made in accordance with all applicable terms and provisions of this Agreement;

(b) The transferee of Interests (other than, with respect to clauses (i) and (ii) below, a transferee that was a Member prior to the Transfer) shall, by written instrument in form and substance reasonably satisfactory to the Board of Managers (and, in the case of clause (iii) below, the transferor Member), (i) make representations and warranties to each nontransferring Member equivalent to those set forth in Section 8, (ii) accept and adopt the terms and provisions of this Agreement, including this Section 10, and (iii) assume the obligations of the transferor Member under this Agreement with respect to the transferred Interests. The transferor Member shall be released from all such assumed obligations except (x) those obligations or liabilities of the transferor Member arising out of a breach of this Agreement, and (y) those obligations or liabilities of the transferor Member based on events occurring, arising or maturing prior to the date of Transfer.

-35-

(c) The transferee pays or reimburses the Company for all reasonable legal, filing, and other costs that the Company incurs in connection with the admission of the transferee as a Member with respect to the transferred Interests; and

(d) Except in the case of a Transfer involuntarily by operation of law, if required by the Board of Managers, the transferee (other than a transferee that was a Member prior to the Transfer) shall deliver to the Company evidence of the authority of such Person to become a Member and to be bound by all of the terms and conditions of this Agreement, and the transferee and transferor shall each execute and deliver such other instruments as the Board of Managers reasonably deems necessary or appropriate to effect, and as a condition to, such Transfer, including amendments to the Certificate or any other instrument filed with the State of Delaware or any other state or governmental authority.

10.13 Representations Regarding Transfers; Legend; LLC Certification.

(a) Each Member hereby severally (and not jointly) represents to, and covenants and agrees with, the Company, for the benefit of the Company and all Members, that (i) it is not currently making a market in Interests and will not in the future make a market in Interests without the prior approval of the Board of Managers, (ii) it will not Transfer its Interests on an established securities market, a secondary market (or the substantial equivalent thereof) within the meaning of Code Section 7704(b) (and any Regulations, proposed Regulations, revenue rulings, or other official pronouncements of the Internal Revenue Service or Treasury Department that may be promulgated or published thereunder), and (iii) in the event such Regulations, revenue rulings, or other pronouncements treat any or all arrangements which facilitate the selling of Company interests and which are commonly referred to as “matching services” as being a secondary market or substantial equivalent thereof, it will not Transfer any Interests through a matching service that is not approved in advance by the Board of Managers. Each Member further agrees that it will not Transfer any Interests to any Person unless such Person agrees to be bound by this Section 10.13(a) and to Transfer such Interests only to Persons who agree to be similarly bound.

(b) Each Member hereby severally (and not jointly) represents and warrants to the Company and the Members that such Member’s acquisition of Interests hereunder, as the case may be, is made as principal for such Members own account and not for resale or distribution of such Interests. Each Member further hereby agrees that the following legend may be placed upon any LLC Certificate (as defined below), any counterpart of this Agreement, the Certificate, or any other document or instrument evidencing ownership of Interests:

THE INTERESTS REPRESENTED BY THIS DOCUMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR THE SECURITIES LAWS OF ANY STATE. THESE INTERESTS HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE. SUCH INTERESTS MAY NOT BE OFFERED FOR SALE, SOLD, DELIVERED AFTER SALE, TRANSFERRED, PLEDGED, ASSIGNED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT COVERING SUCH SECURITIES UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS, UNLESS THE HOLDER SHALL HAVE OBTAINED AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.

-36-

THE INTERESTS REPRESENTED BY THIS DOCUMENT ARE SUBJECT TO FURTHER RESTRICTION AS TO THEIR SALE, TRANSFER, PLEDGE, HYPOTHECATION, OR ASSIGNMENT AS SET FORTH IN THE COMPANY’S OPERATING AGREEMENT.

(c) Each Belvedere Member further hereby agrees that the following legend may be placed upon any LLC Certificate, any counterpart of this Agreement, the Certificate, or any other document or instrument evidencing ownership of Unvested Interests:

THE INTERESTS REPRESENTED BY THIS DOCUMENT ARE UNVESTED AND SUBJECT TO CERTAIN REPURCHASE RIGHTS GRANTED TO THE COMPANY.

(d) The Company shall cause the foregoing legends to be removed at such time as the Company is advised by its counsel that such legends may be removed, or the Company has received an opinion of counsel to a Member, in form and substance reasonably satisfactory to the Company, that such legends may be removed.

(e) LLC Certificates.

(i) The Company shall issue certificates in the form set forth in Schedule 10.13(c) (“LLC Certificates”) to the Members evidencing their respective Interests in the Company. The form of the LLC Certificates may be revised by action of the Board of Managers, but shall be issued substantially in conformity with the following requirements. The LLC Certificates shall be respectively numbered serially, as they are issued, shall be impressed with the Company seal or a facsimile thereof, if any, and shall be signed by the Chairman of the Management Committee. Each LLC Certificate shall state the name of the Company, the fact that the Company is organized under the laws of the State of Delaware as a limited liability company, the name of the person to whom the LLC Certificate is issued, the date of issue, and the Percentage Interest. Each LLC Certificate shall be otherwise in such form as may be determined by the Board of Managers. Upon any transfer of a Member’s Interest in the Company as permitted pursuant to Section 10, the Board of Managers shall have the authority to cancel and issue new LLC Certificates to reflect such permitted transfer, and to amend Schedule 2.1 to this Agreement, which sets forth the identity and respective Interests of the Members in Company, without the requirement or need to obtain an Amendment to this Agreement or approval by the Members. Each Member’s Interest in the Company shall be a security for purposes of Article 8 of the Delaware version of the Uniform Commercial Code.

(ii) Except as herein provided with respect to lost, stolen, or destroyed certificates, no new LLC Certificates shall be issued in lieu of previously issued LLC Certificates until former LLC Certificates for a like number of membership interests shall have been surrendered and canceled. All LLC Certificates surrendered to the Company for transfer shall be canceled.

(iii) Any Member claiming that his or her LLC Certificate is lost, stolen, or destroyed may make an affidavit or affirmation of that fact and request a new LLC

-37-

Certificate. Upon the giving of a satisfactory indemnity to the Company as reasonably required by the Board of Managers, a new LLC Certificate may be issued of the same tenor and representing the same Percentage Interest of membership as was represented by the LLC Certificate alleged to be lost, stolen, or destroyed.

(f) Escrow. The LLC Certificate(s) evidencing Unvested Interests shall be held in the custody of the Company until the restrictions thereon shall have lapsed. As a condition to the issuance of the Interests hereunder, each Belvedere Member shall have delivered, with respect to each such LLC Certificate, a duly executed Assignment Separate From Certificate appropriately endorsed in blank. The LLC Certificate(s) evidencing Unvested Interests shall only be released to any Belvedere Member pursuant to and in accordance with the provisions of Schedule 2.1 hereof.

10.14 Distributions and Allocations in Respect of Transferred Interests.

If any Interests are Transferred during any Allocation Year in compliance with the provisions of this Section 10, Profits, Losses, each item thereof, and all other items attributable to the transferred Interests for such Allocation Year shall be divided and allocated between the transferor and the transferee by taking into account their varying Percentage Interests during the Fiscal Year in accordance with Code Section 706(d), using any conventions permitted by law and selected by the Board of Managers. All distributions on or before the date of such Transfer shall be made to the transferor, and all distributions thereafter shall be made to the transferee. Neither the Company nor any Member, Manager or Officer shall incur any liability for making allocations and distributions in accordance with the provisions of this Section 10.14, whether or not any Member, Manager or Officer or the Company has knowledge of any Transfer of ownership of any Interests.

SECTION 11

DISSOLUTION AND WINDING UP

11.1 Dissolution Events.

(a) Dissolution. The Company shall dissolve and shall commence winding up and liquidating upon the first to occur of any of the following (each a “Dissolution Event”):

(i) The unanimous action or written consent of the Board of Managers; or

(ii) A judicial determination that an event has occurred that makes it unlawful, impossible or impractical to carry on the Business.

The Members hereby agree that, notwithstanding any provision of the Act, the Company shall not dissolve prior to the occurrence of a Dissolution Event.

(b) Reconstitution. If it is determined, by a court of competent jurisdiction, that the Company has dissolved prior to the occurrence of a Dissolution Event, then within an additional 90 days after such determination (the “Reconstitution Period”), Members holding a

-38-

majority of the Percentage Interests may elect to reconstitute the Company and continue its business on the same terms and conditions set forth in this Agreement by forming a new limited liability company on terms identical to those set forth in this Agreement. Unless such an election is made within the Reconstitution Period, the Company shall liquidate and wind up its affairs in accordance with Section 11.2 hereof. If such an election is made within the Reconstitution Period, then:

(i) The reconstituted limited liability company shall continue until the occurrence of a Dissolution Event as provided in Section 11.1(a); and

(ii) The Certificate and this Agreement shall automatically constitute the Certificate and Agreement of the reconstituted Company. All of the assets and liabilities of the dissolved Company shall be deemed to have been automatically assigned, assumed, conveyed and transferred to the new Company. No bond, collateral, assumption or release of any Member’s or the Company’s liabilities shall be required; provided that the right of the Members to select successor managers and to reconstitute and continue the Business shall not exist and may not be exercised unless the Company has received an opinion of counsel that the exercise of the right would not result in the loss of limited liability of any Member and neither the Company nor the reconstituted limited liability company would cease to be treated as a partnership for federal income tax purposes upon the exercise of such right to continue.

11.2 Winding Up.

Upon the occurrence of (i) a Dissolution Event or (ii) the determination by a court of competent jurisdiction that the Company has dissolved prior to the occurrence of a Dissolution Event (unless the Company is reconstituted pursuant to Section 11.1(b) hereof), the Company shall continue solely for the purposes of winding up its affairs in an orderly manner, liquidating its assets, and satisfying the claims of its creditors and Members, and no Member shall take any action that is inconsistent with, or not necessary to or appropriate for, the winding up of the Company’s business and affairs, provided that all covenants contained in this Agreement and obligations provided for in this Agreement shall continue to be fully binding upon the Members until such time as the Company’s property has been distributed pursuant to this Section 11.2 and the Certificate has been canceled pursuant to the Act. The Liquidator shall be responsible for overseeing the winding up and dissolution of the Company, which winding up and dissolution shall be completed within 90 days after (x) the occurrence of the Dissolution Event or (y) the last day on which the Company may be reconstituted pursuant to Section 11.1(b) hereof, as applicable. The Liquidator shall take full account of the Company’s liabilities and property and shall cause the property or the proceeds from the sale thereof (as determined pursuant to Section 11.8 hereof), to the extent sufficient therefor, to be applied and distributed, to the maximum extent permitted by law, in the following order:

(a) first, to creditors (including Members and Managers who are creditors) in satisfaction of all of the Company’s debts and other liabilities (whether by payment or the making of reasonable provision for payment thereof), other than liabilities for which reasonable provision for payment has been made and liabilities for distribution to Members under Section 18-601 or 18-604 of the Act;

-39-

(b) second, except as provided in this Agreement, to Members and former Members of the Company in satisfaction of liabilities for distribution under Sections 18-601 or 18-604 of the Act; and

(c) the balance, if any, to the Members in accordance with the positive balance in each Member’s Capital Account.

11.3 Compliance With Certain Regulatory Requirements; No Obligation to Restore Deficit Capital Accounts. In the event the Company is “liquidated” within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), and any Member has a deficit balance in his Capital Account (after giving effect to all contributions, distributions and allocations for all Allocation Years, including the Allocation Year during which such liquidation occurs), such Member shall have no obligation to make any contribution to the capital of the Company with respect to such deficit, and such deficit shall not be considered a debt owed to the Company or to any other Person for any purpose whatsoever. In the discretion of the Liquidator, a pro rata portion of the distributions that would otherwise be made to the Members pursuant to this Section 11 may be:

(a) Distributed to a trust established for the benefit of the Members for the purpose of liquidating Company assets, collecting amounts owed to the Company, and paying any contingent or unforeseen liabilities or obligations of the Company. The assets of any such trust shall be distributed to the Members from time to time, in the reasonable discretion of the Liquidator, in the same proportions as the amount distributed to such trust by the Company would otherwise have been distributed to the Members pursuant to Section 11.2 hereof; or

(b) Withheld to provide a reasonable reserve for Company liabilities (contingent or otherwise) and to reflect the unrealized portion of any installment obligation owed to the Company; provided that such withheld amounts shall be distributed to the Members as soon as practicable.

11.4 Rights of Members.

Except as otherwise provided in this Agreement, each Member shall look solely to the property of the Company for the return of its Capital Contribution and has no right or power to demand or receive property other than cash from the Company. If the assets of the Company remaining after payment or discharge of the debts or liabilities of the Company are insufficient to return such Capital Contribution, the Members shall have no recourse against the Company or any other Member, Manager or Officer.

11.5 Notice of Dissolution/Termination.

(a) In the event a Dissolution Event occurs or an event occurs that would, but for the provisions of Section 11.1, result in a dissolution of the Company, the Board of Managers shall, if it determines such to be appropriate under the circumstances, within 30 days thereafter, provide written notice thereof to each of the Members and to all other parties with whom the Company regularly conducted business (as determined in the discretion of the Board of Managers) and shall publish notice thereof in a newspaper of general circulation in each place in which the Company regularly conducts business (as determined in the discretion of the Board of Managers).

-40-

(b) Upon completion of the distribution of the Company’s property as provided in this Section 11, the Company shall be terminated, and the Liquidator shall cause the filing of the Certificate of Cancellation pursuant to Section 18-203 of the Act and shall take all such other actions as may be necessary to terminate the Company.

11.6 Allocations During Period of Liquidation.

During the period commencing on the first day of the Fiscal Year during which a Dissolution Event occurs and ending on the date on which all of the assets of the Company have been distributed to the Members pursuant to Section 11.2 hereof (the “Liquidation Period”), the Members shall continue to share Profits, Losses, gain, loss and other items of Company income, gain, loss or deduction in the manner provided in Section 3 hereof.

11.7 The Liquidator.

(a) Definition. The “Liquidator” shall mean a Person (who may be an existing Officer, Manager or Member) appointed by the Board of Managers to oversee the liquidation of the Company.

(b) Fees. The Company shall pay such fees to the Liquidator for its service performed pursuant to this Section 11 and reimburse the Liquidator for its reasonable costs and expenses incurred in performing those services as are approved by the Board of Managers.

(c) Exoneration and Indemnification. The Liquidator shall have the same limitations on liability and rights to indemnification as a Manager pursuant to Section 7 of this Agreement.

11.8 Form of Liquidating Distributions.

For purposes of making distributions required by Section 11.2 hereof, the Liquidator may determine whether to distribute all or any portion of the Company’s property in-kind or to sell all or any portion of the Company’s property and distribute the proceeds therefrom.

SECTION 12

POWER OF ATTORNEY

12.1 Managers as Attorneys-In-Fact.

Each Member hereby makes, constitutes, and appoints each Manager, severally, with full power of substitution and resubstitution, its true and lawful attorney-in-fact for it and in its name, place, and stead and for its use and benefit, to sign, execute, certify, acknowledge, swear to, file, publish and record (i) all certificates of formation, amended name or similar certificates, and other certificates and instruments (including counterparts of this Agreement) that the Board of Managers may deem necessary to be filed by the Company under the laws of the State of Delaware or any other jurisdiction in which the Company is doing or intends to do business; (ii) any and all amendments, restatements or changes to this Agreement and the instruments described in clause (i), as now or hereafter amended, or otherwise that the Board of Managers

-41-

may deem necessary to effect a change or modification of the Company in accordance with the terms of this Agreement, including, without limitation, amendments, restatements or changes to reflect (A) any amendments adopted by the Board of Managers or the Members in accordance with the terms of this Agreement, (B) the admission of any substituted Member and (C) the disposition by any Member of its Interest in the Company, except that such power of attorney does not cover any actions that could reasonably be expected to lead to liability or obligation on the part of any Member; (iii) all certificates of cancellation and other instruments which the Board of Managers deems necessary or appropriate to effect the dissolution and termination of the Company pursuant to the terms of this Agreement and (iv) any other instrument of a ministerial nature (and which in any event creates no liability or obligation and makes no admission against interest with respect to any Member) which is now or may hereafter be required by law to be filed on behalf of the Company or is deemed necessary by the Board of Managers to carry out fully the provisions of this Agreement in accordance with its terms. Each Member authorizes each such attorney-in-fact to take any further ministerial action which such attorney-in-fact shall consider necessary or appropriate in connection with any of the foregoing, hereby giving each such attorney-in-fact full power and authority to do and perform each and every act or thing whatsoever requisite to be done in connection with the foregoing as fully as such Member might or could do personally, and hereby ratifies and confirms all that any such attorney-in-fact shall lawfully do, or cause to be done, by virtue thereof or hereof except that such power-of-attorney does not cover any actions which could reasonably be expected to lead to liability or obligation on the part of any Member.

12.2 Nature of Special Power.

The power of attorney granted to each Manager only for so long as he or she remains a Manager pursuant to this Section 12:

(a) Is a special power of attorney coupled with an interest and is irrevocable;

(b) May be exercised by any such attorney-in-fact by listing the Members executing any agreement, certificate, instrument, or other document with the single signature of any such attorney-in-fact acting as attorney-in-fact for such Members; and

(c) Shall survive and not be affected by the subsequent Bankruptcy, insolvency, dissolution, cessation of existence, death or Disability of a Member and shall survive the delivery of an assignment by a Member of the whole or a portion of its Interest in the Company (except that where the assignment is of such Member’s entire Interest in the Company and the assignee, with the consent of the Board of Managers, is admitted as a substituted Member, the power of attorney shall survive the delivery of such assignment for the sole purpose of enabling any such attorney-in-fact to effect such substitution) and shall extend to such Member’s, or assignee’s successors and assigns.

-42-

SECTION 13

AMENDMENT

13.1 Amendment. Subject to Section 5.4, this Agreement may be amended by the consent of the Board of Managers; except that it shall not be amended without the consent of each Member adversely affected if such amendment would (i) modify the limited liability of such Member, (ii) increase the capital contributions required to be made by such Member, or (iii) alter the interest of such Member in Profits, Losses or any Company distribution except as permitted in Section 2.3 herein.

SECTION 14

TRANSACTION DOCUMENTS

14.1 Transaction Documents.

The Company shall enforce its rights, and perform its obligations, pursuant to the terms of each of the Transaction Documents in accordance with its terms, and shall not enter into any amendment to, or waive any of its rights under, such agreement without approval of Holding. In addition, and without limiting the generality of the foregoing, at the request of any Member, the Company will take all reasonable actions requested by them in connection with the enforcement of the Company’s rights under the Transaction Documents.

SECTION 15

DEFINITIONS

Capitalized words and phrases used in this Agreement have the following meanings:

“Acceptance Notice” has the meaning set forth in Section 10.6(d)(ii) hereof.

“Accepted Offer” has the meaning set forth in Section 10.6(d)(ii) hereof.

“Act” means the Delaware Limited Liability Company Act, 6 Del. C. §18-10 1, et seq., as amended from time to time (or any corresponding provisions of succeeding law).

“Adjusted Capital Account Deficit” means, with respect to any Member, the deficit balance, if any, in such Member’s Capital Account as of the end of the relevant Allocation Year, after giving effect to the following adjustments:

(i) Credit to such Capital Account any amounts which such Member is deemed to be obligated to restore pursuant to the penultimate sentences in Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the Regulations; and

(ii) Debit to such Capital Account the items described in Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) and 1.704-1(b)(2)(ii)(d)(6) of the Regulations.

-43-

The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Section 1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted consistently therewith.

“Affiliate” means, with respect to any Person, (i) any Person directly or indirectly controlling, controlled by or under common control with such Person, (ii) any officer, director, general partner, member or trustee of such Person or (iii) any Person who is an officer, director, general partner, member or trustee of any Person described in clauses (i) or (ii) of this sentence. For purposes of this definition, the terms “controlling,” “controlled by” or “under common control with” shall mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise, or the power to elect at least 50% of the directors, managers, general partners, or persons exercising similar authority with respect to such Person or entities; provided, however, that for the purpose of this Agreement, the Company and any of its Subsidiaries shall be considered not to be Affiliates of any Member or its Subsidiaries, and each Member and its Subsidiaries shall be considered not to be Affiliates of the Company or any of its Subsidiaries.

“Agreement” or “Operating Agreement” means this Agreement of BT Management Company, L.L.C., as amended from time to time. Words such as “herein,” “hereinafter,” “hereof,” “hereto” and “hereunder” refer to this Agreement as a whole, unless the context otherwise requires.

“Allocation Year” means (i) the period commencing on the Effective Date and ending on December 31, 2003, (ii) any subsequent Fiscal Year or (iii) any portion of the period described in clauses (i) or (ii) for which the Company is required to allocate Profits, Losses and other items of Company income, gain, loss or deduction pursuant to Section 3 hereof.

“Annual Budget” means the annual budget of the Company prepared by the President that has been approved by the Board of Managers in accordance with this Agreement.

“Appraisal Notice” has the meaning set forth in Section 10.6(d)(iii) hereof.

“Appraisal Expiration Date” has the meaning set forth in Section 10.6(d)(iv)(F) hereof.

“Appraised Value” has the meaning set forth in Section 10.6(d)(iii) hereof.

“Assumed Tax Rate” means the highest possible marginal federal and California State income tax rates applicable to individuals.

“Available Cash” means the Company’s cash less such portion thereof reserved for all Company expenses, anticipated working capital needs, anticipated capital construction needs, debt payments, capital improvements, replacements, and contingencies, all as determined by the Board of Managers in its reasonable discretion based on an assessment of the Company’s current and anticipated needs.

“Average Value” has the meaning set forth in Section 10.6(d)(iv)(D) hereof.

-44-

“Awarded Interest” has the meaning set forth in Section 10.5(a) hereof.

“Bankruptcy Assignee” has the meaning set forth in Section 10.4(b) hereof.

“Bankruptcy Event” shall mean, with respect to any Member:

(a) the rendering, by a court with appropriate jurisdiction, of a decree or order (i) adjudging such Member bankrupt or insolvent, or (ii) approving as properly filed a petition seeking reorganization, readjustment, arrangement, composition, or similar relief for such Member under the Insolvency Laws; provided, that such decree or order shall remain in force, undischarged and unstayed, for a period of ninety (90) days;

(b) the rendering, by a court with appropriate jurisdiction, of a decree or order (i) for the appointment of a receiver, a liquidator, or a trustee or assignee in bankruptcy or insolvency of such Member; provided, that such decree or order shall have remained in force undischarged and unstayed for a period of sixty (60) days, or (ii) for the sequestration or attachment of any property of such Member without its return to the possession of such Member or its release from such sequestration or attachment within sixty (60) days thereafter; or

(c) such Member (i) institutes proceedings to be adjudicated a voluntary bankrupt or an insolvent; (ii) consents to the filing of a bankruptcy proceeding against such Member; (iii) files a petition or answer or consent seeking reorganization, readjustment, arrangement, composition, or similar relief for such Member under the Insolvency Laws; (iv) consents to the filing of any such petition, or to the appointment of a receiver, a liquidator, or a trustee or assignee in bankruptcy or insolvency for such Member or a substantial part of such Member’s property; (v) makes an assignment for the benefit of such Member’s creditors; (vi) is unable to or admits in writing such Member’s inability to pay such Member’s debts generally as they become due; or (vii) takes any action in furtherance of any of the aforesaid purposes.

“Bankruptcy Repurchase Date” has the meaning set forth in Section 10.4(c) hereof.

“Belvedere Members” means Claus Lund and Russell Thompson.

“Board of Managers” shall mean the Board of Managers established pursuant to Section 5.1 of this Agreement.

“Business” means the business involving, among other things, of operating a specialty finance company focused on the high credit-quality jumbo adjustable rate, hybrid and second-lien mortgage markets.

“Business Day” means a day of the year on which banks are not required or authorized to close in Los Angeles, California.

“Capital Account” means, with respect to any Member, the Capital Account maintained for such Member in accordance with the following provisions:

(i) To each Member’s Capital Account there shall be credited (A) the amount of cash and the Gross Asset Value of any property contributed by such Member to the Company,

-45-

(B) such Member’s distributive share of Profits and any items in the nature of income or gain which are specially allocated pursuant to Section 3.2 or Section 3.4 hereof, and (C) the amount of any Company liabilities assumed by such Member in accordance with Regulations Section 1.704-1(b)(2)(iv)(c) or which are secured by any Company property distributed to such Member.

(ii) To each Member’s Capital Account there shall be debited (A) the amount of cash and the Gross Asset Value of any property distributed by the Company to such Member, (B) such Member’s distributive share of Losses and any items in the nature of expenses or losses which are specially allocated pursuant to Section 3.2, Section 3.3 or Section 3.4 hereof, and (C) the amount of any liabilities of such Member assumed by the Company in accordance with Regulations Section 1.704-1(b)(2)(iv)(c) or which are secured by any property contributed by such Member to the Company.

(iii) In the event Interests are Transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the Transferred Interests.

The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Regulations Section 1.704-1(b)(4), and shall be interpreted and applied in a manner consistent with such Regulations. Each Member shall have the initial capital account as set forth on Schedule 2.1.

“Capital Contributions” means, with respect to any Member, the net value of any property contributed to the Company with respect to the Interests in the Company held or purchased by such Member as reflected in Section 2 of this Agreement, including additional capital contributions, if any, made in accordance with the terms of this Agreement.

“Capital Event” means (a) the issuance or sale of Interests or other equity interests in the Company representing 10% or more of the total voting power of the Company to any unaffiliated third party or parties, (b) the sale of all or substantially all of the assets of the Company or all of the membership interests in the Company to an unaffiliated third party, (c) a merger or consolidation of the Company involving an unaffiliated third party or (d) dissolution or liquidation of the Company.

“Cash Flow” means the excess, if any, of all cash receipts of the Company as of any applicable determination date in excess of the sum of (i) all cash disbursements (inclusive of any guaranteed payment within the meaning of Section 707(c) of the Code paid to any Member, but exclusive of distributions to the Members in their capacities as such) of the Company prior to that date, plus (ii) any reserve, determined in the sole and absolute discretion of the Board of Managers, for anticipated cash disbursements that will have to be made before additional cash receipts from third parties will provide the funds therefor.

“Certificate” means the certificate of formation filed with the Secretary of State of the State of Delaware pursuant to the Act to form the Company, as originally executed and amended, modified, supplemented or restated from time to time, as the context requires.

“Certificate of Cancellation” means a certificate filed in accordance with 6 Del. C. Section 18-203.

-46-

“Chairman” means the Chairman of the Board of Managers, including any interim Chairman. The initial Chairman shall be Joseph Lloyd McAdams.

“Chief Executive Officer” means the Chief Executive Officer of the Company, including any interim Chief Executive Officer. The initial Chief Executive Officer shall be Joseph Lloyd McAdams.

“Code” means the United States Internal Revenue Code of 1986, as amended from time to time.

“Company” means BT Management Company, L.L.C., the limited liability company formed pursuant to this Agreement and the Certificate, and the limited liability company continuing the business of the Company in the event of dissolution of the Company as herein provided.

“Company Minimum Gain” shall have the meaning set forth in Section 1.704-2(b)(2) and 1.704-2(d) of the Regulations for “partnership minimum gain.”

“Defaulting Member” means the Member that is the subject of a Bankruptcy Event.

“Departing Member” means a Belvedere Member (or the duly and validly appointed representative of such Member in any instance wherein the Belvedere Member is deemed by a court of competent jurisdiction not to have the physical or mental capacity to act on his own behalf) whose employment terminated due to such Member’s Disability, or the estate of a deceased Belvedere Member whose employment terminated due to such Belvedere Member’s death.

“Departing Member’s Vested Interest” has the meaning set forth in Section 10.6(a) hereof.

“Depreciation” means, for each Allocation Year, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such Allocation Year, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such Allocation Year, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such Allocation Year bears to such beginning adjusted tax basis; provided, however, that if the adjusted basis for federal income tax purposes of an asset at the beginning of such Allocation Year is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the Board of Managers.

“Disability” shall mean the inability of a Manager, officer or employee substantially to perform his duties and responsibilities for a continuous period of at least six months; provided, that if such person has an employment agreement with the Company, Disability shall have the meaning defined in such employment agreement.

“Dissolution Event” shall have the meaning set forth in Section 11.1 hereof.

-47-

“Divorce Event” has the meaning set forth in Section 10.5(a) hereof.

“Divorce Repurchase Date” has the meaning set forth in Section 10.5(c) hereof.

“Divorced Member” has the meaning set forth in Section 10.5(a) hereof.

“Divorcing Member Notice” has the meaning set forth in Section 10.5(a) hereof.

“Drag-Along Initiator” means Holding and its Affiliates provided that the Board of Managers has previously approved the proposed Drag-Along Transaction.

“Drag-Along Notice” shall have the meaning set forth in Section 10.8 hereof.

“Drag-Along Transaction” shall have the meaning set forth in Section 10.8 hereof.

“Effective Date” means November 3, 2003.

“Employment Agreements” means the Employment Agreements between the Company and each of the Belvedere Members, dated of even date herewith.

“Fiscal Year” means for financial accounting, federal, state and local income tax purposes the calendar year or such other fiscal year that may be required by law for federal income tax purposes.

“Founding Members” means Joseph Lloyd McAdams and each of the Belvedere Members.

“GAAP” means generally accepted accounting principles consistently applied and in effect in the United States of America from time to time.

“Gross Asset Value” means with respect to any asset, the asset’s adjusted basis for federal income tax purposes, except as follows:

(i) The initial Gross Asset Value of any asset contributed by a Member to the Company shall be the gross fair market value of such asset, as determined by the Board of Managers; provided that the initial Gross Asset Values of the asset contributed to the Company pursuant to Section 2.1 hereof shall be as set forth on Schedule 2.1;

(ii) The Gross Asset Values of all Company assets shall be adjusted to equal their respective gross fair market values (taking Code Section 7701(g) into account), as determined by the Board of Managers as of the following times: (A) the acquisition of an additional interest in the Company by any new or existing Member in exchange for more than a de minimis Capital Contribution; (B) the distribution by the Company to a Member of more than a de minimis amount of Company property as consideration for an interest in the Company; (C) to the extent permitted under proposed or final Regulations, the grant of an interest in the Company (other than a de minimis interest) as consideration for the provision of services to or

-48-

for the benefit of the Company by an existing Member of the Company acting in a Member capacity, or by a new member of the Company acting in a Member capacity or in anticipation of being a Member; and (D) the liquidation of the Company within the meaning of Regulations Section 1.704l(b)(2)(ii)(g); provided that an adjustment described in clauses (A), (B) and (C) of this paragraph shall be made only if the Board of Managers reasonably determines that such adjustment is necessary to reflect the relative economic interests of the Members in the Company;

(iii) The Gross Asset Value of any item of Company assets distributed to any Member shall be adjusted to equal the gross fair market value (taking Code Section 7701(g) into account) of such asset on the date of distribution as determined by the Board of Managers; and

(iv) The Gross Asset Values of Company assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m) and subparagraph (vi) of the definition of “Profits” and “Losses.”

If the Gross Asset Value of an asset has been determined or adjusted pursuant to subparagraph (i), (ii) or (iv), such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Profits and Losses.

“Holding” means BT Management Holding Corporation.

“Indemnitee” has the meaning set forth in Section 7.2 hereof.

“Initial Offer Period” has the meaning set forth in Section 10.6(a) hereof.

“Interest” or “Interests” means an ownership interest or interest in the Company, including any and all benefits to which the holder of such interests may be entitled as provided in this Agreement, together with any and all obligations of such Person to comply with the terms and provisions of this Agreement.

“Lead Member” has the meaning set forth in Section 10.6(a) hereof.

“Liquidation Period” has the meaning set forth in Section 11.6 hereof.

“Liquidator” has the meaning set forth in Section 11.7(a) hereof.

“Losses” has the meaning set forth in the definition of “Profits” and “Losses.”

“Majority Vote” means, with respect to actions to be taken by Members, the affirmative vote of or consent of Members holding at least a majority of the Percentage Interests then held by all Members entitled to vote or consent on such action.

“Manager” means any of the individuals elected by the Members to serve on the Board of Managers.

-49-

“Management Agreement” means that certain Management Agreement dated of even date herewith by and between the Company and Belvedere Trust Mortgage Corporation, a Maryland corporation.

“Member” means any Person (i) who is referred to as such on Schedule 2.1 or who has become a substituted Member pursuant to the terms of this Agreement and (ii) who has not ceased to be a Member.

“Member Nonrecourse Debt” has the same meaning as the term “partner nonrecourse debt” in Section 1.704-2(b)(4) of the Regulations.

“Member Nonrecourse Debt Minimum Gain” means an amount, with respect to each Member Nonrecourse Debt, equal to the Company Minimum Gain that would result if such Member Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Section 1.704-2(i)(3) of the Regulations.

“Member Nonrecourse Deductions” has the same meaning as the term “partner nonrecourse deductions” in Sections 1.704-2(i)(1) and 1.704-2(i)(2) of the Regulations.

“Nonsolicitation Agreements” means the Nonsolicitation and Nondisclosure Agreements between the Company and each of the Belvedere Members, dated as of even date herewith.

“Nonrecourse Deductions” has the meaning set forth in Section 1.704-2(b)(1) of the Regulations.

“Nonrecourse Liability” has the meaning set forth in Section 1.704-2(b)(3) of the Regulations.

“Offer Notice” has the meaning set forth in Section 10.6(d)(iii) hereof.

“Offered Interests” has the meaning set forth in Section 10.6(d)(ii) hereof.

“Offered Securities” shall have the meaning set forth in Section 2.3(a) hereof.

“Officers” shall mean each of the individuals elected by the Board of Managers to serve as Officers of the Company in accordance with Section 5.7 hereof.

“Option Event” has the meaning set forth in Section 10.6(d) hereof.

“Option Notice” has the meaning set forth in Section 10.6(d)(ii) hereof.

“Option Period” has the meaning set forth in Section 10.6(d)(ii) hereof.

“Other Member” has the meaning set forth in Section 10.6(d)(ii) hereof.

“Percentage Interest” means, with respect to each Member, as of any date, the percentage set forth in the column entitled “Initial Percentage Interest” opposite each Member’s name on Schedule 2.1, subject to adjustment as set forth in this Agreement.

-50-

“Permitted Transferee” means, with respect to any Founding Member, (x) any spouse or issue of such Founding Member, or any trust solely for the benefit of such Founding Member, spouse or issue, and (y) upon such Founding Member’s death, any spouse or issue to whom Interests are transferred in accordance with the laws of descent and/or testamentary distribution.

“Person” or “person” means any individual, partnership (whether general or limited), limited liability company, corporation, trust, estate, association, nominee or other entity.

“Pre-Emptive Offer” shall have the meaning set forth in Section 2.3(a) hereof.

“President” means the President of the Company, including any interim President. The initial President shall be Claus Lund.

“Pro Rata Portion” has the meaning set forth in Section 10.6(d)(ii) hereof.

“Profits” and “Losses” mean, for each Allocation Year, an amount equal to the Company’s taxable income or loss for such Allocation Year, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments (without duplication):

(i) any income of the Company that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses pursuant to this definition of “Profits” and “Losses” shall be added to such taxable income or loss;

(ii) any expenditures of the Company described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses pursuant to this definition of “Profits” and “Losses” shall be subtracted from such taxable income or loss;

(iii) in the event the Gross Asset Value of any Company asset is adjusted pursuant to subparagraphs (ii), (iii), or (iv) of the definition of Gross Asset Value, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the Gross Asset Value of the asset) or an item of loss (if the adjustment decreases the Gross Asset Value of the asset) from the disposition of such asset and shall be taken into account for purposes of computing Profits or Losses;

(iv) gain or loss resulting from any taxable disposition of Company property shall be computed by reference to the Gross Asset Value of the Company property disposed of, notwithstanding that the adjusted tax basis of such Company property differs from its Gross Asset Value;

(v) in lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such Allocation Year, computed in accordance with the definition of Depreciation;

-51-

(vi) to the extent an adjustment to the adjusted tax basis of any Company asset pursuant to Code Section 734(b) is required, pursuant to Regulations Section 1.704-(b)(2)(iv)(m)(4), to be taken into account in determining Capital Accounts as a result of a distribution other than in liquidation of a Member’s interest in the Company, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) from the disposition of such asset and shall be taken into account for purposes of computing Profits or Losses; and

(vii) notwithstanding any other provision of this definition, any items that are specially allocated pursuant to Section 3.2, Section 3.3 or Section 3.4 hereof shall not be taken into account in computing Profits or Losses.

“Pro Rata Share” shall have the meaning set forth in Section 2.3(a) hereof.

“Purchaser” shall mean any person other than a Permitted Transferee to whom all or any part of an Interest may be transferred.

“Purchase Price” shall mean the purchase price to be paid in accordance with Sections 10.4, 10.5 or 10.6 with respect to a Member’s Interest that is purchased pursuant to the provisions of Sections 10.4, 10.5 or 10.6, as applicable.

“Reconstitution Period” has the meaning set forth in Section 11.1(b) hereof.

“Refused Securities” has the meaning set forth in Section 2.3(c).

“Regulations” means the Income Tax Regulations, including Temporary Regulations, promulgated under the Code, as such regulations are amended from time to time.

“Regulatory Allocations” has the meaning set forth in Section 3.4 hereof.

“Remaining Interests” has the meaning set forth in Section 10.6(d)(iii) hereof.

“Repurchase Date” has the meaning set forth in Section 10.6(e) hereof.

“Repurchase Notice” has the meaning set forth in Section 10.4(a) hereof.

“Second Offer Period” has the meaning set forth in Section 10.6(a) hereof.

“Securities Act” means the Securities Act of 1933, as amended.

“Spouse” has the meaning set forth in Section 10.5(a) hereof.

“Subsidiary” means any corporation, partnership, joint venture, limited liability company, association or other entity in which such Person owns, directly or indirectly, 50% or more of the outstanding equity securities or interests, the holders of which are generally entitled to vote for the election of the board of directors or other governing body of such entity.

“Taxing Authority” shall have the meaning set forth in Section 9.3(b) hereof.

-52-

“Tax Matters Partner” has the meaning set forth in Section 9.3(b) hereof.

“Terminating Member” means the Belvedere Member whose termination of employment gives rise to an Option Event.

“Third Party” shall mean any Person who is not a Member, a Manager, an Officer or an Affiliate of the Company or any Affiliate thereof.

“Transaction Documents” means the Certificate, this Agreement, the Employment Agreements, the Management Agreement and the Nonsolicitation Agreements.

“Transfer” means, as a noun, any voluntary or involuntary transfer, sale, pledge or hypothecation or other disposition and, as a verb, voluntarily or involuntarily to transfer, sell, pledge or hypothecate or otherwise dispose of.

“Unvested Interests” means Interests that are not Vested Interests.

“Vested Interests” means Interests that have vested in accordance with Schedule 2.1.

SECTION 16

MISCELLANEOUS

16.1 Notices.

Any notice, payment, demand, or communication required or permitted to be given by any provision of this Agreement shall be in writing and shall be deemed to have been delivered, given, and received for all purposes (i) if delivered personally to the Person or to an officer of the Person to whom the same is directed, or (ii) when the same is actually received, if sent by certified mail, postage and charges prepaid, or by facsimile, if such facsimile is followed by a hard copy of the facsimile communication sent promptly thereafter by overnight courier, registered or certified mail, postage and charges prepaid, addressed as follows, or to such other address as such Person may from time to time specify by notice to the Board Managers (x) if to the Company, to the address determined pursuant to Section 1.4 hereof; (y) if to the Managers, to the address set forth in Schedule 5.1(b) hereto; and (z) if to a Member, to the address set forth in Schedule 2.1 hereto. Notice received after 5:00 P.M. (recipient’s time) or on a Saturday, Sunday or legal holiday shall be effective the next regular business day.

16.2 Binding Effect.

Except as otherwise provided in this Agreement, every covenant, term, and provision of this Agreement shall be binding upon and inure to the benefit of the Members and their respective successors, transferees, and permitted assigns.

16.3 Time.

In computing any period of time pursuant to this Agreement, the day of the act, event or default from which the designated period of time begins to run shall not be included, but the time

-53-

shall begin to run on the next succeeding day. The last day of the period so computed shall be included, unless it is a Saturday, Sunday or legal holiday, in which event the period shall run until the end of the next day which is not a Saturday, Sunday or legal holiday.

16.4 Headings.

Section and other headings contained in this Agreement are for reference purposes only and are not intended to describe, interpret, define, or limit the scope, extent, or intent of this Agreement or any provision hereof.

16.5 Severability.

Except as otherwise provided in the succeeding sentence, every provision of this Agreement is intended to be severable, and, if any term or provision of this Agreement is illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the validity or legality of the remainder of this Agreement.

16.6 Variation of Terms.

All terms and any variations thereof shall be deemed to refer to masculine, feminine, or neuter, singular or plural, as the identity of the Person or Person may require.

16.7 Governing Law.

The internal laws of the State of Delaware shall govern the validity of this Agreement, the construction of its terms, and the interpretation of the rights and duties arising hereunder.

16.8 Jurisdiction and Service of Process.

Any legal action or proceeding with respect to this Agreement shall be brought in the courts of the State of California or of the United States of America for the Central District of California. By execution and delivery of this Agreement, each of the parties hereto accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts with respect to this Agreement. Each of the parties hereto irrevocably consents to the service of process of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by certified mail, postage prepaid, to the party at its address set forth in Schedule 2.1 hereof.

16.9 Enforcement.

Each of the parties hereto acknowledges and agrees that the rights acquired by each party hereunder are unique and that irreparable damage would occur in the event that any of the provisions of this Agreement to be performed by the other party were not performed in accordance with their specific terms or were otherwise breached. Accordingly, in addition to any other remedy to which the parties hereto are entitled at law or in equity, each party hereto shall be entitled to an injunction or injunctions to prevent breaches of this Agreement by the other party and to enforce specifically the terms and provisions hereof in any federal or state court to which the parties have agreed hereunder to submit to jurisdiction.

-54-

16.10 Counterpart Execution.

This Agreement may be executed in any number of counterparts with the same effect as if all of the Members had signed the same document. All counterparts shall be construed together and shall constitute one agreement.

16.11 Dispute Resolution.

(a) Any dispute, controversy or claim arising in connection with this Agreement shall be settled by binding arbitration if so requested by any Member of the Company pursuant to paragraph (b) below. The arbitration shall be conducted by three arbitrators, who shall be appointed pursuant to the rules of the American Arbitration Association (“AAA”). The arbitration shall be held in Los Angeles, California and shall be conducted in accordance with the commercial arbitration rules of the AAA, except that the rules set forth in this Section 16.11 shall govern such arbitration to the extent they conflict with the rules of AAA.

(b) Upon written notice by a party to the other party of a request for arbitration hereunder, the parties shall use their best efforts to cause the arbitration to be conducted in an expeditious manner. All other procedural matters shall be within the discretion of the arbitrators. In the event a party fails to comply with the procedures in any arbitration in a manner deemed material by the arbitrators, the arbitrators shall fix a reasonable period of time for compliance and, if the party does not comply within said period, a remedy deemed just by the arbitrators, including an award of default, may be imposed.

(c) The determination of the arbitrators shall be final and binding on the parties. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction. The parties shall each be responsible for their own expenses in connection with such arbitration, including without limitation counsel fees and fees of experts; provided, however, that the parties shall share equally in the expense of the arbitrators and of the AAA; provided, further, that the foregoing shall not be in derogation of either party’s rights to recover expenses, liabilities and losses (including its share of the expense of arbitrators and AAA) under Section 7.2 hereof.

16.12 Partnership Intended Solely for Tax Purposes

The Members have formed the Company as a Delaware limited liability company under the Act, and do not intend to form a corporation or a general or limited partnership under Delaware or any other state law. The Members do not intend to be stockholders and/or partners in one another. The Members intend the Company be classified and treated as a partnership solely for federal and state income taxation purposes. Each member agrees to act consistently with the foregoing provisions of this Section 16.12 for all purposes, including, without limitation, for purposes of reporting the transactions contemplated herein to the Internal Revenue Service and all state and local taxing authorities.

16.13 Legal and Tax Advice

Each of the Belvedere Members acknowledges that (i) he has neither received nor relied upon any legal or tax advice from the Company or Holding or any affiliate of Holding or its legal

-55-

or tax counsel, in connection with any matter, including but not limited to, this Agreement or any transactions relating to the Company or Belvedere Trust Mortgage Corporation, and (ii) he has relied upon his own legal and tax counsel for advice in connection therewith.

16.14 Expenses

Each party hereto shall pay its own expenses incident to this and the transactions contemplated hereunder, including all legal and accounting fees and disbursements, except that the Company shall reimburse (i) Anworth for all legal fees and expenses incurred by Anworth in connection with this Agreement and the transactions contemplated hereunder, and (ii) the legal fees and expenses incurred by the Belvedere Members in connection with this Agreement and the Transactions contemplated hereunder in an amount not to exceed $10,000 in the aggregate, upon presentation by the Belvedere Members of reasonably detailed invoices for such services.

16.15 Acknowledgment

The parties hereto agree and acknowledge that potential or actual conflicts of interest may exist in connection with the matters set forth in this Agreement. Such potential or actual conflicts of interest include but are not limited to (i) conflicts between the interests of Members in their capacities as such and their interests as officers or Managers of the Company, and (ii) conflicts of interests between the interests of Members in any of the foregoing capacities and their interests as officers, directors, stockholders and/or affiliates in any other entity, including, but not limited to, Holding and its parent, Anworth Mortgage Asset Corporation. Each Belvedere Member agrees to and does hereby fully and forever waive and release any and all claims of any type whatsoever that such Belvedere Member has, may have had or may have in the future arising from or related to any potential or actual conflict of interest that has arisen or may arise from any of the matters set forth in this Agreement, or from any of the transactions related hereto or thereto, and each Belvedere Member hereby covenants never to make any claim against any such party at any time regarding or related to any such actual or potential conflicts of interest.

*        *        *

-56-

IN WITNESS WHEREOF, the undersigned have executed and entered into this Agreement as of the Effective Date.

BT MANAGEMENT HOLDING CORPORATION
By:	/s/ Thad M. Brown
	Name:  Thad M. Brown
	Title:  Chief Financial Officer
/s/ Joseph Lloyd McAdams
JOSEPH LLOYD MCADAMS
/s/ Claus Lund
CLAUS LUND
/s/ Russell Thompson
RUSSELL THOMPSON

-57-

SCHEDULE 10.4

CALCULATION OF PURCHASE PRICE

The following definitions are used to calculate the Purchase Price of a Member’s interest to be repurchased by the Company pursuant to the provisions of Sections 10.4(a), 10.5(b) and 10.6(a)(ii)(B) or purchased by a Divorced Member pursuant to Section 10.5(a).

The “Purchase Price” for any or all of a Vested Interest, as of any day, shall be the product of (a) the Member’s Percentage Interest (in the case of a divorce, the Spouse’s Percentage Interest, in the case of a Bankruptcy Event, the Defaulting Member’s Percentage Interest and in the case of death or Disability, the Departing Member’s Percentage Interest) expressed as a fraction, times (b) the portion of such Member’s Vested Interest (or the Spouse’s Vested Interest) that is to be purchased expressed as a fraction, times (c) the average of the Company’s Net Operating Income for the two most recently completed calendar years immediately preceding the Notice Date (or Net Operating Income for the last calendar year if the Company has not operated for two calendar years prior to the Notice Date); provided, that, in the case of the death of a Member, the foregoing amount shall be multiplied by 2.5 times to determine the applicable Purchase Price.

For purposes hereof:

“Net Operating Income” means for the applicable period, an amount equal to the sum of the Company’s (i) net income (or loss)(before income taxes, but after deducting all other tax expenses of the Company, including but not limited to the California LLC gross receipts fee), as determined in accordance with generally accepted accounting principles, (ii) losses on the sale or other disposition of assets other than in the ordinary course of business, and (iii) extraordinary losses, minus (a) gains on the sale or disposition of assets other than in the ordinary course of business, and (b) extraordinary gains; and

“Notice Date” means the date of the Repurchase Notice or Divorcing Member Notice, as applicable, which relates to the purchase of a Vested Interest pursuant to Sections 10.4(a), 10.5(a), 10.5(b) or 10.6(a)(ii)(B).

MEMBERS

-1-

EX-10.19

EXHIBIT 10.19

MANAGEMENT AGREEMENT

THIS MANAGEMENT AGREEMENT, is entered into as of November 3, 2003, by and between BELVEDERE TRUST MORTGAGE CORPORATION, a Maryland corporation (hereinafter referred to as the “Company”), and BT MANAGEMENT COMPANY, LLC, a Delaware limited liability company (hereinafter referred to as the “Manager”), with respect to the following:

W I T N E S S E T H:

WHEREAS, the Company intends to engage in the business of investing in mortgage securities (“Mortgage Securities”) and mortgage loans (“Mortgage Loans”) (collectively, “Mortgage Assets”) and to qualify for the tax benefits accorded to a real estate investment trust (“REIT”) by Sections 856 through 860 of the Internal Revenue Code of 1986 (“Code”), as amended; and

WHEREAS, the Company desires to retain the Manager to manage the assets of the Company and to perform administrative services for the Company in the manner and on the terms set forth herein, and wishes to enter into this Agreement for a ten (10) year term and thereafter until the Company’s board of directors (the “Board of Directors”) shall have met to take action on the renewal or termination of this Agreement; and

WHEREAS, the Manager shall not engage in any activity which would cause it to be required to register as an investment advisor under the Investment Advisers Act of 1940; and

WHEREAS, the Manager shall comply with all laws applicable to it and arising in connection with this Agreement.

NOW THEREFORE, in consideration of the mutual agreements herein set forth, the parties hereto agree as follows:

SECTION 1. Definitions. Capitalized terms used herein shall have the following meanings:

(a) “Agreement” means this Management Agreement, as amended from time to time.

(b) “Agreement Date” means the date reflected on page one as of which this Agreement is signed and dated.

(c) “Average Net Invested Assets” means for any period the difference between (i) the aggregate book value of the consolidated assets of the Company and its subsidiaries, before reserves for depreciation or bad debts or other similar noncash market value adjustments and reserves, and (ii) the book value of average debt associated with the Company’s ownership of Mortgage Assets, computed by taking the average of such net values at the end of each month during such period.

-1-

(d) “Average Net Worth” means for any period the arithmetic average of the sum of the gross proceeds from any offering of its equity securities by the Company, before deducting any underwriting discounts and commissions and other expenses and costs relating to the offering, plus the Company’s retained earnings (without taking into account any losses incurred in prior periods) computed by taking the average of such values at the end of each month during such period, and shall be reduced by any amount that the Company pays for the repurchases of Common Stock.

(e) “GAAP” means generally accepted accounting principles consistently applied.

(f) “Governing Instruments” means the articles of incorporation and bylaws in the case of a corporation.

(g) “Return on Equity” means for any quarter the product of the Company’s Net Income for the quarter divided by the Company’s Average Net Worth for the quarter.

SECTION 2. General Duties of the Manager. Subject to the supervision of the Board of Directors, the Manager shall provide services to the Company, and to the extent directed by the Board of Directors, shall provide similar services to any subsidiary of the Company as follows:

(a) serve as the Company’s consultant with respect to formulation and updating of investment criteria and policy guidelines for consideration by the Board of Directors (“Guidelines”);

(b) represent the Company in connection with (i) its commitments to purchase and (ii) the purchase of Mortgage Assets, including the accumulation of Mortgage Loans for securitization;

(c) furnish reports and statistical and economic research to the Company regarding the Company’s investments and activities and the services performed for the Company by the Manager;

(d) monitor and provide to the Board of Directors on an on-going basis price information and other data obtained from certain nationally recognized dealers that maintain markets in Mortgage Assets identified by the Board of Directors from time to time, and provide data and advice to the Board of Directors in connection with the identification of such dealers;

(e) administer the day-to-day operations of the Company and perform or supervise the performance of such other administrative functions necessary or advisable for the management of the Company as may be agreed upon by the Manager and the Board of Directors including, without limitation, collection of the Company’s revenues and payment of the Company’s expenses, debts and obligations and maintenance of appropriate computer services to provide such administrative functions;

(f) communicate on behalf of the Company with the holders of the equity and debt securities of the Company as required to satisfy the continuous reporting and other requirements of any governmental bodies or agencies to holders of such securities and third parties and to maintain effective relations with such holders of the Company’s securities;

-2-

(g) designate one or more servicers (each, a “Servicer”) for those Mortgage Loans sold to the Company by originators or sellers that have elected not to service such loans and arrange for the monitoring and administering of such Servicers;

(h) advise the Company in connection with policy decisions to be made by the Board of Directors;

(i) upon request by and in accordance with the directions of the Board of Directors, invest or reinvest any money of the Company;

(j) engage in hedging activities on behalf of the Company consistent with the Company’s qualification as a REIT and with the Guidelines;

(k) arrange for the issuance of Mortgage Securities from pools of Mortgage Loans acquired by the Company, and provide to the Company itself or through another appropriate party all services in connection with the creation of Mortgage Securities, including:

(1) serving as consultant with respect to the structuring of each class or series of Mortgage Securities;

(2) negotiating the rating requirements with rating agencies with respect to the rating of each class or series of Mortgage Securities;

(3) accumulating and reviewing all Mortgage Loans which may secure or constitute the mortgage pool for each class or series of Mortgage Securities;

(4) negotiating all agreements and credit enhancements with respect to each class or series of Mortgage Securities;

(5) issuing commitments on behalf of the Company to purchase Mortgage Loans to be used to secure or constitute the mortgage pool for each class or series of Mortgage Securities;

(6) organizing and administering activities in connection with the closing of each class or series of Mortgage Securities, including all negotiations and agreements with underwriters, trustees, servicers, master servicers and other parties; and

(7) performing such other services as may be required from time to time for completing the creation of each class or series of Mortgage Securities.

(l) provide to the Company itself or through another appropriate party all services in connection with the administration of each class or series of Mortgage Securities created by the Company;

(m) provide the executive and administrative personnel, office space and services required in rendering the foregoing services to the Company;

-3-

(n) perform such other services as may be required from time to time for management and other activities relating to the assets of the Company as the Manager shall deem necessary, advisable or appropriate under the particular circumstances;

(o) cause the Company to qualify to do business in all applicable jurisdictions as may be required from time to time under applicable state and federal laws; and

(p) comply with all laws applicable to the Manager and use its best efforts to cause the Company to comply with all laws applicable to the Company.

SECTION 3. Additional Activities of Manager.

(a) Nothing herein shall prevent the Manager or any of its Affiliates from engaging in other businesses or from rendering services of any kind to any other person or entity, including investment in, or advisory service to others investing in, any type of real estate investment, including investments which meet the principal investment objectives of the Company. Notwithstanding anything elsewhere in this Agreement to the contrary, the Manager shall not engage in any activity which would cause it to be required to register as an investment advisor under the Investment Advisers Act of 1940. In furtherance thereof, during any twelve (12) month period, the Manager shall not (i) render investment advice to more than fifteen (15) clients, (ii) hold itself out generally to the public as an investment advisor, or (iii) act as an investment advisor to any investment Company that is registered under the Investment Company Act.

(b) Directors, officers, employees and agents of the Manager or Affiliates of the Manager may serve as directors, officers, employees, agents, nominees or signatories for the Company or any subsidiary of the Company, to the extent permitted by their Governing Instruments, as from time to time amended, or by any resolutions duly adopted by the Board of Directors pursuant to the Company’s Governing Instruments. When executing documents or otherwise acting in such capacities for the Company, such persons shall use their respective title in the Company.

SECTION 4. Bank Accounts. At the direction of the Board of Directors, the Manager may establish and maintain one or more bank accounts in the name of the Company or any subsidiary of the Company, and may collect and deposit into any such account or accounts, and disburse funds from any such account or accounts, under such terms and conditions as the Board of Directors may approve; and the Manager shall from time to time render appropriate accountings of such collections and payments to the Board of Directors and, upon request by the Company, to the auditors of the Company or any subsidiary of the Company.

SECTION 5. Records; Confidentiality. The Manager shall maintain appropriate books of account and records relating to services performed hereunder, and such books of account and records shall be accessible for inspection by representatives of the Company or any subsidiary of the Company at any time during normal business hours. The Manager shall keep confidential any and all information it obtains from time to time in connection with the services it renders under this Agreement and shall not disclose any portion thereof to non-affiliated third parties except with the prior written consent of the Company, or except as may be required by applicable law or judicial process.

-4-

SECTION 6. Obligations of Manager.

(a) The Manager shall require each seller or transferor of Mortgage Assets to the Company to make such representations and warranties regarding such Mortgage Assets as may be, in the judgment of the Manager, necessary, advisable and appropriate. In addition, the Manager shall take such other action as it deems necessary, advisable or appropriate with regard to the protection of the Company’s investments.

(b) The Manager shall refrain from any action which would adversely affect the status of the Company or, if applicable, any subsidiary of the Company as a REIT or which would violate any law, rule or regulation of any governmental body or agency having jurisdiction over the Company or any such subsidiary or which would otherwise not be permitted by the Company’s or such subsidiary’s Governing Instruments. If the Manager is ordered to take any such action by the Board of Directors, the Manager shall promptly notify the Board of Directors of the Manager’s judgment that such action would adversely affect such status or violate any such law, rule or regulation or the Governing Instruments. The Manager, its directors, officers, stockholders and employees shall not be liable to the Company, any subsidiary of the Company, or the Board of Directors for any act or omission by the Manager, its directors, officers, stockholders or employees except as provided in Section 11 of this Agreement.

SECTION 7. Compensation.

(a) Annual Base Management Fee. For services rendered under this Agreement, the Company shall pay to the Manager, an annual base management fee based on the Average Net Invested Assets of the Company and its subsidiaries for each year, payable monthly in arrears, as follows:

(A) 1.15% of the first $300 million of Average Net Invested Assets, plus

(B) 0.85% of the portion of Average Net Invested Assets above $300 million.

The annual base management fee shall be calculated by the Manager within fifteen (15) days after the end of each month, and such calculation shall be promptly delivered to the Company. The Company shall pay to the Manager the applicable portion of the annual base management fee payable pursuant to this Section 7(a) for each month within thirty (30) days after the end of each such month. Payments of the applicable portion of the annual base management fee shall be pro rated based on the number of days elapsed during any partial month.

(b) Incentive Compensation. In addition to the annual base management fee, the Manager shall receive as incentive compensation for each fiscal quarter an amount equal to twenty percent (20%) of the Net Income of the Company, before Incentive Compensation, in excess of the amount that would produce an annualized Return on Equity equal to the Ten Year U.S. Treasury Rate (average of weekly average yield to maturity for U.S. Treasury securities (adjusted to a constant maturity of ten (10) years) as published weekly by the Federal Reserve Board in publication H.15 during a quarter) plus one percent (1%). The incentive compensation calculation and payment shall be made quarterly in arrears. The Manager shall compute the incentive compensation payable under this Section 7(b) within forty-five (45) days after the end of each fiscal quarter. The Company shall

-5-

pay the incentive compensation with respect to each fiscal quarter within 15 days following the delivery to the Company of Manager’s written statement setting forth the computation of the incentive compensation for such quarter.

(c) If loans are made to the Company by an “Affiliate” (as such term is defined in Rule 12b-2 of the Exchange Act of 1934, as amended) of the Manager, the maximum amount of interest that may be charged by such Affiliate shall be the prime rate publicly announced by Citibank, N.A. from time to time plus 1% per year.

(d) Net Income of the Company, solely for purposes of calculating the Manager’s Incentive Compensation under Section 7(b), shall be determined by calculating net income available to shareholders of Common Stock, in accordance with generally accepted accounting principles (“GAAP”), as determined by the Company’s independent certified public accountants.

(e) The proceeds from any issue of preferred stock which may from time to time be created and authorized for issuance by the Board of Directors (the “Preferred Stock”) shall be included in Average Net Invested Assets in calculating the Manager’s annual base management fee under Section 7(a). For calculating the Manager’s Incentive Compensation, Preferred Stock (other than Preferred Stock issued to Anworth Mortgage Asset Corporation not in an offering involving unrelated third party investors) shall be excluded from Average Net Worth and the minimum or fixed rate portion of any Preferred Stock (other than Preferred Stock issued to Anworth Mortgage Asset Corporation not in an offering involving unrelated third party investors) dividend shall be deducted from taxable income before incentive compensation.

SECTION 8. Expenses of the Company. The Company or any subsidiary of the Company shall pay all of its expenses as set forth on Section I of Annex A attached, and shall reimburse the Manager for documented expenses of the Manager reasonably incurred on its behalf in furtherance of the Manager’s responsibilities under this Agreement. The reimbursable expenses of the Manager shall include, without limitation, the amount of any California Gross Receipts Tax which the Manager becomes obligated to pay based on the annual base management fees, incentive compensation and any other receipts which the Manager derives in connection with its service to the Company. The Manager shall be responsible for its own costs of operation set forth under Section II of Annex A.

SECTION 9. Annual Operating Expenses Limitation Requiring Reimbursement by the Manager.

(a) Subject to the adjustment as provided in paragraph (b), expenses incurred by the Manager on behalf of the Company shall be reimbursed monthly to the Manager within 30 days after the end of each month. The Manager shall prepare a statement documenting the expenses of the Company and those incurred by the Manager on behalf of the Company during each month, and shall deliver such statement to the Company within 15 days after the end of each month.

(b) Within 120 days after the end of each of the Company’s fiscal years, the Manager shall reimburse the Company for any expense reimbursement received by the Manager from the Company hereunder with respect to such fiscal year to the extent that the Operating Expenses (as defined in Annex A attached hereto) of the Company for such fiscal year exceed the

-6-

greater of 2% of its Average Net Invested Assets or 25% of its Net Income for such fiscal year; unless a majority of the Board of Directors determines that, based upon such unusual or nonrecurring factors which they deem sufficient, a higher level of expenses is justified for such fiscal year, in which case, such expenses shall be payable to the Manager in succeeding fiscal years to the extent that the expenses of the Company are less than the greater of 2% of its Average Net Invested Assets or 25% of its Net Income for such fiscal year. The determination of Net Income for any period for purposes of calculating the expense limitation will be the same as for calculating the Manager’s incentive compensation, except that the determination of Net Income for purposes of calculating the expense limitation will include any incentive compensation payable for such period. The amount of any Gross Receipts Tax reimbursed by the Company to the Manager pursuant to Section 8 above, as well as the other costs and expenses enumerated under Section II of Annex A attached hereto, are not Operating Expenses and are not subject to the operating expense limitation set forth above.

SECTION 10. Monitoring Servicing. The Manager will monitor and administer the servicing of the Company’s Mortgage Loans, other than loans pooled to back Mortgage Securities. Such monitoring and administrative services will include, but not be limited to, the following activities: serving as the Company’s consultant with respect to the servicing of loans; collection of information and submission of reports pertaining to the Mortgage Loans and to moneys remitted to the Manager or the Company by Servicers; periodic review and evaluation of the performance of each servicer to determine its compliance with the terms and conditions of the applicable servicing agreement and, if deemed appropriate, recommending to the Company the termination of such servicing agreement; acting as a liaison between Servicers and the Company and working with servicers to the extent necessary to improve their servicing performance; review of and recommendations as to fire losses, easement problems and condemnation, delinquency, foreclosing and other reports on Mortgage Loans; supervising claims filed under any mortgage insurance policies; and enforcing the obligation of any servicer to repurchase Mortgage Loans from the Company. The Manager may enter into subcontracts with other parties, including its Affiliates, to provide any such services for the Manager; provided however, all such subcontractors shall then be subject to the terms of this Agreement and the Manager shall provide written notice of such subcontracts to the Company; and, provided further, in no event shall any such subcontracts or subcontractors contravene the Manager’s obligations and limitations set forth in Section 3(a) of this Agreement.

SECTION 11. Limits of Manager Responsibility.

(a) The Manager assumes no responsibility under this Agreement other than to render the services called for hereunder in good faith and shall not be responsible for any action of the Board of Directors in following or declining to follow any advice or recommendations of the Manager. The Manager, its members, managers, officers and employees will not be liable to the Company, any subsidiary of the Company, the Board of Directors or the Company’s or its subsidiary’s stockholders for any acts or omissions by the Manager, its members, managers, officers or employees under or in connection with this Agreement, except by reason of acts constituting bad faith, willful misconduct, gross negligence or reckless disregard of their duties. The Company shall reimburse, indemnify and hold harmless the Manager, its members, managers, officers and employees of and from any and all expenses, losses, damages, liabilities, demands, charges and claims of any nature whatsoever (including, without limitation, attorneys’ fees) in respect of or arising from any acts or omissions of the Manager, its members, managers, officers and employees made in good faith in the performance of the Manager’s duties under this Agreement and not constituting bad faith, willful misconduct, gross negligence or reckless disregard of its duties.

-7-

(b) The Manager shall reimburse, indemnify and hold harmless the Company, any subsidiary, or any of their stockholders, directors, officers and employees from any and all expenses, losses, damages, liabilities, demands, charges and claims (including, without limitation, attorneys’ fees) arising out of any intentional misstatements of fact made by the Manager in connection with the issuance of commitments to purchase Mortgage Assets on behalf of the Company and the purchase of Mortgage Assets by the Company resulting from such commitments.

SECTION 12. No Joint Venture. The Company and the Manager are not partners or joint venturers with each other and nothing herein shall be construed to make them such partners or joint venturers or impose any liability as such on either of them.

SECTION 13. Term; Termination.

(a) This Agreement shall commence on the Agreement Date and shall continue in force until the next regularly scheduled Board of Directors meeting of the Company following the tenth anniversary of the Agreement Date, and thereafter, it may be extended only with the consent of the Manager and by the affirmative vote of a majority of the Board of Directors. Each extension shall be executed in writing by the parties hereto before the expiration of this Agreement or any extension thereof. Each such extension shall not exceed a term of ten years. Notwithstanding any other provision to the contrary, this Agreement, or any extension hereof, may be terminated by the Company, upon 60 days written notice, by majority vote of the Board of Directors or by majority vote of the Stockholders. If this Agreement is terminated pursuant to this Section 13, such termination shall be subject to the provisions of Section 16 of this Agreement.

(b) Name Change Upon Termination of Management Agreement. The Company agrees that, if at any time the Manager or any Affiliate of the Manager shall cease to serve generally as Manager of the Company or any Subsidiary, upon receipt of a written request of the Manager, the Company and such Subsidiary will cause their governing instruments, including articles of incorporation and by-laws, to be amended so as to change the name of the Company or such Subsidiary to a name that does not include “Belvedere” or any approximation thereof.

(c) The Board of Directors shall determine at least annually that the compensation paid to the Manager is reasonable in relation to the nature and quality of services performed and also shall supervise performance of the Manager and the compensation paid to it to determine that the provisions of this Agreement are being carried out. The Board of Directors shall also determine at least annually that the total fees and expenses of the Company are reasonable in light of all relevant factors. Each such determination shall be based upon the following factors and all other factors the Board of Directors may deem relevant and the findings of the Board of Directors on each of such factors shall be recorded in the minutes of the Board of Directors:

(1) the size of the management fee in relation to the size, compensation and profitability of the investment portfolio of the Company;

(2) the success of the Manager in generating opportunities that meet the investment objectives of the Company;

-8-

(3) the rates charged to other real estate investment trusts and to other investors by advisors performing similar services;

(4) additional revenues realized by the Manager and its affiliates through their relationship with the Company whether paid by the Company or by others with whom the Company does business;

(5) the quality and extent of service and advice furnished to the Company;

(6) the performance of the investment portfolio of the Company, including income, conservation or appreciation of capital, frequency of problem investments and competence in dealing with distress situations; and

(7) the quality of the investment portfolio of the Company.

SECTION 14. Assignments.

(a) Except as set forth in Section 13(b) of this Agreement, this Agreement shall terminate automatically in the event of its assignment, in whole or in part, by the Manager, unless the Company (with the approval of a majority of the Board of Directors) consents to such assignment in advance. Any such assignment shall bind the assignee hereunder in the same manner as the Manager is bound. In addition, the assignee shall execute and deliver to the Company a counterpart of this Agreement naming such assignee as Manager. This Agreement shall not be assigned by the Company without the prior written consent of the Manager, except in the case of assignment by the Company to a REIT or other organization which is a successor (by merger, consolidation or purchase of assets) to the Company, in which case such successor organization shall be bound hereunder and by the terms of such assignment in the same manner as the Company is bound hereunder.

(b) Notwithstanding any provision of this Agreement to the contrary, subject to Section 3(a), the Manager may subcontract and assign any or all of its responsibilities under Sections 2(k), 2(l) and 10 of this Agreement to any of its Affiliates, and the Company hereby consents to any such assignment and subcontracting.

SECTION 15. Termination by Company for Cause. At the option of the Company, this Agreement shall be and become terminated upon 60 days written notice of termination from the Board of Directors to the Manager if any of the following events shall occur:

(a) if the Manager shall violate any provision of this Agreement and, after written notice of such violation, shall not cure such violation within 30 days;

(b) there is entered an order for relief or similar decree or order with respect to the Manager by a court having competent jurisdiction in an involuntary case under the federal bankruptcy laws as now or hereafter constituted or under any applicable federal or state bankruptcy, insolvency or other similar laws; or the Manager (i) ceases, or admits in writing its inability to pay its debts as they become due and payable, or makes a general assignment for the benefit of, or enters into any composition or arrangement with, creditors; (ii) applies for, or consents (by admission of material allegations of a petition or otherwise) to the appointment of a receiver, trustee, assignee,

-9-

custodian, liquidator or sequestrator (or other similar official) of the Manager or of any substantial part of its properties or assets, or authorizes such an application or consent, or proceedings seeking such appointment are commenced without such authorization, consent or application against the Manager and continue undismissed for 30 days; (iii) authorizes or files a voluntary petition in bankruptcy, or applies for or consents (by admission of material allegations of a petition or otherwise) to the application of any bankruptcy, reorganization, arrangement, readjustment of debt, insolvency, dissolution, liquidation or other similar law of any jurisdiction, or authorizes such application or consent, or proceedings to such end are instituted against the Manager without such authorization, application or consent and are approved as properly instituted and remain undismissed for 30 days or result in adjudication of bankruptcy or insolvency; or (iv) permits or suffers all or any substantial part of its properties or assets to be sequestered or attached by court order and the order remains undismissed for 30 days; or

(c) If any of the events specified in Section 15(b) of this Agreement shall occur, the Manager shall give prompt written notice thereof to the Board of Directors upon the occurrence of such event.

SECTION 16. Action Upon Termination.

(a) From and after the effective date of termination of this Agreement, pursuant to Sections 13, 14 or 15 of this Agreement, the Manager shall not be entitled to compensation for further services hereunder, except pursuant to any separate written management termination agreement that may hereafter be negotiated by the parties, but shall be paid all compensation accruing to the date of termination, including deferred incentive compensation which is recoverable in accordance with Section 7(e) of this Agreement. Upon such termination, the Manager shall forthwith:

(1) after deducting any accrued compensation and reimbursement for its expenses to which it is then entitled, pay over to the Company or any subsidiary of the Company all money collected and held for the account of the Company or any subsidiary of the Company pursuant to this Agreement;

(2) deliver to the Board of Directors a full accounting, including a statement showing all payments collected by it and a statement of all money held by it, covering the period following the date of the last accounting furnished to the Board of Directors with respect to the Company or any subsidiary of the Company;

(3) pay to the Company all sums set forth on the accounting referenced in (b) above; and

(4) deliver to the Board of Directors all property and documents of the Company or any subsidiary of the Company then in the custody of the Manager.

(b) Upon the occurrence of (i) an Acquisition Event (as defined below) or (ii) the termination of this Agreement by the Company (in either case, a “Termination Event”), other than a termination for cause on the grounds set forth in Section 15 of this Agreement, the Company agrees to, and shall be obligated to, acquire and pay for substantially all of the assets of the Manager (the “Reorganization”). The Reorganization shall be effected in a transaction intended to qualify, in the

-10-

opinion of the Company’s certified public accountants, as a pooling of interests for financial accounting purposes if such treatment is then available and, in the determination of the Company, advisable. In consideration for the Reorganization, the Company shall issue to the Manager an amount of [publicly registered] shares of Common Stock of the Company, calculated as follows:

(1) The Manager will retain an independent certified public accountant mutually acceptable to the Company and the Manager to prepare in accordance with generally accepted accounting principals on the cash receipts and disbursements method of accounting audited financial statements for the three 12 month periods (the “Statements”) over the thirty-six month period ending with the most recently completed calendar quarter (the “Measuring Period”). The Statements will show gross revenues received by the Manager less all expenses (excluding bonus payments to the Manager’s employees and affiliates) paid by the Manager during the Measuring Period.

(2) The Company will issue to the Manager as payment for the Reorganization that number of shares of Common Stock of the Company equal to 120% of the quotient of the Manager’s net profit (excluding bonus payments to the Manager’s employees and affiliates) on the Statement for the 12 month period showing the highest net profit during the Measuring Period, divided by the dividend per share declared by the Company during the most recent fiscal quarter in which a dividend was declared, on an annualized basis; provided, however, that such Reorganization payment shall not be less than the sum of $5 million for each $100 million of equity capital attributable to the Company’s Common Stock and preferred stock.

(3) “Acquisition Event” means a merger, consolidation, or reorganization between the Company and another entity with the Company being either the surviving entity or the acquired entity, or the transfer of assets into the Company for stock or other equity securities of the Company, or securities exercisable or convertible into equity securities by any person or entity, other than any subsidiary or benefit plan of the Company.

(4) The Company shall at all times keep and maintain an adequate reserve of authorized but unissued shares available to fulfill the obligation to issue shares pursuant to the Reorganization.

(5) Upon the occurrence of an Acquisition Event, the Company shall promptly file a registration statement and use its best efforts to cause such registration statement to become effective under the Securities Act of 1933, as amended, with respect to the public offering and distribution of such shares reserved for issuance pursuant to the Reorganization.

(6) The Company and the Manager will, as soon as possible after the occurrence of an Acquisition Event, but in no event later than 60 days after the Acquisition Event, take all necessary corporate action to consummate and close the Reorganization, including the Company’s issuance of the shares of common stock to the Manager as determined in paragraph (2) above.

SECTION 17. Release of Money or Other Property Upon Written Request. The Manager agrees that any money or other property of the Company or any subsidiary of the Company held by the Manager under this Agreement shall be held by the Manager as custodian for the Company or

-11-

such subsidiary, and the Manager’s records shall be appropriately marked clearly to reflect the ownership of such money or other property by the Company or such subsidiary. Upon the receipt by the Manager of a written request signed by a duly authorized officer of the Company requesting the Manager to release to the Company or any subsidiary of the Company any money or other property then held by the Manager for the account of the Company or any subsidiary of the Company under this Agreement, the Manager shall release such money or other property to the Company or any subsidiary of the Company within a reasonable period of time, but in no event later than 30 days following such request. The Manager shall not be liable to the Company, any subsidiary of the Company, the Board of Directors, or the Company’s stockholders for any acts performed or omissions to act by the Company or any subsidiary of the Company in connection with the money or other property released to the Company or any subsidiary of the Company in accordance with this Section. Subject to the foregoing, the Company shall indemnify the Manager, its members, managers, officers and employees against any and all expenses, losses, damages, liabilities, demands, charges and claims of any nature whatsoever, which arise in connection with the Manager’s release of such money or other property to the Company or any subsidiary of the Company in accordance with the terms of this Section 17. Indemnification pursuant to this provision shall be in addition to any right of the Manager to indemnification under Section 11 of this Agreement.

SECTION 18. Representations and Warranties.

(a) The Company hereby represents and warrants to the Manager as follows:

(1) The Company is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, has the corporate power to own its assets and to transact the business in which it is now engaged and is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, except for failures to be so qualified, authorized or licensed that could not in the aggregate have a material adverse effect on the business, operations, assets or financial condition of the Company and its subsidiaries, taken as a whole. The Company does not do business under any fictitious business name.

(2) The Company has the corporate power and authority to execute, deliver and perform this Agreement and all obligations required hereunder and has taken all necessary corporate action to authorize this Agreement on the terms and conditions hereof and the execution, delivery and performance of this Agreement and all obligations required hereunder. No consent of any other person including, without limitation, stockholders and creditors of the Company, and no license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required by the Company in connection with this Agreement or the execution, delivery, performance, validity or enforceability of this Agreement and all obligations required hereunder. This Agreement has been, and each instrument or document required hereunder will be, executed and delivered by a duly authorized officer of the Company, and this Agreement constitutes, and each instrument or document required hereunder when executed and delivered hereunder will constitute, the legally valid and binding obligation of the Company enforceable against the Company in accordance with its terms.

-12-

(3) The execution, delivery and performance of this Agreement and the documents or instruments required hereunder, will not violate any provision of any existing law or regulation binding on the Company, or any order, judgment, award or decree of any court, arbitrator or governmental authority binding on the Company, or the Governing Instruments of, or any securities issued by the Company or of any mortgage, indenture, lease, contract or other agreement, instrument or undertaking to which the Company is a party or by which the Company or any of its assets may be bound, the violation of which would have a material adverse effect on the business operations, assets or financial condition of the Company and its subsidiaries, taken as a whole, and will not result in, or require, the creation or imposition of any lien on any of its property, assets or revenues pursuant to the provisions of any such mortgage, indenture, lease, contract or other agreement, instrument or undertaking.

(4) Nothing in this Agreement shall or is intended to contravene any fact or representation set forth in any prospectus, registration statement, annual report or quarterly report as filed by the Company with the Securities and Exchange Commission.

(b) The Manager hereby represents and warrants to the Company as follows:

(1) The Manager is duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation, has the limited liability company power to own its assets and to transact the business in which it is now engaged and is duly qualified to do business and is in good standing under the laws of each jurisdiction where its ownership or lease of property or the conduct of its business require such qualification, except for failures to be so qualified, authorized or licensed that could not in the aggregate have a material adverse effect on the business operations, assets or financial condition of the Manager and its subsidiaries, taken as a whole. The Manager does not do business under any fictitious business name.

(2) The Manager has the limited liability company power and authority to execute, deliver and perform this Agreement and all obligations required hereunder and has taken all necessary limited liability company action to authorize this Agreement on the terms and conditions hereof and the execution, delivery and performance of this Agreement and all obligations required hereunder. No consent of any other person including, without limitation, members and creditors of the Manager, and no license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required by the Manager in connection with this Agreement or the execution, delivery, performance, validity or enforceability of this Agreement and all obligations required hereunder. This Agreement has been, and each instrument or document required hereunder will be executed and delivered by a duly authorized agent of the Manager, and this Agreement constitutes, and each instrument or document required hereunder when executed and delivered hereunder will constitute, the legally valid and binding obligation of the Manager enforceable against the Manager in accordance with its terms.

(3) The execution, delivery and performance of this Agreement and the documents or instruments required hereunder, will not violate any provision of any existing law or regulation binding on the Manager, or any order, judgment, award or decree of any court, arbitrator or governmental authority binding on the Manager, or any securities issued by the Manager or of any mortgage, indenture, lease, contract or other agreement, instrument or undertaking to which the Manager is a party or by which the Manager or any of its assets may be bound, the violation of

-13-

which would have a material adverse effect on the business operations, assets or financial condition of the Manager and its subsidiaries, taken as a whole, and will not result in, or require, the creation or imposition of any lien on any of its property assets or revenues pursuant to the provisions of any such mortgage indenture, lease, contract or other agreement, instrument or undertaking.

SECTION 19. Notice. Unless expressly provided otherwise herein, all notices, request, demands and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given, made and received when delivered against receipt or upon actual receipt of registered or certified mail, postage prepaid, return receipt requested. The parties may deliver to each other notice by electronically transmitted facsimile copies (“Fax”) provided that such Fax notice is followed within twenty-four (24) hours by any type of notice otherwise provided for in this paragraph. Any notice shall be duly addressed to the parties as follows:

If to the Company:	1299 Ocean Avenue, Suite 250
	Santa Monica, CA 90401
	Attention: Joseph Lloyd McAdams
Copy to:	Mark J. Kelson, Esq.
	Allen Matkins Leck Gamble & Mallory LLP
	1901 Avenue of the Stars, Suite 1800
	Los Angeles, CA 90067
If to the Manager:	1299 Ocean Avenue, Suite 260
	Santa Monica, CA 90401
	Attention: Thad M. Brown
Copy to:	Mark J. Kelson, Esq.
	Allen Matkins Leck Gamble & Mallory LLP
	1901 Avenue of the Stars, Suite 1800
	Los Angeles, CA 90067

Either party may alter the address to which communications or copies are to be sent by giving notice of such change of address in conformity with the provisions of this Section 19 for the giving of notice.

SECTION 20. Binding Nature of Agreement; Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns as provided herein.

SECTION 21. Entire Agreement. This Agreement contains the entire agreement and understanding among the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements, understandings, inducements and conditions, express or implied, oral or written, of any nature whatsoever with respect to the subject matter hereof. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified or amended other than by an agreement in writing approved by the Company (including a majority of the Independent Board of Directors) and the Manager.

-14-

SECTION 22. Controlling Law. This Agreement and all questions relating to its validity, interpretation, performance and enforcement shall be governed by and construed, interpreted and enforced in accordance with the laws of the State of California, notwithstanding any California or other conflict of law provisions to the contrary.

SECTION 23. Schedules and Exhibits. All Schedules and Exhibits referred to herein or attached hereto are hereby incorporated by reference into, and made a part of, this Agreement.

SECTION 24. Indulgences, Not Waivers. Neither the failure nor any delay on the part of a party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver.

SECTION 25. Titles Not to Affect Interpretation. The titles of paragraphs and subparagraphs contained in this Agreement are for convenience only, and they neither form a part of this Agreement nor are they to be used in the construction or interpretation hereof.

SECTION 26. Execution in Counterparts. This Agreement may be executed in any number of counterparts, including electronically transmitted counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories.

SECTION 27. Provisions Separable. The provisions of this Agreement are independent of and separable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part.

SECTION 28. Gender. Words used herein regardless of the number and gender specifically used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context requires.

SECTION 29. Computation of Interest. Interest will be computed on the basis of a 360-day year consisting of twelve months of thirty days each.

-15-

IN WITNESS WHEREOF, the parties hereto have executed this Management Agreement as of the date first written above.

“Company”
BELVEDERE TRUST MORTGAGE CORPORATION a Maryland corporation
By:	/s/ Claus Lund
	Claus Lund, Chief Executive Officer

“Manager”
BT MANAGEMENT COMPANY, LLC, a Delaware limited liability company
By:	/s/ Joseph Lloyd McAdams
	Joseph Lloyd McAdams, President

-16-

ANNEX A

DEFINITION OF “OPERATING EXPENSES”

I. The term Operating Expenses means all of the ordinary and necessary operating expenses of the Company and of each subsidiary of the Company of every type including, but not limited to, costs of originating loans directly, acquiring loans through correspondent, bulk or other loan acquisition channels, securitizing, selling, hedging, owning, carrying, servicing and monitoring the servicing or subservicing of, and disposing of the Company’s portfolio of mortgage loans, mortgage securities and other assets, including the costs of software and costs of equipment related thereto, and costs of organizing any subsidiary of the Company, costs of issuing, servicing, paying dividends or interest on, selling or reacquiring any instrument or security or mortgage asset (whether or not a security), costs preparatory to entering into a business or activity, costs of winding up or disposing of a business or activity, interest, points, fees, finance costs, costs of maintaining compliance with governmental requirements of any type, taxes, losses, bad debts of any type, in each case incurred by or on behalf of the Company or any subsidiary regardless whether such expenses and costs would be treated as current costs or expenses for tax purposes or under generally accepted accounting principles. Such costs and expenses shall include all compensation costs, equipment and a pro rata portion of overhead expenses of the personnel employed by the Manager, the Company or any subsidiary to perform the foregoing services for the Company and its subsidiaries, other than as set forth in Section II below.

II. The term “Operating Expenses” of the Company shall not include the following:

(A) employment expenses of the Manager’s personnel who are performing management services for the Manager (including Directors, officers, and employees of the Company who are managers, directors, officers, or employees of the Manager or its Affiliates), other than the expenses of those employee services listed in Section I above; and

(B) rent, telephone, utilities, and office equipment, furnishings and other office and overhead related expenses of the Manager in connection with those employees providing management services for the Manager.

-1-

EX-10.20

EXHIBIT 10.20

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (this “Agreement”), dated as of November 3, 2003, is by and between, BT MANAGEMENT COMPANY, L.L.C., a Delaware limited liability company (the “Company”), and Claus Lund (the “Executive”).

R E C I T A L S :

A. The Company wishes to have the services of the Executive, and the Executive wishes to be employed by the Company as contemplated by this Agreement; and

B. The Company and the Executive desire to establish the terms and conditions of the Executive’s services and employment as set forth herein.

C. Capitalized terms used herein without definition shall have the meanings ascribed thereto in the BT Management Company LLC Operating Agreement dated of even date herewith (the “Operating Agreement”).

A G R E E M E N T :

NOW, THEREFORE, in consideration of the mutual covenants and obligations hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1. Employment. The Executive hereby agrees to be employed by the Company, and the Company hereby agrees to employ the Executive, upon the terms and conditions hereinafter set forth.

2. Term. Subject to the provisions of Sections 6, 7, and 8 hereof, the term of the provision of services hereunder will be for the three (3) year period commencing on November 3, 2003 (the “Commencement Date”) and ending on the third anniversary of the Commencement Date. Unless the Company gives notice of its intent not to renew the Executive’s assignment and employment hereunder, or the Executive gives written notice to the Company of his determination not to renew his service and employment hereunder, in any case at least ninety (90) days prior to the third anniversary of the Commencement Date, this Agreement, and the Executive’s employment by the Company hereunder, shall be renewed for one year from that anniversary. Thereafter, unless the Company or the Executive gives written notice of determination not to renew at least ninety (90) days prior to the next succeeding anniversary of the Commencement Date, this Agreement shall be renewed for one year from that anniversary. The term “Service Period” shall mean the three (3) year period provided for in this Section 2 and any extension thereof, or any shorter period resulting from any termination of service under Sections 6, 7 and 8 hereof.

3. Duties and Responsibilities. The Executive will be the President of the Company. The Executive will perform such duties and services as are customary for the position of President in

companies similar to the Company, subject to such duties as are set forth in the Operating Agreement, if any, and such other duties as may be assigned to him from time to time by the Company’s Board of Managers (the “Board”) or its designee. In furtherance of the foregoing, the Executive hereby agrees to perform well and faithfully such duties and responsibilities and the other reasonable duties and responsibilities assigned to him from time to time by the Board or its designee and shall conform to and/or comply with all rules, regulations, instructions, personnel practices and policies of the Company, whether now in force or hereafter adopted.

4. Time to be Devoted to Service. The Executive agrees to devote his entire productive time, ability and attention to the diligent prosecution of the business and affairs of the Company. During the Service Period, Executive shall not directly or indirectly render any services of a business or commercial nature to any person, firm, or organization other than the Company, whether for compensation or otherwise, without the prior written consent of the Board. Notwithstanding the foregoing, it is understood that the Executive may conduct personal business activities that do not relate to the business of the Company and may engage in charitable, civic and other similar pursuits, if such activities do not interfere with his duties for the Company or conflict with its interests or his obligations hereunder.

5. Compensation; Reimbursement.

5.1 Base Salary. The Executive’s annual base salary (the “Base Salary”) will be $75,000. The Base Salary will be payable in such installments as are applicable to employees of the Company at substantially the same service level as the Executive.

5.2 Performance-Based Compensation. Pursuant to the Management Agreement (the “Management Agreement”) dated of even date herewith by and between the Company and Belvedere Trust Mortgage Company (“Belvedere Trust”), the Company receives incentive fee revenue which is based on Belvedere Trust’s return on equity relative to a benchmark as set forth in the Management Agreement (the “Incentive Fee Revenue”). The Executive shall be eligible to participate in the distribution of the portion of the Company’s Incentive Fee Revenue that is available after required distributions to the Company’s members are made. The allocation of the amount of the Company’s Incentive Fee Revenue to the Executive shall be determined by theBoard which shall take into account the recommendation of senior management along with the Board’s evaluation of the Executive’s direct contribution to the excess returns which produced the Incentive Fee Revenue for the Company in any particular measurement period.

5.3 Benefit Plans. The Executive shall be entitled to participate in any benefit plans available to other executive employees of the Company, subject to any restrictions (including waiting periods) specified in such plans. The Company shall make commercially reasonable efforts to obtain medical and disability insurance, and such other forms of insurance as the Board of Directors shall from time to time determine, for its employees.

5.4 Vacation. The Executive shall be entitled to four (4) weeks of paid vacation per calendar year during the Service Period, with such vacation to be scheduled and taken in accordance with the Company’s standard vacation policies. Such vacation time shall not accrue.

-2-

5.5 Reimbursements. The Executive will be reimbursed, in accordance with the practice applicable to officers of the Company from time to time, for all reasonable and necessary traveling expenses and other disbursements incurred by him for or on behalf of the Company in the performance of his duties hereunder upon presentation by the Executive of appropriate vouchers.

5.6 Reservation. Company reserves the right to modify, suspend or discontinue the above referenced benefit plans, practices, policies and programs under Sections 5.3, 5.4 and 5.5 at any time (whether before or after termination of employment) without notice to or recourse by Executive so long as such action is taken generally with respect to other similarly situated peer executives and does not single out Executive.

6. Involuntary Termination.

6.1 Death or Disability. If the Executive dies, then the Executive’s employment by the Company hereunder shall be deemed to terminate on the date of the Executive’s death. If, in the good faith judgment of the Board, the Executive is incapacitated or disabled by accident, sickness or otherwise so as to render him mentally or physically incapable of performing the services required to be performed by him under this Agreement for a period of ninety (90) consecutive days or longer, or for ninety (90) days during any 360 day period (such condition being herein referred to as “Disability”), the Company, at its option, may terminate the Executive’s employment under this Agreement immediately upon giving him or his guardian notice to that effect. Termination pursuant to this Section 6.1 is hereinafter referred to as an “Involuntary Termination.”

6.2 Substitution. The Board may designate another employee to act in the Executive’s place during any period of the Executive’s Disability during the Service Period.

6.3 Verification of Disability. If any question shall arise as to whether during any period the Executive is disabled through any illness, injury, accident or condition of either a physical or psychological nature so as to be unable to perform substantially all of the Executive’s duties and responsibilities hereunder, the Executive may, and at the request of the Company shall, submit to a medical examination by a physician selected by the Company to whom the Executive or the Executive’s guardian has no reasonable objection to determine whether the Executive is so disabled and such determination shall for the purposes of this Agreement be conclusive of the issue. If such question shall arise and Executive shall fail to submit to such medical examination, the Company’s determination of the issue shall be binding on the Executive.

7. Termination by the Company.

7.1 Termination For Cause. The Company may terminate the service of the Executive hereunder at any time during the Service Period for “Cause” (such termination being called a “Termination for Cause”) by giving the Executive notice of such termination, which notice shall specify: (i) the basis for termination, upon the giving of which such termination shall take effect immediately. For the purpose of this Section 7, “Cause” will mean: (a) the Executive’s willful misconduct or gross negligence with respect to the business and affairs of the Company or any subsidiary or affiliate thereof, (b) the Executive’s gross or habitual neglect in the performance of his duties, (c) the Executive’s material breach of his duties, obligations and responsibilities under this Agreement, or of any provision of the Nonsolicitation Agreement which, to the extent curable, is

-3-

not cured in full within five (5) business days after written notice thereof is given to the Executive, (d) the commission by the Executive of an act involving moral turpitude or fraud, (e) the Executive’s conviction of (or entering a plea of nolo contendere to) any felony, or of any misdemeanor involving fraud, theft, embezzlement, forgery or moral turpitude, or (f) the Executive’s breach of his duty of trust or fiduciary duty owing to the Company.

7.2 Termination Without Cause. The Company may terminate the services of the Executive hereunder at any time during the Service Period without “Cause” (such termination being called a “Termination Without Cause”) by giving the Executive notice of such termination, upon the giving of which such termination shall take effect immediately. Any termination by the Company of the Executive’s services hereunder during the Service Period for which “Cause” is not present, as set forth in Section 7.1, shall be deemed to be a Termination Without Cause.

7.3 Termination by the Executive.

(i) For Good Reason. The Executive may terminate his services hereunder at any time during the Service Period for Good Reason (as defined below) by giving the Company written notice of such termination, which notice shall specify: (a) the basis for termination and (b) the effective date of termination (such termination being hereinafter referred to as a “Termination for Good Reason”). For purposes of this Agreement, the term “Good Reason” shall mean (A) the relocation of the Company’s San Francisco Bay Area headquarters to a location more than one hundred (100) miles from the Company’s current San Francisco Bay Area headquarters, (B) the assignment to the Executive of a lower position in the organization in terms of his title, responsibility or authority, unless agreed to in writing by the Executive, or (C) a reduction in the Executive’s compensation as set forth in this Agreement, other than a general reduction affecting all similarly situated executives of the Company.

(ii) Without Good Reason. The Executive may terminate his services hereunder at any time during the Service Period by giving the Company ninety (90) days prior written notice of such termination. Any termination of the Executive’s services hereunder by the Executive other than as a result of an Involuntary Termination is called a “Voluntary Termination”.

8. Effect of Termination.

8.1 Voluntary Termination or a Termination for Cause. Upon the termination of the Executive’s services hereunder pursuant to a Voluntary Termination or a Termination for Cause, neither the Executive nor his beneficiary or estate will have any further rights or claims against the Company, its affiliates, or its subsidiaries under this Agreement except to receive:

(i) any unpaid portion of the Base Salary provided for in Section 5.1 and any accrued vacation owing Executive, computed on a pro rata basis to the date of such termination; and

(ii) reimbursement for any expenses for which the Executive has not been reimbursed as provided in Section 5.3.

-4-

8.2 Termination without Cause, Termination for Good Reason or Involuntary Termination. Upon the termination of the Executive’s services hereunder pursuant to a Termination without Cause, Termination for Good Reason or due to Involuntary Termination, neither the Executive nor his beneficiary or estate will have any further rights or claims against the Company, its affiliates or its subsidiaries under this Agreement except to receive:

(i) any unpaid portion of the Base Salary provided for in Section 5.1 and any accrued vacation owing Executive, computed on a pro rata basis to the date of such termination;

(ii) reimbursement for any expenses for which the Executive has not been reimbursed as provided in Section 5.3;

(iii) an aggregate amount equal to the Base Salary for twelve (12) months after termination (the “Severance Period”), payable at the same rate and in the same manner as set forth in Section 5.1; and

(iv) an aggregate amount equal to the performance-based compensation paid to the Executive under Section 5.2 for the last completed calendar year, payable during in twenty four equal installments during the Severance Period at the same times as the Executive receives payments under subsection (iii) above.

8.3 COBRA Benefits. To the extent required by law, the Company shall permit the Executive to participate, at the Executive’s own expense, in the Company’s group medical insurance plan for the statutorily required time period after the Termination Date, subject to the terms of the applicable plan documents and other applicable restrictions relating to such plan.

8.4 Liquidated Damages. The parties acknowledge and agree that damages which will result to the Executive for termination by the Company without Cause or other breach of this Agreement by the Company shall be extremely difficult or impossible to establish or prove, and agree that the payments made to the Executive during the Severance Period shall constitute liquidated damages for any breach of this Agreement by the Company through the Termination Date. The Executive agrees that, except for such other payments and benefits to which the Executive may be entitled as expressly provided by the terms of this Agreement or any applicable benefit plan, such liquidated damages shall be in lieu of all other claims that the Executive may make by reason of termination of his employment or any such breach of this Agreement and that, as a condition to receiving payments during the Severance Period, the Executive will execute a release of claims in a form reasonably satisfactory to the Company.

8.5 Mitigation. The parties hereto agree that the Executive shall be required to mitigate damages in respect of any termination benefit, severance pay or payment due under this Agreement or in respect of any damage award as a result of the Company’s breach of this Agreement, and any such benefit or award may be offset by any future compensation or income received by the Executive from any other source.

9. Nonsolicitation and Non-Disclosure Agreement. As a pre-condition to the effectiveness of this Agreement, the Executive agrees to execute and deliver the Nonsolicitation and Non-Disclosure Agreement attached hereto as Exhibit A (the “Nonsolicitation Agreement”), the terms and conditions of which are specifically incorporated herein by reference. The obligation of

-5-

the Company to make payments to or on behalf of the Executive under Section 8.2(iii) above is expressly conditioned upon the Executive’s continued performance of the Executive’s obligations under the Nonsolicitation Agreement.

10. Enforcement. It is the desire and intent of the parties hereto that the provisions of this Agreement will be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, to the extent that a restriction contained in this Agreement is more restrictive than permitted by the laws of any jurisdiction whose law may be deemed to govern the review and interpretation of this Agreement, the terms of such restriction, for the purpose only of the operation of such restriction in such jurisdiction, will be the maximum restriction allowed by the laws of such jurisdiction and such restriction will be deemed to have been revised accordingly herein. A court having jurisdiction over an action arising out of or seeking enforcement of any restriction contained in this Agreement may modify the terms of such restriction in accordance with this Section 10. The parties hereto agree that a breach of this Agreement could result in immediate, extraordinary and irreparable damage to the Company and that money damages would be an inadequate remedy for any breach of this Agreement. As a result, in the event of a breach or threatened breach of this Agreement, the Company or its successors or assigns may, in addition to other rights and remedies existing in their favor, apply to any court of competent jurisdiction for specific performance and/or injunctive or other relief in order to enforce, or prevent any violations of, the provisions hereof (without posting a bond or other security therefor).

11. Notices. All notices, demands and other communications which are required to be given, served or sent pursuant to this Agreement will be in writing and will be delivered personally or sent by air courier or first class certified or registered mail, return receipt requested and postage prepaid, addressed as follows:

If to the Executive:

176 Madrona Avenue

Belvedere, CA 94920

Facsimile: 415-435-4128

With a copy to (which shall not constitute notice):

Tobin & Tobin

500 Sansome St., 8th Floor

San Francisco, CA 94111

Attention: Phil Pollock, Esq.

If to the Company:

BT Management Company, LLC

1299 Ocean Avenue, Suite 260

Santa Monica, CA

Attention: Chairman of the Board

-6-

With a copy to (which shall not constitute notice):

Allen Matkins Leck Gamble & Mallory LLP

1901 Avenue of the Stars, Suite 1800

Los Angeles, CA 90067

Attention: Mark J. Kelson, Esq.

All notices and other communications given to any party hereto in accordance with the provisions of this Agreement will be deemed to have been given on the date of delivery if personally delivered; on the business day after the date when sent if sent by air courier or other guaranteed delivery service; and on the third business day after the date when sent if sent by mail, in each case addressed to such party as provided in this Section 11 or in accordance with the latest unrevoked direction from such party.

12. Binding Agreement; Benefit. The provisions of this Agreement will be binding upon and will inure to the benefit of, the respective heirs, legal representatives and successors of the parties hereto.

13. Choice of Law. ALL ISSUES CONCERNING THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE STATE OF CALIFORNIA OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAW OF ANY JURISDICTION OTHER THAN THE STATE OF CALIFORNIA.

14. Arbitration. To the fullest extent allowed by law, any controversy, claim or dispute between you and the Company (and/or any of its owners, managers, officers, employees, or agents) relating to or arising out of your employment or the cessation of that employment will be submitted to final and binding arbitration in the county in which you work(ed) for determination in accordance with the American Arbitration Association’s (“AAA”) National Rules for the Resolution of Employment Disputes, as the exclusive remedy for such controversy, claim or dispute. In any such arbitration, the parties may conduct discovery to the same extent as would be permitted in a court of law. The arbitrator shall issue a reasoned, written decision, and shall have full authority to award all remedies which would be available in court. The Company shall pay the arbitrator’s fees and any AAA administrative expenses. Any judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Possible disputes covered by the above include (but are not limited to) unpaid wages, breach of contract, torts, violation of public policy, discrimination, harassment, or any other employment-related claims under laws including but not limited to, Title VII of the Civil Rights Act of 1964, the Americans With Disabilities Act, the Age Discrimination in Employment Act, the California Fair Employment and Housing Act, the California Labor Code, and any other statutes or laws relating to an employee’s relationship with his/her employer, regardless of whether such dispute is initiated by the employee or the Company. Thus, this bilateral arbitration agreement fully applies to any and all claims that the Company may have against an employee, including but not limited to, claims for misappropriation of Company property, disclosure of proprietary information or trade secrets, interference with contract, trade libel, gross negligence, or any other claim for alleged wrongful conduct or breach of the duty of loyalty by an employee.

-7-

However, claims for workers’ compensation benefits and unemployment insurance (or any other claims where mandatory arbitration is prohibited by law) are not covered by this arbitration agreement, and such claims may be presented by either you or the Company to the appropriate court or government agency. BY AGREEING TO THIS BINDING ARBITRATION PROVISION, BOTH YOU AND THE COMPANY GIVE UP ALL RIGHTS TO TRIAL BY JURY. This arbitration agreement is to be construed as broadly as is permissible under relevant law.

15. Waiver of Breach. The waiver by either party of a breach of any provision of this Agreement by the other party must be in writing and will not operate or be construed as a waiver of any subsequent breach by such other party.

16. Entire Agreement; Amendments. This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements or understanding among the parties with respect thereto. This Agreement may be amended only by an agreement in writing signed by the parties hereto.

17. Headings. The section headings contained in this Agreement are for reference purposes only and will not affect in any way the meaning or interpretation of this Agreement.

18. Severability. Subject to the provisions of Section 10 above, any provision of this Agreement that is prohibited or unenforceable in any jurisdiction will, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction will not invalidate or render unenforceable such provision in any other jurisdiction.

19. Assignment. This Agreement is personal in its nature and the parties hereto shall not, without the consent of the other party hereto, assign or transfer this Agreement or any rights or obligations hereunder, provided, however, that the rights and obligations of the Company hereunder shall be assignable and delegable in connection with any subsequent merger, consolidation, sale of all or substantially all of the assets or stock of the Company or similar transaction involving the Company or a successor corporation.

20. Confidentiality. The Executive agrees not to disclose this Agreement or its terms to any person or entity, other than the Executive’s agents, advisors or representatives, except as consented to by the Company in writing or as may be required by law.

21. Further Assurances. The Executive agrees to execute, acknowledge, seal and deliver such further assurances, documents, applications, agreements and instruments, and to take such further actions, as the Company may reasonably request in order to accomplish the purposes of this Agreement.

22. Representation by Counsel; Interpretation. The Company and the Executive each acknowledge that each party to this Agreement has been represented by counsel in connection with this Agreement and the matters contemplated by this Agreement. Accordingly, any rule of law, including but not limited to Section 1654 of the California Civil Code, or any legal decision that would require interpretation of any claimed ambiguities in this Agreement against the party that drafted it has no application and is expressly waived. The provisions of this Agreement shall be interpreted in a reasonable manner to effect the intent of the parties.

-8-

IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first written above.

THE COMPANY:
BT MANAGEMENT COMPANY, L.L.C.
By:	/s/ Lloyd McAdams
	Name: Lloyd McAdams
	Title: Chairman
THE EXECUTIVE:
/s/ Claus Lund
Claus Lund

-9-

EX-10.21

EXHIBIT 10.21

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (this “Agreement”), dated as of November 3, 2003, is by and between, BT MANAGEMENT COMPANY, L.L.C., a Delaware limited liability company (the “Company”), and Russell Thompson (the “Executive”).

R E C I T A L S :

A. The Company wishes to have the services of the Executive, and the Executive wishes to be employed by the Company as contemplated by this Agreement; and

B. The Company and the Executive desire to establish the terms and conditions of the Executive’s services and employment as set forth herein.

C. Capitalized terms used herein without definition shall have the meanings ascribed thereto in the BT Management Company LLC Operating Agreement dated of even date herewith (the “Operating Agreement”).

A G R E E M E N T :

NOW, THEREFORE, in consideration of the mutual covenants and obligations hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1. Employment. The Executive hereby agrees to be employed by the Company, and the Company hereby agrees to employ the Executive, upon the terms and conditions hereinafter set forth.

2. Term. Subject to the provisions of Sections 6, 7, and 8 hereof, the term of the provision of services hereunder will be for the three (3) year period commencing on November 17, 2003 (the “Commencement Date”) and ending on the third anniversary of the Commencement Date. Unless the Company gives notice of its intent not to renew the Executive’s assignment and employment hereunder, or the Executive gives written notice to the Company of his determination not to renew his service and employment hereunder, in any case at least ninety (90) days prior to the third anniversary of the Commencement Date, this Agreement, and the Executive’s employment by the Company hereunder, shall be renewed for one year from that anniversary. Thereafter, unless the Company or the Executive gives written notice of determination not to renew at least ninety (90) days prior to the next succeeding anniversary of the Commencement Date, this Agreement shall be renewed for one year from that anniversary. The term “Service Period” shall mean the three (3) year period provided for in this Section 2 and any extension thereof, or any shorter period resulting from any termination of service under Sections 6, 7 and 8 hereof.

3. Duties and Responsibilities. The Executive will be the Executive Vice President and Treasurer of the Company. The Executive will perform such duties and services as are

customary for the position of Executive Vice President and Treasurer in companies similar to the Company, subject to such duties as are set forth in the Operating Agreement, if any, and such other duties as may be assigned to him from time to time by the Company’s Board of Managers (the “Board”) or its designee. In furtherance of the foregoing, the Executive hereby agrees to perform well and faithfully such duties and responsibilities and the other reasonable duties and responsibilities assigned to him from time to time by the Board or its designee and shall conform to and/or comply with all rules, regulations, instructions, personnel practices and policies of the Company, whether now in force or hereafter adopted.

4. Time to be Devoted to Service. The Executive agrees to devote his entire productive time, ability and attention to the diligent prosecution of the business and affairs of the Company. During the Service Period, Executive shall not directly or indirectly render any services of a business or commercial nature to any person, firm, or organization other than the Company, whether for compensation or otherwise, without the prior written consent of the Board. Notwithstanding the foregoing, it is understood that the Executive may conduct personal business activities that do not relate to the business of the Company and may engage in charitable, civic and other similar pursuits, if such activities do not interfere with his duties for the Company or conflict with its interests or his obligations hereunder.

5. Compensation; Reimbursement.

5.1 Base Salary. The Executive’s annual base salary (the “Base Salary”) will be $75,000. The Base Salary will be payable in such installments as are applicable to employees of the Company at substantially the same service level as the Executive.

5.2 Performance-Based Compensation. Pursuant to the Management Agreement (the “Management Agreement”) dated of even date herewith by and between the Company and Belvedere Trust Mortgage Company (“Belvedere Trust”), the Company receives incentive fee revenue which is based on Belvedere Trust’s return on equity relative to a benchmark as set forth in the Management Agreement (the “Incentive Fee Revenue”). The Executive shall be eligible to participate in the distribution of the portion of the Company’s Incentive Fee Revenue that is available after required distributions to the Company’s members are made. The allocation of the amount of the Company’s Incentive Fee Revenue to the Executive shall be determined by theBoard which shall take into account the recommendation of senior management along with the Board’s evaluation of the Executive’s direct contribution to the excess returns which produced the Incentive Fee Revenue for the Company in any particular measurement period.

5.3 Benefit Plans. The Executive shall be entitled to participate in any benefit plans available to other executive employees of the Company, subject to any restrictions (including waiting periods) specified in such plans. The Company shall make commercially reasonable efforts to obtain medical and disability insurance, and such other forms of insurance as the Board of Directors shall from time to time determine, for its employees.

5.4 Vacation. The Executive shall be entitled to four (4) weeks of paid vacation per calendar year during the Service Period, with such vacation to be scheduled and taken in accordance with the Company’s standard vacation policies. Such vacation time shall not accrue.

-2-

5.5 Reimbursements. The Executive will be reimbursed, in accordance with the practice applicable to officers of the Company from time to time, for all reasonable and necessary traveling expenses and other disbursements incurred by him for or on behalf of the Company in the performance of his duties hereunder upon presentation by the Executive of appropriate vouchers.

5.6 Reservation. Company reserves the right to modify, suspend or discontinue the above referenced benefit plans, practices, policies and programs under Sections 5.3, 5.4 and 5.5 at any time (whether before or after termination of employment) without notice to or recourse by Executive so long as such action is taken generally with respect to other similarly situated peer executives and does not single out Executive.

6. Involuntary Termination.

6.1 Death or Disability. If the Executive dies, then the Executive’s employment by the Company hereunder shall be deemed to terminate on the date of the Executive’s death. If, in the good faith judgment of the Board, the Executive is incapacitated or disabled by accident, sickness or otherwise so as to render him mentally or physically incapable of performing the services required to be performed by him under this Agreement for a period of ninety (90) consecutive days or longer, or for ninety (90) days during any 360 day period (such condition being herein referred to as “Disability”), the Company, at its option, may terminate the Executive’s employment under this Agreement immediately upon giving him or his guardian notice to that effect. Termination pursuant to this Section 6.1 is hereinafter referred to as an “Involuntary Termination.”

6.2 Substitution. The Board may designate another employee to act in the Executive’s place during any period of the Executive’s Disability during the Service Period.

6.3 Verification of Disability. If any question shall arise as to whether during any period the Executive is disabled through any illness, injury, accident or condition of either a physical or psychological nature so as to be unable to perform substantially all of the Executive’s duties and responsibilities hereunder, the Executive may, and at the request of the Company shall, submit to a medical examination by a physician selected by the Company to whom the Executive or the Executive’s guardian has no reasonable objection to determine whether the Executive is so disabled and such determination shall for the purposes of this Agreement be conclusive of the issue. If such question shall arise and Executive shall fail to submit to such medical examination, the Company’s determination of the issue shall be binding on the Executive.

7. Termination by the Company.

7.1 Termination For Cause. The Company may terminate the service of the Executive hereunder at any time during the Service Period for “Cause” (such termination being called a “Termination for Cause”) by giving the Executive notice of such termination, which notice shall specify: (i) the basis for termination, upon the giving of which such termination shall take effect immediately. For the purpose of this Section 7, “Cause” will mean: (a) the Executive’s willful misconduct or gross negligence with respect to the business and affairs of the Company or any subsidiary or affiliate thereof, (b) the Executive’s gross or habitual neglect in the performance of his duties, (c) the Executive’s material breach of his duties, obligations and responsibilities under this Agreement, or of any provision of the Nonsolicitation Agreement which, to the extent curable, is

-3-

not cured in full within five (5) business days after written notice thereof is given to the Executive, (d) the commission by the Executive of an act involving moral turpitude or fraud, (e) the Executive’s conviction of (or entering a plea of nolo contendere to) any felony, or of any misdemeanor involving fraud, theft, embezzlement, forgery or moral turpitude, or (f) the Executive’s breach of his duty of trust or fiduciary duty owing to the Company.

7.2 Termination Without Cause. The Company may terminate the services of the Executive hereunder at any time during the Service Period without “Cause” (such termination being called a “Termination Without Cause”) by giving the Executive notice of such termination, upon the giving of which such termination shall take effect immediately. Any termination by the Company of the Executive’s services hereunder during the Service Period for which “Cause” is not present, as set forth in Section 7.1, shall be deemed to be a Termination Without Cause.

7.3 Termination by the Executive.

(i) For Good Reason. The Executive may terminate his services hereunder at any time during the Service Period for Good Reason (as defined below) by giving the Company written notice of such termination, which notice shall specify: (a) the basis for termination and (b) the effective date of termination (such termination being hereinafter referred to as a “Termination for Good Reason”). For purposes of this Agreement, the term “Good Reason” shall mean (A) the relocation of the Company’s San Francisco Bay Area headquarters to a location more than one hundred (100) miles from the Company’s current San Francisco Bay Area headquarters, (B) the assignment to the Executive of a lower position in the organization in terms of his title, responsibility or authority, unless agreed to in writing by the Executive, or (C) a reduction in the Executive’s compensation as set forth in this Agreement, other than a general reduction affecting all similarly situated executives of the Company.

(ii) Without Good Reason. The Executive may terminate his services hereunder at any time during the Service Period by giving the Company ninety (90) days prior written notice of such termination. Any termination of the Executive’s services hereunder by the Executive other than as a result of an Involuntary Termination is called a “Voluntary Termination”.

8. Effect of Termination.

8.1 Voluntary Termination or a Termination for Cause. Upon the termination of the Executive’s services hereunder pursuant to a Voluntary Termination or a Termination for Cause, neither the Executive nor his beneficiary or estate will have any further rights or claims against the Company, its affiliates, or its subsidiaries under this Agreement except to receive:

(i) any unpaid portion of the Base Salary provided for in Section 5.1 and any accrued vacation owing Executive, computed on a pro rata basis to the date of such termination; and

(ii) reimbursement for any expenses for which the Executive has not been reimbursed as provided in Section 5.3.

-4-

8.2 Termination without Cause, Termination for Good Reason or Involuntary Termination. Upon the termination of the Executive’s services hereunder pursuant to a Termination without Cause, Termination for Good Reason or due to Involuntary Termination, neither the Executive nor his beneficiary or estate will have any further rights or claims against the Company, its affiliates or its subsidiaries under this Agreement except to receive:

(i) any unpaid portion of the Base Salary provided for in Section 5.1 and any accrued vacation owing Executive, computed on a pro rata basis to the date of such termination;

(ii) reimbursement for any expenses for which the Executive has not been reimbursed as provided in Section 5.3;

(iii) an aggregate amount equal to the Base Salary for twelve (12) months after termination (the “Severance Period”), payable at the same rate and in the same manner as set forth in Section 5.1;

(iv) an aggregate amount equal to the performance-based compensation paid to the Executive under Section 5.2 for the last completed calendar year, payable during in twenty four equal installments during the Severance Period at the same times as the Executive receives payments under subsection (iii) above.

8.3 COBRA Benefits. To the extent required by law, the Company shall permit the Executive to participate, at the Executive’s own expense, in the Company’s group medical insurance plan for the statutorily required time period after the Termination Date, subject to the terms of the applicable plan documents and other applicable restrictions relating to such plan.

8.4 Liquidated Damages. The parties acknowledge and agree that damages which will result to the Executive for termination by the Company without Cause or other breach of this Agreement by the Company shall be extremely difficult or impossible to establish or prove, and agree that the payments made to the Executive during the Severance Period shall constitute liquidated damages for any breach of this Agreement by the Company through the Termination Date. The Executive agrees that, except for such other payments and benefits to which the Executive may be entitled as expressly provided by the terms of this Agreement or any applicable benefit plan, such liquidated damages shall be in lieu of all other claims that the Executive may make by reason of termination of his employment or any such breach of this Agreement and that, as a condition to receiving payments during the Severance Period, the Executive will execute a release of claims in a form reasonably satisfactory to the Company.

8.5 Mitigation. The parties hereto agree that the Executive shall be required to mitigate damages in respect of any termination benefit, severance pay or payment due under this Agreement or in respect of any damage award as a result of the Company’s breach of this Agreement, and any such benefit or award may be offset by any future compensation or income received by the Executive from any other source.

9. Nonsolicitation and Non-Disclosure Agreement. As a pre-condition to the effectiveness of this Agreement, the Executive agrees to execute and deliver the Nonsolicitation and Non-Disclosure Agreement attached hereto as Exhibit A (the “Nonsolicitation Agreement”), the terms and conditions of which are specifically incorporated herein by reference. The obligation of

-5-

the Company to make payments to or on behalf of the Executive under Section 8.2(iii) above is expressly conditioned upon the Executive’s continued performance of the Executive’s obligations under the Nonsolicitation Agreement.

10. Enforcement. It is the desire and intent of the parties hereto that the provisions of this Agreement will be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, to the extent that a restriction contained in this Agreement is more restrictive than permitted by the laws of any jurisdiction whose law may be deemed to govern the review and interpretation of this Agreement, the terms of such restriction, for the purpose only of the operation of such restriction in such jurisdiction, will be the maximum restriction allowed by the laws of such jurisdiction and such restriction will be deemed to have been revised accordingly herein. A court having jurisdiction over an action arising out of or seeking enforcement of any restriction contained in this Agreement may modify the terms of such restriction in accordance with this Section 10. The parties hereto agree that a breach of this Agreement could result in immediate, extraordinary and irreparable damage to the Company and that money damages would be an inadequate remedy for any breach of this Agreement. As a result, in the event of a breach or threatened breach of this Agreement, the Company or its successors or assigns may, in addition to other rights and remedies existing in their favor, apply to any court of competent jurisdiction for specific performance and/or injunctive or other relief in order to enforce, or prevent any violations of, the provisions hereof (without posting a bond or other security therefor).

11. Notices. All notices, demands and other communications which are required to be given, served or sent pursuant to this Agreement will be in writing and will be delivered personally or sent by air courier or first class certified or registered mail, return receipt requested and postage prepaid, addressed as follows:

If to the Executive:

313 Donald Drive

Moraga, CA 94556

Facsimile: 415-435-4128

With a copy to (which shall not constitute notice):

Tobin & Tobin

500 Sansome St., 8^th Floor

San Francisco, CA 94111

Attention: Phil Pollock, Esq.

If to the Company:

BT Management Company, LLC

1299 Ocean Avenue, Suite 260

Santa Monica, CA

Attention: Chairman of the Board

-6-

With a copy to (which shall not constitute notice):

Allen Matkins Leck Gamble & Mallory LLP

1901 Avenue of the Stars, Suite 1800

Los Angeles, CA 90067

Attention: Mark J. Kelson, Esq.

All notices and other communications given to any party hereto in accordance with the provisions of this Agreement will be deemed to have been given on the date of delivery if personally delivered; on the business day after the date when sent if sent by air courier or other guaranteed delivery service; and on the third business day after the date when sent if sent by mail, in each case addressed to such party as provided in this Section 11 or in accordance with the latest unrevoked direction from such party.

12. Binding Agreement; Benefit. The provisions of this Agreement will be binding upon and will inure to the benefit of, the respective heirs, legal representatives and successors of the parties hereto.

13. Choice of Law. ALL ISSUES CONCERNING THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE STATE OF CALIFORNIA OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAW OF ANY JURISDICTION OTHER THAN THE STATE OF CALIFORNIA.

14. Arbitration. To the fullest extent allowed by law, any controversy, claim or dispute between you and the Company (and/or any of its owners, managers, officers, employees, or agents) relating to or arising out of your employment or the cessation of that employment will be submitted to final and binding arbitration in the county in which you work(ed) for determination in accordance with the American Arbitration Association’s (“AAA”) National Rules for the Resolution of Employment Disputes, as the exclusive remedy for such controversy, claim or dispute. In any such arbitration, the parties may conduct discovery to the same extent as would be permitted in a court of law. The arbitrator shall issue a reasoned, written decision, and shall have full authority to award all remedies which would be available in court. The Company shall pay the arbitrator’s fees and any AAA administrative expenses. Any judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Possible disputes covered by the above include (but are not limited to) unpaid wages, breach of contract, torts, violation of public policy, discrimination, harassment, or any other employment-related claims under laws including but not limited to, Title VII of the Civil Rights Act of 1964, the Americans With Disabilities Act, the Age Discrimination in Employment Act, the California Fair Employment and Housing Act, the California Labor Code, and any other statutes or laws relating to an employee’s relationship with his/her employer, regardless of whether such dispute is initiated by the employee or the Company. Thus, this bilateral arbitration agreement fully applies to any and all claims that the Company may have against an employee, including but not limited to, claims for misappropriation of Company property, disclosure of proprietary information or trade secrets, interference with contract, trade libel, gross negligence, or any other claim for alleged wrongful conduct or breach of the duty of loyalty by an employee.

-7-

However, claims for workers’ compensation benefits and unemployment insurance (or any other claims where mandatory arbitration is prohibited by law) are not covered by this arbitration agreement, and such claims may be presented by either you or the Company to the appropriate court or government agency. BY AGREEING TO THIS BINDING ARBITRATION PROVISION, BOTH YOU AND THE COMPANY GIVE UP ALL RIGHTS TO TRIAL BY JURY. This arbitration agreement is to be construed as broadly as is permissible under relevant law.

15. Waiver of Breach. The waiver by either party of a breach of any provision of this Agreement by the other party must be in writing and will not operate or be construed as a waiver of any subsequent breach by such other party.

16. Entire Agreement; Amendments. This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements or understanding among the parties with respect thereto. This Agreement may be amended only by an agreement in writing signed by the parties hereto.

17. Headings. The section headings contained in this Agreement are for reference purposes only and will not affect in any way the meaning or interpretation of this Agreement.

18. Severability. Subject to the provisions of Section 10 above, any provision of this Agreement that is prohibited or unenforceable in any jurisdiction will, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction will not invalidate or render unenforceable such provision in any other jurisdiction.

19. Assignment. This Agreement is personal in its nature and the parties hereto shall not, without the consent of the other party hereto, assign or transfer this Agreement or any rights or obligations hereunder, provided, however, that the rights and obligations of the Company hereunder shall be assignable and delegable in connection with any subsequent merger, consolidation, sale of all or substantially all of the assets or stock of the Company or similar transaction involving the Company or a successor corporation.

20. Confidentiality. The Executive agrees not to disclose this Agreement or its terms to any person or entity, other than the Executive’s agents, advisors or representatives, except as consented to by the Company in writing or as may be required by law.

21. Further Assurances. The Executive agrees to execute, acknowledge, seal and deliver such further assurances, documents, applications, agreements and instruments, and to take such further actions, as the Company may reasonably request in order to accomplish the purposes of this Agreement.

22. Representation by Counsel; Interpretation. The Company and the Executive each acknowledge that each party to this Agreement has been represented by counsel in connection with this Agreement and the matters contemplated by this Agreement. Accordingly, any rule of law, including but not limited to Section 1654 of the California Civil Code, or any legal decision that would require interpretation of any claimed ambiguities in this Agreement against the party that drafted it has no application and is expressly waived. The provisions of this Agreement shall be interpreted in a reasonable manner to effect the intent of the parties.

-8-

IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first written above.

THE COMPANY:
BT MANAGEMENT COMPANY, L.L.C.
By:	/s/ Lloyd McAdams
	Name: Lloyd McAdams
	Title:   Chairman
THE EXECUTIVE:
/s/ Russell Thompson
Russell Thompson

-9-

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Joseph Lloyd McAdams, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Anworth Mortgage Asset Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: November 12, 2003	/s/ JOSEPH LLOYD MCADAMS
	Joseph Lloyd McAdams Chairman of the Board, President and Chief Executive Officer (authorized officer of registrant)

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Thad M. Brown, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Anworth Mortgage Asset Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: November 12, 2003	/s/ THAD M. BROWN
	Thad M. Brown Chief Financial Officer (principal accounting officer)

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Anworth Mortgage Asset Corporation (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2003, as filed with the Securities and Exchange Commission on November 12, 2003 (the “Report”), I, Joseph Lloyd McAdams, Chairman of the Board, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

By: /s/ Joseph Lloyd McAdams

Joseph Lloyd McAdams

Chairman of the Board, President and

Chief Executive Officer

November 12, 2003

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 (“Section 906”), or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Anworth Mortgage Asset Corporation (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2003, as filed with the Securities and Exchange Commission on November 12, 2003 (the “Report”), I, Thad M. Brown, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

By: /s/ Thad Brown

Thad Brown

Chief Financial Officer

November 12, 2003

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 (“Section 906”), or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.