----

| Virginia                                                                      | 52-1549373                                     |
|-------------------------------------------------------------------------------|------------------------------------------------|
| (State      or other jurisdiction of incorporation or organization)           | (I.R.S.      Employer Identification No.)      |
|                                                                          |                                           |
| 4551      Cox Road, Suite 300, Glen Allen, Virginia                           | 23060-6740                                     |
| (Address      of principal executive offices)                                 | (Zip      Code)                                |
|                                                                          |
| Registrant’s      telephone number, including area code (804) 217-5800  |
|                                                                          |
| Securities      registered pursuant to Section 12(b) of the Act:              |
| Title of each      class                                                      | Name of each exchange      on which registered |
| Common      Stock, $.01 par value                                             | New      York Stock Exchange                   |
| Series      D 9.50% Cumulative Convertible Preferred Stock, $.01 par    value | New      York Stock Exchange                   |
|                                                                          |
| Securities      registered pursuant to Section 12(g) of theAct:               |

----

|           |          |                                                                                                                         | Page      Number |
|----------------|---------------|------------------------------------------------------------------------------------------------------------------------------|------------------|
| PART      I.   |          |                                                                                                                         |             |
|           | Item      1.  | Business                                                                                                                     | 1                |
|           | Item      1A. | Risk      Factors                                                                                                            | 5                |
|           | Item      1B. | Unresolved      Staff Comments                                                                                               | 10               |
|           | Item      2.  | Properties                                                                                                                   | 10               |
|           | Item      3.  | Legal      Proceedings                                                                                                       | 10               |
|           | Item      4.  | Submission      of Matters to a Vote of Security Holders                                                                     | 11               |
|           |          |                                                                                                                         |             |
| PART      II.  |          |                                                                                                                         |             |
|           | Item      5.  | Market      for Registrant’s Common Equity, Related Stockholder Matters and Issuer      Purchases of Equity Securities | 12               |
|           | Item      6.  | Selected      Financial Data                                                                                                 | 14               |
|           | Item      7.  | Management’s      Discussion and Analysis of Financial Condition and Results of      Operation                         | 14               |
|           | Item      7A. | Quantitative      and Qualitative Disclosures about Market Risk                                                              | 38               |
|           | Item      8.  | Financial      Statements and Supplementary Data                                                                             | 39               |
|           | Item      9.  | Changes      in and Disagreements with Accountants on Accounting and Financial      Disclosure                               | 39               |
|           | Item      9A. | Controls      and Procedures                                                                                                 | 39               |
|           | Item      9B. | Other      Information                                                                                                       | 40               |
|           |          |                                                                                                                         |             |
| PART      III. | Item      10. | Directors,      Executive Officers and Corporate Governance                                                                  | 40               |
|           | Item      11. | Executive      Compensation                                                                                                  | 40               |
|           | Item      12. | Security      Ownership of Certain Beneficial Owners and Management and Related      Stockholder Matters                     | 41               |
|           | Item      13. | Certain      Relationships and Related Transactions, and Director      Independence                                          | 41               |
|           | Item      14. | Principal      Accountant Fees and Services                                                                                  | 41               |
|           |          |                                                                                                                         |             |
| PART      IV.  | Item      15. | Exhibits,      Financial Statement Schedules                                                                                 | 42               |
|           |          |                                                                                                                         |             |
| SIGNATURES     |          | 44                                                                                                                           |
|           |          |                                                                                                                         |

----

----

----

----

----

|   | · | Prepayment      risk may increase as we will likely be purchasing these securities at      prices exceeding their par value.  In such instance our earnings      and book value may be negatively impacted if prepayments on these      securities exceed our expectations. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Interest      rate risk will increase as result of, among other things, the purchase of      Hybrid Agency RMBS, which have interest rates that are fixed for an      initial period and will be financed principally with repurchase agreements      that are not expected to have fixed rates of interest.  In      addition, Hybrid Agency RMBS typically have contractually limited periodic      or lifetime caps on their interest rates whereas repurchase agreement      financing will not. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | · | Operational      risk will increase as we begin to deploy our capital and as we become more      concentrated in Agency RMBS. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------|

|   | · | Liquidity,      or margin-call risk, will increase as a result of our reliance on      financing for the purchase of Agency RMBS.  In periods of high      volatility in the marketplace, such as was experienced in 2007, our access      to financing may be substantially reduced, potentially requiring us to      sell assets in unfavorable markets to repay financings and impacting our      ability to add investments at a positive net interest      spread.  In addition, if the value of the collateral should fall      below the required level, the repurchase agreement lender could initiate a      margin call, which would require that we either pledge additional      collateral acceptable to the lender or repay a portion of the debt in      order to meet the margin requirement.  If we are unable to meet      a margin call, we could be forced to quickly sell the assets      collateralizing the financing, potentially resulting in a lower sales      price than could otherwise be obtained if the assets were sold in a more      orderly fashion. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | • | available      interest rate hedging may not correspond directly with the interest rate      risk for which protection issought; |
|--------|---------|----------------------------------------------------------------------------------------------------------------------------------|

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

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

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

|   | • | the      value of derivatives used for hedging may be adjusted from time to time in      accordance with accounting rules to reflect changes in fair      value.  Downward adjustments, or “mark-to-market losses,” would      reduce our shareholders’ equity. |
|--------|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | ·If we make      frequent asset sales from our REIT entities to persons deemed customers,      we could be viewed as a “dealer,” and thus subject to 100% prohibited      transaction taxes or other entity level taxes on income from such      transactions.                                                                                                                  |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | ·Compliance      with the REIT income and asset rules may limit the type or extent of      hedging that we can undertake.                                                                                                                                                                                                                                                                   |
|   | ·Our ability to      own non-real estate related assets and earn non-real estate related income      is limited.  Our ability to own equity interests in other      entities is limited.  If we fail to comply with these limits, we      may be forced to liquidate attractive assets on short notice on      unfavorable terms in order to maintain our REIT status.  |
|   | ·Our ability to      invest in taxable subsidiaries is limited under the REIT      rules.  Maintaining compliance with this limitation could      require us to constrain the growth of our taxable REIT affiliates in the      future.                                                                                                                                           |
|   | ·Meeting      minimum REIT dividend distribution requirements could reduce our      liquidity.  Earning non-cash REIT taxable income could      necessitate our selling assets, incurring debt, or raising new equity in      order to fund dividend distributions.                                                                                                               |
|   | ·Stock      ownership tests may limit our ability to raise significant amounts of      equity capital from one source.                                                                                                                                                                                                                                                                           |

----

----

| Name      (Age)                | Current      Title                                           | Offices      Held                                                                                                                                                                   |
|--------------------------------|--------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Thomas      B. Akin (56)       | Chairman      of the Board and Chief Executive Officer  | Chief      Executive Officer since February 2008; Chairman of the Board since      2003.                                                                                            |
| Stephen      J. Benedetti (45) | Executive      Vice President and Chief Operating Officer    | Executive      Vice President and Chief Operating Officer since November 2005; Executive      Vice President and Chief Financial Officer from September 2001 to November      2005. |

----

| ITEM      5. | MARKET      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER      PURCHASES OF EQUITY SECURITIES |
|--------------|------------------------------------------------------------------------------------------------------------------------------|

|                |   | High   |   |   | Low    |   |   | Dividends      Declared |   |
|---------------------|--------|--------|--------|--------|--------|--------|--------|-------------------------|--------|
| 2007:               |   |   |   |   |   |   |   |                    |   |
| First      quarter  |   | $      | 7.99   |   |   | $      | 7.00   |                    |   | $ | – |   |
| Second      quarter |   | $      | 8.50   |   |   | $      | 7.75   |                    |   | $ | – |   |
| Third      quarter  |   | $      | 8.35   |   |   | $      | 7.62   |                    |   | $ | – |   |
| Fourth      quarter |   | $      | 8.92   |   |   | $      | 7.74   |                    |   | $ | – |   |
|                |   |   |   |   |   |   |   |                    |   |   |   |   |
| 2006:               |   |   |   |   |   |   |   |                    |   |   |   |   |
| First      quarter  |   | $      | 6.98   |   |   | $      | 6.44   |                    |   | $ | – |   |
| Second      quarter |   | $      | 6.99   |   |   | $      | 6.35   |                    |   | $ | – |   |
| Third      quarter  |   | $      | 7.49   |   |   | $      | 6.60   |                    |   | $ | – |   |
| Fourth      quarter |   | $      | 7.20   |   |   | $      | 6.70   |                    |   | $ | – |   |

----

|                                   |   | Cumulative      Total Stockholder Returns as of December 31, |   |
|----------------------------------------|--------|--------------------------------------------------------------|--------|
| Index                                  |   | 2002                                                         |   |   | 2003 |   |   | 2004 |   |   | 2005 |   |   | 2006 |   |   | 2007 |   |
| Dynex      Capital, Inc.               |   | $                                                            | 100.00 |   |   | $ | 126.03 |   |   | $ | 161.57 |   |   | $ | 142.57 |   |   | $ | 146.49 |   |   | $ | 183.27 |   |
| S&P      500 (1)                   |   | $                                                            | 100.00 |   |   | $ | 128.36 |   |   | $ | 142.15 |   |   | $ | 149.01 |   |   | $ | 172.27 |   |   | $ | 181.71 |   |
| Bloomberg      Mortgage REIT Index (1) |   | $                                                            | 100.00 |   |   | $ | 131.92 |   |   | $ | 167.18 |   |   | $ | 140.47 |   |   | $ | 167.60 |   |   | $ | 92.92 |   |

|  (1) | Cumulative      total return assumes reinvestment of dividends.  The source of      this information is Bloomberg and Standard & Poor’s.  The      factual material is obtained from sources believed to be      reliable. |
|-----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| Years      ended December 31,                                              |   | 2007   |    |   | 2006   |   |    | 2005   |   |   | 2004    |   |   | 2003   |    |
|----------------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|---------|--------|--------|--------|---------|--------|--------|--------|---------|
| (amounts      in thousands except share and per share data)                |   |   |    |   |   |   |    |   |   |   |    |   |   |   |    |
| Net      interest income                                                   |   | $      | 10,683  |   |   | $      | 11,087  |   |   | $      | 11,889  |   |   | $      | 23,281  |   |   | $ | 38,971 |   |
| Net      interest income after recapture of (provision for) loan    losses |   |   | 11,964  |   |   |   | 11,102  |   |   |   | 6,109   |   |   |   | 4,818   |   |   |   | 1,889 |   |
| Impairment      charges                                                    |   |   | – |   |   |   | (60     | )      |   |   | (2,474  | )      |   |   | (14,756 | ) |   |   | (16,355 | ) |
| Equity      in income (loss) of joint venture                              |   |   | 709     |   |   |   | (852    | )      |   |   | – |   |   |   | – |   |   |   | – |   |
| Loss      on capitalization of joint venture                               |   |   | – |   |   |   | (1,194  | )      |   |   | – |   |   |   | – |   |   |   | – |   |
| Gain      (loss) on sale of investments                                    |   |   | 755     |   |   |   | (183    | )      |   |   | 9,609   |   |   |   | 14,490  |   |   |   | 1,555 |   |
| Other      (expense) income                                                |   |   | (533    | )      |   |   | 617     |   |   |   | 2,022   |   |   |   | (179    | ) |   |   | 436 |   |
| General      and administrative expenses                                   |   |   | (3,996  | )      |   |   | (4,521  | )      |   |   | (5,681  | )      |   |   | (7,748  | ) |   |   | (8,632 | ) |
| Net      income (loss)                                                     |   | $      | 8,899   |   |   | $      | 4,909   |   |   | $      | 9,585   |   |   | $      | (3,375  | ) |   | $ | (21,107 | ) |
| Net      income (loss) to common shareholders                              |   | $      | 4,889   |   |   | $      | 865     |   |   | $      | 4,238   |   |   | $      | (5,194  | ) |   | $ | (14,260 | ) |
| Net      income (loss) per common share:                                   |   |   |    |   |   |   |    |   |   |   |    |   |   |   |    |   |   |   |   |   |
| Basic      & diluted                                                   |   | $      | 0.40    |   |   | $      | 0.07    |   |   | $      | 0.35    |   |   | $      | (0.46   | ) |   | $ | (1.31 | ) |
| Dividends      declared per share:                                         |   |   |    |   |   |   |    |   |   |   |    |   |   |   |    |   |   |   |   |   |
| Common                                                                     |   | $      | – |   |   | $      | – |   |   | $      | – |   |   | $      | – |   |   | $ | – |   |
| Series A and B      Preferred                                              |   | $      | – |   |   | $      | – |   |   | $      | – |   |   | $      | – |   |   | $ | 0.8775 |   |
| Series C    Preferred                                                      |   | $      | – |   |   | $      | – |   |   | $      | – |   |   | $      | – |   |   | $ | 1.0950 |   |
| Series D    Preferred                                                      |   | $      | 0.9500  |   |   | $      | 0.9500  |   |   | $      | 0.9500  |   |   | $      | 0.6993  |   |   | $ | – |   |

| December      31,                           |   | 2007   |       |   | 2006   |   |       | 2005   |   |   | 2004       |   |   | 2003   |       |
|---------------------------------------------|--------|--------|------------|--------|--------|--------|------------|--------|--------|--------|------------|--------|--------|--------|------------|
| Investments                                 |   | $      | 333,735    |   |   | $      | 403,566    |   |   | $      | 756,409    |   |   | $      | 1,343,448  |   |   | $ | 1,853,675 |   |
| Total      assets                           |   |   | 374,758    |   |   |   | 466,557    |   |   |   | 805,976    |   |   |   | 1,400,934  |   |   |   | 1,865,235 |   |
| Securitization      financing               |   |   | 204,385    |   |   |   | 211,564    |   |   |   | 516,578    |   |   |   | 1,177,280  |   |   |   | 1,679,830 |   |
| Repurchase      agreements and senior notes |   |   | 4,612      |   |   |   | 95,978     |   |   |   | 133,315    |   |   |   | 70,468     |   |   |   | 33,933 |   |
| Total      liabilities                      |   |   | 232,822    |   |   |   | 330,019    |   |   |   | 656,642    |   |   |   | 1,252,168  |   |   |   | 1,715,389 |   |
| Shareholders’      equity             |   |   | 141,936    |   |   |   | 136,538    |   |   |   | 149,334    |   |   |   | 148,766    |   |   |   | 149,846 |   |
| Common      shares outstanding              |   |   | 12,136,262 |   |   |   | 12,131,262 |   |   |   | 12,163,391 |   |   |   | 12,162,391 |   |   |   | 10,873,903 |   |
| Book      value per common share            |   | $      | 8.22       |   |   | $      | 7.78       |   |   | $      | 7.65       |   |   | $      | 7.60       |   |   | $ | 7.55 |   |

| ITEM      7. | MANAGEMENT’S      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF      OPERATION |
|--------------|------------------------------------------------------------------------------------------------------|

----

|                                 |   | December      31, |    |
|--------------------------------------|--------|-------------------|---------|
| (amounts      in thousands)          |   | 2007              |    |   | 2006 |   |
| Investments:                         |   |              |    |   |   |   |
| Securitized mortgage loans,      net |   | $                 | 278,463 |   |   | $ | 346,304 |   |
| Investment in joint      venture     |   |              | 19,267  |   |   |   | 37,388 |   |
| Securities                           |   |              | 29,231  |   |   |   | 13,143 |   |
|                                 |   |              |    |   |   |   |   |   |
| Securitization      financing        |   |              | 204,385 |   |   |   | 211,564 |   |
| Repurchase      agreements           |   |              | 4,612   |   |   |   | 95,978 |   |
| Shareholders’      equity      |   |              | 141,936 |   |   |   | 136,538 |   |

| (amounts      in thousands)           |   | 2007   |    |   | 2006   |   |
|---------------------------------------|--------|--------|---------|--------|--------|--------|
| Securitized      mortgage loans, net: |   |   |    |   |   |   |
| Commercial                            |   | $      | 190,570 |   |   | $      | 228,466 |   |
| Single-family                         |   |   | 87,893  |   |   |   | 117,838 |   |
|                                  |   |   | 278,463 |   |   |   | 346,304 |   |

----

| (amounts      in thousands)    |   | 2007   |   |   | 2006   |   |
|--------------------------------|--------|--------|--------|--------|--------|--------|
| Securities:                    |   |   |   |   |   |   |
| Non-agency RMBS                |   | $      | 7,726  |   |   | $      | 10,196 |   |
| Agency RMBS                    |   |   | 7,456  |   |   |   | 1,663 |   |
| Equity securities              |   |   | 9,701  |   |   |   | 1,284 |   |
| Corporate debt      securities |   |   | 4,348  |   |   |   | – |   |
|                           |   | $      | 29,231 |   |   | $      | 13,143 |   |

----

| (amounts      in thousands)                            |   | 2007   |    |   | 2006   |   |
|--------------------------------------------------------|--------|--------|---------|--------|--------|--------|
| Securitization      financing bonds:                   |   |   |    |   |   |   |
| Fixed, secured by commercial      mortgage loans       |   | $      | 170,623 |   |   | $      | 211,564 |   |
| Variable, secured by single-family      mortgage loans |   |   | 33,762  |   |   |   | – |   |
|                                                   |   | $      | 204,385 |   |   | $      | 211,564 |   |

----

|                                       |   | December      31, 2007    |    |
|--------------------------------------------|--------|---------------------------|---------|
| (amounts      in thousands)                |   | Amortized      cost basis |    |   | Financing (4) |   |   | Net      Investment |   |   | Fair      value of Net Investment |   |
| Securitized      mortgage loans: (1)  |   |                      |    |   |   |   |   |   |   |   |   |   |
| Single-family      mortgage loans          |   | $                         | 88,024  |   |   | $ | 38,374 |   |   | $ | 49,650 |   |   | $ | 45,761 |   |
| Commercial      mortgage loans             |   |                      | 193,160 |   |   |   | 170,623 |   |   |   | 22,537 |   |   |   | 19,542 |   |
| Allowance      for loan losses             |   |                      | (2,721  | ) |   |   | – |   |   |   | (2,721 | ) |   |   | – |   |
|                                       |   |                      | 278,463 |   |   |   | 208,997 |   |   |   | 69,466 |   |   |   | 65,303 |   |
| Securities:      (2)                       |   |                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment      grade RMBS                 |   |                      | 14,810  |   |   |   | – |   |   |   | 14,810 |   |   |   | 14,843 |   |
| Non-investment      grade RMBS             |   |                      | 284     |   |   |   | – |   |   |   | 284 |   |   |   | 339 |   |
| Equity      and other                      |   |                      | 12,426  |   |   |   | – |   |   |   | 12,426 |   |   |   | 14,049 |   |
|                                       |   |                      | 27,520  |   |   |   | – |   |   |   | 27,520 |   |   |   | 29,231 |   |
|                                       |   |                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment      in joint venture(3)        |   |                      | 19,267  |   |   |   | – |   |   |   | 19,267 |   |   |   | 18,847 |   |
| Obligation      under payment agreement(1) |   |                      | – |   |   |   | 16,796 |   |   |   | (16,796 | ) |   |   | (15,473 | ) |
| Other      loans and investments(2)        |   |                      | 6,774   |   |   |   | – |   |   |   | 6,774 |   |   |   | 7,407 |   |
| Net      unrealized gain(2)                |   |                      | 1,711   |   |   |   | – |   |   |   | 1,711 |   |   |   | – |   |
|                                       |   |                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                      |   | $                         | 333,735 |   |   | $ | 225,793 |   |   | $ | 107,942 |   |   | $ | 105,315 |   |
|                                       |   |                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |

|   | (1) | Fair      values for securitized mortgage loans and the obligation under payment      agreement are based on discounted cash flows using assumptions set forth      in the table below, inclusive of amounts invested in redeemed      securitization financing bonds. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | Fair      values are based on dealer quotes, if available, and closing prices from a      national exchange where applicable.  Approximately $22 million      of fair value of securities were based on available dealer quotes or      closing prices from a national exchange.   Where dealer      quotes are not available, fair values are calculated as the net present      value of expected future cash flows, discounted at a weighted average      discount rate of 7.1% for investment grade securities and 36.1% for      non-investment grade securities. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3) | Fair      value for investment in joint venture represents our share of the fair      value of the  joint venture’s assets valued using methodologies      and assumptions consistent with Note 1above. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (4) | Financing      includes securitization financing issued to third parties and repurchase      agreements. |
|--------|-----|----------------------------------------------------------------------------------------------------------|

----

|                              | Fair      Value Assumptions             |               |
|-----------------------------------|-----------------------------------------|--------------------|
| Loan      type                    | Weighted-average      prepayment speeds | Losses             | Weighted-averagediscount      rate(6) | Projected      cash flow termination date | (amounts      in thousands)2007      Cash Flows (1) |
|                              |                                    |               |   |   |   |
| Single-family      mortgage loans | 20%      CPR                            | 0.2%      annually | 20% | Anticipated      final maturity 2024 | $      2,757 |
|                              |                                    |               |   |   |   |
| Commercial      mortgage loans(2) | (3)                                     | 0.8%      annually | (4) | (5) | $     2,590 |

| (1) | Represents      the excess of the cash flows received on the collateral pledged over the      cash flow required to service the related securitization      financing.  These      cash flows exclude the net principal and interest received on the senior      single family bond we owned at December 31,  2007. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Includes      loans pledged to two different securitization  trusts. |
|-----|----------------------------------------------------------------------|

| (3) | Assumed      constant prepayment rate (CPR) speeds generally are governed by underlying      pool characteristics, prepayment lock-out provisions, and yield      maintenance provisions.  Loans currently delinquent in excess of      30 days are assumed to be liquidated in six months at a loss amount that      is calculated for each loan based on its specific  facts. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | Weighed-average      discount rates for the two securitization trusts were 16.0% and 14.4%,      respectively. |
|-----|----------------------------------------------------------------------------------------------------------------|

| (5) | Cash      flow termination dates are modeled based on the repayment dates of the      loans or optional redemption dates of the underlying securitization      financing bonds. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (6) | Represents      management’s estimate of the market discount rate that would be used by a      third party in valuing these or similarassets. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                   |   | December      31, |    |
|--------------------------------------------------------|--------|-------------------|---------|
| (amounts      in thousands)                            |   | 2007              |    |   | 2006 |   |
| Investments:                                           |   |              |    |   |   |   |
| AAA      rated and Agency RMBS fixed income securities |   | $                 | 53,849  |   |   | $ | 20,876 |   |
| AA      and A rated RMBS                               |   |              | 449     |   |   |   | 2,777 |   |
| Unrated      and non-investment grade                  |   |              | 21,399  |   |   |   | 8,924 |   |
| Securitization      over-collateralization             |   |              | 12,978  |   |   |   | 9,760 |   |
| Investment      in joint venture                       |   |              | 19,267  |   |   |   | 37,388 |   |
|                                                   |   | $                 | 107,942 |   |   | $ | 79,725 |   |

----

|                                                                         |   | December      31, 2007 |    |
|------------------------------------------------------------------------------|--------|------------------------|---------|
| (amounts      in thousands except per share information)                     |   | Book      Value        |    |   | Adjusted      Book Value |   |
| Total      investment assets                                                 |   | $                      | 107,942 |   |   | $ | 105,315 |   |
| Cash      and cash equivalents                                               |   |                   | 35,352  |   |   |   | 35,352 |   |
| Other      assets and liabilities, net                                       |   |                   | (1,358  | ) |   |   | (1,358 | ) |
|                                                                         |   |                   | 141,936 |   |   |   | 139,309 |   |
| Less:  Preferred      stock liquidation preference                 |   |                   | (42,215 | ) |   |   | (42,215 | ) |
| Common      equity book value and adjusted book value                        |   | $                      | 99,721  |   |   | $ | 97,094 |   |
|                                                                         |   |                   |    |   |   |   |   |   |
| Common      equity book value per share and adjusted book value per    share |   | $                      | 8.22    |   |   | $ | 8.00 |   |

| (amounts      in millions) |   | Credit      Exposure (1) |   |   | Credit      Exposure, Net of Allowance (2) |   |   | ActualCreditLosses |   |   | Credit      Exposure, Net of Allowance to Outstanding Loan Balance (3) |   |
|----------------------------|--------|--------------------------|--------|--------|--------------------------------------------|--------|--------|--------------------|--------|--------|------------------------------------------------------------------------|--------|
| 2005                       |   | $                        | 47.9   |   |                                       | $      | 28.9   |               |   | $      | 3.6                                                                    |   |   |   | 3.85 | % |
| 2006                       |   |                     | 26.3   |   |                                       |   | 21.8   |               |   |   | 7.2                                                                    |   |   |   | 6.20 |   |
| 2007                       |   |                     | 27.5   |   |                                       |   | 24.8   |               |   |   | 0.5                                                                    |   |   |   | 8.57 |   |

| (1) | Represents      the overcollateralization pledged to a securitization trust and      subordinate securities we own, net of any  discounts. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Represents      credit exposure, net of allowance for loan  losses. |
|-----|---------------------------------------------------------------------|

| (3) | Represents      credit exposure net of allowance divided by current unpaid principal      balance of loans in the securitizationtrust |
|-----|---------------------------------------------------------------------------------------------------------------------------------------|

----

| Months      remaining to end of compliance period |   | As      a Percent of Unpaid Principal Balance |   |
|---------------------------------------------------|--------|-----------------------------------------------|--------|
| Compliance      period already exceeded           |   |                                          | 26.5   | % |
| Zero      through twelve months remaining         |   |                                          | 4.4    |   |
| Thirteen      through thirty six months remaining |   |                                          | 50.2   |   |
| Thirty      seven through sixty months remaining  |   |                                          | 18.9   |   |
|                                              |   |                                          | 100.0  | % |

|  December      31, | 30      to 59 days delinquent | 60      to 89 daysdelinquent | 90      days and over delinquent      (1) |  Total |
|-------------------------|-------------------------------|------------------------------|-------------------------------------------|-------------|
| 2005                    | –%                      | 0.25%                        | 6.65%                                     | 6.90%       |
| 2006                    | –%                      | –%                     | 1.36%                                     | 1.36%       |
| 2007                    | –%                      | –%                     | –%                                  | –%    |

| (1) | Includes      foreclosures and real estate owned. |
|-----|---------------------------------------------------|

----

|  December      31, | 30      to 59 days delinquent | 60      to 89 daysdelinquent | 90      days and over delinquent      (1) |  Total |
|-------------------------|-------------------------------|------------------------------|-------------------------------------------|-------------|
| 2005                    | 4.28%                         | 0.62%                        | 2.60%                                     | 7.50%       |
| 2006                    | 4.90%                         | 1.89%                        | 3.05%                                     | 9.84%       |
| 2007                    | 5.20%                         | 0.58%                        | 2.44%                                     | 8.22%       |

| (1) | Includes      foreclosures and real estate owned. |
|-----|---------------------------------------------------|

RESULTS OFOPERATIONS

|                                                                       |   | Year      Ended December 31, |    |
|----------------------------------------------------------------------------|--------|------------------------------|---------|
| (amounts      in thousands except per share information)                   |   | 2007                         |    |   | 2006 |   |   | 2005 |   |
|                                                                       |   |                         |    |   |   |   |   |   |   |
| Interest      income                                                       |   | $                            | 30,778  |   |   | $ | 50,449 |   |   | $ | 74,395 |   |
| Interest      expense                                                      |   |                         | 20,095  |   |   |   | 39,362 |   |   |   | 62,506 |   |
| Net      interest income                                                   |   | $                            | 10,683  |   |   | $ | 11,087 |   |   | $ | 11,889 |   |
| Recapture      of (provision for) loan losses                              |   |                         | 1,281   |   |   |   | 15 |   |   |   | (5,780 | ) |
| Net      interest income after recapture of (provision for) loan    losses |   |                         | 11,964  |   |   |   | 11,102 |   |   |   | 6,109 |   |
| Equity      in earnings (loss) of joint venture                            |   |                         | 709     |   |   |   | (852 | ) |   |   | – |   |
| Loss      on capitalization of joint venture                               |   |                         | – |   |   |   | (1,194 | ) |   |   | – |   |
| Impairment      charges                                                    |   |                         | – |   |   |   | (60 | ) |   |   | (2,474 | ) |
| Gain      (loss) on sales of investments                                   |   |                         | 755     |   |   |   | (183 | ) |   |   | 9,609 |   |
| Other      (expense) income                                                |   |                         | (533    | ) |   |   | 617 |   |   |   | 2,022 |   |
| General      and administrative expenses                                   |   |                         | (3,996  | ) |   |   | (4,521 | ) |   |   | (5,681 | ) |
| Net      income                                                            |   |                         | 8,899   |   |   |   | 4,909 |   |   |   | 9,585 |   |
| Preferred      stock dividends                                             |   |                         | (4,010  | ) |   |   | (4,044 | ) |   |   | (5,347 | ) |
| Net      income to common shareholders                                     |   | $                            | 4,889   |   |   | $ | 865 |   |   | $ | 4,238 |   |
|                                                                       |   |                         |    |   |   |   |   |   |   |   |   |   |
| Basic      & diluted net income per common share                       |   | $                            | 0.40    |   |   | $ | 0.07 |   |   | $ | 0.35 |   |
|                                                                       |   |                         |    |   |   |   |   |   |   |   |   |   |
| Dividends      declared per share:                                         |   |                         |    |   |   |   |   |   |   |   |   |   |
| Common                                                                     |   | $                            | – |   |   | $ | – |   |   | $ | – |   |
| Series      D Preferred                                                    |   | $                            | 0.95    |   |   | $ | 0.95 |   |   | $ | 0.95 |   |

|                             |   | Year      ended December 31, |   |
|----------------------------------|--------|------------------------------|--------|
| (amounts      in thousands)      |   | 2007                         |   |   | 2006 |   |
| Interest      income:            |   |                         |   |   |   |   |
| Securitized mortgage      loans  |   | $                            | 26,424 |   |   | $ | 46,240 |   |
| Securities                       |   |                         | 1,256  |   |   |   | 1,558 |   |
| Cash and cash      equivalents   |   |                         | 2,611  |   |   |   | 2,015 |   |
| Other loans and      investments |   |                         | 487    |   |   |   | 636 |   |
|                             |   | $                            | 30,778 |   |   | $ | 50,449 |   |

----

|                             |   | Year      ended December 31, |   |
|----------------------------------|--------|------------------------------|--------|
|                             |   | 2007                         |   |   | 2006 |   |
| (amounts      in thousands)      |   | Interest      Income         |   |   | Net      Amortization |   |   | Total      Interest Income |   |   | Interest      Income |   |   | Net      Amortization |   |   | Total      Interest Income |   |
| Securitized      mortgage loans: |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                       |   | $                            | 18,114 |   |   | $ | 485 |   |   | $ | 18,599 |   |   | $ | 36,048 |   |   | $ | 654 |   |   | $ | 36,702 |   |
| Single-family                    |   |                         | 7,887  |   |   |   | (62 | ) |   |   | 7,825 |   |   |   | 10,109 |   |   |   | (571 | ) |   |   | 9,538 |   |
| Total      mortgage loans        |   | $                            | 26,001 |   |   | $ | 423 |   |   | $ | 26,424 |   |   | $ | 46,157 |   |   | $ | 83 |   |   | $ | 46,240 |   |

|                                                                 |   | Year      ended December 31, |   |
|----------------------------------------------------------------------|--------|------------------------------|--------|
| (amounts      in thousands)                                          |   | 2007                         |   |   | 2006 |   |
| Non-agency      RMBS                                                 |   | $                            | 925    |   |   | $ | 1,090 |   |
| Agency      RMBS                                                     |   |                         | 110    |   |   |   | 198 |   |
| Corporate      debt securities and other interest bearing securities |   |                         | 221    |   |   |   | 270 |   |
|                                                                 |   | $                            | 1,256  |   |   | $ | 1,558 |   |

----

|                                    |   | Year      ended December 31, |   |
|-----------------------------------------|--------|------------------------------|--------|
| (amounts      in thousands)             |   | 2007                         |   |   | 2006 |   |
| Interest      expense:                  |   |                         |   |   |   |   |
| Securitization      financing           |   | $                            | 14,999 |   |   | $ | 33,172 |   |
| Repurchase      agreements              |   |                         | 3,546  |   |   |   | 5,933 |   |
| Obligation under payment      agreement |   |                         | 1,525  |   |   |   | 489 |   |
| Other                                   |   |                         | 25     |   |   |   | (232 | ) |
|                                    |   | $                            | 20,095 |   |   | $ | 39,362 |   |

|                           |   | Year      ended December 31, |   |
|--------------------------------|--------|------------------------------|--------|
|                           |   | 2007                         |   |   | 2006 |   |
| (amounts      in thousands)    |   | Interest      Expense        |   |   | Net      Amortization |   |   | Total      Interest Expense |   |   | Interest      Expense |   |   | Net      Amortization |   |   | Total      Interest Expense |   |
| Securitization      financing: |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                     |   | $                            | 15,856 |   |   | $ | (1,831 | ) |   | $ | 14,025 |   |   | $ | 33,003 |   |   | $ | (606 | ) |   | $ | 32,397 |   |
| Single-family                  |   |                         | 387    |   |   |   | 62 |   |   |   | 449 |   |   |   | – |   |   |   | – |   |   |   | – |   |
| Other bond related      costs  |   |                         | 525    |   |   |   | – |   |   |   | 525 |   |   |   | 775 |   |   |   | – |   |   |   | 775 |   |
| Total      mortgage loans      |   | $                            | 16,768 |   |   | $ | (1,769 | ) |   | $ | 14,999 |   |   | $ | 33,778 |   |   | $ | (606 | ) |   | $ | 33,172 |   |

----

|                             |   | Year      ended December 31, |   |
|----------------------------------|--------|------------------------------|--------|
| (amounts      in thousands)      |   | 2006                         |   |   | 2005 |   |
| Interest      income:            |   |                         |   |   |   |   |
| Securitized mortgage      loans  |   | $                            | 46,240 |   |   | $ | 68,387 |   |
| Securities                       |   |                         | 1,558  |   |   |   | 3,885 |   |
| Cash and cash      equivalents   |   |                         | 2,015  |   |   |   | 767 |   |
| Other loans and      investments |   |                         | 636    |   |   |   | 1,356 |   |
|                             |   | $                            | 50,449 |   |   | $ | 74,395 |   |

----

|                             |   | Year      ended December 31, |    |
|----------------------------------|--------|------------------------------|---------|
|                             |   | 2006                         |    |   | 2005 |   |
| (amounts      in thousands)      |   | Interest      Income         |    |   | Net      Amortization |   |   | Total      Interest Income |   |   | Interest      Income |   |   | Net      Amortization |   |   | Total      Interest Income |   |
| Securitized      mortgage loans: |   |                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                       |   | $                            | 36,048  |   |   | $ | 654 |   |   | $ | 36,702 |   |   | $ | 48,439 |   |   | $ | 976 |   |   | $ | 49,415 |   |
| Single-family                    |   |                         | 10,109  |   |   |   | (571 | ) |   |   | 9,538 |   |   |   | 11,484 |   |   |   | (840 | ) |   |   | 10,644 |   |
| Manufactured-housing             |   |                         | – |   |   |   | – |   |   |   | – |   |   |   | 8,268 |   |   |   | 60 |   |   |   | 8,328 |   |
| Total      mortgage loans        |   | $                            | 46,157  |   |   | $ | 83 |   |   | $ | 46,240 |   |   | $ | 68,191 |   |   | $ | 196 |   |   | $ | 68,387 |   |

|                                                                 |   | Year      ended December 31, |   |
|----------------------------------------------------------------------|--------|------------------------------|--------|
| (amounts      in thousands)                                          |   | 2006                         |   |   | 2005 |   |
| Mortgage      backed securities (non-agency)                         |   | $                            | 1,090  |   |   | $ | 2,370 |   |
| Mortgage      backed securities (agency)                             |   |                         | 198    |   |   |   | 59 |   |
| Corporate      debt securities and other interest bearing securities |   |                         | 270    |   |   |   | 1,456 |   |
|                                                                 |   | $                            | 1,558  |   |   | $ | 3,885 |   |

----

|                                    |   | Year      ended December 31, |   |
|-----------------------------------------|--------|------------------------------|--------|
| (amounts      in thousands)             |   | 2006                         |   |   | 2005 |   |
|                                    |   |                         |   |   |   |   |
| Interest      expense:                  |   |                         |   |   |   |   |
| Securitization      financing           |   | $                            | 33,172 |   |   | $ | 57,166 |   |
| Repurchase      agreements              |   |                         | 5,933  |   |   |   | 5,428 |   |
| Obligation under payment      agreement |   |                         | 489    |   |   |   | – |   |
| Other                                   |   |                         | (232   | ) |   |   | (88 | ) |
|                                    |   | $                            | 39,362 |   |   | $ | 62,506 |   |

|                           |   | Year      ended December 31, |    |
|--------------------------------|--------|------------------------------|---------|
|                           |   | 2006                         |    |   | 2005 |   |
| (amounts      in thousands)    |   | Interest      Expense        |    |   | Net      Amortization |   |   | Total      Interest Expense |   |   | Interest      Expense |   |   | Net      Amortization |   |   | Total      Interest Expense |   |
|                           |   |                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securitization      financing: |   |                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                     |   | $                            | 33,003  |   |   | $ | (606 | ) |   | $ | 32,397 |   |   | $ | 45,160 |   |   | $ | 1,477 |   |   | $ | 46,637 |   |
| Single-family                  |   |                         | – |   |   |   | – |   |   |   | – |   |   |   | 2,206 |   |   |   | 27 |   |   |   | 2,233 |   |
| Manufactured      housing      |   |                         | – |   |   |   | – |   |   |   | – |   |   |   | 7,196 |   |   |   | (257 | ) |   |   | 6,939 |   |
| Other bond related      costs  |   |                         | 775     |   |   |   | – |   |   |   | 775 |   |   |   | 1,357 |   |   |   | – |   |   |   | 1,357 |   |
| Total      mortgage loans      |   | $                            | 33,778  |   |   | $ | (606 | ) |   | $ | 33,172 |   |   | $ | 55,919 |   |   | $ | 1,247 |   |   | $ | 57,166 |   |

----

----

|                                                    |   | Year      ended December 31, |    |
|---------------------------------------------------------|--------|------------------------------|---------|
|                                                    |   | 2007                         |    |   | 2006 |   |   | 2005 |   |
| (amounts      in thousands)                             |   | AverageBalance               |    |   | EffectiveRate |   |   | AverageBalance |   |   | EffectiveRate |   |   | AverageBalance |   |   | EffectiveRate |
| Interest-earning      assets(1):                        |   |                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securitized mortgage loans(2)                           |   | $                            | 315,962 |   |   |   | 8.35 | % |   | $ | 586,113 |   |   |   | 7.88 | % |   | $ | 931,777 |   |   |   | 7.19 | % |
| Other interest-bearing      assets                      |   |                         | 17,122  |   |   |   | 10.17 | % |   |   | 23,823 |   |   |   | 8.86 | % |   |   | 83,767 |   |   |   | 5.31 | % |
| Total      interest-earning assets                      |   | $                            | 333,084 |   |   |   | 8.45 | % |   | $ | 609,936 |   |   |   | 7.92 | % |   | $ | 1,015,544 |   |   |   | 7.10 | % |
| Interest-bearing      liabilities:                      |   |                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securitization financing(3)                             |   | $                            | 201,148 |   |   |   | 7.19 | % |   | $ | 401,050 |   |   |   | 8.08 | % |   | $ | 735,910 |   |   |   | 7.40 | % |
| Repurchase      agreements                              |   |                         | 64,231  |   |   |   | 5.45 | % |   |   | 114,252 |   |   |   | 5.12 | % |   |   | 151,328 |   |   |   | 3.59 | % |
| Total      interest-bearing liabilities                 |   | $                            | 265,379 |   |   |   | 6.77 | % |   | $ | 515,302 |   |   |   | 7.42 | % |   | $ | 887,238 |   |   |   | 6.75 | % |
|                                                    |   |                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net      interest spread(3)                             |   |                         |    |   |   |   | 1.68 | % |   |   |   |   |   |   | 0.50 | % |   |   |   |   |   |   | 0.35 | % |
| Net      yield on average interest-earning assets(3)(4) |   |                         |    |   |   |   | 3.05 | % |   |   |   |   |   |   | 1.64 | % |   |   |   |   |   |   | 1.20 | % |

| (1) | Average      balances exclude any unrealized gains and losses on available for sale      securities. |
|-----|------------------------------------------------------------------------------------------------------|

| (2) | Average      balances exclude funds held by trustees except defeased funds held by      trustees. |
|-----|---------------------------------------------------------------------------------------------------|

| (3) | Effective      rates are calculated excluding non-interest related securitization      financing expenses. |
|-----|------------------------------------------------------------------------------------------------------------|

| (4) | Net      yield on average interest-earning assets reflects the annualized net      interest income, excluding non-interest related securitization financing      expense, divided by the average interest-earning assets for the      period.  The 2007 value of 3.05% increased from 1.64% in 2006      primarily due to the derecognition of the commercial loan securitization      in 2006 and the substantial repayment of repurchase agreements in      2007. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                               |   | 2007      to 2006 |   |   | 2006      to 2005 |   |
|------------------------------------|--------|-------------------|--------|--------|-------------------|--------|
| (amounts      in thousands)        |   | Rate              |   |   | Volume            |   |   | Total |   |   | Rate |   |   | Volume |   |   | Total |   |
|                               |   |              |   |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securitized      mortgage loans    |   | $                 | 2,618  |   |              | $      | (22,421 | ) |   | $ | (19,803 | ) |   | $ | 5,973 |   |   | $ | (26,805 | ) |   | $ | (20,832 | ) |
| Other      interest-bearing assets |   |              | 259    |   |              |   | (627 | ) |   |   | (368 | ) |   |   | 1,161 |   |   |   | (4,103 | ) |   |   | (2,942 | ) |
| Total      interest income         |   |              | 2,877  |   |              |   | (23,048 | ) |   |   | (20,171 | ) |   |   | 7,134 |   |   |   | (30,908 | ) |   |   | (23,774 | ) |
|                               |   |              |   |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securitization      financing      |   |              | (3,220 | )      |              |   | (14,702 | ) |   |   | (17,922 | ) |   |   | 4,577 |   |   |   | (26,675 | ) |   |   | (22,098 | ) |
| Repurchase      agreements         |   |              | 351    |   |              |   | (2,738 | ) |   |   | (2,387 | ) |   |   | 2,096 |   |   |   | (1,591 | ) |   |   | 505 |   |
|                               |   |              |   |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total      interest expense        |   |              | (2,869 | )      |              |   | (17,440 | ) |   |   | (20,309 | ) |   |   | 6,673 |   |   |   | (28,266 | ) |   |   | (21,593 | ) |
|                               |   |              |   |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net      interest income           |   | $                 | 5,746  |   |              | $      | (5,608 | ) |   | $ | 138 |   |   | $ | 461 |   |   | $ | (2,642 | ) |   | $ | (2,181 | ) |

| Note: | The      change in interest income and interest expense due to changes in both      volume and rate, which cannot be segregated, has been allocated      proportionately to the change due to volume and the change due to      rate.  This table excludes non-interest related securitization      financing expense, other interest expense and provision for credit      losses. |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

| (amounts      in thousands)                |   | Payments      due by period |    |
|--------------------------------------------|--------|-----------------------------|---------|
| Contractual      Obligations(1)            |   | Total                       |    |   | <      1 year |   |   | 1-3      years |   |   | 3-5      years |   |   | >      5 years |   |
| Long-Term      Debt Obligations:(2)        |   |                        |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Securitization      financing(3)           |   | $                           | 252,979 |   |   | $ | 26,800 |   |   | $ | 146,772 |   |   | $ | 56,412 |   |   | $ | 22,995 |   |
| Repurchase      agreements                 |   |                        | 4,612   |   |   |   | 4,612 |   |   |   | – |   |   |   | – |   |   |   | – |   |
| Operating      lease obligations           |   |                        | 60      |   |   |   | 60 |   |   |   | – |   |   |   | – |   |   |   | – |   |
| Mortgage      servicing obligations (4)    |   |                        | 4,944   |   |   |   | 408 |   |   |   | 1,135 |   |   |   | 648 |   |   |   | 2,753 |   |
| Obligation      under payment agreement(5) |   |                        | 23,282  |   |   |   | 1,582 |   |   |   | 2,958 |   |   |   | 18,742 |   |   |   | – |   |
| Total                                      |   | $                           | 285,877 |   |   | $ | 33,462 |   |   | $ | 150,865 |   |   | $ | 75,802 |   |   | $ | 25,748 |   |

| (1) | As      the master servicer for certain of the series of non-recourse      securitization financing securities which we have issued, and certain      loans which have been securitized but for which we are not the master      servicer, we have an obligation to advance scheduled principal and      interest on delinquent loans in accordance with the underlying servicing      agreements should the primary servicer fail to make such      advance.  Such advance amounts are generally repaid in the same      month as they are made, or shortly thereafter, and the contractual      obligation with respect to these advances is excluded from the above      table. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Amounts      presented for Long-Term Debt Obligations include estimated principal and      interest on the relatedobligations. |
|-----|--------------------------------------------------------------------------------------------------------------------------------|

| (3) | Securitization      financing is non-recourse to us as the bonds are payable solely from loans      and securities pledged as securitized mortgage loans.  Payments      due by period were estimated based on the principal repayments forecast      for the underlying loans and securities, substantially all of which is      used to repay the associated securitization financing      outstanding. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | Represents      anticipated payments made by us to the subservicer of certain loans      pledged to a securitization trust where we have an obligation to pay      subservicing fees in excess of amounts paid by the trust  . |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (5) | We      entered an agreement to contribute to a joint venture all of the net cash      flows, including principal and interest,  from our interests in      a pool of securitized commercial mortgage loans.  By agreement,      the joint venture is scheduled to dissolve no later than    2011. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| Year      Ended December 31, 2007                                        |   | First      Quarter |    |   | Second      Quarter |   |    | Third      Quarter |   |   | Fourth      Quarter |   |
|--------------------------------------------------------------------------|--------|--------------------|---------|--------|---------------------|--------|---------|--------------------|--------|--------|---------------------|--------|
| Operating      results:                                                  |   |               |    |   |                |   |    |               |   |   |                |   |
| Total      interest income                                               |   | $                  | 8,215   |   |                | $      | 8,023   |               |   | $      | 7,473               |   |   | $ | 7,067 |   |
| Net      interest income after recapture of provision for loan    losses |   |               | 2,983   |   |                |   | 3,665   |               |   |   | 2,584               |   |   |   | 2,732 |   |
| Net      income (2)                                                      |   |               | 1,942   |   |                |   | 2,702   |               |   |   | 2,686               |   |   |   | 1,569 |   |
| Basic      and diluted net income per common share                       |   |               | 0.08    |   |                |   | 0.14    |               |   |   | 0.14                |   |   |   | 0.05 |   |
| Cash      dividends declared per common share                            |   |               | – |   |                |   | – |               |   |   | –             |   |   |   | – |   |
|                                                                     |   |               |    |   |                |   |    |               |   |   |                |   |   |   |   |   |
| Average      interest-earning assets      (3)                            |   |               | 359,115 |   |                |   | 343,436 |               |   |   | 324,087             |   |   |   | 306,234 |   |
| Average      borrowed funds                                              |   |               | 301,139 |   |                |   | 287,263 |               |   |   | 256,311             |   |   |   | 217,816 |   |
|                                                                     |   |               |    |   |                |   |    |               |   |   |                |   |   |   |   |   |
| Net      interest spread on interest-earning assets      (4)             |   |               | 1.35    | %      |                |   | 2.17    | %                  |   |   | 1.39                | %      |   |   | 1.79 | % |
| Average      asset yield                                                 |   |               | 8.32    | %      |                |   | 8.41    | %                  |   |   | 8.44                | %      |   |   | 8.63 | % |
| Net      yield on average interest-earning assets(1)                     |   |               | 2.48    | %      |                |   | 3.19    | %                  |   |   | 2.86                | %      |   |   | 2.77 | % |
| Cost      of funds(4)                                                    |   |               | 6.97    | %      |                |   | 6.24    | %                  |   |   | 7.05                | %      |   |   | 6.85 | % |

| Year      Ended December 31, 2006                         |   | FirstQuarter |    |   | SecondQuarter |   |    | ThirdQuarter |   |   | FourthQuarter |   |
|-----------------------------------------------------------|--------|--------------|---------|--------|---------------|--------|---------|--------------|--------|--------|---------------|--------|
| Operating      results:                                   |   |         |    |   |          |   |    |         |   |   |          |   |
| Total      interest income                                |   | $            | 14,766  |   |          | $      | 14,192  |         |   | $      | 13,000        |   |   | $ | 8,491 |   |
| Net      interest income after provision for loan losses  |   |         | 2,407   |   |          |   | 2,543   |         |   |   | 3,102         |   |   |   | 3,050 |   |
| Net      income (loss)                                    |   |         | 1,213   |   |          |   | 1,615   |         |   |   | (215          | )      |   |   | 2,297 |   |
| Basic      and diluted net income (loss) per common share |   |         | 0.01    |   |          |   | 0.05    |         |   |   | (0.10         | )      |   |   | 0.11 |   |
| Cash      dividends declared per common share             |   |         | – |   |          |   | – |         |   |   | –       |   |   |   | – |   |
|                                                      |   |         |    |   |          |   |    |         |   |   |          |   |   |   |   |   |
| Average      interest-earning assets (3)                  |   |         | 764,682 |   |          |   | 713,000 |         |   |   | 588,306       |   |   |   | 375,152 |   |
| Average      borrowed funds                               |   |         | 635,877 |   |          |   | 609,813 |         |   |   | 502,842       |   |   |   | 316,388 |   |
|                                                      |   |         |    |   |          |   |    |         |   |   |          |   |   |   |   |   |
| Net      interest spread on interest-earning assets       |   |         | (0.13   | )%     |          |   | 0.14    | %            |   |   | 0.83          | %      |   |   | 2.00 | % |
| Average      asset yield                                  |   |         | 7.59    | %      |          |   | 7.68    | %            |   |   | 8.39          | %      |   |   | 8.28 | % |
| Net      yield on average interest-earning assets (1)     |   |         | 1.18    | %      |          |   | 1.22    | %            |   |   | 1.90          | %      |   |   | 2.95 | % |
| Cost      of funds                                        |   |         | 7.72    | %      |          |   | 7.54    | %            |   |   | 7.56          | %      |   |   | 6.28 | % |

| (1) | Computed      as net interest margin excluding non-interest non-recourse securitization      financing expenses divided by average interest-earning    assets. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | The      decrease in net income during the fourth quarter of 2007 relates primarily      to losses incurred by a joint venture, which is accounted for under the      equity method.  The loss was related to a $3.9 million decrease      in the fair value of an investment. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | Excludes      cash and cash equivalents. |
|-----|------------------------------------------|

| (4) | Second      quarter 2007 net interest spread increased compared to other quarters and      cost of funds decreased due to amortization of asset discounts and bond      premiums resulting from the prepayment of three commercial loans that      constituted 17% of outstanding UPB. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | · | We      may be unable to invest in new assets with attractive yields, and yields      on new assets in which we do invest may not generate attractive returns,      resulting in a decline in our earnings per share over  time. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | New      investments may entail risks that we do not currently have in our      investment portfolio or may substantially add risks to the investment      portfolio which we may or may not have managed in the past as part of our      investment strategy.  In addition, while we have owned Agency      RMBS in the past, we have never had a significant amount of our capital      invested in these assets. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Competition      may prevent us from acquiring new investments at favorable yields      potentially negatively impacting our  profitability. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Our      ownership of certain subordinate interests in securitization trusts      subjects us to credit risk on the underlying loans, and we provide for      loss reserves on these loans as required under  GAAP. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Our      efforts to manage credit risk may not be successful in limiting      delinquencies and defaults in underlying loans or losses on our      investments. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | · | Certain      investments employ internal structural leverage as a result of the      securitization process, and are in the most subordinate position in the      capital structure, which magnifies the potential impact of adverse events      on our cash flows and reportedresults. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | We may      be subject to the risks associated with inadequate or untimely services      from third-party service providers, which may harm our results of      operations. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Prepayments      of principal on our investments, and the timing of prepayments, may impact      our reported earnings and our cashflows. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | We      may finance a portion of our investment portfolio with short-term recourse      repurchase agreements which may subject us to margin calls if the assets      pledged subsequently decline invalue. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Interest      rate fluctuations can have various negative effects on us, and could lead      to reduced earnings and/or increased earnings  volatility. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Hedging      against interest rate exposure may adversely affect our      earnings. |
|--------|--------|-------------------------------------------------------------------------------------|

|   | · | Our      reported income depends on accounting conventions and assumptions about      the future that may change. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------|

|   | · | Failure      to qualify as a REIT would adversely affect our dividend distributions and      could adversely affect the value of our  securities. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Maintaining      REIT status may reduce our flexibility to manage our      operations. |
|--------|--------|----------------------------------------------------------------------------------------|

|   | · | We      may fail to properly conduct our operations so as to avoid falling under      the definition of an investment company pursuant to the Investment Company      Act of 1940. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | We      are dependent on certain keypersonnel. |
|--------|--------|------------------------------------------------|

----

----

|                                                                 |   | Investment      Portfolio |   |   | Investment      Portfolio, including Cash and Cash Equivalents |   |
|----------------------------------------------------------------------|--------|---------------------------|--------|--------|----------------------------------------------------------------|--------|
| (amounts      in thousands)Basis      Point Change in Interest Rates |   | Cash      Flow            |   |   | Percent                                                        |   |   | Cash      Flow |   |   | Percent |   |
| +200                                                                 |   | $                         | 15,035 |   |                                                           |   | 5.4 | % |   | $ | 19,553 |   |   |   | 13.5 | % |
| +100                                                                 |   |                      | 14,675 |   |                                                           |   | 2.9 | % |   |   | 18,420 |   |   |   | 6.9 | % |
| Base      Case                                                       |   |                      | 14,265 |   |                                                           |   | – |   |   |   | 17,235 |   |   |   | – |   |
| -100                                                                 |   |                      | 14,237 |   |                                                           |   | (0.2 | )% |   |   | 16,432 |   |   |   | (4.7 | )% |
| -200                                                                 |   |                      | 14,583 |   |                                                           |   | 2.2 | % |   |   | 16,011 |   |   |   | (7.1 | )% |

| ITEM      9. | CHANGES      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL      DISCLOSURE |
|--------------|------------------------------------------------------------------------------------------------|

----

----

| ITEM      12. | SECURITY      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED      STOCKHOLDER MATTERS |
|---------------|----------------------------------------------------------------------------------------------------------|

| Plan      Category                                                        |   | Number      of Securities to Be Issued upon Exercise of Outstanding Options, Warrants      and Rights |    |   | Weighted-AverageExercise      Price of Outstanding Options, Warrants and Rights |   |    | Number      of Securities Remaining Availablefor      Future IssuanceUnder      EquityCompensation      Plans (2) |   |
|---------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------|---------|--------|---------------------------------------------------------------------------------|--------|---------|-------------------------------------------------------------------------------------------------------------------|--------|
| Equity      Compensation Plans Approved by Shareholders:                  |   |                                                                                                  |    |   |                                                                            |   |    |                                                                                                              |   |
| 2004      Stock Incentive Plan                                            |   |                                                                                                  | 373,146 | (1)    |                                                                            | $      | 7.53    |                                                                                                              |   |   | 1,126,854 |   |
|                                                                      |   |                                                                                                  |    |   |                                                                            |   |    |                                                                                                              |   |   |   |   |
| Equity      Compensation Plans Not Approved by  Shareholders(2) |   |                                                                                                  | – |   |                                                                            |   | – |                                                                                                              |   |   | – |   |
|                                                                      |   |                                                                                                  |    |   |                                                                            |   |    |                                                                                                              |   |   |   |   |
| Total                                                                     |   |                                                                                                  | 373,146 |   |                                                                            | $      | 7.53    |                                                                                                              |   |   | 1,126,854 |   |

| (1)   | Amount      includes all SAR awards to employees and stock option awards to      directors. |
|-----------------|---------------------------------------------------------------------------------------------|

| (2) | The      Company does not have any equity compensation plans that have not been      approved by shareholders. |
|-----|----------------------------------------------------------------------------------------------------------------|

----

| 1.      and 2. | Financial      Statements and SchedulesThe      information required by this section of Item 15 is set forth in the      Consolidated Financial Statements and Report of Independent Registered      Public Accounting Firm beginning at page F-1 of this Form      10-K.  The index to the Financial Statements is set forth at      page F-2 of this Form 10-K. |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3. | Exhibits |
|----|----------|

| Number | Exhibit                                                                                                                                                                                                                                                              |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1    | Articles      of Incorporation, as amended, effective as of February 4, 1988      (incorporated herein by reference to Exhibit 4.9 to Dynex’s Amendment No.      1 to the Registration Statement on Form S-3 (No. 333-10783) filed March      21, 1997).       |
| 3.2    | Amended      and Restated Bylaws (incorporated herein by reference to Exhibit 3.1 to      Dynex’s Current Report on Form 8-K filed June 21, 2006).                                                                                                        |
| 3.3    | Amendment      to Articles of Incorporation, effective December 29, 1989 (incorporated      herein by reference to Exhibit 4.10 to Dynex’s Amendment No. 1 to the      Registration Statement on Form S-3 (No. 333-10783) filed March 21,      1997).     |
| 3.4    | Amendment      to Articles of Incorporation, effective October 19, 1992 (incorporated      herein by reference to Exhibit 4.2 to Dynex’s Amendment No. 1 to the      Registration Statement on Form S-3 (No. 333-10783) filed March 21,      1997).  |
| 3.5    | Amendment      to Articles of Incorporation, effective April 25, 1997 (incorporated      herein by reference to Exhibit 3.10 to Dynex’s Quarterly Report on Form      10-Q for the quarter ended March 31, 1997).                                         |
| 3.6    | Amendment      to Articles of Incorporation, effective June 17, 1998 (incorporated herein      by reference to Exhibit 3.7 to Dynex’s Annual Report on Form 10-K for the      year ended December 31, 2004).                                              |
| 3.7    | Amendment      to Articles of Incorporation, effective August 2, 1999 (incorporated      herein by reference to Exhibit 3.8 to Dynex’s Annual Report on Form 10-K      for the year ended December 31, 2004).                                             |
| 3.8    | Amendment      to Articles of Incorporation, effective May 18,      2004  (incorporated herein by reference to Exhibit 3.3 to      Dynex’s Quarterly Report on Form 10-Q for the quarter ended June 30,      2004).                             |

----

| Number | Exhibit                                                                                                                                                                                                                                                                                                                                                     |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1*  | Dynex      Capital, Inc. 2004 Stock Incentive Plan (incorporated herein by reference      to Exhibit 10.1 to Dynex’s Annual Report on Form 10-K for the year ended      December 31, 2004).                                                                                                                                                           |
| 10.2*  | Form      of Stock Option Agreement for Non-Employee Directors under the Dynex      Capital, Inc. 2004 Stock Incentive Plan (incorporated herein by reference      to Exhibit 10.2 to Dynex’s Quarterly Report on Form 10-Q for the quarter      ended June 30, 2005).                                                                                |
| 10.3*  | Form      of Stock Appreciation Rights Agreement for Senior Executives under the      Dynex Capital, Inc. 2004 Stock Incentive Plan (incorporated herein by      reference to Exhibit 10.3 to Dynex’s Quarterly Report on Form 10-Q for the      quarter ended June 30, 2005).                                                                        |
| 10.4   | Limited      Liability Company Agreement of Copperhead Ventures, LLC dated September 8,      2006 (portions of this exhibit have been omitted pursuant to a request for      confidential treatment) (incorporated herein by reference to Exhibit 10.1      to Dynex’s Quarterly Report on Form 10-Q for the quarter ended September      30, 2006).  |
| 10.5*  | Severance      Agreement between Dynex and Stephen J. Benedetti dated June 11, 2004      (filed herewith).                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                             |
| 21.1   | List      of consolidated entities of Dynex (filed herewith).                                                                                                                                                                                                                                                                                               |
| 23.1   | Consent      of BDO Seidman, LLP (filed herewith).                                                                                                                                                                                                                                                                                                          |
| 31.1   | Certification      of principal executive officer pursuant to Section 302 of the      Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                                                                          |
| 31.2   | Certification      of principal financial officer pursuant to Section 302 of the      Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                             |
| 32.1   | Certification      of principal executive officer and principal financial officer pursuant to      Section 906 of the Sarbanes-Oxley Act of 2002 (filed      herewith).                                                                                                                                                                                     |

----

|                   | DYNEX CAPITAL, INC.                                                                 |   |
|------------------------|-------------------------------------------------------------------------------------|--------|
|                   | (Registrant)                                                                        |   |
|                   |                                                                                |   |
|                   |                                                                                |   |
| February      27, 2008 | /s/      Stephen J. Benedetti                                                       |   |
|                   | Stephen      J. Benedetti, Executive Vice President andChief      Operating Officer |   |
|                   |                                                                                |   |

| Signature                       | Title                                     | Date                   |
|---------------------------------|-------------------------------------------|------------------------|
|                            |                                      |                   |
| /s/      Thomas B. Akin         | Chairman      and Chief Executive Officer | February      27, 2008 |
| Thomas      B. Akin             | (Principal      Executive Officer)        |                   |
|                            |                                      |                   |
| /s/      Stephen J. Benedetti   | Executive      Vice President and Chief   | February      27, 2008 |
| Stephen      J. Benedetti       | Operating      Officer                    |                   |
|                            | (Principal      Financial Officer)        |                   |
|                            |                                      |                   |
| /s/      Jeffrey L. Childress   | Controller                                | February      27, 2008 |
| Jeffrey      L. Childress       | (Principal      Accounting Officer)       |                   |
|                            |                                      |                   |
|                            |                                      |                   |
| /s/      Leon A. Felman         | Director                                  | February      27, 2008 |
| Leon      A. Felman             |                                      |                   |
|                            |                                      |                   |
|                            |                                      |                   |
| /s/      Barry Igdaloff         | Director                                  | February      27, 2008 |
| Barry      Igdaloff             |                                      |                   |
|                            |                                      |                   |
|                            |                                      |                   |
| /s/      Daniel K. Osborne      | Director                                  | February      27, 2008 |
| Daniel      K. Osborne          |                                      |                   |
|                            |                                      |                   |
|                            |                                      |                   |
| /s/      Eric P. Von der Porten | Director                                  | February      27, 2008 |
| Eric      P. Von der Porten     |                                      |                   |
|                            |                                      |                   |

----

----

|   |                                                                                                            | Page   |
|--------|-----------------------------------------------------------------------------------------------------------------|--------|
|   |                                                                                                            |   |
|   | Reports      of Independent Registered Public Accounting Firm                                                   | F-3    |
|   | Consolidated      Balance Sheets – As of December 31, 2007 and 2006                                       | F-5    |
|   | Consolidated      Statements of Income -- Years ended December 31, 2007, 2006 and      2005                     | F-6    |
|   | Consolidated      Statements of Shareholders’ Equity -- Years ended December 31, 2007, 2006      and 2005 | F-7    |
|   | Consolidated      Statements of Cash Flows -- Years ended December 31, 2007, 2006 and      2005                 | F-8    |
|   | Notes      to Consolidated Financial Statements                                                                 | F-9    |

----

----

----

|                                                                             |   | 2007   |     |   | 2006   |   |
|----------------------------------------------------------------------------------|--------|--------|----------|--------|--------|--------|
| ASSETS                                                                           |   |   |     |   |   |   |
| Cash      and cash equivalents                                                   |   | $      | 35,352   |   |   | $      | 56,880 |   |
| Other      assets                                                                |   |   | 5,671    |   |   |   | 6,111 |   |
|                                                                             |   |   | 41,023   |   |   |   | 62,991 |   |
| Investments:                                                                     |   |   |     |   |   |   |   |   |
|   Securitized      mortgage loans, net                                 |   |   | 278,463  |   |   |   | 346,304 |   |
|   Investment      in joint venture                                     |   |   | 19,267   |   |   |   | 37,388 |   |
|   Securities                                                           |   |   | 29,231   |   |   |   | 13,143 |   |
|   Other      loans and investments                                     |   |   | 6,774    |   |   |   | 6,731 |   |
|                                                                             |   |   | 333,735  |   |   |   | 403,566 |   |
|                                                                             |   | $      | 374,758  |   |   | $      | 466,557 |   |
| LIABILITIES      AND SHAREHOLDERS’ EQUITY                                  |   |   |     |   |   |   |   |   |
| LIABILITIES                                                                      |   |   |     |   |   |   |   |   |
| Securitization      financing                                                    |   | $      | 204,385  |   |   | $      | 211,564 |   |
| Repurchase      agreements                                                       |   |   | 4,612    |   |   |   | 95,978 |   |
| Obligation      under payment agreement                                          |   |   | 16,796   |   |   |   | 16,299 |   |
| Other      liabilities                                                           |   |   | 7,029    |   |   |   | 6,178 |   |
|                                                                             |   |   | 232,822  |   |   |   | 330,019 |   |
|                                                                             |   |   |     |   |   |   |   |   |
| Commitments      and Contingencies (Note 14)                                     |   |   |     |   |   |   |   |   |
|                                                                             |   |   |     |   |   |   |   |   |
| SHAREHOLDERS’      EQUITY                                                  |   |   |     |   |   |   |   |   |
| Preferred      stock, par value $.01 per share,                                  |   |   |     |   |   |   |   |   |
| 50,000,000 shares      authorized:                                               |   |   |     |   |   |   |   |   |
| 9.5% Cumulative Convertible      Series D,                                       |   |   |     |   |   |   |   |   |
| 4,221,539 shares issued and      outstanding                                     |   |   | 41,749   |   |   |   | 41,749 |   |
| ($43,218 aggregate liquidation      preference)                                  |   |   |     |   |   |   |   |   |
| Common      stock, par value $.01 per share, 100,000,000 shares      authorized, |   |   |     |   |   |   |   |   |
| 12,136,262 and 12,131,262 shares      issued and outstanding, respectively       |   |   | 121      |   |   |   | 121 |   |
| Additional      paid-in capital                                                  |   |   | 366,716  |   |   |   | 366,637 |   |
| Accumulated      other comprehensive income                                      |   |   | 1,093    |   |   |   | 663 |   |
| Accumulated      deficit                                                         |   |   | (267,743 | )      |   |   | (272,632 | ) |
|                                                                             |   |   | 141,936  |   |   |   | 136,538 |   |
|                                                                             |   | $      | 374,758  |   |   | $      | 466,557 |   |

----

|                                                                       |   | 2007   |    |   | 2006   |   |   | 2005   |   |
|----------------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|--------|--------|--------|
| Interest      income:                                                      |   |   |    |   |   |   |   |   |   |
| Securitized      mortgage loans                                            |   | $      | 26,424  |   |   | $      | 46,240 |   |   | $ | 68,387 |   |
| Securities                                                                 |   |   | 1,256   |   |   |   | 1,558  |   |   |   | 3,885 |   |
| Cash      and cash equivalents                                             |   |   | 2,611   |   |   |   | 2,015  |   |   |   | 767 |   |
| Other      loans and investments                                           |   |   | 487     |   |   |   | 636    |   |   |   | 1,356 |   |
|                                                                       |   |   | 30,778  |   |   |   | 50,449 |   |   |   | 74,395 |   |
|                                                                       |   |   |    |   |   |   |   |   |   |   |   |   |
| Interest      and related expense:                                         |   |   |    |   |   |   |   |   |   |   |   |   |
| Securitization      financing                                              |   |   | 14,999  |   |   |   | 33,172 |   |   |   | 57,166 |   |
| Repurchase      agreements                                                 |   |   | 3,546   |   |   |   | 5,933  |   |   |   | 5,428 |   |
| Obligation      under payment agreement                                    |   |   | 1,525   |   |   |   | 489    |   |   |   | – |   |
| Other                                                                      |   |   | 25      |   |   |   | (232   | )      |   |   | (88 | ) |
|                                                                       |   |   | 20,095  |   |   |   | 39,362 |   |   |   | 62,506 |   |
|                                                                       |   |   |    |   |   |   |   |   |   |   |   |   |
| Net      interest income                                                   |   |   | 10,683  |   |   |   | 11,087 |   |   |   | 11,889 |   |
| Recapture      of (provision for) loan losses                              |   |   | 1,281   |   |   |   | 15     |   |   |   | (5,780 | ) |
| Net      interest income after recapture of (provision for) loan    losses |   |   | 11,964  |   |   |   | 11,102 |   |   |   | 6,109 |   |
|                                                                       |   |   |    |   |   |   |   |   |   |   |   |   |
| Impairment      charges                                                    |   |   | – |   |   |   | (60    | )      |   |   | (2,474 | ) |
| Equity      in income (loss) of joint venture, net                         |   |   | 709     |   |   |   | (852   | )      |   |   | – |   |
| Loss      on capitalization of joint venture                               |   |   | – |   |   |   | (1,194 | )      |   |   | – |   |
| Gain      (loss) on sale of investments, net                               |   |   | 755     |   |   |   | (183   | )      |   |   | 9,609 |   |
| General      and administrative expenses                                   |   |   | (3,996  | )      |   |   | (4,521 | )      |   |   | (5,681 | ) |
| Other      (expense) income                                                |   |   | (533    | )      |   |   | 617    |   |   |   | 2,022 |   |
| Net      income                                                            |   |   | 8,899   |   |   |   | 4,909  |   |   |   | 9,585 |   |
| Preferred      stock dividends                                             |   |   | (4,010  | )      |   |   | (4,044 | )      |   |   | (5,347 | ) |
| Net      income to common shareholders                                     |   | $      | 4,889   |   |   | $      | 865    |   |   | $ | 4,238 |   |
|                                                                       |   |   |    |   |   |   |   |   |   |   |   |   |
| Net      income per common share:                                          |   |   |    |   |   |   |   |   |   |   |   |   |
| Basic      and diluted                                                     |   | $      | 0.40    |   |   | $      | 0.07   |   |   | $ | 0.35 |   |

----

|                                                                    |   | PreferredStock |    |   | CommonStock |   |    | AdditionalPaid-inCapital |   |   | Accumulated      OtherCompre­hen­siveIncome |   |   | AccumulatedDeficit |    |   | Total  |   |
|-------------------------------------------------------------------------|--------|----------------|---------|--------|-------------|--------|---------|--------------------------|--------|--------|-------------------------------------------------------|--------|--------|--------------------|---------|--------|--------|--------|
| Balance      at January 1, 2005                                         |   | $              | 55,666  |   |        | $      | 122     |                     |   | $      | 366,896                                               |   |   | $                  | 3,817   |   |   | $      | (277,735 | ) |   | $ | 148,766 |   |
|                                                                    |   |           |    |   |        |   |    |                     |   |   |                                                  |   |   |               |    |   |   |   |   |   |   |   |   |   |
| Net      income                                                         |   |           | – |   |        |   | – |                     |   |   | –                                               |   |   |               | – |   |   |   | 9,585 |   |   |   | 9,585 |   |
| Other      comprehensive income:                                        |   |
| Amounts      related to hedge instruments, net                          |   |           | – |   |        |   | – |                     |   |   | –                                               |   |   |               | 609     |   |   |   | – |   |   |   | 609 |   |
| Change      in market value of securities                               |   |           | – |   |        |   | – |                     |   |   | –                                               |   |   |               | (4,276  | )      |   |   | – |   |   |   | (4,276 | ) |
| Reclassification      adjustment for net losses included in net income  |   |           | – |   |        |   | – |                     |   |   | –                                               |   |   |               | (10     | )      |   |   | – |   |   |   | (10 | ) |
| Total      comprehensive income                                         |   |           |    |   |        |   |    |                     |   |   |                                                  |   |   |               |    |   |   |   |   |   |   |   | 5,908 |   |
|                                                                    |   |           |    |   |        |   |    |                     |   |   |                                                  |   |   |               |    |   |   |   |   |   |   |   |   |   |
| Dividends      on preferred stock                                       |   |           | – |   |        |   | – |                     |   |   | –                                               |   |   |               | – |   |   |   | (5,347 | ) |   |   | (5,347 | ) |
| Issuance      of common stock                                           |   |           | – |   |        |   | – |                     |   |   | 7                                                     |   |   |               | – |   |   |   | – |   |   |   | 7 |   |
|                                                                    |   |           |    |   |        |   |    |                     |   |   |                                                  |   |   |               |    |   |   |   |   |   |   |   |   |   |
| Balance      at December 31, 2005                                       |   |           | 55,666  |   |        |   | 122     |                     |   |   | 366,      903                                         |   |   |               | 140     |   |   |   | (273,497 | ) |   |   | 149,334 |   |
|                                                                    |   |           |    |   |        |   |    |                     |   |   |                                                  |   |   |               |    |   |   |   |   |   |   |   |   |   |
| Net      income                                                         |   |           | – |   |        |   | – |                     |   |   | –                                               |   |   |               | – |   |   |   | 4,909 |   |   |   | 4,909 |   |
| Other      comprehensive income:                                        |   |
| Change      in market value of securities                               |   |           | – |   |        |   | – |                     |   |   | –                                               |   |   |               | 891     |   |   |   | – |   |   |   | 891 |   |
| Reclassification      adjustment for net (gains) included in net income |   |           | – |   |        |   | – |                     |   |   | –                                               |   |   |               | (368    | )      |   |   | – |   |   |   | (368 | ) |
| Total      comprehensive income                                         |   |           |    |   |        |   |    |                     |   |   |                                                  |   |   |               |    |   |   |   |   |   |   |   | 5,432 |   |
|                                                                    |   |           |    |   |        |   |    |                     |   |   |                                                  |   |   |               |    |   |   |   |   |   |   |   |   |   |
| Redemption      of preferred stock                                      |   |           | (13,917 | )      |        |   | – |                     |   |   | (155                                                  | )      |   |               | – |   |   |   | – |   |   |   | (14,072 | ) |
| Conversion      of preferred stock for common stock                     |   |           | – |   |        |   | – |                     |   |   | 4                                                     |   |   |               | – |   |   |   | – |   |   |   | 4 |   |
| Dividends      on preferred stock                                       |   |           | – |   |        |   | – |                     |   |   | –                                               |   |   |               | – |   |   |   | (4,044 | ) |   |   | (4,044 | ) |
| Repurchase      of common stock                                         |   |           | – |   |        |   | (1      | )                        |   |   | (219                                                  | )      |   |               | – |   |   |   | – |   |   |   | (220 | ) |
| Stock      option issuance                                              |   |           | – |   |        |   | – |                     |   |   | 104                                                   |   |   |               | – |   |   |   | – |   |   |   | 104 |   |
|                                                                    |   |           |    |   |        |   |    |                     |   |   |                                                  |   |   |               |    |   |   |   |   |   |   |   |   |   |
| Balance      at December 31, 2006                                       |   |           | 41,749  |   |        |   | 121     |                     |   |   | 366,637                                               |   |   |               | 663     |   |   |   | (272,632 | ) |   |   | 136,538 |   |
|                                                                    |   |           |    |   |        |   |    |                     |   |   |                                                  |   |   |               |    |   |   |   |   |   |   |   |   |   |
| Net      income                                                         |   |           | – |   |        |   | – |                     |   |   | –                                               |   |   |               | – |   |   |   | 8,899 |   |   |   | 8,899 |   |
| Other      comprehensive income:                                        |   |
| Change      in market value of securities                               |   |           | – |   |        |   | – |                     |   |   | –                                               |   |   |               | 1,256   |   |   |   | – |   |   |   | 1,256 |   |
| Reclassification      adjustment for net (gains) included in net income |   |           | – |   |        |   | – |                     |   |   | –                                               |   |   |               | (826    | )      |   |   | – |   |   |   | (826 | ) |
| Total      comprehensive income                                         |   |           |    |   |        |   |    |                     |   |   |                                                  |   |   |               |    |   |   |   |   |   |   |   | 9,329 |   |
|                                                                    |   |           |    |   |        |   |    |                     |   |   |                                                  |   |   |               |    |   |   |   |   |   |   |   |   |   |
| Dividends      on preferred stock                                       |   |           | – |   |        |   | – |                     |   |   | –                                               |   |   |               | – |   |   |   | (4,010 | ) |   |   | (4,010 | ) |
| Stock      option exercise                                              |   |           | – |   |        |   | – |                     |   |   | 37                                                    |   |   |               | – |   |   |   | – |   |   |   | 37 |   |
| Stock      option issuance                                              |   |           | – |   |        |   | – |                     |   |   | 42                                                    |   |   |               | – |   |   |   | – |   |   |   | 42 |   |
|                                                                    |   |           |    |   |        |   |    |                     |   |   |                                                  |   |   |               |    |   |   |   |   |   |   |   |   |   |
| Balance      at December 31, 2007                                       |   | $              | 41,749  |   |        | $      | 121     |                     |   | $      | 366,716                                               |   |   | $                  | 1,093   |   |   | $      | (267,743 | ) |   | $ | 141,936 |   |

----

|                                                                                 |   | 2007   |     |   | 2006   |   |     | 2005   |   |
|--------------------------------------------------------------------------------------|--------|--------|----------|--------|--------|--------|----------|--------|--------|
| Operating      activities:                                                           |   |   |     |   |   |   |     |   |   |
| Net      income                                                                      |   | $      | 8,899    |   |   | $      | 4,909    |   |   | $ | 9,585 |   |
| Adjustments      to reconcile net income to cash provided byoperating    activities: |   |   |     |   |   |   |     |   |   |   |   |   |
| Equity      in (earnings) loss of joint venture                                      |   |   | (709     | )      |   |   | 852      |   |   |   | – |   |
| Distribution      of joint venture earnings                                          |   |   | 1,125    |   |   |   | –  |   |   |   | – |   |
| Loss      on capitalization of joint venture                                         |   |   | –  |   |   |   | 1,194    |   |   |   | – |   |
| (Recapture      of) provision for loan loss                                          |   |   | (1,281   | )      |   |   | (15      | )      |   |   | 5,780 |   |
| Impairment      charges                                                              |   |   | –  |   |   |   | 60       |   |   |   | 2,474 |   |
| (Gain)      loss on sale of investments                                              |   |   | (755     | )      |   |   | 183      |   |   |   | (9,609 | ) |
| Amortization      and depreciation                                                   |   |   | (583     | )      |   |   | (538     | )      |   |   | 2,607 |   |
| Stock      based compensation expense                                                |   |   | 306      |   |   |   | 244      |   |   |   | – |   |
| Net      change in other assets and other liabilities                                |   |   | 1,023    |   |   |   | 536      |   |   |   | 1,500 |   |
| Net      cash and cash equivalents provided by operatingactivities                   |   |   | 8,025    |   |   |   | 7,425    |   |   |   | 12,337 |   |
|                                                                                 |   |   |     |   |   |   |     |   |   |   |   |   |
| Investing      activities:                                                           |   |   |     |   |   |   |     |   |   |   |   |   |
| Principal      payments received on securitized mortgage loans                       |   |   | 68,787   |   |   |   | 93,945   |   |   |   | 144,532 |   |
| Purchase      of securities and other investments                                    |   |   | (27,882  | )      |   |   | (17,221  | )      |   |   | (56,246 | ) |
| Payments      received on securities, other loans and investments                    |   |   | 9,871    |   |   |   | 28,819   |   |   |   | 117,264 |   |
| Proceeds      from sales of securities and other investments                         |   |   | 3,762    |   |   |   | 3,348    |   |   |   | 15,321 |   |
| Return      of capital from joint venture                                            |   |   | 17,095   |   |   |   | –  |   |   |   | – |   |
| Other                                                                                |   |   | 1,035    |   |   |   | (385     | )      |   |   | 168 |   |
| Net      cash and cash equivalents provided by investingactivities                   |   |   | 72,668   |   |   |   | 108,506  |   |   |   | 221,039 |   |
|                                                                                 |   |   |     |   |   |   |     |   |   |   |   |   |
| Financing      activities:                                                           |   |   |     |   |   |   |     |   |   |   |   |   |
| Principal      payments on securitization financing                                  |   |   | (40,547  | )      |   |   | (48,283  | )      |   |   | (102,510 | ) |
| Proceeds      on sale of bonds                                                       |   |   | 35,289   |   |   |   | –  |   |   |   | – |   |
| Redemption      of securitization financing                                          |   |   | –  |   |   |   | –  |   |   |   | (195,653 | ) |
| (Repayment      of) borrowings under repurchase agreements, net                      |   |   | (92,990  | )      |   |   | (37,337  | )      |   |   | 62,847 |   |
| Redemption      of preferred stock                                                   |   |   | –  |   |   |   | (14,068  | )      |   |   | – |   |
| Proceeds      from issuance of common stock                                          |   |   | 37       |   |   |   | –  |   |   |   | – |   |
| Repurchase      of common stock                                                      |   |   | –  |   |   |   | (220     | )      |   |   | – |   |
| Dividends      paid                                                                  |   |   | (4,010   | )      |   |   | (4,378   | )      |   |   | (5,347 | ) |
| Net      cash and cash equivalents used in financing activities                      |   |   | (102,221 | )      |   |   | (104,286 | )      |   |   | (240,663 | ) |
| Net      (decrease) increase in cash and cash equivalents                            |   |   | (21,528  | )      |   |   | 11,645   |   |   |   | (7,287 | ) |
| Cash      and cash equivalents at beginning of year                                  |   |   | 56,880   |   |   |   | 45,235   |   |   |   | 52,522 |   |
| Cash      and cash equivalents at end of year                                        |   | $      | 35,352   |   |   | $      | 56,880   |   |   | $ | 45,235 |   |

----

----

----

----

----

----

|                                                             |   | 2007   |    |   | 2006   |   |
|------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|
| Securitized      mortgage loans:                                 |   |   |    |   |   |   |
| Commercial                                                       |   | $      | 185,998 |   |   | $      | 225,463 |   |
| Single-family                                                    |   |   | 86,088  |   |   |   | 116,060 |   |
|                                                             |   |   | 272,086 |   |   |   | 341,523 |   |
| Funds      held by trustees, including funds held for defeasance |   |   | 7,225   |   |   |   | 7,351 |   |
| Accrued      interest receivable                                 |   |   | 1,940   |   |   |   | 2,380 |   |
| Unamortized      discounts and premiums, net                     |   |   | (67     | )      |   |   | (455 | ) |
| Loans,      at amortized cost                                    |   |   | 281,184 |   |   |   | 350,799 |   |
| Allowance      for loan losses                                   |   |   | (2,721  | )      |   |   | (4,495 | ) |
|                                                             |   | $      | 278,463 |   |   | $      | 346,304 |   |

----

|                                          |   | 2007   |    |   | 2006   |   |    | 2005   |   |
|-----------------------------------------------|--------|--------|---------|--------|--------|--------|---------|--------|--------|
| Allowance      at beginning of year           |   | $      | 4,495   |   |   | $      | 19,035  |   |   | $ | 28,014 |   |
| (Recapture      of) provision for loan losses |   |   | (1,281  | )      |   |   | (15     | )      |   |   | 5,780 |   |
| Credit      losses, net of recoveries         |   |   | (493    | )      |   |   | (4,172  | )      |   |   | (3,450 | ) |
| Loans      sold/transferred                   |   |   | – |   |   |   | (10,353 | )      |   |   | (11,309 | ) |
| Allowance      at end of year                 |   | $      | 2,721   |   |   | $      | 4,495   |   |   | $ | 19,035 |   |

|   |   | Investment      in Impaired Loans |   |   | Reserves      on Impaired Loans |   |   | Investment      in Excess of Reserves |   |
|--------|--------|-----------------------------------|--------|--------|---------------------------------|--------|--------|---------------------------------------|--------|
| 2005   |   | $                                 | 54,558 |   |                            | $      | 21,609 |                                  |   | $ | 32,949 |   |
| 2006   |   |                              | 13,266 |   |                            |   | 4,107  |                                  |   |   | 9,159 |   |
| 2007   |   |                              | 13,792 |   |                            |   | 2,590  |                                  |   |   | 11,202 |   |

|                                                   |   | 2007   |   |   | 2006                         |   |
|--------------------------------------------------------|--------|--------|--------|--------|------------------------------|--------|
|                                                   |   | Value  |   |   | Effective      Interest Rate |   |   | Value |   |   | Effective      Interest Rate |   |
| Securities,      available-for-sale at amortized cost: |   |   |   |   |                         |   |   |   |   |   |   |   |
| Agency      mortgage-backed securities                 |   | $      | 7,410  |   |                         |   | 9.03 | % |   | $ | 1,582 |   |   |   | 9.33 | % |
| Non-agency      mortgage-backed securities             |   |   | 7,684  |   |                         |   | 9.41 | % |   |   | 9,780 |   |   |   | 6.88 | % |
| Equity      securities                                 |   |   | 7,704  |   |                         |   |   |   |   |   | 1,151 |   |   |   |   |   |
| Corporate      debt securities                         |   |   | 4,722  |   |                         |   | 12.46 | % |   |   | – |   |   |   |   |   |
|                                                   |   |   | 27,520 |   |                         |   |   |   |   |   | 12,513 |   |   |   |   |   |
| Gross      unrealized gains                            |   |   | 2,406  |   |                         |   |   |   |   |   | 636 |   |   |   |   |   |
| Gross      unrealized losses                           |   |   | (695   | )      |                         |   |   |   |   |   | (6 | ) |   |   |   |   |
| Securities,      available-for-sale at fair value      |   | $      | 29,231 |   |                         |   |   |   |   | $ | 13,143 |   |   |   |   |   |

----

|                                                         |   | 2007   |   |   | 2006   |   |
|--------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
| Single-family      mortgage loans                            |   | $      | 2,486  |   |   | $      | 3,345 |   |
| Multifamily      and commercial mortgage loan participations |   |   | 927    |   |   |   | 962 |   |
| Unamortized      discounts on mortgage loans                 |   |   | (289   | )      |   |   | (378 | ) |
| Mortgage      loans, net                                     |   |   | 3,124  |   |   |   | 3,929 |   |
|                                                         |   |   |   |   |   |   |   |   |
| Delinquent      property tax receivable securities           |   |   | 2,127  |   |   |   | 2,802 |   |
| Notes      receivable and other investments                  |   |   | 1,523  |   |   |   | – |   |
| Other      loans and investments                             |   | $      | 6,774  |   |   | $      | 6,731 |   |

----

|                                 |   | 2007                   |      |   | 2006                             |   |
|--------------------------------------|--------|------------------------|-----------|--------|----------------------------------|--------|
|                                 |   | Bonds      Outstanding |      |   | Range      ofInterest      Rates |   |   | Bonds      Outstanding |   |   | Range      of Interest      Rates |   |
| Fixed      rate classes              |   | $                      | 167,398   |   |                             |   | 6.6%      - 8.8 | % |   | $ | 206,478 |   |   |   | 6.6%      - 8.8 | % |
| Variable      rate class             |   |                   | 34,500    |   |                             |   | 5.1 | % |   |   | - |   |   |   |   |   |
| Accrued      interest payable        |   |                   | 1,186     |   |                             |   |   |   |   |   | 1,428 |   |   |   |   |   |
| Deferred      costs                  |   |                   | (1,851    | )      |                             |   |   |   |   |   | (2,848 | ) |   |   |   |   |
| Unamortized      net bond premium    |   |                   | 3,152     |   |                             |   |   |   |   |   | 6,506 |   |   |   |   |   |
|                                 |   | $                      | 204,385   |   |                             |   |   |   |   | $ | 211,564 |   |   |   |   |   |
|                                 |   |                   |      |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Range      of stated maturities      |   |                   | 2024-2027 |   |                             |   |   |   |   |   | 2024-2027 |   |   |   |   |   |
| Estimated      weighted average life |   | 3.3      years         |      |   |                             |   |   |   | 3.5      years |   |   |   |   |   |
| Number      of series                |   |                   | 3         |   |                             |   |   |   |   |   | 2 |   |   |   |   |   |

----

|                                                |   | 2007          |    |   | 2006      |   |
|-----------------------------------------------------|--------|---------------|---------|--------|-----------|--------|
|                                                |   | RecordedBasis |    |   | FairValue |   |   | RecordedBasis |   |   | FairValue |   |
| Assets:                                             |   |          |    |   |      |   |   |   |   |   |   |   |
|   Securitized      mortgage loans, net    |   | $             | 278,463 |   |      | $      | 282,242 |   |   | $ | 346,304 |   |   | $ | 369,984 |   |
|   Securities                              |   |          | 29,231  |   |      |   | 29,231 |   |   |   | 13,143 |   |   |   | 13,143 |   |
|   Other      loans and investments        |   |          | 6,774   |   |      |   | 7,407 |   |   |   | 6,731 |   |   |   | 7,507 |   |
|                                                |   |          |    |   |      |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities:                                        |   |          |    |   |      |   |   |   |   |   |   |   |   |   |   |   |
|   Securitization      financing           |   |          | 204,385 |   |      |   | 212,327 |   |   |   | 211,564 |   |   |   | 230,575 |   |
|   Repurchase      agreements              |   |          | 4,612   |   |      |   | 4,612 |   |   |   | 95,978 |   |   |   | 95,978 |   |
|   Obligation      under payment agreement |   |          | 16,796  |   |      |   | 15,473 |   |   |   | 16,299 |   |   |   | 16,541 |   |

----

| Condensed      Statement of Operations     |   | 2007   |    |   | 2006   |   |
|--------------------------------------------|--------|--------|---------|--------|--------|--------|
| Interest      income                       |   | $      | 5,819   |   |   | $      | 1,611 |   |
| Interest      expense                      |   |   | – |   |   |   | – |   |
| Impairment                                 |   |   | – |   |   |   | (3,664 | ) |
| (Loss)      gain on derivative instruments |   |   | (3,275  | )      |   |   | 589 |   |
| Net      income (loss)                     |   | $      | 2,318   |   |   | $      | (1,508 | ) |

| Condensed      Balance Sheet |   | 2007   |    |   | 2006   |   |
|------------------------------|--------|--------|---------|--------|--------|--------|
| Total      assets            |   | $      | 37,972  |   |   | $      | 73,219 |   |
| Total      liabilities       |   |   | – |   |   |   | – |   |
| Total      equity            |   | $      | 37,972  |   |   | $      | 73,219 |   |

|                                             |   | 2007   |    |   | 2006                                |   |       | 2005   |   |
|--------------------------------------------------|--------|--------|---------|--------|-------------------------------------|--------|------------|--------|--------|
|                                             |   | Income |    |   | Weighted      Average Common Shares |   |       | Income |   |   | Weighted      Average Common Shares |   |   | Income |   |   | Weighted      Average Common Shares |   |
|                                             |   |   |    |   |                                |   |       |   |   |   |   |   |   |   |   |   |   |   |
| Net      income                                  |   | $      | 8,899   |   |                                |   |       |   | $      | 4,909 |   |   |   |   |   | $ | 9,585 |   |   |   |   |
| Preferred      stock charge                      |   |   | (4,010  | )      |                                |   |       |   |   | (4,044 | ) |   |   |   |   |   | (5,347 | ) |   |   |   |
| Net      income available to common shareholders |   | $      | 4,889   |   |                                |   | 12,135,495 |   |   | $ | 865 |   |   |   | 12,140,452 |   |   | $ | 4,238 |   |   |   | 12,163,062 |   |
|                                             |   |   |    |   |                                |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net      income per share:                       |   |   |    |   |                                |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic and diluted                                |   |   |    |   |                                | $      | 0.40       |   |   |   |   |   |   | $ | 0.07 |   |   |   |   |   |   | $ | 0.35 |   |
|                                             |   |   |    |   |                                |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net      effect of dilutive stock options        |   |   | – |   |                                |   | 2,593      |   |   |   | – |   |   |   | – |   |   |   | – |   |   |   | – |   |
|                                             |   |   |    |   |                                |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                             |   | $      | 4,889   |   |                                |   | 12,138,088 |   |   | $ | 865 |   |   |   | 12,140,452 |   |   | $ | 4,238 |   |   |   | 12,163,062 |   |
|                                             |   |   |    |   |                                |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

----

|                                           |   | Year      ended December 31, |      |
|------------------------------------------------|--------|------------------------------|-----------|
|                                           |   | 2007                         |      |   | 2006 |   |   | 2005 |   |
| Shares      issuable under stock option awards |   |                         | 92,407    |   |   |   | 70,000 |   |   |   | 35,000 |   |
| Convertible      preferred shares              |   |                         | 4,221,539 |   |   |   | 4,256,237 |   |   |   | 5,628,737 |   |

|                                         |   | Shares        |       |
|----------------------------------------------|--------|---------------|------------|
|                                         |   | Preferred     |       |   |   |   |
|                                         |   | Series      D |       |   | Common |   |
| January      1, 2005                         |   |          | 5,628,737  |   |   |   | 12,162,391 |   |
| Granted                                      |   |          | -          |   |   |   | 1,000 |   |
| December      31, 2005                       |   |          | 5,628,737  |   |   |   | 12,163,391 |   |
| Redeemed                                     |   |          | (1,406,767 | ) |   |   | - |   |
| Converted                                    |   |          | (431       | ) |   |   | 431 |   |
| Repurchased                                  |   |          | -          |   |   |   | (32,560 | ) |
| December      31, 2006                       |   |          | 4,221,539  |   |   |   | 12,131,262 |   |
| Shares      issued for stock option exercise |   |          | -          |   |   |   | 5,000 |   |
| December      31, 2007                       |   |          | 4,221,539  |   |   |   | 12,136,262 |   |

----

NOTE 13 – EMPLOYEE BENEFITS

|                                 | SARs      Fair Value |
|--------------------------------------|----------------------|
|                                 | December      31,    |
|                                 | 2007                 | 2006 | 2005 |
| Expected      volatility             | 15.0%-20.0%          | 17.2%-22.9% | 14.6%-17.8% |
| Weighted-average      volatility     | 16.2%                | 19.4% | 16.1% |
| Expected      dividends              | 0%                   | 0% | 0% |
| Expected      term (in months)       | 49                   | 45 | 35 |
| Weighted-average      risk-free rate | 3.5%                 | 4.7% | 4.7% |
| Range      of risk-free rates        | 3.3%-3.6%            | 4.7% | 4.6%-4.7% |

----

|                                         |   | Year      Ended        |    |
|----------------------------------------------|--------|------------------------|---------|
|                                         |   | December      31, 2007 |    |
|                                         |   | Number      of Shares  |    |   | Weighted-AverageExercisePrice |   |
| SARs      outstanding at beginning of period |   |                   | 203,297 |   |   | $ | 7.36 |   |
| SARs      granted                            |   |                   | 82,500  |   |   |   | 7.06 |   |
| SARs      forfeited or redeemed              |   |                   | (7,651  | ) |   |   | 7.25 |   |
| SARs      exercised                          |   |                   | – |   |   |   | – |   |
| SARs      outstanding at end of period       |   |                   | 278,146 |   |   | $ | 7.27 |   |
| SARs      vested and exercisable             |   |                   | 78,249  |   |   | $ | 7.53 |   |

|                                            |   | Year      Ended        |    |
|-------------------------------------------------|--------|------------------------|---------|
|                                            |   | December      31, 2007 |    |
|                                            |   | Number      of Shares  |    |   | Weighted-AverageExercisePrice |   |
| Options      outstanding at beginning of period |   |                   | 75,000  |   |   | $ | 7.98 |   |
| Options      granted                            |   |                   | 25,000  |   |   |   | 9.02 |   |
| Options      forfeited or redeemed              |   |                   | – |   |   |   | – |   |
| Options      exercised                          |   |                   | (5,000  | )  |   |   | 7.43 |   |
| Options      outstanding at end of period       |   |                   | 95,000  |   |   | $ | 8.28 |   |
| Options      vested and exercisable             |   |                   | 95,000  |   |   | $ | 8.28 |   |

----

The Company and one of its subsidiaries may be involved in certainlitigation matters arising in the ordinary courseof  business.  Although the ultimate outcome of thesematters cannot be ascertained at this time, and the results of legal proceedingscannot be predicted with certainty, the Company believes, based on currentknowledge, that the resolution of these matters will not have a material adverseeffect on the Company’s financial position or results ofoperations.  Information on litigation arising out of the ordinarycourse of business is described below.

----

|                                                 |   | Years      ended December 31, |    |
|------------------------------------------------------|--------|-------------------------------|---------|
|                                                 |   | 2007                          |    |   | 2006 |   |   | 2005 |   |
| Cash      paid for interest                          |   | $                             | 20,082  |   |   | $ | 40,932 |   |   | $ | 61,824 |   |
|                                                 |   |                          |    |   |   |   |   |   |   |   |   |   |
| Supplemental      disclosure of non-cash activities: |   |                          |    |   |   |   |   |   |   |   |   |   |
| Formation      of joint venture with Deutsche Bank   |   | $                             | – |   |   | $ | 38,248 |   |   | $ | – |   |
| Conversion      of preferred shares to common shares |   | $                             | – |   |   | $ | 4 |   |   | $ | – |   |

----

| Year      Ended December 31, 2007                        |   | First      Quarter |    |   | Second      Quarter |   |    | Third      Quarter |   |   | Fourth      Quarter |   |
|----------------------------------------------------------|--------|--------------------|---------|--------|---------------------|--------|---------|--------------------|--------|--------|---------------------|--------|
| Operating      results:                                  |   |               |    |   |                |   |    |               |   |   |                |   |
| Total      interest income                               |   | $                  | 8,215   |   |                | $      | 8,023   |               |   | $      | 7,473               |   |   | $ | 7,067 |   |
| Net      interest income after provision for loan losses |   |               | 2,983   |   |                |   | 3,665   |               |   |   | 2,584               |   |   |   | 2,732 |   |
| Net      income                                          |   |               | 1,942   |   |                |   | 2,702   |               |   |   | 2,686               |   |   |   | 1,569 |   |
| Basic      and diluted net income per common share       |   |               | 0.08    |   |                |   | 0.14    |               |   |   | 0.14                |   |   |   | 0.05 |   |
| Cash      dividends declared per common share            |   |               | – |   |                |   | – |               |   |   | –             |   |   |   | – |   |

| Year      Ended December 31, 2006                         |   | First      Quarter |    |   | Second      Quarter |   |    | Third      Quarter |   |   | Fourth      Quarter |   |
|-----------------------------------------------------------|--------|--------------------|---------|--------|---------------------|--------|---------|--------------------|--------|--------|---------------------|--------|
| Operating      results:                                   |   |               |    |   |                |   |    |               |   |   |                |   |
| Total      interest income                                |   | $                  | 14,766  |   |                | $      | 14,192  |               |   | $      | 13,000              |   |   | $ | 8,491 |   |
| Net      interest income after provision for loan losses  |   |               | 2,407   |   |                |   | 2,543   |               |   |   | 3,102               |   |   |   | 3,050 |   |
| Net      income (loss)                                    |   |               | 1,213   |   |                |   | 1,615   |               |   |   | (215                | )      |   |   | 2,297 |   |
| Basic      and diluted net income (loss) per common share |   |               | 0.01    |   |                |   | 0.05    |               |   |   | (0.10               | )      |   |   | 0.11 |   |
| Cash      dividends declared per common share             |   |               | – |   |                |   | – |               |   |   | –             |   |   |   | – |   |