(PRD.L) Prodesse Investment Ltd Buy/Sell

and release of cash flow hedge
- - - 14,870 14,870

Cash flow hedge reserve - Unrealised loss taken to
equity (100) (100)
Realised gain on cash flow - - - - - - -
hedge 100 100
Transfer of net realised gains 3,17 - - - - 359 - -
to capital reserve (359) -
Total recognised income and -
expenses for the year - - -
28,201 359 50,121 14,870 93,551
Dividend paid 9 - - - - (30,054) - - - (30,054)
At 31 December 2009 17 310 30 91,560 141,513 (17,509) 2,258 40,017 (142) 258,037

Statement of Changes in Shareholders' EquityFor the year ended 31 December 2008
Note Share capital Capital redemption Share premium Distributable Accumulated profits Capital Reserve - Revaluation reserve Cash flow hedge Total
reserve reserve Realised gains on - Unrealised gain on reserve
available for sale available for sale
investments investments
US $'000 US $'000 US $'000 US $'000 US $'000 US $'000 US $'000 US $'000 US $'000
At 1 January 2008 282 30 71,680 141,513 7,220 1,600 16,411 (21,966) 216,770

Available for sale investments:

cash flow hedge
- - - 1,949 1,949
Transfer of net realised gains 3,17 - - - - 299 - -
to capital reserve (299) -
Cash flow hedge reserve - 15,17 - - - - - - -

Unrealised loss taken to
equity (1,770) (1,770)

Notes US $'000 US $'000

Current assets
Available for sale investments 13 1,600,489 1,709,479
Accrued income receivable 8,072 7,785
Receivable for principal paydowns 3,945 1,519
Receivable for securities sold 43,173 19,426
Prepaid expenses 211 139
Cash and cash equivalents 14 129 19,173
Total assets 1,656,019 1,757,521

Equity attributable to equity shareholders
Ordinary share capital 17 310 310
Capital redemption reserve 17 30 30
Share premium 17 91,560 91,560
Distributable reserve 17 141,513 141,513
Accumulated losses 17 (17,509) (15,656)

Capital reserve - Realised gain on available for
sale investments and interest rate swaps 17 2,258 1,899
Revaluation reserve 17 40,017 (10,104)
Cash flow hedge reserve 17 (142) (15,012)
Total equity 258,037 194,540
Current liabilities 14
Reverse repurchase agreements 16 1,363,000 1,515,351
Accrued interest expense 3,989 5,958
Accrued expenses payable 2,090 2,015
Provision for winding down costs 4 6,364 -
Fair value of interest rate swaps 15 22,539 39,657
Total liabilities 1,397,982 1,562,981
Total equity and liabilities 1,656,019 1,757,521
Net Assets US$258,037 US$194,540
Net Asset Value per Ordinary Share 18 US$8.33 US$6.28

The Balance sheet presents the financial positions of the Company as of 31 December 2009.

The financial statements on pages 18 to 44 were approved by the Board of Directors on 10 March 2010 and are signed on its behalf by:

John E Hallam Christopher N Fish
Director Director

Cash Flow StatementFor the year ended 31 December 2009

Notes US $'000 US $'000
Net cash inflow from operating activities 19 163,361 522,234

Cash flows from financing activities

Borrowings under reverse repurchase 16 11,925,630 17,833,564

agreements
Repayments under reverse repurchase 16 (12,077,981) (18,329,597)

agreements
Dividends paid to shareholders 9 (30,054) (26,984)
Issue of shares 17 - 19,908
Net cash outflow from financing activities (182,405) (503,109)
Net (decrease)/increase in cash and cash (19,044) 19,125

equivalents

Cash and cash equivalents at the beginning 19,173 48

of the year

Cash and cash equivalents at the end of the 129 19,173

year

All items in the cashflow statement are derived from discontinuing activities.

Notes to the financial statements

1. General Information

Prodesse Investment Limited is a limited liability Guernsey-incorporated closed-end investment company, the investments of which are managed by Fixed Income Discount Advisory Company ("the Investment Manager"). The Company's share capital structure consists solely of Ordinary Shares. The Company has a listing on the London Stock Exchange and a listing on the Channel Islands Stock Exchange. On 21 December 2009, an Extraordinary General Meeting was held at which resolutions were proposed (1) to authorise the Directors to commence a programme of realisation of the Company's assets and amend the investment policy of the Company accordingly, and (2) to amend Article 149(A) of the Articles of Incorporation of the Company to postpone the obligation to propose the scheduled continuation resolution from the 2010 annual general meeting to the 2015 annual general meeting. Both resolutions were passed by the shareholders of the Company.

2. Adoption of new and revised Standards

In the current financial year, the Company has adopted International Financial Reporting Standard 8 "Operating Segments" and International Accounting Standard 1 "Presentation of Financial Statements" (revised 2007).

IFRS 8 requires operating segments to be identified on the basis of internal reports about components of the Company that are regularly reviewed by the Directors to allocate resources to the segments and to assess their performance. In contrast, the predecessor Standard IAS 14 "Segmental Reporting" required the Company to identify two sets of segments (business and geographical), using a risks and rewards approach, with the Company's system of internal financial reporting to Directors serving only as the starting point for the identification of such segments. However, as the Company is engaged in a single segment of business and no such segmental reporting is undertaken, this has not resulted in any changes to the financial information provided.

IAS 1 (revised) requires the presentation of a statement of changes in equity as primary statement, separate from the income statement and statement of comprehensive income. As a result, a statement of comprehensive income has been included in the primary statements, showing changes in each component of equity for each period presented.

IFRS 7 (amendments) requires financial instruments to be disclosed with reference to an explicit three-level fair value hierarchy which groups fair value measurements based on their observability. This disclosure has been made in note 12(c).

The Directors believe that pronouncements which are in issue but not yet operative or adopted by the Company will not have a material impact on the financial statements of the Company.

3. Significant Accounting Policies

Basis of Accounting

The financial statements of the Company have been prepared in accordance with International Financial Reporting Standards ("IFRS") together with applicable legal and regulatory requirements of Guernsey Law and the Listing Rules of the UK Listing Authority and Channel Islands Stock Exchange.

The financial statements have been prepared on the historical cost basis as modified for the revaluation of certain financial instruments. The principal accounting policies are set out below. The preparation of financial statements in conformity with IFRS requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting year. Actual results could differ from those estimates.

These financial statements are presented in US Dollars because that is the currency of the primary economic environment in which the Company operates. The functional currency of the Company is also considered to be US Dollars.

Basis of Accounting (continued)

On 21 December 2009, an Extraordinary General Meeting was held and the shareholders passed the all resolutions proposed and recommended by the Board in the shareholder circular dated 23 November 2009 (see note 1 for details of the resolution). The Circular recommended that the fund begin the winding-down of the activities of the Company. At a future date, that will later be determined within the first quarter of 2010, there will be an EGM meeting with the intention to discuss the costs and specific subjects related to the wind down of the Company.

As a result of the passing of the resolution to commence a program of realisation of the Company's assets and the circulation of the directors' proposal to wind up the Company thereafter, the financial statements have been prepared on a basis other than of a going concern.

No asset impairments were required to be posted in respect to the passing of the vote by shareholders on 21 December 2009. The MBS investments have been transferred in the balance sheet from "Non current assets" to "Current assets."

Provision has also been made for any contractual commitments that have been onerous at the end of the reporting period. Such provisions relate to a provision for US$6.3m in respect of costs to terminate the structured repurchase agreement which is scheduled to mature on 28 February 2012.

The financial statements do not include any provision for the future costs of terminating the business of the Company except to the extent those such costs were committed at the end of the reporting period.

Investments

The Company invests in securities issued by the United States Government Sponsored Enterprises such as the Federal Home Loan Mortgage Corporation ("Freddie Mac"), Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Banks ("FHLB") as well as the Government National Mortgage Association ("Ginnie Mae"), a US Government Corporation.

On September 7, 2008 the Federal Housing Finance Agency (FHFA) was appointed as conservator of Freddie Mac and Fannie Mae. In addition, the US department of the Treasury agreed to provide up to $100 billion of capital to each company as needed to ensure they continue to provide liquidity to the housing and mortgage markets.

The payment of principal and interest on the debt of FHLB is backed by that agency, the debt and mortgage backed securities issued by Freddie Mac and Fannie Mae are backed by those respective agencies, which are operating under the conservatorship of FHFA, and the payment of principal and interest on the Ginnie Mae mortgage backed securities are backed by the full-faith-and-credit of the US Government. The Company classifies all its mortgage-backed securities as available for sale and these are reported at fair value. Expenses incidental to the acquisition of available for sale investments are included within the cost of that investment. As a result of the passing of the shareholder vote on 21 December 2009 to commence a programme of realisation of the Company's investments, the investments in MBSs have been transferred in the balance sheet from "non current assets" to "current assets."

Realised and Unrealised Gains and Losses on Investments and Impairments

As at 31 December 2009 and 31 December 2008, unrealised gains or losses arising on the revaluation of investments are included in equity. Unrealised losses on investment securities that are considered other than temporary, as measured by the amount of decline in fair value attributable to factors other than temporary, are recognised in the income statement and the cost basis of the mortgage-backed securities is adjusted.

Realised gains or losses arising on the sale of investments are initially recognised in the income statement and are subsequently transferred to a non-distributable capital reserve in accordance with the Memorandum and Articles of Association of the Company.

When-Issued / Delayed Securities

The Company may purchase or sell securities on a when-issued or delayed delivery basis, including "TBA" securities. TBA Securities are mortgaged-backed securities for which details about the underlying mortgages have not yet been announced. Securities traded on a when-issued basis are traded for delivery beyond the normal settlement date at a stated price and yield, and no income accrues to the purchaser prior to delivery.

Purchasing or selling securities on a when-issued or delayed delivery basis involves the risk that the market price at the time of delivery may be lower or higher than the agreed upon price, in which case an unrealised loss may be incurred.

Security Transactions and Investment Income Recognition

Security transactions are recorded on the trade date. Realised and unrealised gains and losses are calculated based on specific identified cost. Interest income is recorded as earned. Interest income and expense includes amortisation of market discount and premium as calculated using a hybrid methodology utilising the principles of effective interest method.

Other Receivables

Other receivables do not carry any interest and are short-term in nature and are accordingly stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts.

Cash and Cash Equivalents

Cash includes amounts held in interest bearing overnight accounts.

Financial Liabilities and Equity

Financial liabilities and equity are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities. Financial liabilities and equity are recorded at the proceeds received, net of issue costs.

Other Accruals and Payables

Other accruals and payables are not interest-bearing and are stated at their nominal value.

Reverse Repurchase Agreements

The Company enters into reverse repurchase agreements with qualified third party financial institutions to finance its investment in mortgage-backed securities. The agreements are secured by the value of the Company's mortgage-backed securities. A repurchase agreement involves the sale by the Company of securities that it holds with an agreement by the Company to repurchase the same securities at an agreed price and date. Such an agreement involves the risk that the value of the securities sold by the Company may decline in value below the price of the securities.

Interest on the principal value of reverse repurchase agreements issued and outstanding is based upon competitive market rates at the time of issuance. When the Company enters into a reverse repurchase agreement, it establishes and maintains a segregated account with the lender containing securities having a value not less than the repurchase price, including accrued interest, of the reverse repurchase agreement.

Repurchase agreements are treated as collateralised financing transactions and are carried at their contractual amounts, including accrued interest, as specified in the repurchase agreements. Accrued interest is recorded as a separate line item.

Securities sold subject to repurchase agreements are retained in the financial statements as available for sale securities and the counterparty liability is included in liabilities under repurchase agreements.

Derivative Financial Instruments and Hedge Accounting

The Company's activities expose it primarily to the financial risks of changes in interest rates. The Company uses interest rate swap contracts to hedge these exposures. The Company does not use derivative financial instruments for speculative purposes.

The use of financial derivatives is governed by the Company's policies approved by the board of directors, which provide written principles on the use of financial derivatives.

Changes in the fair value of derivative financial instruments that are designed and effective as hedges of future cash flows are recognised directly in equity and any ineffective portion is recognised immediately in the income statement. The amount in equity is released to income when the forecast transaction impacts profit or loss.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, or exercised, or no longer qualified for hedge accounting. At that time, any cumulative gain or loss on the hedging instrument recognised in equity for cash flow hedges is retained in equity until the forecasted transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to net profit or loss in the year.

The Company voluntarily discontinued hedge accounting in the fourth quarter of 2008 through a combination of de-designating previously defined hedge relationships and not designating new contracts as cash flow hedges. In respect of the de-designation of cash flow hedges, IAS 39 requires that any cumulative gain or loss on the hedging instrument recognised in equity for cash flow hedges is retained in equity until the forecasted transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to net profit or loss in the period. Changes in the fair value of the interest rate swaps subsequent to 30 September 2008 are reflected in the Company's income statement.

Taxes

The Company is exempt from Guernsey taxation under the Income Tax (Exempt Bodies) (Guernsey) Ordinance 1989 for which it pays an annual fee of £600.

Business and Geographical Segments

The Directors are of the opinion that the Company is engaged in a single segment of business of investing in debt securities, issued by companies operating and generating revenue in the United States, and therefore no segmental reporting is provided

4. Critical accounting judgementsand key sources of estimation uncertainty

In the process of applying the Company's accounting policies (described in note 3 above), the Company has determined that the following judgements and estimates have the most significant effect on the amounts recognised in the financial statements:

Income recognition As described in note 3 interest income is recorded as earned. Interest income and expense includes amortisation of market discount and premium as calculated using a hybrid methodology utilising the principles of effective interest.
Fair values of financial instruments Many of the Company's financial instruments are measured at fair value on the balance sheet and it is usually possible to determine fair values within a reasonable range of estimates.

For all the Company's investments there is an active market and quoted market prices are available. However certain financial instruments, for example over the counter derivatives, are fair valued using valuation techniques or via third party counterparties.

Impairment

The Company is required to evaluate the securities in its portfolio to determine if any of the securities are impaired. The Company's process for deciding whether a security is impaired incorporates an assessment of the following conditions and how the cash flow is affected:

· whether the purchase price is over par;
· whether the coupon is lower than the current cost of funds;
· whether the yield on the bond is lower than the current cost of funds; and
· the effect interest rate swaps on funding cost for the assets.

Prodesse has determined that the unrealised losses on its securities will be recovered on realisation of the assets.

Fair value and impairment estimates are made at a specific point in time based on market conditions and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgement.

Provisions for winding down costs

On 21 December 2009, an Extraordinary General Meeting was held and the shareholders passed all the resolutions proposed and recommended by the Board in the shareholder circular dated 23 November 2009. The Circular recommended that the fund begin the winding down of the activities of the Company. The table below reflects various known expenses relating to the winding down of the Company. The amounts shown below are estimates of the nature of the costs which are expected to be incurred. The numbers are subject to change as the wind down continues, in particular the costs to pay off the structured repo are likely to change in respect of changes in market interest rates.
Vendor US$'000 Description
Liquidation Agent 20 Liquidation Fees
Ogier Group L.P. 19 Legal
Dechert, LLP 32 Legal
Citi Group 6,293 Payoff structured repo
6,364

The best estimate of the costs to terminate the interest rate swaps included in the balance sheet as at 31 December 2009 as part of the wind up of the Company is US$22.5m, based on the market conditions as at 31 December 2009. We note that the actual termination costs of the interest rate swaps will vary depending on the market conditions as of the dates of termination and there will be other additional costs incurred in relation to the wind down. Notice has been given to terminate the contracts with the various service providers and advisors as detailed in note 8 by the expected date of completion of the wind down of assets or expected date of liquidation, as relevant.

5. Interest income

US $'000 US $'000

Interest income received on financial assets that are not at fair value through profit or loss:

US $'000 US $'000

Interest expense for financial liabilities that are not at fair value through profit or loss:

US $'000 US $'000

Management, Custodian and Administration fees
Investment management fee (note 8) 3,730 3,726
Administration fee (note 8) 498 507
Custodian fee (note 8) 277 285
4,505 4,518

Other operating expenses
Directors' fees 173 174
Insurance 326 317
Audit fee 255 256
Corporate broker fees 30 30
Public relations and website costs 250 250
Legal fee 63 63
Regulatory fee 50 49
Other expenses 122 120
1,269 1,259

Total operating expenses 5,774 5,777

The Company has no employees. The Directors are the only key management personnel of the Company. Their remuneration disclosed above is all in respect of short term employee benefits. The basic fee payable to each independent non-executive director is at a rate of £20,000 per annum, except for the Chairman who receives £25,000 per annum.

The above expenses do not include a one time expense of US$6.4 million for the provisional costs for the Company's wind down (see note 4).

8. Investment Management, Accounting and Administration and Custodian Fees

Fixed Income Discount Advisory Company ("FIDAC"), a Delaware corporation serves as the Investment Manager to the Company. Pursuant to the terms of the Investment Management Agreement, the Investment Manager is paid periodic fees, quarterly in arrears, at a rate equivalent to 0.2 per cent. per annum of the value of the gross assets of the Company.

Prior to 5 June 2007, The Bank of New York served as the Company's custodian pursuant to a Global Custody Agreement dated 5 April 2005. That custody agreement was replaced with effect from 5 June 2007 by (i) the Securities Clearing Agreement pursuant to which The Bank of New York will act as clearing agent and the Company's assets will be held in a clearing account for the benefit of the Company at The Bank of New York until sold or pledged as collateral to a financing counterparty, and (ii) an amendment to the Investment Management Agreement pursuant to which the Investment Manager will provide trade execution instructions over the Clearing Agent's computerised trading system.

The total fees for such services were decreased from one basis point per annum on the Company's gross assets plus the transaction based fees charged by The Bank of New York as custodian to 0.8 basis points per annum on the Company's gross assets charged by FIDAC plus the transaction based fees charged by the Clearing Agent.

BNP Paribas Fund Services (Guernsey) Limited serves as the Company's administrator. The Administrator is entitled to a fee calculated on the value of the gross assets of the Company of 0.04 per cent, per annum on the first US$400 million of value of gross assets, 0.0225 per cent per annum on the next US$1.6 billion of value of the gross assets and 0.01 per cent per annum on any value of the gross assets in excess of US$2 billion payable monthly in arrears (subject to a minimum annual fee of US$250,000).

9. Dividends

US $'000 US $'000

Amounts recognized as distributions to equity shareholders in the year: Fourth interim dividend for the period ended 31 December
2008 of 5,887 5,915

19 cents per share (2007: 21 cents per share)

First interim dividend for the year ended 31 December 2009
of 23 cents per share (2008: 22 cents per share) 7,126 6,817

Second interim dividend for the year ended 31 December 2009
of 8,365 7,126

27 cents per share (2008: 23 cents per share)

Third interim dividend for the year ended 31 December 2009
of 28 cents per share (2008: 23 cents per share) 8,676 7,126
30,054 26,984

A fourth interim dividend of US$0.04 cents per Ordinary share, in respect of the final quarter of 2009 was declared on 09 February 2010 and is payable on 10 March 2010. In accordance with The Companies (Guernsey) Law, 2008, the Board of Directors have approved certificates stating that in their opinion the Company had, immediately after the payment of each dividend, satisfied the solvency test.

10. Earnings Per Share

Basic earnings per share is calculated by dividing net profit available to Ordinary Shareholders by the weighted average number of Ordinary Shares outstanding during the year.

Number of shares Number of shares
Weighted average number of Ordinary Shares 30,982,050 30,204,819

outstanding

11. Financial Risk Management

The Company's activities expose it to a variety of financial risks. The main risks to which the Company is exposed through the period of wind-down are market risk, credit, interest rate and liquidity risk. The Company has limited exposure to foreign exchange risk.

Capital risk management

The capital structure of the Company consists of cash and cash equivalents and equity attributable to equity holders, comprising issued share capital, capital redemption reserve, share premium account, distributable reserve and retained earnings as disclosed in note 17. The Company does not have any externally imposed capital requirements. At 31 December 2009 the Company had capital of US$218 million (2008: US$220 million).

Following the EGM, the Company's investment policy is to conduct an orderly realisation of its assets.

The investment objective of Prodesse was to generate distributable income yield on net assets (in US dollar terms) of 3.5 per cent. to 5.0 per cent. greater than the yield on the ten-year US Treasury on an annualized basis while preserving net asset value (in US Dollar Terms) over the long term.

The Company aimed to deliver its objective by investing available cash and using leverage (in the form of repurchase agreements) whilst maintaining sufficient liquidity to meet on-going expenses and dividend payments.

The Company's investment policy was to provide net income for distribution from the spread between the interest income earned from a portfolio of residential mortgage-backed securities and the cost of repurchase agreements entered into to finance the acquisition of such residential mortgage-backed securities, while seeking to limit exposure to interest rate risk and credit risk. Prodesse invested primarily in a portfolio of US residential mortgage-backed securities created or issued by the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) or the Government National Mortgage Association (Ginnie Mae) with a targeted (actual or implied) credit rating of approximately 'AAA', and to a lesser extent, other 'AAA'-rated US residential mortgage-backed securities, US government securities and debentures issued by a US Agency.

Prodesse used leverage to enhance the returns to shareholders and for this purpose borrowed amounts equal to between five and ten times its net assets. Prodesse used primarily short-term borrowings for the purpose of making investments and to pledge its assets to secure such borrowings. To effect such borrowings in a cost-efficient manner, Prodesse had entered into master repurchase agreements (an agreement effecting a current sale of a security with a concurrent agreement by the seller to repurchase the security at a later date at a higher fixed price reflecting the cost of funds for the term of the agreement) with various major financial institutions.

The purchases and sales were consistent with the Investment Manager's Barbell Strategy. The FIDAC MBS Barbell Strategysm seeks to utilize the principal and interest cash flows of US Agency floating, adjustable and fixed-rate MBS to mitigate the primary risk of the company, interest rate risk. By maintaining an approximate one-third adjustable and floating-rate securities and two-thirds fixed-rate security balance the portfolio is able to manage through a range of US interest rate environments.

To manage the risks, FIDAC, the Company's investment manager, used several risk management models, including proprietary models and models that it believed were widely used by the investment management community. FIDAC had set capital investment guidelines that were incorporated into its portfolio management system. The Company's investment portfolio was monitored daily by FIDAC to ensure that it was operating within the guidelines. Reviews were conducted at least yearly to review the risk reward profile of the market and the capital investment guidelines. Key measures of risk included but are not limited to, duration, convexity, prepayments, coupon reset caps, cash-flow and leverage.

The Company's investment portfolio was also analysed to determine its performance in a wide range of interest rate scenarios. In addition, price volatility levels were monitored daily and trading positions may have been adjusted in response to changing risk measures and price volatility levels.

The Board had also adopted certain investment restrictions to manage the risk profile. These include:

· Save in respect of cash deposits awaiting investment, no more than 20 per cent. of the gross assets of the Company (before deducting borrowed money) could be lent to or invested in any one company or group at the time the investment or loan is made;

· Not more than 10 per cent., in aggregate, of the value of the gross assets of the Company (before deducting borrowed money) could be invested in other investment companies (including investment trusts) listed on the London Stock Exchange, except where the investment companies themselves have stated investment policies to invest no more than 15 per cent. of their gross assets in other investment companies (including investment trusts) listed on the London Stock Exchange;

· Not more than 15 per cent., in aggregate, of the value of the gross assets of the Company (before deducting borrowed money) would have been invested in other investment companies (including investment trusts) listed on the London Stock Exchange; and

· Prodesse would not take legal or management control over investments in its portfolio.

11(a) Market Risk

The Company is exposed to the market risk on the underlying investments during the wind-down period as changes in overall interest rate levels will affect their value.

Price Sensitivity

The following table quantifies the potential changes in the portfolio value should interest rates go down 25, 50, and go up 150 basis points from those rates in existence at 31 December 2008 and 31 December 2009, assuming the yield curves of the rate shocks will be parallel to each other and the current yield curve.

The rationale for the selection of the interest rate movement was based on the federal funds target rate. Since the federal funds target interest rate has not changed since 31 December 2008 and is in a range of 0%-0.25%, the analysis of interest rate changes was prepared using an initial and an additional change down in interest rates of 0.25% and then a change 1.5% up from the base rate.

The base interest rate scenario assumes interest rates at December 31, 2009 and various estimates regarding prepayment and all activities are made at each level of rate shock. Actual results could differ significantly from these estimates.

Change in the fair value of investments and swaps Change in the fair value of investments and
US$ swaps
US$
Change in interest rates Change in interest
rates
-0.25% 7.0 million -0.25% 8.6 million
-0.50% 12.7 million -0.50% 16.1 million
+1.50% (68.4 million) +1.50% (74.1 million)

The sensitivity illustrates the benefit of lower interest rates on the fair value of fixed and adjustable rate assets over and above the negative impact on the fair value of the interest rate swaps in respect of smaller movements in interest rates and the impact of increased prepayments speeds on the value the assets and swaps as further falls in interest rates occur. The contrary will also occur if the interest rates increase.

The analysis of price sensitive risk is based on management's experience, estimates, models and assumptions. These analyses rely on models which utilize estimates of fair value and interest rate sensitivity. Actual economic conditions or implementation of investment decisions by our management may produce results that differ significantly from the estimates and assumptions used in our models and the projected results shown in the above tables and in this report

11(b) Foreign Exchange Risk

All or substantially all of the Company's assets and liabilities are denominated in US dollars. The Company accounts for its assets and determines the value of its Ordinary Shares and of dividends thereon in US dollars. For investors resident outside the United States or whose functional currency is not the US dollar, fluctuations in the value of the US dollar may affect the value of their investment. The Directors do not hedge foreign exchange risk. The Directors are of the opinion that the Company is not exposed to significant foreign exchange risk.

11(c) Credit Risk

The Company is subject to credit risk with respect to its investments in mortgage backed securities, hedging derivatives and other receivables, bank balances and cash and cash equivalents which represent the Company's maximum exposure to credit risk in relation to financial assets.

At the reporting date the Company's financial assets exposed to credit risk amounted to the following:

US $'000 US $'000
Available for sale investments 1,600,489 1,709,479
Accrued income receivable 8,072 7,785
Receivable for principal paydowns 3,945 1,519
Receivable for securities sold 43,173 19,426
Prepaid expenses 211 139
Cash and cash equivalents 129 19,173
Total assets 1,656,019 1,757,521

Credit risk on investments is mitigated as the Company invests primarily in a portfolio of US residential mortgage-backed securities created or issued by Fannie Mae, Freddie Mac or Ginnie Mae with a targeted (actual or implied) credit rating of approximately 'AAA', and, to a lesser extent, other 'AAA'-rated US residential mortgage-backed securities, US government securities and debentures issued by a US Agency.

The following table details the investment grade of the Company's investment portfolio.

Rating 2009 2008

Implied "AAA" 100% 100%

To date, all of the mortgage-backed securities that the Company has acquired have been agency mortgage-backed securities which, although not rated, carry an implied "AAA" rating.

In addition, credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with high credit ratings assigned by international credit rating agencies as follows:

The Company's cash balances are held with Bank of New York ("BONY" or "the Bank"), who also act as custodian for the Company's investments. Bankruptcy or insolvency of BONY may cause the Company's rights with respect to the cash and securities held by the Bank to be delayed or limited.

The Company monitors this risk by monitoring the credit rating of the bank and if the credit quality of the bank deteriorates consideration may be given to transferring the assets to another bank.

The Company has also entered into a number of interest rate swap arrangements (as disclosed in note 15). The Company is exposed to credit risk from counterparties used in these transactions. This risk is again mitigated by the Company only engaging with credit-worthy counterparties. The counterparties for the swaps, being UBS AG London, J.P. Morgan, Merrill Lynch Capital Services, Inc., have credit ratings of Aa2 to Aa3.

Credit risk on transactions arising with brokers relates to transactions awaiting settlement. Risk relating to unsettled transactions is considered small due to the short settlement period involved and the high credit ratings quality of the brokers used. The Company monitors the credit rating of the broker used to further mitigate this risk.

Other than outlined above, there were no significant concentrations of credit risk to counterparties at 31 December 2009 or 31 December 2008. No individual investment exceeded the investment restrictions adopted by the Directors (as described above) as at 31 December 2009 or 31 December 2008.

11(d) Interest Rate Risk

The Company's profitability is also subject to risks associated with changes in interest rates (in addition to the fair value impact of changes as a result of changes in interest rates illustrated in note 11(a) above). An increase in the interest payments on the Company's financing relative to the interest earned on its mortgage-backed securities may adversely affect profitability.

The Company enters into reverse repurchase agreements in order to increase the amount of capital available for investment. The use of leverage has the potential to magnify the gains or the loss on the Company's investments.

The Company invests in, or sells short, various interest rate derivative instruments and futures contracts to reduce the impact of changes in interest rates. Should interest rates move unexpectedly, the Company may not achieve the anticipated benefits of the hedging instruments and may realise a loss. Further, the use of such derivative instruments involves the risk of imperfect correlation in movements in the price of the instruments, interest rates and the underlying hedged assets.

The primary interest rate exposures relate to its available for sale investments, repurchase agreements, cash balances and interest rate swaps. The Company hedges some of its exposure to floating interest rate payments in respect of liabilities for reverse repurchase agreements as described in note 16. The estimated lives of the mortgage-backed securities at 31 December 2009 in the table below are based upon data provided through subscription-based financial information services, assuming constant principal prepayment rates to the reset date of each security which is the basis of accounting for the investments as at 31 December 2009.. The prepayment model considers current yield, forward yield, steepness of the yield curve, current mortgage rates, mortgage rate of the outstanding loans, loan age, margin and volatility.

Actual maturities of Mortgage-Backed Securities are generally shorter than stated contractual maturities. Actual maturities of the Company's Mortgage-Backed Securities are affected by the contractual lives of the underlying mortgages, periodic payments of principal, and prepayments of principal.

The Company has entered into repurchase agreements which provide the counterparty with the right to call the balance prior to maturity date. At December 31, 2009 and 2008 the principal balance of the structured repurchase agreements was $300 million and $300 million, respectively.

The principal value of the rate sensitive assets is reflected in the following tables.

The interest rate profile of the Company as at 31 December 2009 was as follows:
More than 1 Year to
Within 3 Months 4-12 Months 3 Years 3 Years and Over Total

At 31 December 2009
US $'000 US $'000 US $'000 US $'000 US $'000

Rate Sensitive Assets:
Investment Securities 211,240 88,264 726,949 402,542 1,428,995

(Principal)

Rate Sensitive Liabilities:
Repurchase Agreements, with
effect of interest rate 885,500 94,700 290,300 92,500 1,363,000

swaps

Interest rate sensitivity gap (674,260) (6,436) 436,649 310,042 65,995
Cumulative rate sensitivity (674,260) (680,696) (244,047) 65,995

gap

Cumulative interest rate sensitivity gap as a
percentage of total (47%) (48%) (17%) 5%

rate-sensitive assets

More than 1 Year to
Within 3 Months 4-12 Months 3 Years 3 Years and Over Total

At 31 December 2008
US $'000 US $'000 US $'000 US $'000 US $'000

Rate Sensitive Assets:
Investment Securities 554,225 72,730 124,923 952,146 1,704,024

(Principal)

Rate Sensitive Liabilities:
Repurchase Agreements, with
effect of interest rate 666,051 65,750 555,500 228,050 1,515,351

swaps

Interest rate sensitivity gap (111,826) 6,980 (430,577) 724,096 188,673
Cumulative rate sensitivity (111,826) (104,846) (535,423) 188,673

gap

Cumulative interest rate sensitivity gap as a
percentage of total (7%) (6%) (31%) 11%

rate-sensitive assets

The weighted average yields on mortgage-backed securities by life expectancy are as follows:

2009 Total Within one year One to five years Over five years
Market Value US$'000 Weighted Average Market Value US$'000 Weighted Average Market Value US$'000 Weighted Average Market Value US$'000 Weighted Average
Yield Yield Yield Yield
Adjustable rate 618,993 2.97 - - 349,291 2.43 269,702 3.67
Fixed rate 981,496 5.14 61,258 3.68 767,028 5.23 153,210 5.30
Total 1,600,489 4.30 61,258 3.68 1,116,319 4.35 422,912 4.26
2008 Total Within one year One to five years Over five years
Market Value US$'000 Weighted Average Market Value US$'000 Weighted Average Market Value US$'000 Weighted Average Market Value US$'000 Weighted Average
Yield Yield Yield Yield
Adjustable rate 862,458 3.04 275,676 1.58 220,075 2.17 366,707 4.65
Fixed rate 847,021 5.96 62,679 5.74 754,545 5.98 29,797 5.86
Total 1,709,479 4.49 338,355 2.35 974,620 5.12 396,504 4.74

Interest rate sensitivity

The following table quantifies the potential changes in net income should interest rates go down 25, 50, and go up 150 basis points from those rates in existence at 31 December 2008 and 31 December 2009, assuming the yield curves of the rate shocks will be parallel to each other and the current yield curve. The base interest rate scenario assumes interest rates at December 31, 2009 and various estimates regarding prepayment and all activities are made at each level of rate shock. Actual results could differ significantly from these estimates.

The rationale for the selection of the interest rate movement was based on the federal funds target rate. Since the federal funds target interest rate has not changed since 31 December 2008 and is in a range of 0%-0.25%, the analysis of interest rate changes was prepared using an initial and an additional change down in interest rates of 0.25% and then a 1.5% change up from the base rate.

Estimated change in net income due to changes in Estimated change in net income due to changes in interest rates
interest rates US$
US$
Change in interest rates Change in interest rates
-0.25% (684,000) -0.25% (1.0 million)
-0.50% (1.0 million) -0.50% (2.0 million)
+1.50% 4.1 million +1.50% 553,000

The analysis of net income sensitive risk is based on management's experience, estimates, models and assumptions. These analyses rely on models which utilize estimates of fair value and interest rate sensitivity. Actual economic conditions or implementation of investment decisions by our management may produce results that differ significantly from the estimates and assumptions used in our models and the projected results shown in the above tables and in this report.

11(e) Liquidity Risk

Liquidity risk arises as a result of the Company not having sufficient cash to meet its liabilities as they fall due. A maturity analysis of the Company's contractual undiscounted liabilities is included in the table below:

Maturity 2009

US $'000 US $'000
Reverse repurchase agreements See table below 1,363,000 1,515,351
Accrued interest expense < 1 month 3,989 5,958
Accrued expenses payable < 1 month 2,090 2,015
Provisions per wind down costs 6,364 -
1,375,443 1,523,324

The above table includes cost of provisions per wind down. They do not have a contractual maturity date but are expected to be settled by 30 April 2010.

The following table presents cash needs to meet liquidity requirements on repurchase agreements, without the effect of interest rate swaps and assuming that structured repurchase agreements are called on their first available call date.

More than 1 Year to
Within 3 Months 4-12 Months 3 Years 3 Years and Over
US$'000 US$'000 US$'000 US$'000 Total
US$'000

At 31 December 2009
Repurchase Agreements 1,363,000 - - - 1,363,000

At 31 December 2008
Repurchase Agreements 1,515,351 - - - 1,515,351

The Company's liquidity risk is managed through the Company's ability to execute its business strategy and depends to a significant degree on its ability to raise capital via reverse repurchase agreements and also through interest and paydowns received on its investment portfolio. The Company maintains a low cash balance in order to meet short term requirements.

The Company's primary source of funds for liquidity consists of net cash provided by operating activities. Its reverse repurchase agreements are secured directly by its investment portfolio.

The Company expects that its cash on hand and cash flow provided through operations will satisfy its liquidity needs for the foreseeable future. In addition it is expected that further reverse repurchase agreements will be available should this be required during the period of realisation of the Company. The investments are also traded in an active market at the present time and hence could be realised to provide additional liquidity to the Company.

A substantial portion of the Company's borrowings are short-term or variable-rate borrowings. The borrowings are implemented primarily through repurchase agreements. The Company enters into financing transactions only with institutions that the Directors believe are sound credit risks and follow other internal policies designed to limit the Company's credit and other exposure to financing institutions.

The current situation in the sub-prime mortgage sector, and the current weakness in the broader mortgage market, could adversely affect one or more of the Company's lenders and could cause one or more of the Company's lenders to be unwilling or unable to provide it with additional financing. This could potentially increase the Company's financing costs and reduce liquidity. If one or more major market participants fails, it could negatively impact the marketability of all fixed income securities, including government mortgage securities, and this could negatively impact the value of the securities in the Company's portfolio, thus reducing its net book value. Furthermore, if many of the Company's lenders are unwilling or unable to provide it with additional financing, the Company could be forced to sell its Investment Securities at an inopportune time when prices are depressed. Even with the current situation in the sub-prime mortgage sector, the Company does not anticipate having difficulty converting its assets to cash or extending financing term, due to the fact that its investment securities have an actual or implied "AAA" rating and principal payment is guaranteed.

12. Financial instruments

12(a) Categories of financial instruments

US $'000 US $'000

Assets Designated as available for sale:

US $'000 US $'000

Liabilities
Other financial liabilities measured at amortised cost 12,443 7,973
Reverse Repurchase Agreements at amortised cost 1,363,000 1,515,351
Fair value of interest rate swaps 22,539 39,657
1,397,982 1,562,981

Receivables presented above represent, interest and principal paydowns as detailed in the balance sheet.

Financial liabilities measured at amortised cost presented above represent balances due to brokers, payables under repurchase agreements, accounts payable and accrued expenses and the market value of interest rate swaps as detailed in the balance sheet.

12(b) Fair value information

Many of the Company's financial instruments are carried at fair value on the balance sheet. The fair value can generally be reliably determined within a reasonable range of estimates. For certain other financial instruments, including amounts due to brokers, other receivables and payables, the carrying amounts approximate fair value due to the short term nature of these financial instruments.

The carrying amounts of all the Company's financial assets and liabilities at the balance sheet date approximated their fair values. The fair value of repurchase agreements may be greater than the book cost given that lenders may be unwilling to provide financing at these rates given current economic conditions (see note 11(e) above). However it is not expected that this difference would be material.

At 31 December 2009, the carrying amounts of investments (for which there is an active market) whose fair values were determined by the investment advisor and are compared to an outside pricing source amounted to US$1,600,488,515 (2008: US$1,709,479,025).

At 31 December 2009, the fair values of the swaps entered into were estimated at US$22,538,986 loss (2008: US$39,656,907 loss).

12(c) Fair Value Measurements

The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into levels 1 to 3 based on the degree to which the fair value is observable:

· Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities

· Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability with directly (as prices) or indirectly (derived from prices)

· Level 3 fair value measurements are those derived from valuation techniques that include inputs for the assets or liability that are not based on observable market data (unobservable inputs)

Level 2 Total Level 2 Total
US $'000 US $'000 US $'000 US $'000
Investment in mortgage backed 1,600,489 1,600,489 1,709,479 1,709,479

securities

Derivative financial liabilities 22,539 22,539 39,657 39,657

13. Available for Sale Investments

As disclosed in note 3 the investments in mortgage back securities were transferred in the balance sheet from "non- current assets" to "current assets."

US $'000 US $'000
Cost at 1 January 1,719,583 2,263,635
Purchases of investments 611,884 738,887
Proceeds from sale of investments (232,162) (1,029,158)
Realised gain on sale of investments 259 7,074
Principal paydowns (533,800) (259,304)
Net amortisation of premiums (5,292) (1,551)
Amortised cost at 31 December 1,560,472 1,719,583
Unrealised gain on available for sale investments 40,017 (10,104)
Market value at 31 December 1,600,489 1,709,479
Gross Unrealised Gross Unrealised Estimated Fair Value
At 31 December 2009 Amortised Cost Gain Loss
US $'000 US $'000 US $'000 US $'000
Adjustable rate 468,254 10,201 (152) 478,303
Floating rate 143,907 - (3,217) 140,690
Fixed rate 948,311 33,245 (60) 981,496
Total 1,560,472 43,446 (3,429) 1,600,489
Gross Unrealised Gross Unrealised Estimated Fair Value
At 31 December 2008 Amortised Cost Gain Loss
US $'000 US $'000 US $'000 US $'000
Adjustable rate 417,503 1,699 (1,606) 417,596
Floating Rate 466,385 - (21,524) 444,861
Fixed rate 835,695 11,540 (213) 847,022
Total 1,719,583 13,239 (23,343) 1,709,479

As at 31 December 2009, all of the assets in the Company's portfolio were Fannie Mae and Freddie Mac mortgage-backed securities, which carry an implied "AAA" rating.

Fixed-rate mortgage-backed securities 61% 49%

Adjustable-rate mortgage-backed securities 30% 24%
Floating-rate mortgage-backed securities 9% 27%

As at 31 December 2009, investments totalling US$1.4 billion (2008: US$1.5 billion) were pledged as security in respect of reverse repurchase agreements (see note 16).

Mortgage-backed securities are created when mortgages and their attendant streams of interest and principal payments are pooled to serve as collateral for the issuance of securities to investors. Interests in mortgage-backed securities differ from other forms of traditional debt securities, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. Instead, mortgage-backed securities typically provide irregular cash flows consisting of both interest and principal.

An investment consideration of any mortgage-backed security is the structure of the payment of the cash flow streams from the underlying mortgages to the holders of the mortgage-backed securities. The cash flows can be simply passed from the mortgage holder to the investor or they can be structured in a number of different ways. The market values of the various structures will vary in different interest rate or prepayment environments, with the more derivative or complex structures (e.g., interest-only or principal-only securities) being more sensitive to movements in interest rates or rates of prepayment.

Beyond the basic security of the mortgages and properties that underlie mortgage-backed securities, a critical attribute of mortgage-backed securities issued by the US Agencies is the credit enhancement that the US Agencies provide. The holder of mortgage-backed securities issued or guaranteed by the US Agencies is guaranteed the timely payment of principal and interest. Ginnie Mae is the principal governmental (i.e., backed by the full credit of the US Government) guarantor of mortgage-backed securities. On September 6, 2008, the Federal Housing Finance Agency (FHFA) was appointed as conservator of Freddie Mac and Fannie Mae. In addition, the US Department of the Treasury agreed to provide up to $100 billion of capital to each company as needed to ensure they continue to provide liquidity to the housing and mortgage markets.

Adjustable-rate and floating-rate mortgage-backed securities in which the Company may invest include pass-through mortgage-backed securities issued by the US Agencies backed by adjustable-rate mortgages and Floaters. The interest rates on adjustable-rate mortgage-backed securities are reset at periodic intervals to an increment over some predetermined reference interest rate. There are two main categories of reference rates: (i) those based on US Treasury securities and (ii) those derived from a calculated measure such as a cost of funds index or a moving average of mortgage rates. Commonly utilised reference rates include the one-year Treasury Bill rate or one-month US dollar LIBOR. Some reference rates, such as the one-year Treasury Bill rate or LIBOR, closely mirror changes in market interest rate levels. Others tend to lag changes in market rate levels and tend to be somewhat less volatile.

Adjustable-rate mortgages frequently have upper and lower limits on the interest rates to which a residential borrower may be subject (i) in any reset or adjustment interval and (ii) over the life of the loan. These upper and lower limits are commonly known as ''caps'' and ''floors'' respectively.

14. Current Assets and Current Liabilities

Cash and cash equivalents comprise bank balances held by the Company. The carrying amount of these assets approximates their fair value. Other payables principally comprise amounts outstanding on purchases of investments awaiting settlement and ongoing costs.

15. Hedging Instruments

The Company uses interest rate swaps to manage its exposure to interest rate movements. When the Company enters into an interest rate swap, it agrees to pay a fixed rate of interest and to receive a variable interest rate, generally based on the London Interbank Offered Rate ("LIBOR"). The Company's swaps were designated as cash flow hedges up until 1 October 2008 against the benchmark interest rate risk associated with the Company's borrowings. From 1 October 2008 the swaps are no longer designated as cash flow hedges.

The amortisation taken into income is the Present Value of the cash flows for each swap calculated monthly. The amortisation adjustment is applied quarterly and taken into income and reduces the Cash flow hedge reserve - de-designated balance in the equity section.

As a result of the shareholder vote passed on 21 December 2009 the interest rate swaps with a total carrying value of U.S $5.3 million (loss) were released from equity to the income statement for the year ended 31 December 2009, as the instruments will no longer be held to maturity. This amount is included within the US$14,870,000 amortisation on designation and release of cash flow hedge in the income statement.

At 31 December 2009, the Company had interest swap agreements of US$534 million notional amount (2008: US$563 million) in which the Company will pay a weighted average rate of 4.73% (2008: 4.96%) and receive a weighted average rate of 0.23% (2008: 1.08%).

The fair value of the swaps entered into at 31 December 2009 is estimated at US$22,538,936 loss (2008: US$39,656,907 loss). The unrealised gain on the swaps for the year was US$17,118,000 (2008: US$22,696,000 unrealised loss).

The realised gain on the cash flow hedge reserve for the year was US$100,000 (2008: US$6,775,000 realised loss).

16. Reverse Repurchase Agreements

At 31 December 2009 the aggregate value of securities pledged by the Company under reverse repurchase agreements exceeds the liability under such agreements by approximately US$68.5 million (2008: US$81.3 million) (approximately 5.03% of such liability). The interest rates on the open reverse repurchase agreements at 31 December 2009 range from 0.06% to 4.57% (2008: from 0.15% to 4.57%) and have maturity dates ranging from 1 day to 105 days (2008: 2 days to 1,154 days).

The current situation in the sub-prime mortgage sector, and the current weakness in the broader mortgage market, could adversely affect one or more of the Company's lenders during the period until the repurchase agreements are paid off in early 2010 and could cause one or more of the Company's lenders to be unwilling or unable to provide it with additional financing. This could potentially increase the Company's financing costs and reduce liquidity as disclosed in note 11(e).

A provision for US$6.3 million has been made as at 31 December 2009 in respect of costs to pay off a structured repo with a contractual maturity of 2012, see note 4 for further details.

17. Issued Capital and Reserves

Ordinary Share Capital

US $'000 US $'000

Authorised
60,000,000 Ordinary Shares of US$0.01 each 600 600

Issued
30,982,050 (2008: 30,982,050) Ordinary Shares of US$0.01 310 310

each

The share capital of the Company comprises one class of Ordinary shares which carry no right to fixed income.

Repurchase of shares

The Company has not purchased shares for cancellation in the current year to 31 December 2009.

Authority to buyback shares

The Company currently has authority to undertake a share purchase of up to 14.99% of the share capital of the Company and the Board of Directors has approved the use of on-market purchases of Ordinary Shares for cancellation at appropriate prices which will enhance net asset value.

Capital Redemption Reserve

US $'000 US $'000
Balance at 1 January and 31 December 30 30

Share Premium

US $'000 US $'000
Balance at 1 January 91,560 71,680
Premium arising on issue of equity shares - 20,497
Expenses incurred on issue of equity shares - (617)
Balance at 31 December 91,560 91,560

Distributable Reserve

US $'000 US $'000
Balance at 1 January and 31 December 141,513 141,513

The Distributable Reserve was set up following the cancellation of the share premium account following the Initial Public Offering. A transfer has been made from the Distributable Reserve to the Capital Reserve - Realised Gain/(Loss) on Available for Sale Investments to make good the realised loss on investments.

Accumulated Profits

US $'000 US $'000
Balance at 1 January (15,656) 7,220
Net profit for the year 28,560 4,407

Realised gains transferred to non-distributable capital
reserve (see below) (359) (299)
Dividends paid (30,054) (26,984)
Balance at 31 December (17,509) (15,656)

Capital Reserve - Realised Gains on Available for Sale Investments

US $'000 US $'000
Balance at 1 January 1,899 1,600

Net gains on sale of available for sale investments and impairment of available for sale investments transferred
from accumulated profits 259 7,074
Gains/(losses) on termination of cash flow hedges 100 (6,775)
Balance at 31 December 2,258 1,899

Capital Reserve - Realised Gains on Available for Sale Investments (continued)

Realised gains or losses arising on the sale of investments are initially recognised in the income statement as required under International Financial Reporting Standards but are transferred to a non-distributable capital reserve in accordance with the Memorandum and Articles of Association of the Company.

Revaluation Reserve - Unrealised Gain on Available for Sale Investments

US $'000 US $'000
Balance at 1 January (10,104) 16,411
Unrealised gains/(losses) on revaluation taken to equity 49,862 (19,441)
Transferred to income statement on sale of investments 259 (7,074)
Balance at 31 December 40,017 (10,104)

Cash Flow Hedge Reserve

US $'000 US $'000
Balance at 1 January (15,012) (21,966)
Decrease in fair value of hedging instruments taken to (100) (1,770)

equity
Transferred to income statement on termination of cash 100 6,775

flow hedges
Amortisation of de-designated cash flow hedge 14,870 1,949
Balance at 31 December (142) (15,012)

18. Net Asset Value

The net asset value per Ordinary Share is based on net assets at the year end and on 30,982,050 (2008:30,982,050,) Ordinary Shares, being the number of Ordinary Shares in issue at the year end.

At 31 December 2009, the reported net asset value per Ordinary Share (before excluding the dividend declared for the quarter ended 31 December 2009) is US$8.33 (2008: US$6.28).

At 31 December 2009, the Company had a net asset value per Ordinary Share of US$8.29 (2008: US$6.09), after including the effect of the dividend declared for the quarter of 31 December 2009 of US$1,239,282 (2008: US$5,886,590).

19. Cash Flows from Operating Activities

US $'000 US $'000
Net profit for the year 28,560 4,407
Net amortisation of premiums on available for sale 5,292 1,551

investments
Amortisation of de-designation of cash flow hedge 14,870 1,949
Unrealised (gain)/loss on interest rate swaps (17,118) 22,696
Realised gain on available for sale investments (259) (7,074)
Realised loss on termination of interest rate swaps (100) 6,775
2,685 25,897
Purchases of investments (611,884) (770,769)
Proceeds from sale of investments 208,515 1,009,732
Termination of interest rate swap - (6,775)
(403,369) 232,188
Principal paydowns 531,374 260,624
(Increase)/decrease in receivables (359) 2,694
Increase/(decrease) in payables 4,470 (3,576)
4,111 (882)
Net cash inflow from operating activities 163,361 522,234

20. Notes to the Cash Flow Statement

Purchases and sale of investments are considered to be operating activities of the Company, given its purpose, rather than investing activities. The cash flows arising from these activities are shown in Note 19 above. Cash and cash equivalents (which are presented as a single class on the face of the balance sheet) comprise cash at bank.

21. Related Party Transactions

The relationship between the Company and FIDAC is disclosed in Note 8. The amounts paid to FIDAC during the year are disclosed in Note 7. The amounts outstanding at the year end were:

US$'000 US$'000
FIDAC investment management fee 823 870

Mr R Kazel is Managing Director of FIDAC and as such he has waived his right to remuneration as a Director of the Company.

22. Post Balance Sheet Events

Due to the current wind down, as of 10 March 2010 the current repo balance has decreased to US$456 million, and the current swap notional amount has decreased to US$22.5 million. From 1 January 2010 to 10 March 2010, the Company has sold mortgage-backed securities with a current face of US$899 million, of which US$770 million have settled as of 10 March 2010. Refer to the Chairman's Statement on page 5 and the disclosure within the Basis of Accounting note on pages 24 and 25 for further details of the wind down of the Company.

Investment Policy and Investment Restrictions

Investment Policy

On 21 December 2009, an Extraordinary General Meeting ("EGM") was held at which resolutions were proposed to authorise the Directors to commence a programme of realisation of the Company's assets and amend the investment policy of the Company accordingly.

Investment Restrictions

The Directors will ensure that the following investment restrictions are observed:

In accordance with the requirements of the UK Listing Authority, any material changes in the principal investment policies and restrictions (as set out above) of the Company will only be made with the approval of Shareholders by ordinary resolution.

Glossary

Collateralized Mortgage Obligations (CMOs)-The CMO is a multi-class bond backed by a pool of mortgage pass-through securities or mortgage loans.

Credit Risk-The risk that the underlying borrower on the mortgage defaults on his mortgage payment either in part or in whole, which would result in a loss on the investment.

Currency Risk-The risk that a company's operations or an investment's value could be affected by changes in one currency's value relative to another. Global business' operations, in particular, are exposed to currency risk.

GNMA (Government National Mortgage Association)-Ginnie Mae is a government-owned corporation within the Department of Housing and Urban Development. Ginnie Mae guarantees the timely payment of principal and interest on all of its pass-through securities, and Ginnie Mae's guarantee is backed by the full faith and credit of the U.S. government. This guarantees prompt payment of monthly interest, whether or not mortgage payments are collected and full repayment of principal even if the mortgages in the pool default.

Fed Funds-Funds in excess of the reserve requirements that banks deposit in Federal Reserve Banks. Member banks may lend reserves to one another.

Federal Housing Finance Agency (FHFA) - FHFA is the independent regulator of the FHLB, Freddie Mac and Fannie Mae.

FHLB (Federal Home Loan Bank) - The FHLB System is a government-sponsored enterprise (GSE) chartered by US Congress. Its purpose is to support residential mortgage lending and community investment at the local level. This is accomplished by providing primary mortgage liquidity (direct loans) to member financial institutions.

FHLMC (Federal Home Loan Mortgage Corporation)-Freddie Mac is chartered by Congress, but owned by stockholders. Freddie Mac guarantees timely payment of both principal and interest on its Gold PCs. Some older series of Freddie Mac PCs guarantee timely payment of interest and eventual payment of principal. On 6 September 2008, FHFA placed Freddie Mac into conservatorship.

Fixed-Rate MBS-The coupon on these MBS is fixed for the life of the security.

Floating-Rate or Adjustable-Rate MBS-The coupon on these MBS adjusts to changes in an index, generally a short-term interest rate benchmark such as Libor (London Inter Bank Offered Rate) or the CMT (Constant Maturity Treasury), at a predetermined spread to that index. (e.g.; if LIBOR equals 6% and the spread equals 1% then the resulting coupon equals 7 %.)

FNMA (Federal National Mortgage Association)-Fannie Mae is chartered by Congress, but owned by stockholders. Fannie Mae guarantees timely payment of both principal and interest on its mortgage securities whether or not the payments have been collected from the borrower. On 6 September 2008, FHFA placed Fannie Mae into conservatorship..

FOMC (Federal Open Market Committee)-The FOMC is a committee within the Federal Reserve System that makes short-term monetary policy for the Fed.

LIBOR-The London Interbank Offered Rate Index (LIBOR) is an average of the interest rates that major international banks charge each other to borrow US dollars in the London money market. Like the US treasury the CD indexes, LIBOR tends to move and adjust quite rapidly to changes in interest rates.

Mortgage-backed securities (MBS)-an ownership interest in mortgage loans made by financial institutions (savings & loans, commercial banks, or mortgage companies) to finance a borrower's purchase of a home or other real estate. Investors may purchase mortgage securities either when they are issued or afterward in the secondary market from a dealer. Residential mortgage-backed securities are backed by pools of residential real estate mortgage loans.

Repurchase Market-A market in which an institutional investor finances their securities purchases. The investor sells (pledges) their securities to a broker-dealer for a loan, with the agreement that the investor will buy them back on a predetermined date at a specified price. The difference between the principal received and the amount paid to the broker-dealer represents the interest on the loan. The term of each transaction can be as short as one day or as long as five years. The interest rate is highly correlated to the Fed Funds rate.

A full copy of the Annual Report and Accounts for the year to 31st December 2009, can be viewed or downloaded from the Company's website: www.prodesse.co.uk

For further information:

BNP Paribas Fund Service (Guernsey) Limited 01481 750850

Jean McMillan/Sara Bourne

This information is provided by RNS The company news service from the London Stock Exchange

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