The accompanying notes are an integral part of the consolidated financial statements.

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MFA MORTGAGE INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

The accompanying notes are an integral part of the consolidated financial statements.

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1. Organization

     MFA Mortgage Investments, Inc. (the "Company"“Company”) was incorporated in Maryland on July 24, 1997 and began operations on April 10, 1998.

     On April 10, 1998,The Company has elected to be treated as a real estate investment trust (“REIT”) for federal income tax purposes. In order to maintain its status as a REIT, the Company and three partnerships, America First Participating/Preferred Equity Mortgage Fund Limited Partnership (“PREP Fund 1”), America First PREP Fund 2 Limited Partnership (“PREP Fund 2”), and America First PREP Fund 2 Pension Series Limited Partnership (“Pension Fund” and, togethermust comply with PREP Fund 1 and PREP Fund 2, the “PREP Funds”), consummated a merger transaction (the “1998 Merger”) whereby the pre-existing net assets and operationsnumber of PREP Fund 1 and PREP Fund 2 and a majority interest in the Pension Fund were contributed to the Company in exchange for 9,035,084 shares of the Company’s common stock, $.01 par value per share (the “Common Stock”). The 1998 Merger was accounted for using the purchase method of accounting in accordance with generally accepted accounting principles (“GAAP”), whereby PREP Fund 1 was deemed to be the acquirer of PREP Fund 2 and Pension Fund. Accordingly, the 1998 Merger resulted, for financial accounting purposes, in the effective purchase by PREP Fund 1 of all the Beneficial Unit Certificates (“BUCs”) of PREP Fund 2 and 99% of the BUCs of Pension Fund. In December 1999, Pension Fund was liquidated and dissolved and, as a result, the Company directly acquired 99% of the assets of Pension Fund. The remaining assets, consisting solely of cash, were distributed to the holders of Pension Fund BUCs who elected to remain in place following the 1998 Merger. As the surviving entity for financial accounting purposes, the assets and liabilities of PREP Fund 1 were recorded by the Companyrequirements under federal tax law, including that it must distribute at their historical cost and the assets and liabilities of PREP Fund 2 and Pension Fund were adjusted to fair value. The excess of the fair value of the Common Stock issued over the fair value of net assets acquired was recorded as goodwill.

     From the timeleast 90% of its inception through January 1, 2002, the Company was externally managed by America First Mortgage Advisory Corporation (the “Advisor”) pursuantannual taxable net income to an advisory agreement between the parties. As an externally managed company, the Company had no employees of its own and relied on the Advisorstockholders, subject to conduct its business and operations.

     On January 1, 2002, the Company acquired its external advisor through a merger (the “Advisor Merger”) and, as a result, became self-advised commencing January 1, 2002. For accounting purposes, the Advisor Merger was not considered the acquisition of a “business” for purposes of applying Accounting Principles Board (“APB”) Opinion No. 16, “Business Combinations” as superceded by Financial Accounting Standards (“FAS”) 141, “Business Combinations” and, therefore, the market value of the Common Stock issued, valued as of the consummation of the Advisor Merger, in excess of the fair value of the net tangible assets acquired was charged to operating income rather than capitalized as goodwill.

On August 13, 2002, the Company changed its name from America First Mortgage Investments, Inc. to MFA Mortgage Investments, Inc.certain adjustments.

2. Summary of Significant Accounting Policies

(a) Basis of Presentation

The accompanying interim unaudited financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in financial statements prepared in accordance with GAAPgenerally accepted accounting principles (“GAAP”) have been condensed or omitted according to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. The financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.2003. In the opinion of management, all normal and recurring adjustments necessary to present fairly the financial positioncondition at September 30, 2003March 31, 2004 and results of operations for all periods presented have been made. The results of operations for the three and nine monththree-month period ended September 30, 2003March 31, 2004 should not be construed as indicative of the results to be expected for the full year.

     The financial statements are prepared on the accrual basis of accounting in accordance with GAAP. The preparation of financial statements in conformity with GAAP 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.

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     (b) MBS, Corporate Debt Securities and Corporate Equity Securities

Statement of FASFinancial Accounting Standards (“FAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” requires that investments in securities be designated as either “held-to-maturity,” “available-for-sale” or “trading” at the time of acquisition. Securities that are designated as held-to-maturity are carried at their amortized cost. Securities that are designated as available-for-sale are carried at their estimated fair value with unrealized gains and losses excluded from earnings and reported in other comprehensive income.

     Although the Company generally intends to hold its MBS until maturity, it may, from time to time, sell any of its MBS as part of the overall management of its business. The available-for-sale designation provides the Company with the flexibility to sell its MBS in order to act on potential future market opportunities, changes in economic conditions, to ensure future liquidity and to meet other general corporate purposes as they arise. (See Note 2e.)

     Gains or losses on the sale of investment securities are based on the specific identification method.

     The Company’s adjustable-rate assets are comprised primarily of adjustable-rate MBS (“ARM-MBS”and hybrid MBS (collectively, “ARM-MBS”) issued orthat are guaranteed as to principal and/or interest by an agency of the U.S. government, such as the Government National Mortgage Association (“Ginnie Mae”), or a federally chartered corporation, such as Fannie Mae or the Federal Home Loan Mortgage Corporation (“Freddie Mac”). The Company’s portfolio of ARM-MBS includes hybridMac. Hybrid MBS have interest rates that have fixed-rate couponsare fixed for a specified period not to exceed five years, and, thereafter, typically convert into a one-year adjustablegenerally reset annually. At March 31, 2004, 89.1% of the Company’s MBS had interest rate coupon.rates scheduled to contractually reprice within three years or less. Contractual repricing does not consider the impact of prepayments.

     Interest income is accrued based on the outstanding principal balance of the investment securities and their contractual terms. Premiums and discounts associated with the purchase of the investment securities are amortized into interest income over the life of such securities using the effective yield method, adjusted for actual prepayment activity.

     During 2002, the Company liquidated the remainder of its portfolio of corporate debt and equity securities, with the final sale of such securities made during the quarter ended September 30, 2002. The Company’s corporate debt securities were comprised of non-investment grade, high yield bonds. The Company had taken an impairment charge of $3,474,000 on certain of its corporate debt securities during the first quarter of 2002. (See Note 3c.)MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

     (c) 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 estimated fair value.

     (d) Restricted Cash

Restricted cash represents cash held on deposit as collateral with certain repurchase agreement counterparties (i.e., lenders). Such amounts may be used to make principal and interest payments on the related repurchase agreements.

     (e) Credit Risk

The Company limits its exposure to credit losses on its investment portfolio by requiring that at least 50% of its investment portfolio consist of MBS that are issued or guaranteed as to principal and/or interest by an agency of the U.S. government, such as Ginnie Mae, or a federally chartered corporation, such as Fannie Mae orand Freddie Mac (collectively, “Agency MBS”). Pursuant to its operating policies, the remainder of the Company’s assets may be investments in:consist of: (i) multi-family apartment properties; (ii) investments in limited partnerships, real estate investment trusts or preferred stock of a real estate related corporations; or (iii) other fixed-income instruments. As of September 30, 2003, 91.5%March 31, 2004, 95.5% of the Company’s assets consisted of Agency MBS and related receivables, 3.7%2.4% were MBS rated “AAA” by Standard &and Poor’s Corporation, a nationally recognized rating agency, and 3.9%1.2% were of cash and cash equivalents; combined these assets comprised 99.2%99.1% of the Company’s total assets.

     Other-than-temporary losses on investment securities, whether designated as available-for-sale or held-to-maturity, as measured by the amount of decline in estimated fair value attributable to factors that are considered to be other-than-temporary, are charged against income resulting in an adjustment of the cost basis of such securities. The following are among, but not all of, the factors considered in determining whether and to what extent an other-than-temporary impairment exists: (i) the expected cash flow from the investment; (ii) whether there has been an other-than-temporary deterioration of the credit quality of the underlying mortgages, debtor, or the company in which equity interests are held; (iii) the credit protection available to the related mortgage pool for MBS; (iv) any other market information available, including analysts assessments and statements, public statements and filings made by the debtor, counterparty or other relevant party issuing or otherwise securing the particular security; (v) management’s internal analysis of the security considering all known relevant information at the time of assessment; and (vi) the magnitude and duration of historical decline in market prices.value when available. Because management’s assessments are based on factual information as well as subjective information available at the time of assessment, the determination as to whether an other-than-temporary decline exists and, if so, the amount considered impaired is also subjective and, therefore, constitutes material estimates, that are susceptible to a significant change. As of September 30, 2003At March 31, 2004 and December 31, 2002,2003 the Company had no remaining assets on which an impairment charge had been made.

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(f) Real Estate Investment
Investments

At September 30, 2003,March 31, 2004, the Company indirectly held a 100% ownership interest in twoa multi-family apartment properties,property known as The Greenhouse and a 99.9% interest in a multi-family apartment property known as Lealand Place. Prior to October 1, 2002, the Company held indirect interests in these two properties through its preferred stock investment in Retirement Centers Corporation, a Delaware corporation (“RCC”), and accounted for its investments in RCC and these two properties under the equity method of accounting. Subsequent to October 1, 2002, when the Company purchased all of the remaining outstanding securities of RCC, RCC became a wholly-owned subsidiary of the Company and, as such, was consolidated on a prospective basis. RCC is consolidated with its subsidiaries whichthat directly hold these two properties, bothis consolidated with the Company. In addition, at March 31, 2004, the Company held a 99% limited partner interest in a limited partnership, which owns a multi-family apartment property known as Cameron at Hickory Grove (“Cameron”). Through December 31, 2003, the Company accounted for the investment in Cameron under the equity method. Commencing on January 1, 2004, the Company changed its accounting for such investment from the equity method to consolidating such entity, on a prospective basis, in accordance with FASB Interpretation No. 46 “Consolidation of whichVariable Interest Entities” (“FIN 46”), as amended. Each of these three properties were acquired through tax deferred exchanges under Section 1031 of the Internal Revenue Code of 1986, as amended (the “Code”). (See Note 6a.6.)

     In addition, the Company holds a 99% limited partner interest in a limited partnership, which owns a multi-family apartment property known as Cameron at Hickory Grove, which is accounted for under the equity method.

     The properties, capital improvements and other assets held in connection with these investments are carried at cost, net of accumulated depreciation and amortization, not to exceed estimated fair value. Depreciation and amortization are computed using the straight linestraight-line method over the estimated useful life of the related asset. Maintenance, repairs and minor improvements are charged to expense in the period incurred, while capital improvements are capitalized and depreciated over their useful life.depreciated. The Company intends to hold its remaining real estate investments as long-term investments.

MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

     (g) Repurchase Agreement
Agreements

The Company finances the acquisition of its MBS at short-term borrowing rates through the use of repurchase agreements. Under these repurchase agreements, the Company sells securities to a lender and agrees to repurchase the same securities in the future for a price that is higher than the original sales price. The difference between the sale price that the Company receives and the repurchase price that the Company pays represents interest paid to the lender. Although structured as a sale and repurchase obligation, a repurchase agreement operates as a financing under which the Company effectively pledges its securities as collateral to secure a loan which is equal in value to a specified percentage of the estimated fair value of the pledged collateral. The Company retains beneficial ownership of the pledged collateral, including the right to payments of principal and interest.collateral. At the maturity of a repurchase agreement, the Company is required to repay the loan and concurrently receives back its pledged collateral from the lender or, upon mutualwith the consent with the lender, the Company may renew such agreement at the then prevailing financing rate. These repurchase agreements may require the Company to pledge additional assets to the lender in the event the estimated fair value of the existing pledged collateral declines. Through September 30, 2003,March 31, 2004, the Company did not have any margin calls on its repurchase agreements that it was not able to satisfy with either cash or additional pledged collateral.

     TheOriginal terms to maturity of the Company’s repurchase agreements generally range from one month to 36 months in duration;months; however, the Company is not precluded from entering into repurchase agreements with longer durations.maturities. Should a counterparty decide not to renew a repurchase agreement at maturity, the Company must either refinance elsewhere or be in a position to satisfy the obligation(s).obligation. If, during the term of a repurchase agreement, a lender should file for bankruptcy, the Company might experience difficulty recovering its pledged assets and may have an unsecured claim against the lender’s assets for the difference between the amount loaned to the Company and the estimated fair value of the collateral pledged to such lender. To reduce this risk, the Company enters into repurchase agreements only with financially sound institutions whose holding or parent company’s long-term debt rating is “A” or better as determined by at least one nationally recognized rating agency (collectively, the “Rating Agencies”), where applicable. TheIf this criterion is not met, the Company will not enter into repurchase agreements with a lender without the specific approval of the Company’s Board of Directors (the “Board”), if the minimum criterion is not met.. In the event an existing lender is downgraded below “A,” the Company will seek the approval of the Board before entering into additional repurchase agreements with that lender. The Company generally seeks to diversify its exposure by entering into repurchase agreements with at least four separate lenders with a maximum loan from any lender of no more than three times the Company’s stockholders’ equity. As of September 30, 2003,March 31, 2004, the Company had amounts outstanding under repurchase agreements with 11 separate lenders with a maximum net exposure (the difference between the amount loaned to the Company and the estimated fair value of the security pledged by the Company as collateral) to anya single lender of $44.8$73.0 million. (See Note 7.)

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(h) Earnings Perper Common Share (“EPS”)

Basic EPS is computed by dividing net income by the weighted average number of shares of Common Stockcommon stock outstanding during the period. Diluted EPS is computed by dividing net income by the weighted-average shares of common sharesstock and common equivalent shares outstanding during the period. For the diluted EPS calculation, common equivalent shares outstanding includeincludes the weighted average number of shares of Common Stockcommon stock outstanding adjusted for the dilutive effect of unexercised stock options using the treasury stock method. Under the treasury stock method, common equivalent shares are calculated assuming that all dilutive Common Stockcommon stock equivalents are exercised and the proceeds are used to buy back shares of the Company’s outstanding Common Stockcommon stock at the average market price during the reported period. No common share equivalents are included in the computation of any diluted per share amount for a period in which a net operating loss is reported. (See Note 10.)

     (i) Comprehensive Income

The Company’s consolidated statements of comprehensive income include all changes in the Company’s stockholders’ equity with the exception of additional investments by or dividends to stockholders. Such comprehensive income for the Company includes net income and the change in net unrealized holding gains gains/(losses) on investments and certain derivative instruments. (For accumulated comprehensive income, see(See Note 11.)

     (j) Federal Income Taxes

The Company has elected to be taxed as a real estate investment trust (a “REIT”)REIT under the provisions of the Code and the corresponding provisions of state law. The Company expects to operate in a manner that will enable it to continue to be taxed as a REIT. As such, no provision for current or deferred income taxes has been made in the accompanying consolidated financial statements.

MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

     (k) Derivative Financial Instruments – Interest Rate Cap Agreements
In

     The Company accounts for its interest rate cap agreements (“Cap Agreements” or “Caps”) in accordance with FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”), as amended by FAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities” (“FAS 138”), a derivative which iswhereby such instruments are designated as a hedge is recognized as an asset/liabilityhedges and measuredcarried at estimated fair value. In order for the Company’s interest rate cap agreements (“Cap Agreements” or “Caps”)Agreements to qualify for hedge accounting, upon entering into the Cap Agreement, the Company must anticipate that the hedge will be highly “effective,” as defined by FAS 133, in limiting the Company’s cost beyond the Cap threshold on its matching (on an aggregate basis) anticipated repurchase agreements during the active period of the Cap. As long as the hedge remains effective, changes in the estimated fair value of the Cap Agreements are included in other comprehensive income. Upon commencement of the Cap Agreement active period, the premium paid to enter into the Cap Agreement is amortized and reflected in interest expense. The periodic amortization of the premium expense is based on an estimated allocation of the premium, determined at inception of the hedge, for the monthly components on aan estimated fair value basis. Payments received in connection with the Cap Agreement, will beif any, are reported as a reduction to interest expense. If it is determined that a Cap Agreement is not effective, the premium would be reduced and a corresponding charge made to interest expense, for the ineffective portion of the Cap Agreement. The maximum cost related to the Company’s CapsCap Agreements is limited to the original purchase price.price paid to enter into the Cap Agreement. In order to limit credit risk associated with purchased Caps,Cap Agreements, the CompanyCompany’s policy is to only purchases Capspurchase Cap Agreements from financial institutions rated “A” or better by at least one of the Rating Agencies. Income generated by Caps, if any, would be presented as an off-set to interest expense onAgencies at the hedged liabilities.time of purchase.

     In order to continue to qualify for and to apply hedge accounting, CapsCap Agreements are monitored on a quarterly basis to determine whether they continue to be effective or, if prior to the commencement of the active period, whether it is expected that the Cap will continue to be effective. If during the term of the Cap Agreement, the Company determines that a Cap is not effective or that a Cap is not expected to be effective, the ineffective portion of the Cap will no longer qualify for hedge accounting and, accordingly, subsequent changes in its estimated fair value will be reflected in earnings.

     At September 30, 2003,March 31, 2004, the Company had 1116 Cap Agreements, which are derivative instruments as defined by FAS 133 and FAS 138, with an aggregate notional amount of $310.0$610.0 million, on which there were unrealized losses of $3.5 million. The Company utilizes Caps for the purpose of managingCap Agreements to manage interest rate risk and does not anticipate entering into derivative transactions for speculative or trading purposes. As of September 30, 2003, there were unrealized losses of $3.6 million on the Company’s Caps. (See Note 5.)

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     (l) Adoption of New Accounting Standards
Equity Based Compensation

On January 1, 2003, the Company adopted FASFASB Statement No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (“FAS 148”). FAS 148, amendsamended FAS No. 123, “Accounting for Stock-Based Compensation” (“FAS 123”), by providingand provided 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 amendsamended 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. The Company will record option expense for options granted subsequent to January 1, 2003, in accordance with FAS 123, as amended by FAS 148. The adoption of FAS 148 did not have ana significant impact on the Company as all outstanding options were fully vested and no new options were granted since the adoptionCompany’s results of FAS 148 through September 30, 2003. However,operations; however, the future effect of FAS 148 will be based on, among other things, the underlying terms of any future grants of stock-basedstock based compensation. (See Note 14.)

     (m) Adoption of New Accounting Pronouncements
Standards

In January 2003, the FASB issued Interpretation No.FIN 46, “Consolidation of Variable Interest Entities” (“which was revised in December 2003. FIN 46”), which46 requires consolidation by the primary beneficiary of all variable interest entities. FIN 46, as revised, became effective immediatelyin January 2003 for investments in all variable interest entities acquired after February 1, 2003 and for previously held investments beginning with the first interim period beginning after June 15,December 31, 2003. FIN 46 applies to certain of the Company’s equity investments in real estate in which it has a majority interest as a limited partner but has not historically consolidated because it does not have effective control under the terms of the respective partnership agreements. (See Note 6.) On October 8, 2003, the FASB deferred the effective dateThe implementation of FIN 46 such that the Company will be required to apply the provisions of FIN 46 beginning with the fourth quarter of 2003. Accordingly, the Company will consolidate such investments as required by FIN 46 effective beginning with the fourth calendar quarter of 2003. The application of FIN 46 willdid not have a material impacteffect on the Company’s consolidated financial statements. (See Note 6.)

     (n) Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

3. Related Parties

     (a) Property Management

America First Properties Management Company L.L.C. (the “Property Manager”), a wholly-ownedwholly owned subsidiary of America First Companies LLCL.L.C. (“AFC”), provides property management services for the multi-family apartment properties in which the Company holds investment interests. The Property Manager receives a management fee equal to a stated percentage of the gross receipts generated by these properties, which for 2003, ranged from 3.5% to 4.0% of gross receipts and, commencing on January 1, 2004, was 3% of gross receipts, increasing to a maximum of 4% of gross receipts upon attaining certain performance goals. The Company paid the Property Manager fees of approximately $31,000 and $98,000, respectively, for the quarters ended March 31, 2004 and 2003. The Property Manager also provided property management services to certain properties in which the Company previously held investment interests. Michael B. Yanney, the Company’s former Chairman of the Board, who retired onfrom the Board in March 6, 2003, has been the Chairman of AFC since 1984 and Mr. Yanney and George H. Krauss, one of the Company’s directors, beneficially own equity interests57% and 17%, respectively, of AFC.

(b) Advisory Services

During the fourth quarter of 2003, the Company formed and became the sole stockholder of MFA Spartan, Inc., a Delaware corporation (“Spartan Inc.”). Spartan Inc. then formed and, pursuant to an operating agreement dated November 6, 2003, became the sole member of MFA Spartan I, LLC, a Delaware limited liability company (“Spartan LLC”). On November 7, 2003, Spartan LLC entered into a sub-advisory agreement with America First Apartment Advisory Corporation (“AFAAC”), a Maryland corporation and the external advisor of America First Apartment Investors, Inc. (“AFAI”), pursuant to which Spartan LLC agreed, among other things, to provide sub-advisory services to AFAAC with respect to, and to assist AFAAC in AFC. The Property Manager receives a management fee equalconnection with, AFAI’s acquisition and disposition of MBS and the maintenance of AFAI’s MBS portfolio. During the quarter ended March 31, 2004, the Company earned fees of $24,000 related to a stated percentagethe sub-advisory services rendered by Spartan LLC to AFAAC. George H. Krauss, one of the gross revenues generated by these properties, ranging from 3.5% to 4% of gross receipts, which are considered market rates for such services. The Property Manager was paid fees of approximately $39,000 and $119,000 for the three and nine month periods ended September 30, 2003, respectively, and $103,000 and $316,000 for the three and nine months period ended September 30, 2002, respectively, for managing the properties in which the Company indirectly holds investment interests.

(b) Investment in RCC
From 1998 through September 30, 2002, the Company held all of the non-voting preferred stock, representing 95% of the ownership and economic interest, in RCC, an entity formed following the 1998 Merger, which indirectly holds interest in two multi-family apartment properties. Through September 30, 2002, Mr. William S. Gorin, the Company’s Executive Vice President, Chief Financial Officer and Treasurer, held all of the voting common stock of RCC, representing a 5% economic interest and 100% controlling interest in RCC.

     On October 1, 2002, the Company purchased 100% of the voting common stock held by Mr. Gorin for $260,000. The purchase price was based on the estimated value of the underlying properties, as determined by independent appraisers, net of the related mortgage indebtedness. As a result of the purchase of this voting common stock, RCC become a wholly-owned subsidiary of the Company. (See Note 6.)

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(c) Investments in Certain Corporate Debt Securities
Prior to the Company liquidating its corporate debt securities portfolio in 2002, the Company held the corporate debt securities of RCN Corporation (“RCN”), which were purchased between February 1999 and August 2000, and Level 3 Corporation (“Level 3”), which were purchased between August 1998 and August 2000. Mr. Yanney, who retired as Chairman and asdirectors, is a member of the Board on March 6, 2003, was on the board of directors of both RCNAFAI and Level 3 at the time the Company purchased and sold these securities. Onebeneficially owns 17% of AFC, which owns 100% of the Company’s Directors, W. David Scott, is the sonvoting stock of the Chairman of both Level 3 and RCN.AFAAC.

4. Mortgage BackedMortgage-Backed Securities

     As of September 30, 2003At March 31, 2004 and December 31, 2002,2003, all of the Company’s MBS were classified as available-for-sale and, as such, were carried at their estimated fair value as determined by obtaining several market quotes froman independent pricing source and investment banks that trade such securities. The following table presents the carrying value of the Company’s MBS as of September 30, 2003March 31, 2004 and December 31, 2002.2003.

     At September 30, 2003March 31, 2004 and December 31, 2002,2003, the Company’s portfolio of MBS consisted of pools of ARM-MBS with carrying values of approximately $4.04$5.690 billion and $3.47$4.366 billion respectively, and fixed-rate MBS with carrying values of approximately $7.7 million and $6.8$7.1 million, respectively.

     Agency MBS:Although not rated, Agency MBS carry an implied “AAA” rating. Agency MBS are issued or guaranteed as to principal and/or interest by an agency of the U.S. government, such as Ginnie Mae, or a federally chartered corporation, such as Fannie Mae or Freddie Mac. The payment of principal andand/or interest on Fannie Mae and Freddie Mac MBS Securities is guaranteed by those respective agencies and the payment of principal andand/or interest on Ginnie Mae MBS Securities is backed by the full faith and credit of the U.S. government.

     Non-Agency “AAA”: Non-Agency “AAA” MBS are privately issued certificates that are backed by pools of single-family and multi-family mortgage loans. Non-Agency “AAA” MBS are rated as such by one of the Rating

MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Agencies. “AAA” is the highest bond rating given by the Rating Agencies and indicates the relative security of the investment. These securities are not guaranteed by the U.S. government or any of its agencies or any federally chartered corporation.

     The following table presents the components of the carryingamortized cost, gross unrealized gains, gross unrealized losses and fair value of the Company’s MBS as of September 30, 2003March 31, 2004 and December 31, 2002:2003:

11

Table     The following table presents the gross unrealized losses and estimated fair value of Contentsthe Company’s MBS, aggregated by investment category and length of time that such individual securities have been in a continuous unrealized loss position, at March 31, 2004.