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|       þ | ANNUAL REPORT      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF      1934 |
|--------------------------------------------|------------------------------------------------------------------------------------------------|

|       o | TRANSITION      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF      1934 |
|---------------------------------------|----------------------------------------------------------------------------------------------------|

| Virginia                                                                           | 52-1549373                                     |
|------------------------------------------------------------------------------------|------------------------------------------------|
| (State      or other jurisdiction of                                               | (I.R.S.      Employer                          |
| incorporation      or organization)                                                | Identification      No.)                       |
|                                                                               |                                           |
| 4991      Lake Brook Drive, Suite 100, Glen Allen, Virginia                        | 23060                                          |
| (Address      of principal executive offices)                                      | (Zip      Code)                                |
|                                                                               |                                           |
| (804)      217-5800(Registrant’s      telephone number, including area code) |
|                                                                               |
| 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 ConvertiblePreferred      Stock, $.01 par value     | New      York Stock Exchange                   |
|                                                                               |                                           |
| Securities      registered pursuant to Section 12(g) of the Act: None              |

| Large      accelerated filer | o                                                               | Accelerated    filer           | þ |
|------------------------------|-----------------------------------------------------------------|--------------------------------|--------|
| Non-accelerated      filer   | o  (Do      not check if a smaller reporting company) | Smaller reporting      company | o      |

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|           |          |                                                                                                                         | Page      Number |
|----------------|---------------|------------------------------------------------------------------------------------------------------------------------------|------------------|
| PART      I.   |          |                                                                                                                         |             |
|           | Item      1.  | Business                                                                                                                     | 1                |
|           | Item      1A. | Risk      Factors                                                                                                            | 6                |
|           | Item      1B. | Unresolved      Staff Comments                                                                                               | 19               |
|           | Item      2.  | Properties                                                                                                                   | 19               |
|           | Item      3.  | Legal      Proceedings                                                                                                       | 20               |
|           | Item      4.  | Submission      of Matters to a Vote of Security Holders                                                                     | 21               |
|           |          |                                                                                                                         |             |
| PART      II.  |          |                                                                                                                         |             |
|           | Item      5.  | Market      for Registrant’s Common Equity, Related Stockholder Matters and Issuer      Purchases of Equity Securities | 21               |
|           | Item      6.  | Selected      Financial Data                                                                                                 | 23               |
|           | Item      7.  | Management’s      Discussion and Analysis of Financial Condition and Results of      Operations                        | 23               |
|           | Item      7A. | Quantitative      and Qualitative Disclosures About Market Risk                                                              | 52               |
|           | Item      8.  | Financial      Statements and Supplementary Data                                                                             | 59               |
|           | Item      9.  | Changes      in and Disagreements with Accountants on Accounting and Financial      Disclosure                               | 59               |
|           | Item      9A. | Controls      and Procedures                                                                                                 | 59               |
|           | Item      9B. | Other      Information                                                                                                       | 59               |
|           |          |                                                                                                                         |             |
| PART      III. | Item      10. | Directors,      Executive Officers and Corporate Governance                                                                  | 60               |
|           | Item      11. | Executive      Compensation                                                                                                  | 60               |
|           | Item      12. | Security      Ownership of Certain Beneficial Owners and Management and Related      Stockholder Matters                     | 60               |
|           | Item      13. | Certain      Relationships and Related Transactions, and Director      Independence                                          | 60               |
|           | Item      14. | Principal      Accountant Fees and Services                                                                                  | 61               |
|           |          |                                                                                                                         |             |
| PART      IV.  | Item      15. | Exhibits,      Financial Statement Schedules                                                                                 | 62               |
|           |          |                                                                                                                         |             |
| SIGNATURES     |          | 64                                                                                                                           |
|           |          |                                                                                                                         |

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| ITEM      1. | BUSINESS |
|--------------|----------|

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| ·   | interest      rate hedging can be expensive, particularly during periods of rising and      volatile interest rates; |
|--------------------|----------------------------------------------------------------------------------------------------------------------|

| ·   | available      interest rate hedges may not correspond directly with the interest rate      risk for which we seek protection; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------|

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

| ·   | the      amount of income that a REIT may earn from hedging transactions (other      than through taxable REIT subsidiaries) to offset interest rate losses may      be limited by U.S. federal income tax provisions governing      REITs; |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | 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; |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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| ·   | 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 dividenddistributions. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Stock      ownership tests may limit our ability to raise significant amounts of      equity capital from one source. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------|

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| ITEM      1B. | UNRESOLVED      STAFF COMMENTS |
|---------------|--------------------------------|

| ITEM      2. | PROPERTIES |
|--------------|------------|

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| ITEM      3. | LEGAL      PROCEEDINGS |
|--------------|------------------------|

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| ITEM      4. | SUBMISSION      OF MATTERS TO A VOTE OF SECURITYHOLDERS |
|--------------|---------------------------------------------------------|

| Name      (Age)                | Current      Title                                                                      | Business      Experience During Past 5 Years                                                                                                                                                                                                            |
|--------------------------------|-----------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Thomas      B. Akin (57)       | Chairman      of the Board and Chief Executive Officer                             | Chief      Executive Officer since February 2008; Chairman of the Board since 2003;      managing general partner of Talkot Capital, LLC since 1995.                                                                                               |
| Stephen      J. Benedetti (46) | Executive      Vice President, Chief Operating Officer and Chief Financial      Officer | Executive      Vice President and Chief Operating Officer since November 2005; Executive      Vice President and Chief Financial Officer from September 2001 to November      2005 and beginning again in February 2008.                           |
| Byron      L. Boston (50)      | Chief      Investment Officer                                                           | Chief      Investment Officer since April 2008; President of Boston Consulting Group      from November 2006 to April 2008; Vice Chairman and Executive Vice      President of Sunset Financial Resources, Inc. from January 2004 to October      2006. |

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

|                |   | High   |   |   | Low    |   |   | Dividends      Declared |   |
|--------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|-------------------------|--------|
| 2008:                                                                                |   |   |   |   |   |   |   |                    |   |
| First      quarter                                                                   |   | $      | 9.90   |   |   | $      | 8.23   |                    |   | $ | 0.10 |   |
| Second      quarter                                                                  |   | $      | 9.99   |   |   | $      | 8.50   |                    |   | $ | 0.15 |   |
| Third      quarter                                                                   |   | $      | 9.23   |   |   | $      | 6.52   |                    |   | $ | 0.23 |   |
| Fourth      quarter                                                                  |   | $      | 8.00   |   |   | $      | 5.79   |                    |   | $ | 0.23 |   |
|                                                                                 |   |   |   |   |   |   |   |                    |   |   |   |   |
| 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   |                    |   | $ | – |   |

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|                                   |   | Cumulative      Total Stockholder Returns as of December 31, |   |
|----------------------------------------|--------|--------------------------------------------------------------|--------|
| Index                                  |   | 2003                                                         |   |   | 2004 |   |   | 2005 |   |   | 2006 |   |   | 2007 |   |   | 2008 |   |
| Dynex      Capital, Inc.               |   | $                                                            | 100.00 |   |   | $ | 128.20 |   |   | $ | 113.12 |   |   | $ | 116.23 |   |   | $ | 145.42 |   |   | $ | 117.21 |   |
| S&P      500 (1)                   |   | $                                                            | 100.00 |   |   | $ | 110.88 |   |   | $ | 116.32 |   |   | $ | 134.69 |   |   | $ | 142.09 |   |   | $ | 89.51 |   |
| Bloomberg      Mortgage REIT Index (1) |   | $                                                            | 100.00 |   |   | $ | 127.95 |   |   | $ | 106.92 |   |   | $ | 128.42 |   |   | $ | 69.63 |   |   | $ | 40.91 |   |

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

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| ITEM      6. | SELECTED      FINANCIAL DATA |
|--------------|------------------------------|

| Years      ended December 31,                                                           |   | 2008   |    |   | 2007   |   |    | 2006   |   |   | 2005    |   |   | 2004   |    |
|-----------------------------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|---------|--------|--------|--------|---------|--------|--------|--------|---------|
| (amounts      in thousands except share and per share data)                             |   |   |    |   |   |   |    |   |   |   |    |   |   |   |    |
| Net      interest income                                                                |   | $      | 10,547  |   |   | $      | 10,683  |   |   | $      | 11,087  |   |   | $      | 11,889  |   |   | $ | 23,281 |   |
| Net      interest income after (provision for) recapture of  loan      losses |   |   | 9,556   |   |   |   | 11,964  |   |   |   | 11,102  |   |   |   | 6,109   |   |   |   | 4,818 |   |
| Equity      in (loss) income of joint venture                                           |   |   | (5,733  | )      |   |   | 709     |   |   |   | (852    | )      |   |   | – |   |   |   | – |   |
| Loss      on capitalization of joint venture                                            |   |   | – |   |   |   | – |   |   |   | (1,194  | )      |   |   | – |   |   |   | – |   |
| Gain      (loss) on sale of investments                                                 |   |   | 2,316   |   |   |   | 755     |   |   |   | (183    | )      |   |   | 9,609   |   |   |   | 14,490 |   |
| Impairment      charges                                                                 |   |   | – |   |   |   | – |   |   |   | – |   |   |   | (2,474  | ) |   |   | (14,756 | ) |
| Fair      value adjustments, net                                                        |   |   | 7,147   |   |   |   | – |   |   |   | – |   |   |   | – |   |   |   | – |   |
| Other      income (expense)                                                             |   |   | 7,467   |   |   |   | (533    | )      |   |   | 557     |   |   |   | 2,022   |   |   |   | (179 | ) |
| General      and administrative expenses                                                |   |   | (5,632  | )      |   |   | (3,996  | )      |   |   | (4,521  | )      |   |   | (5,681  | ) |   |   | (7,748 | ) |
| Net      income (loss)                                                                  |   | $      | 15,121  |   |   | $      | 8,899   |   |   | $      | 4,909   |   |   | $      | 9,585   |   |   | $ | (3,375 | ) |
| Net      income (loss) to common shareholders                                           |   | $      | 11,111  |   |   | $      | 4,889   |   |   | $      | 865     |   |   | $      | 4,238   |   |   | $ | (5,194 | ) |
| Net      income (loss) per common share:                                                |   |   |    |   |   |   |    |   |   |   |    |   |   |   |    |   |   |   |   |   |
| Basic      & diluted                                                                |   | $      | 0.91    |   |   | $      | 0.40    |   |   | $      | 0.07    |   |   | $      | 0.35    |   |   | $ | (0.46 | ) |
| Dividends      declared per share:                                                      |   |   |    |   |   |   |    |   |   |   |    |   |   |   |    |   |   |   |   |   |
| Common                                                                                  |   | $      | 0.71    |   |   | $      | – |   |   | $      | – |   |   | $      | – |   |   | $ | – |   |
| Series A and B      Preferred                                                           |   | $      | – |   |   | $      | – |   |   | $      | – |   |   | $      | – |   |   | $ | – |   |
| Series C    Preferred                                                                   |   | $      | – |   |   | $      | – |   |   | $      | – |   |   | $      | – |   |   | $ | – |   |
| Series D    Preferred                                                                   |   | $      | 0.9500  |   |   | $      | 0.9500  |   |   | $      | 0.9500  |   |   | $      | 0.9500  |   |   | $ | 0.6993 |   |

| December      31,                |   | 2008   |       |   | 2007   |   |       | 2006   |   |   | 2005       |   |   | 2004   |       |
|----------------------------------|--------|--------|------------|--------|--------|--------|------------|--------|--------|--------|------------|--------|--------|--------|------------|
| Investments                      |   | $      | 573,793    |   |   | $      | 333,735    |   |   | $      | 403,566    |   |   | $      | 756,409    |   |   | $ | 1,343,448 |   |
| Total      assets                |   |   | 607,191    |   |   |   | 374,758    |   |   |   | 466,557    |   |   |   | 805,976    |   |   |   | 1,400,934 |   |
| Securitization      financing    |   |   | 178,165    |   |   |   | 204,385    |   |   |   | 211,564    |   |   |   | 516,578    |   |   |   | 1,177,280 |   |
| Repurchase      agreements       |   |   | 274,217    |   |   |   | 4,612      |   |   |   | 95,978     |   |   |   | 133,315    |   |   |   | 70,468 |   |
| Total      liabilities           |   |   | 466,782    |   |   |   | 232,822    |   |   |   | 330,019    |   |   |   | 656,642    |   |   |   | 1,252,168 |   |
| Shareholders’      equity  |   |   | 140,409    |   |   |   | 141,936    |   |   |   | 136,538    |   |   |   | 149,334    |   |   |   | 148,766 |   |
| Common      shares outstanding   |   |   | 12,169,762 |   |   |   | 12,136,262 |   |   |   | 12,131,262 |   |   |   | 12,163,391 |   |   |   | 12,162,391 |   |
| Book      value per common share |   | $      | 8.07       |   |   | $      | 8.22       |   |   | $      | 7.78       |   |   | $      | 7.65       |   |   | $ | 7.60 |   |

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

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|                                    |   | December      31, |    |
|-----------------------------------------|--------|-------------------|---------|
| (amounts      in thousands)             |   | 2008              |    |   | 2007 |   |
|                                    |   |              |    |   |   |   |
| Agency      MBS, at fair value          |   | $                 | 311,576 |   |   | $ | 7,456 |   |
| Securitized      mortgage loans, net    |   |              | 243,827 |   |   |   | 278,463 |   |
| Investment      in joint venture        |   |              | 5,655   |   |   |   | 19,267 |   |
| Other      investments                  |   |              | 12,735  |   |   |   | 28,549 |   |
|                                    |   |              |    |   |   |   |   |   |
| Repurchase      agreements              |   |              | 274,217 |   |   |   | 4,612 |   |
| Securitization      financing           |   |              | 178,165 |   |   |   | 204,385 |   |
| Obligation      under payment agreement |   |              | 8,534   |   |   |   | 16,796 |   |
| Shareholders’      equity         |   |              | 140,409 |   |   |   | 141,936 |   |

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| (amounts      in thousands)             |   | December      31, 2008 |    |   | December      31, 2007 |   |
|-----------------------------------------|--------|------------------------|---------|--------|------------------------|--------|
| Hybrid      Agency MBS:                 |   |                   |    |   |                   |   |
| Fannie Mae      Certificates            |   | $                      | 213,023 |   |                   | $      | – |   |
| Freddie Mac      Certificates           |   |                   | 97,403  |   |                   |   | – |   |
|                                    |   |                   | 310,426 |   |                   |   | – |   |
| Fixed      Rate Agency MBS              |   |                   | 194     |   |                   |   | 7,456 |   |
|                                    |   |                   | 310,620 |   |                   |   | 7,456 |   |
| Principal      receivable on Agency MBS |   |                   | 956     |   |                   |   | – |   |
|                                    |   | $                      | 311,576 |   |                   | $      | 7,456 |   |

| (amounts      in thousands)           |   | 2008   |    |   | 2007   |   |
|---------------------------------------|--------|--------|---------|--------|--------|--------|
| Securitized      mortgage loans, net: |   |   |    |   |   |   |
| Commercial                            |   | $      | 171,963 |   |   | $      | 190,570 |   |
| Single-family                         |   |   | 71,864  |   |   |   | 87,893 |   |
|                                  |   |   | 243,827 |   |   |   | 278,463 |   |

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| (amounts      in thousands)                         |   | December      31, 2008 |    |   | December      31, 2007 |   |
|-----------------------------------------------------|--------|------------------------|---------|--------|------------------------|--------|
| Other      securities, at fair value:               |   |                   |    |   |                   |   |
| Non-Agency MBS                                      |   | $                      | 6,260   |   |                   | $      | 7,726 |   |
| Corporate debt      securities                      |   |                   | – |   |                   |   | 4,348 |   |
| Equity securities of publicly      traded companies |   |                   | 3,607   |   |                   |   | 9,701 |   |
|                                                |   |                   | 9,867   |   |                   |   | 21,775 |   |
| Other      loans and investments, at amortized cost |   |                   | 2,868   |   |                   |   | 6,774 |   |
|                                                |   | $                      | 12,735  |   |                   | $      | 28,549 |   |

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| (amounts      in thousands)                            |   | 2008   |    |   | 2007   |   |
|--------------------------------------------------------|--------|--------|---------|--------|--------|--------|
| Securitization      financing bonds:                   |   |   |    |   |   |   |
| Fixed, secured by commercial      mortgage loans       |   | $      | 150,588 |   |   | $      | 170,623 |   |
| Variable, secured by single-family      mortgage loans |   |   | 27,577  |   |   |   | 33,762 |   |
|                                                   |   | $      | 178,165 |   |   | $      | 204,385 |   |

----

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|                                                 |   | December      31, 2008(amounts      in thousands) |    |
|------------------------------------------------------|--------|---------------------------------------------------|---------|
| Investment                                           |   | Investment      basis                             |    |   | Financing(1) |   |   | Net      investment basis |   |   | Estimated      fair value of net investment basis |   |
| Agency      MBS (2)                                  |   | $                                                 | 311,576 |   |   | $ | 274,217 |   |   | $ | 37,359 |   |   | $ | 37,359 |   |
|                                                 |   |                                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securitized      mortgage loans: (3)            |   |                                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Single-family      mortgage loans – 2002 Trust |   |                                              | 71,864  |   |   |   | 27,577 |   |   |   | 44,287 |   |   |   | 35,972 |   |
| Commercial      mortgage loans – 1993 Trust    |   |                                              | 21,486  |   |   |   | 18,321 |   |   |   | 3,165 |   |   |   | 3,376 |   |
| Commercial      mortgage loans – 1997 Trust    |   |                                              | 150,477 |   |   |   | 140,801 |   |   |   | 9,676 |   |   |   | – |   |
|                                                 |   |                                              | 243,827 |   |   |   | 186,699 |   |   |   | 57,128 |   |   |   | 39,348 |   |
|                                                 |   |                                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment      in joint venture (4)                 |   |                                              | 5,655   |   |   |   | – |   |   |   | 5,655 |   |   |   | 5,595 |   |
|                                                 |   |                                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other      investments:      (5)                     |   |                                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-agency      MBS                                  |   |                                              | 6,260   |   |   |   | – |   |   |   | 6,260 |   |   |   | 6,260 |   |
| Equity      securities                               |   |                                              | 3,607   |   |   |   | – |   |   |   | 3,607 |   |   |   | 3,607 |   |
| Other      loans and investments                     |   |                                              | 2,868   |   |   |   | – |   |   |   | 2,868 |   |   |   | 2,491 |   |
|                                                 |   |                                              | 12,735  |   |   |   | – |   |   |   | 12,735 |   |   |   | 12,358 |   |
|                                                 |   |                                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                                |   | $                                                 | 573,793 |   |   | $ | 460,916 |   |   | $ | 112,877 |   |   | $ | 94,660 |   |

| (1)   | Financing      includes repurchase agreements and securitization financing issued to      third parties.  Financing for the 1997 Trust also includes our      obligation under payment agreement, which at December 31, 2008 had a      balance of $8,534. |
|-----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2)   | Fair      values are based on a third-party pricing service and dealer      quotes. |
|-----------------|-------------------------------------------------------------------------------------|

| (3)   | Fair      values are based on discounted cash flows using assumptions set forth in      the table below, inclusive of amounts invested in unredeemed      securitization financing bonds. |
|-----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4)   | 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 3above. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (5)   | Fair      values are based on closing prices from national exchange for equity      securities.  For the other items, fair value is calculated as      the net present value of expected future cash  flows. |
|-----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|                                                 | Fair      Value Assumptions               |                                       |
|------------------------------------------------------|-------------------------------------------|--------------------------------------------|
| Loan      type                                       | Approximate      date of loan origination | Weighted-average      prepayment speeds(1) | Projected      Annual Losses (2) | Weighted-averagediscount      rate(3) | YTD      2008 Cash Flows (4)(amounts      in thousands) |
|                                                 |                                      |                                       |   |   |   |
| Single-family      mortgage loans – 2002 Trust | 1994                                      | 15%      CPR                               | 0.2% | 20% | $      6,729 |
|                                                 |                                      |                                       |   |   |   |
| Commercial      mortgage loans – 1993 Trust    | 1993                                      | 0%      CPR                                | 0.8% | 20% | $         447 |
| Commercial      mortgage loans – 1997 Trust    | 1997                                      | (5)                                        | 0.8% | 35% | $             – |
|                                                 |                                      |                                       |   |   |   |
|                                                 |                                      |                                       |   |   |   |

| (1) | Assumed      CPR speeds generally are governed by underlying pool characteristics, such      as loan rate, loan age and borrower creditworthiness as well as other      factors.   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. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Management’s      estimate of losses that would be used by a third party in valuing these or      similar assets. |
|-----|-------------------------------------------------------------------------------------------------------------------------|

| (3) | Represents      management’s estimate of the market discount rate that would be used by a      third party in valuing these or similarassets. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | Represents      total cash flows received in 2008 on the investment including principal      and interest.  Cash flows from the Commercial mortgage loans –      1997 Trust are paid by the Company to the joint venture pursuant to the      Payment Agreement (see Note 10 to the consolidated financial      statements). |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (5) | Although      no prepayments are modeled, estimated  cash flows assume these      loans prepay on the expiration of their lockout period, which is before      their scheduled maturity. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (amounts      in thousands)                 |   | December      31, 2008 |    |
|---------------------------------------------|--------|------------------------|---------|
| Investments:                                |   |                   |    |
| Agency      MBS                             |   | $                      | 37,359  |   |
| AAA      rated loans and securities         |   |                   | 40,622  |   |
| AA      and A rated fixed income securities |   |                   | 337     |   |
| Unrated      and non-investment grade       |   |                   | 6,917   |   |
| Securitization      over-collateralization  |   |                   | 21,987  |   |
| Investment      in joint venture            |   |                   | 5,655   |   |
|                                        |   | $                      | 112,877 |   |

----

| (amounts      in thousands)                    |   | Book      Value |    |
|------------------------------------------------|--------|-----------------|---------|
| Total      investment assets (per table above) |   | $               | 112,877 |   |
| Cash      and cash equivalents                 |   |            | 27,309  |   |
| Other      assets and liabilities, net         |   |            | 223     |   |
|                                           |   | $               | 140,409 |   |

RESULTS OFOPERATIONS

|                                                     |   | Year      Ended December 31, |    |
|----------------------------------------------------------|--------|------------------------------|---------|
| (amounts      in thousands except per share information) |   | 2008                         |    |   | 2007 |   |   | 2006 |   |
|                                                     |   |                         |    |   |   |   |   |   |   |
| Interest      income                                     |   | $                            | 29,653  |   |   | $ | 30,778 |   |   | $ | 50,449 |   |
| Interest      expense                                    |   |                         | 19,106  |   |   |   | 20,095 |   |   |   | 39,362 |   |
| (Provision      for) recapture of loan losses            |   |                         | (991    | ) |   |   | 1,281 |   |   |   | 15 |   |
| Equity      in (loss) earnings of joint venture          |   |                         | (5,733  | ) |   |   | 709 |   |   |   | (852 | ) |
| Loss      on capitalization of joint venture             |   |                         | – |   |   |   | – |   |   |   | (1,194 | ) |
| Gain      (loss) on sales of investments                 |   |                         | 2,316   |   |   |   | 755 |   |   |   | (183 | ) |
| Fair      value adjustments, net                         |   |                         | 7,147   |   |   |   | – |   |   |   | – |   |
| Other      income (expense)                              |   |                         | 7,467   |   |   |   | (533 | ) |   |   | 557 |   |
| General      and administrative expenses:                |   |                         |    |   |   |   |   |   |   |   |   |   |
| Compensation and      benefits                           |   |                         | (2,341  | ) |   |   | (1,921 | ) |   |   | (2,140 | ) |
| Other general and administrative      expenses           |   |                         | (3,291  | ) |   |   | (2,075 | ) |   |   | (2,381 | ) |
| Net      income                                          |   |                         | 15,121  |   |   |   | 8,899 |   |   |   | 4,909 |   |
| Net      income to common shareholders                   |   |                         | 11,111  |   |   |   | 4,889 |   |   |   | 865 |   |
|                                                     |   |                         |    |   |   |   |   |   |   |   |   |   |
| Basic      and diluted net income per common share       |   | $                            | 0.91    |   |   | $ | 0.40 |   |   | $ | 0.07 |   |
|                                                     |   |                         |    |   |   |   |   |   |   |   |   |   |

|                                                   |   | Year      Ended December 31, |   |
|--------------------------------------------------------|--------|------------------------------|--------|
| (amounts      in thousands)                            |   | 2008                         |   |   | 2007 |   |
| Interest      income - Investments:                    |   |                         |   |   |   |   |
| Agency MBS                                             |   | $                            | 6,731  |   |   | $ | 110 |   |
| Securitized mortgage      loans                        |   |                         | 20,886 |   |   |   | 26,424 |   |
| Other    investments                                   |   |                         | 1,351  |   |   |   | 1,633 |   |
|                                                   |   |                         | 28,968 |   |   |   | 28,167 |   |
| Interest      income – Cash and cash equivalents |   |                         | 685    |   |   |   | 2,611 |   |
|                                                   |   | $                            | 29,653 |   |   | $ | 30,778 |   |

----

|                             |   | Year      Ended December 31, |   |
|----------------------------------|--------|------------------------------|--------|
|                             |   | 2008                         |   |   | 2007 |   |
| (amounts      in thousands)      |   | Interest      Income         |   |   | Net      Amortization |   |   | Total      Interest Income |   |   | Interest      Income |   |   | Net      Amortization |   |   | Total      Interest Income |   |
| Securitized      mortgage loans: |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                       |   | $                            | 15,282 |   |   | $ | 409 |   |   | $ | 15,691 |   |   | $ | 18,114 |   |   | $ | 485 |   |   | $ | 18,599 |   |
| Single-family                    |   |                         | 5,474  |   |   |   | (279 | ) |   |   | 5,195 |   |   |   | 7,887 |   |   |   | (62 | ) |   |   | 7,825 |   |
|                             |   | $                            | 20,756 |   |   | $ | 130 |   |   | $ | 20,886 |   |   | $ | 26,001 |   |   | $ | 423 |   |   | $ | 26,424 |   |

----

|                                    |   | Year      Ended December 31, |   |
|-----------------------------------------|--------|------------------------------|--------|
| (amounts      in thousands)             |   | 2008                         |   |   | 2007 |   |
| Interest      expense:                  |   |                         |   |   |   |   |
| Securitization      financing           |   | $                            | 13,416 |   |   | $ | 14,999 |   |
| Repurchase      agreements              |   |                         | 4,079  |   |   |   | 3,546 |   |
| Obligation under payment      agreement |   |                         | 1,608  |   |   |   | 1,525 |   |
| Other                                   |   |                         | 3      |   |   |   | 25 |   |
|                                    |   | $                            | 19,106 |   |   | $ | 20,095 |   |

|                           |   | Year      Ended December 31, |   |
|--------------------------------|--------|------------------------------|--------|
|                           |   | 2008                         |   |   | 2007 |   |
| (amounts      in thousands)    |   | Interest      Expense        |   |   | Net      Amortization |   |   | Total      Interest Expense |   |   | Interest      Expense |   |   | Net      Amortization |   |   | Total      Interest Expense |   |
| Securitization      financing: |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                     |   | $                            | 12,903 |   |   | $ | (995 | ) |   | $ | 11,908 |   |   | $ | 15,856 |   |   | $ | (1,831 | ) |   | $ | 14,025 |   |
| Single-family                  |   |                         | 995    |   |   |   | 155 |   |   |   | 1,150 |   |   |   | 387 |   |   |   | 62 |   |   |   | 449 |   |
| Other bond related      costs  |   |                         | 358    |   |   |   | – |   |   |   | 358 |   |   |   | 525 |   |   |   | – |   |   |   | 525 |   |
|                           |   | $                            | 14,256 |   |   | $ | (840 | ) |   | $ | 13,416 |   |   | $ | 16,768 |   |   | $ | (1,769 | ) |   | $ | 14,999 |   |

----

----

|                                                   |   | Year      Ended December 31, |   |
|--------------------------------------------------------|--------|------------------------------|--------|
| (amounts      in thousands)                            |   | 2007                         |   |   | 2006 |   |
| Interest      income - Investments:                    |   |                         |   |   |   |   |
| Agency MBS                                             |   | $                            | 110    |   |   | $ | 198 |   |
| Securitized mortgage      loans                        |   |                         | 26,424 |   |   |   | 46,240 |   |
| Other    investments                                   |   |                         | 1,633  |   |   |   | 1,996 |   |
|                                                   |   |                         | 28,167 |   |   |   | 48,434 |   |
| Interest      income – Cash and cash equivalents |   |                         | 2,611  |   |   |   | 2,015 |   |
|                                                   |   | $                            | 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 |   |
|                             |   | $                            | 26,001 |   |   | $ | 423 |   |   | $ | 26,424 |   |   | $ | 46,157 |   |   | $ | 83 |   |   | $ | 46,240 |   |

----

|                        |   | Year      Ended December 31, |   |
|-----------------------------|--------|------------------------------|--------|
| (amounts      in thousands) |   | 2007                         |   |   | 2006 |   |
|                        |   |                         |   |   |   |   |
| Non-agency      securities  |   | $                            | 1,146  |   |   | $ | 1,360 |   |
| Other loans                 |   |                         | 432    |   |   |   | 636 |   |
| Note receivable             |   |                         | 55     |   |   |   | – |   |
|                        |   | $                            | 1,633  |   |   | $ | 1,996 |   |

|                                    |   | 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 |   |
|                           |   | $                            | 16,768 |   |   | $ | (1,769 | ) |   | $ | 14,999 |   |   | $ | 33,778 |   |   | $ | (606 | ) |   | $ | 33,172 |   |

----

----

Average Balances andEffective Interest Rates

|                              |   | Year      ended December 31, |    |
|-----------------------------------|--------|------------------------------|---------|
|                              |   | 2008                         |    |   | 2007 |   |   | 2006 |   |
| (amounts      in thousands)       |   | AverageBalance(1)(2)         |    |   | EffectiveRate(3) |   |   | AverageBalance(1)(2) |   |   | EffectiveRate(3) |   |   | AverageBalance(1)(2) |   |   | EffectiveRate(3) |   |
| Agency      MBS                   |   |                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Agency MBS                        |   | $                            | 149,229 |   |   |   | 4.51 | % |   | $ | 1,214 |   |   |   | 9.03 | % |   | $ | 2,100 |   |   |   | 9.40 | % |
| Repurchase      agreements        |   |                         | 134,252 |   |   |   | 2.96 | % |   |   | – |   |   |   | – | % |   |   | – |   |   |   | – | % |
| Net interest    spread            |   |                         |    |   |   |   | 1.55 | % |   |   |   |   |   |   | 9.03 | % |   |   |   |   |   |   | 9.40 | % |
|                              |   |                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securitized Mortgage      Loans   |   |                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securitized mortgage      loans   |   | $                            | 262,482 |   |   |   | 7.95 | % |   | $ | 315,962 |   |   |   | 8.35 | % |   | $ | 586,113 |   |   |   | 7.88 | % |
| Securitization financing      (4) |   |                         | 190,234 |   |   |   | 6.86 | % |   |   | 201,148 |   |   |   | 7.19 | % |   |   | 401,050 |   |   |   | 8.08 | % |
| Repurchase      agreements        |   |                         | 3,201   |   |   |   | 3.15 | % |   |   | 64,231 |   |   |   | 5.45 | % |   |   | 114,168 |   |   |   | 5.12 | % |
| Net interest    spread            |   |                         |    |   |   |   | 1.15 | % |   |   |   |   |   |   | 1.56 | % |   |   |   |   |   |   | 0.46 | % |
|                              |   |                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other    investments              |   |                         | 12,203  |   |   |   | 11.07 | % |   |   | 15,908 |   |   |   | 10.26 | % |   |   | 21,723 |   |   |   | 8.80 | % |
| Repurchase      agreements        |   |                         | – |   |   |   | – | % |   |   | – |   |   |   | – | % |   |   | 84 |   |   |   | 4.98 | % |
|                              |   |                         |    |   |   |   | 11.07 | % |   |   |   |   |   |   | 10.26 | % |   |   |   |   |   |   | 3.82 | % |
|                              |   |                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                             |   |                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-earning      assets      |   | $                            | 423,914 |   |   |   | 6.83 | % |   | $ | 333,084 |   |   |   | 8.45 | % |   | $ | 609,936 |   |   |   | 7.92 | % |
| Interest-bearing      liabilities |   |                         | 327,687 |   |   |   | 5.23 | % |   |   | 265,379 |   |   |   | 6.77 | % |   |   | 515,302 |   |   |   | 7.42 | % |
| Net interest    spread            |   |                         |    |   |   |   | 1.60 | % |   |   |   |   |   |   | 1.68 | % |   |   |   |   |   |   | 0.50 | % |
|                              |   |                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

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

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

| (3)   | Certain      income and expense items of a one-time nature are not annualized for the      calculation of effective rates.  Examples of such one-time items      include retrospective adjustments of discount and premium amortization      arising from adjustments of effective interest  rates. |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4)   | Effective      rates are calculated excluding non-interest related securitization      financing expenses. |
|-----------------|------------------------------------------------------------------------------------------------------------|

----

----

----

|                            |   | 2008      to 2007 |   |   | 2007      to 2006 |   |
|---------------------------------|--------|-------------------|--------|--------|-------------------|--------|
| (amounts      in thousands)     |   | Rate              |   |   | Volume            |   |   | Total |   |   | Rate |   |   | Volume |   |   | Total |   |
|                            |   |              |   |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Agency      MBS                 |   | $                 | (82    | )      |              | $      | 6,703 |   |   | $ | 6,621 |   |   | $ | (8 | ) |   | $ | (80 | ) |   | $ | (88 | ) |
| Securitized      mortgage loans |   |              | (1,232 | )      |              |   | (4,299 | ) |   |   | (5,531 | ) |   |   | 2,612 |   |   |   | (22,422 | ) |   |   | (19,810 | ) |
| Other      investments          |   |              | 125    |   |              |   | (408 | ) |   |   | (283 | ) |   |   | 263 |   |   |   | (542 | ) |   |   | (279 | ) |
| Total      interest income      |   |              | (1,189 | )      |              |   | 1,996 |   |   |   | 807 |   |   |   | 2,867 |   |   |   | (23,044 | ) |   |   | (20,177 | ) |
|                            |   |              |   |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securitization      financing   |   |              | (650   | )      |              |   | (766 | ) |   |   | (1,416 | ) |   |   | (3,220 | ) |   |   | (14,702 | ) |   |   | (17,922 | ) |
| Repurchase      agreements      |   |              | 916    |   |              |   | (384 | ) |   |   | 532 |   |   |   | 351 |   |   |   | (2,738 | ) |   |   | (2,387 | ) |
| Total      interest expense     |   |              | 266    |   |              |   | (1,150 | ) |   |   | (884 | ) |   |   | (2,869 | ) |   |   | (17,440 | ) |   |   | (20,309 | ) |
|                            |   |              |   |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net      interest income        |   | $                 | 1,455  |   |              | $      | (3,146 | ) |   | $ | (1,691 | ) |   | $ | 5,736 |   |   | $ | (5,604 | ) |   | $ | 132 |   |

| 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 and dividends on equity      securities. |
|-------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| ·   | Level      1 — Inputs are unadjusted, quoted prices in active markets for identical      assets or liabilities at the measurement date.  Our investments      included in Level 1 fair value generally are equity securities listed in      active markets. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| ·   | Level      2 — Inputs (other than quoted prices included in Level 1) are either      directly or indirectly observable for the asset or liability through      correlation with market data at the measurement date and for the duration      of the instrument’s anticipated life.  Fair valued assets and      liabilities that are generally included in this category are Agency MBS,      which are valued based on the average of multiple dealer quotes that are      active in the Agency MBS market. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Level      3 — Inputs reflect management’s best estimate of what market participants      would use in pricing the asset or liability at the measurement      date.  Consideration is given to the risk inherent in the      valuation technique and the risk inherent in the inputs to the      model.  Generally, assets and liabilities carried at fair value      and included in this category are non-agency mortgage-backed securities,      delinquent property tax receivables and the obligation under payment      agreement liability. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| (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)           |   | $                           | 322,534 |   |   | $ | 50,242 |   |   | $ | 211,507 |   |   | $ | 23,886 |   |   | $ | 36,899 |   |
| Repurchase      agreements                 |   |                        | 274,217 |   |   |   | 274,217 |   |   |   | – |   |   |   | – |   |   |   | – |   |
| Operating      lease obligations           |   |                        | 769     |   |   |   | 145 |   |   |   | 461 |   |   |   | 163 |   |   |   | – |   |
| Obligation      under payment agreement(4) |   |                        | 23,627  |   |   |   | 1,557 |   |   |   | 20,965 |   |   |   | 315 |   |   |   | 790 |   |
| Total                                      |   | $                           | 621,147 |   |   | $ | 326,161 |   |   | $ | 232,933 |   |   | $ | 24,364 |   |   | $ | 37,689 |   |

| (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 of the loan 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.  During 2008, our average monthly servicing advance was      $0.2 million. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (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, substantially all of which is used to repay the      associated securitization financingoutstanding. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | 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 pursuant to a payment      agreement.  By agreement, the joint venture is scheduled to      dissolve in 2009, unless extended by the joint venture      partners.  For purposes of this table, we have assumed the joint      venture continues in existenceindefinitely. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| Year      Ended December 31, 2008                                          |   | First      Quarter |    |   | Second      Quarter |   |    | Third      Quarter |   |   | Fourth Quarter |   |
|----------------------------------------------------------------------------|--------|--------------------|---------|--------|---------------------|--------|---------|--------------------|--------|--------|----------------|--------|
| Operating      results:                                                    |   |               |    |   |                |   |    |               |   |   |           |   |
| Net      interest income                                                   |   | $                  | 2,421   |   |                | $      | 2,501   |               |   | $      | 2,787          |   |   | $ | 2,838 |   |
| Net      interest income after (provision for) recapture of loan    losses |   |               | 2,395   |   |                |   | 2,180   |               |   |   | 2,338          |   |   |   | 2,643 |   |
| Net      income (1)                                                        |   |               | 5,319   |   |                |   | 4,296   |               |   |   | 3,045          |   |   |   | 2,461 |   |
| Basic      net income per common share                                     |   |               | 0.36    |   |                |   | 0.27    |               |   |   | 0.17           |   |   |   | 0.12 |   |
| Diluted      net income per common share                                   |   |               | 0.32    |   |                |   | 0.26    |               |   |   | 0.17           |   |   |   | 0.12 |   |
| Cash      dividends declared per common share                              |   |               | 0.10    |   |                |   | 0.15    |               |   |   | 0.23           |   |   |   | 0.23 |   |
|                                                                       |   |               |    |   |                |   |    |               |   |   |           |   |   |   |   |   |
| Average      interest-earning assets      (2)                              |   |               | 301,133 |   |                |   | 353,189 |               |   |   | 480,760        |   |   |   | 558,473 |   |
| Average      borrowed funds                                                |   |               | 207,151 |   |                |   | 258,435 |               |   |   | 391,354        |   |   |   | 451,744 |   |
|                                                                       |   |               |    |   |                |   |    |               |   |   |           |   |   |   |   |   |
| Net      interest spread on interest-earning assets                        |   |               | 1.18    | %      |                |   | 1.50    | %                  |   |   | 1.64           | %      |   |   | 1.38 | % |
| Average      asset yield                                                   |   |               | 8.18    | %      |                |   | 7.35    | %                  |   |   | 6.38           | %      |   |   | 6.06 | % |
| Net      yield on average interest-earning assets(3)                       |   |               | 3.36    | %      |                |   | 3.19    | %                  |   |   | 2.86           | %      |   |   | 2.77 | % |
| Cost      of funds                                                         |   |               | 7.00    | %      |                |   | 5.85    | %                  |   |   | 4.74           | %      |   |   | 4.68 | % |

| Year      Ended December 31, 2007                        |   | FirstQuarter |    |   | SecondQuarter |   |    | ThirdQuarter |   |   | FourthQuarter |   |
|----------------------------------------------------------|--------|--------------|---------|--------|---------------|--------|---------|--------------|--------|--------|---------------|--------|
| Operating      results:                                  |   |         |    |   |          |   |    |         |   |   |          |   |
| Net      interest income                                 |   | $            | 2,460   |   |          | $      | 2,963   |         |   | $      | 2,457         |   |   | $ | 2,803 |   |
| 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            |   |         | – |   |          |   | – |         |   |   | –       |   |   |   | – |   |
|                                                     |   |         |    |   |          |   |    |         |   |   |          |   |   |   |   |   |
| Average      interest-earning assets (2)                 |   |         | 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 (3)    |   |         | 2.48    | %      |          |   | 3.19    | %            |   |   | 2.86          | %      |   |   | 2.77 | % |
| Cost      of funds(4)                                    |   |         | 6.97    | %      |          |   | 6.24    | %            |   |   | 7.05          | %      |   |   | 6.85 | % |

|  (1) | The      decrease in net income during the fourth quarter of 2008 relates primarily      to losses incurred by a joint venture, which is accounted for under the      equity method.  The loss was related to $2.2 million decreases      in the fair value of CMBS owned by the joint  venture. |
|-----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Excludes      cash and cash equivalents. |
|-----|------------------------------------------|

| (3) | Computed      as net interest income excluding non-interest securitization financing      expenses divided by average interest-earning  assets. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------|

| (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 unpaid principal  balance. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| ·   | We      rely on Fannie Mae and Freddie Mac as guarantors on MBS in which we      invest.  The federal conservatorship of Fannie Mae and Freddie      Mac and related efforts may prove unsuccessful in stabilizing Fannie Mae      and Freddie Mac, which may impact their ability to perform under the      guaranty. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The      attempts to stabilize the U. S. housing and mortgage market may make the      U.S. Treasury a direct competitor for mortgage assets and  may      prove unsuccessful. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The      federal conservatorship of Fannie Mae and Freddie Mac may lead to      structural changes in Agency RMBS and Fannie Mae and Freddie Mac which may      adversely affect our business. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | There      can be no assurance that the actions taken by the U.S. and foreign      governments, central banks and other governmental and regulatory bodies      for the purpose of seeking to stabilize the financial markets will achieve      the intended effect or benefit our business, and further government or      market developments could adversely affectus. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| ·   | Our      business strategy involves the use of leverage, including short-term      repurchase agreements. Changes to the availability and terms of this      leverage may adversely affect the return on our investments, result in      losses when conditions are unfavorable, and may reduce cash available for      distribution to our shareholders. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Adverse      developments involving major financial institutions or one of our lenders      could result in a rapid reduction in our ability to borrow and adversely      affect our business andprofitability. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Our profitability      may be limited by a reduction in ourleverage. |
|--------------------|---------------------------------------------------------------------------|

| ·   | If      we are unable to renew our borrowings at favorable rates, we may be forced      to sell assets and our profitability may be adversely      affected. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | If      a lender to us in a repurchase transaction defaults on its obligation to      resell the underlying security back to us at the end of the transaction      term, or if we default on our obligations under the repurchase agreement,      we would incur losses. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Our      use of repurchase agreements to borrow money may give our lenders greater      rights in the event of bankruptcy. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------|

| ·   | Our      ownership of securitized mortgage loans subjects us to credit risk 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. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Guarantors      may fail to perform on their obligations to our securitization      trusts. |
|--------------------|---------------------------------------------------------------------------------------------|

| ·   | The      commercial mortgage loans in which we have invested are subject to      delinquency, foreclosure and loss, which could result in losses for      us. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The      volatility of certain mortgaged property values may adversely affect our      commercial mortgage loans. |
|--------------------|------------------------------------------------------------------------------------------------------------------------|

| ·   | Prepayment      rates on the mortgage loans underlying our investments may adversely      affect our profitability and subject us to reinvestment    risk. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Interest      rate fluctuations, particularly increases in interest rates on which our      borrowings are based, may have various negative effects on us and could      lead to reduced earnings and/or increased earnings      volatility.  In addition, adjustments of interest rates on our      borrowings may not be matched to interest rate indexes on our      investments. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | A      flat or inverted yield curve may adversely affect Agency MBS prepayment      rates and supply. |
|--------------------|-------------------------------------------------------------------------------------------------------|

| ·   | Interest      rate caps on the adjustable rate mortgage loans collateralizing our      investments may adversely affect our profitability if interest rates      increase. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Because      we acquire securities with a fixed-rate of interest for at least an      initial period, an increase in interest rates may adversely affect our      book value. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | A      decline in the market value of our assets may result in margin calls that      may force us to sell assets under adverse market conditions and may cause      a decline in our book value. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Our      use of hedging strategies to mitigate our interest rate exposure may not      be effective, may adversely  affect our earnings, and may expose      us to counterparty risks. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | We      may enter into Hedging Instruments that could expose us to contingent      liabilities in the future. |
|--------------------|---------------------------------------------------------------------------------------------------------------|

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

| ·   | The      stock ownership limit imposed by the Code for REITs and our restated      articles of incorporation may restrict our business combination      opportunities. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The      stock ownership limitation contained in our articles of incorporation      generally does not permit ownership in excess of 9.8% of our common or      capital stock, and attempts to acquire our common or capital stock in      excess of these limits will be ineffective unless an exemption is granted      by our Board of Directors. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Qualifying      as a REIT involves highly technical and complex provisions of the Code,      and a technical or inadvertent violation could jeopardize our REIT      qualification. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | If      we do not qualify as a REIT or fail to remain qualified as a REIT, we may      be subject to tax as a regular corporation and could face a tax liability,      which would reduce the amount of cash available for distribution to our      stockholders. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| ·   | Even      if we remain qualified as a REIT, we may face other tax liabilities that      reduce our cash flow and ourresults. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------|

| ·   | If      we fail to maintain our REIT status, our business operations may be      impacted. |
|--------------------|--------------------------------------------------------------------------------------------|

| ·   | Dividends      payable to REITs do not qualify for the reduced tax rates available for      some dividens. |
|--------------------|------------------------------------------------------------------------------------------------------------|

| ·   | The      failure of investments subject to repurchase agreements to qualify as real      estate assets could adversely affect our ability to qualify as a      REIT. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Certain      of our securitization trusts, which qualify as “taxable mortgage pools,”      require us to maintain equity interests in the securitization      trusts. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Recognition      of excess inclusion income by us could have adverse consequences to us or      our shareholders. |
|--------------------|-------------------------------------------------------------------------------------------------------------------|

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

| ·   | If      we fail to properly conduct our operations we could become subject to      regulation under the Investment Company Act of  1940. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | We      may change our investment strategy, operating policies, dividend policy      and/or asset allocations without shareholder  consent. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------|

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

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

----

| ITEM      7A. | QUANTITATIVE      AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK |
|---------------|----------------------------------------------------------------|

----

----

| Investment(amounts      in thousands) |   | Amortized      Cost Basis |    |   | Amount      of Guaranty |   | Guarantor |   | Average      Credit Rating of Guarantor (1) |   |
|---------------------------------------|--------|---------------------------|---------|--------|-------------------------|--------|-----------|--------|---------------------------------------------|--------|
| With      Guaranty of Payment         |   |                      |    |   |                    |   |      |   |                                        |   |
| Agency MBS                            |   | $                         | 311,576 |   |                    | $      | 306,592   |   | Fannie      Mae/Freddie Mac                 |   | AAA |   |
| Securitized mortgage      loans:      |   |                      |    |   |                    |   |      |   |                                        |   |   |   |
| Commercial                            |   |                      | 65,490  |   |                    |   | 6,935     |   | American      International Group           |   |   | A3 |   |
| Single-family                         |   |                      | 23,081  |   |                    |   | 22,621    |   | PMI/GEMICO                                  |   | B3/Baa1 |   |
| Defeased loans                        |   |                      | 11,144  |   |                    |   | 11,118    |   | Fully      secured with cash                |   |   |   |   |
|                                  |   |                      |    |   |                    |   |      |   |                                        |   |   |   |   |
| Without      Guaranty of Payment      |   |                      |    |   |                    |   |      |   |                                        |   |   |   |   |
| Securitized mortgage      loans:      |   |                      |    |   |                    |   |      |   |                                        |   |   |   |   |
| Commercial                            |   |                      | 98,856  |   |                    |   | –   |   |                                        |   |   |   |   |
| Single-family                         |   |                      | 48,963  |   |                    |   | –   |   |                                        |   |   |   |   |
| Investment in joint      venture      |   |                      | 5,655   |   |                    |   | –   |   |                                        |   |   |   |   |
| Otherinvestments                      |   |                      | 12,735  |   |                    |   | –   |   |                                        |   |   |   |   |
|                                  |   |                      |    |   |                    |   |      |   |                                        |   |   |   |   |
|                                  |   |                      | 577,500 |   |                    |   | 347,266   |   |                                        |   |   |   |   |
| Allowance      for loan losses        |   |                      | (3,707  | )      |                    |   | –   |   |                                        |   |   |   |   |
|                                  |   |                      |    |   |                    |   |      |   |                                        |   |   |   |   |
| Totalinvestments                      |   | $                         | 573,973 |   |                    | $      | 347,266   |   |                                        |   |   |   |   |

| (1) | Reflects      lowest rating of the three nationally-recognized ratings agencies for the      senior unsecured debt of theguarantor. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------|

----

| Investment(amounts      in thousands) |   | Amortized      Cost Basis of loans |    |   | Average      Seasoning (in      years) |   |   | Current      Loan-to-Value based on Original Appraised Value |   |   | Amortized      Cost Basis of Delinquent Loans(1) |   |   | Delinquency      % |   |
|---------------------------------------|--------|------------------------------------|---------|--------|---------------------------------------------|--------|--------|--------------------------------------------------------------|--------|--------|--------------------------------------------------|--------|--------|--------------------|--------|
| Commercial      mortgage loans        |   | $                                  | 174,185 |   |                                        |   | 13     |                                                         |   |   | 50                                               | %      |   | $                  | 3,080  |   |   |   | 1.77 | % |
| Single-family      mortgage loans     |   |                               | 71,663  |   |                                        |   | 15     |                                                         |   |   | 53                                               | %      |   |               | 6,068  | (2) |   |   | 8.47 | % |

| (1) | Loans      contractually delinquent by 30 or moredays. |
|-----|--------------------------------------------------------|

| (2) | Of      the $6,068 of delinquent single-family loans, approximately $1,871 are      pool insured and, of the remaining $4,197, $3,622 of the loans made a      payment within the 90 days prior to December 31,  2008. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Months      remaining to end of compliance period |   | As      a Percent of Unpaid Principal Balance |   |
|---------------------------------------------------|--------|-----------------------------------------------|--------|
| Compliance      period already exceeded           |   |                                          | 25.9   | % |
| Up      to one year remaining                     |   |                                          | 21.2   |   |
| Between      one and three years remaining        |   |                                          | 52.0   |   |
| Between      four and six years remaining         |   |                                          | 0.9    |   |
| Total                                             |   |                                          | 100.0  | % |

----

|                                            |   | Investments      |    |   | Borrowings |   |
|-------------------------------------------------|--------|------------------|---------|--------|------------|--------|
| (amounts      in thousands)                     |   | Amounts      (1) |    |   | Percent    |   |   | Amounts |   |   | Percent |   |
| Fixed-Rate      Investments/Obligations         |   | $                | 184,877 |   |       |   | 33.0 | % |   | $ | 159,121 |   |   |   | 34.5 | % |
|                                            |   |             |    |   |       |   |   |   |   |   |   |   |   |   |   |   |
| Adjustable-Rate      Investments/Obligations:   |   |             |    |   |       |   |   |   |   |   |   |   |   |   |   |   |
| Less than 3    months                           |   |             | – |   |       |   | – |   |   |   | 301,795 |   |   |   | 65.5 |   |
| Greater than 3 months and less      than 1 year |   |             | 156,279 |   |       |   | 28.0 |   |   |   | – |   |   |   | – |   |
| Greater than 1 year and less      than 2 years  |   |             | 116,304 |   |       |   | 20.8 |   |   |   | – |   |   |   | – |   |
| Greater than 2 years and less      than 3 years |   |             | 68,246  |   |       |   | 12.2 |   |   |   | – |   |   |   | – |   |
| Greater than 3 years and less      than 5 years |   |             | 33,404  |   |       |   | 6.0 |   |   |   | – |   |   |   | – |   |
| Total                                           |   | $                | 559,110 |   |       |   | 100.0 | % |   | $ | 460,916 |   |   |   | 100.0 | % |

| (1) | The      investment amount represents the fair value of the related securities and      amortized cost basis of the related loans, excluding any related allowance      for loan losses. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                            |   | Investments |    |   | Borrowings |   |
|-------------------------------------------------|--------|-------------|---------|--------|------------|--------|
| (amounts      in thousands)                     |   | Amounts(1)  |    |   | Percent    |   |   | Amounts |   |   | Percent |   |
| Fixed-Rate      Investments/Obligations         |   | $           | 212,312 |   |       |   | 73.6 | % |   | $ | 187,419 |   |   |   | 83.0 | % |
|                                            |   |        |    |   |       |   |   |   |   |   |   |   |   |   |   |   |
| Adjustable-Rate      Investments/Obligations:   |   |        |    |   |       |   |   |   |   |   |   |   |   |   |   |   |
| Less than 3    months                           |   |        | – |   |       |   | – |   |   |   | 38,374 |   |   |   | 17.0 |   |
| Greater than 3 months and less      than 1 year |   |        | 76,328  |   |       |   | 26.4 |   |   |   | – |   |   |   | – |   |
| Greater than 1 year and less      than 2 years  |   |        | – |   |       |   | – |   |   |   | – |   |   |   | – |   |
| Greater than 2 years and less      than 3 years |   |        | – |   |       |   | – |   |   |   | – |   |   |   | – |   |
| Greater than 3 years and less      than 5 years |   |        | – |   |       |   | – |   |   |   | – |   |   |   | – |   |
| Total                                           |   | $           | 288,640 |   |       |   | 100.0 | % |   | $ | 225,793 |   |   |   | 100.0 | % |

| (1) | The      investment amount represents the fair value of the related securities and      amortized cost basis of the related loans, excluding any related allowance      for loan losses. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Lifetime      Interest Rate Caps on ARM MBS |   | Interim      Interest Rate Caps on ARM MBS |
|---------------------------------------------|--------|--------------------------------------------|
|                                        |   | %      of Total                            |   |   |   | %      of Total |
| 9.0%      to 10.0%                          |   | 21.68%                                     |   | 2.0% |   | 41.61% |
| >10.0%      to 11.0%                     |   | 54.01%                                     |   | 5.0% |   | 58.39% |
| >11.0%      to 12.0%                     |   | 24.31%                                     |   |   |   | 100.00% |
|                                        |   | 100.00%                                    |   |   |   |   |

----

| CPR         | Estimated      Months toAssetReset      or Expected Prepayment | Estimated      Months to Liabilities Reset  | Repricing      Gap in Months |
|-------------|----------------------------------------------------------------|--------------------------------------------------|------------------------------|
| 0%      (1) | 21 months                                                      | 1 month                                          | 20 months                    |
| 15%         | 18 months                                                      | 1 month                                          | 17 months                    |
| 25%         | 16 months                                                      | 1 month                                          | 15 months                    |
| 35%         | 14 months                                                      | 1 month                                          | 13  months                   |

| (1) | Reflects      contractual maturities, which do not consider any    prepayments. |
|-----|---------------------------------------------------------------------------------|

----

| Basis      Point Change inInterest      Rates |   | Percentage      change in projected net interest income |   | Percentage      change in projected market value |   |
|-----------------------------------------------|--------|---------------------------------------------------------|--------|--------------------------------------------------|--------|
|                                          |   |                                                    |   |                                             |   |
| +200                                          |   | (14.44)%                                                |   | (1.44)%                                          |   |
| +100                                          |   | (5.59)%                                                 |   | (0.66)%                                          |   |
| 0                                             |   | –                                                 |   | –                                          |   |
| -100                                          |   | 0.39%                                                   |   | 0.42%                                            |   |
| -200                                          |   | (3.42)%                                                 |   | 0.68%                                            |   |

----

| ITEM      8. | FINANCIAL      STATEMENTS AND SUPPLEMENTARY DATA |
|--------------|--------------------------------------------------|

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

| ITEM      9A. | CONTROLS      AND PROCEDURES |
|---------------|------------------------------|

| ITEM      9B. | OTHER      INFORMATION |
|---------------|------------------------|

----

| ITEM      10. | DIRECTORS,      EXECUTIVE OFFICERS AND CORPORATEGOVERNANCE |
|---------------|------------------------------------------------------------|

| ITEM      11. | EXECUTIVE      COMPENSATION |
|---------------|-----------------------------|

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

| ITEM      13. | CERTAIN      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR      INDEPENDENCE |
|---------------|-------------------------------------------------------------------------------------|

----

| ITEM      14. | PRINCIPAL      ACCOUNTANT FEES AND SERVICES |
|---------------|---------------------------------------------|

----

| ITEM      15. | EXHIBITS,      FINANCIAL STATEMENT SCHEDULES |
|---------------|----------------------------------------------|

| 1.      and 2. | Financial      Statements and SchedulesThe      information required by this section of Item 15 is set forth in the      Consolidated Financial Statements and Reports of Independent Registered      Public Accounting Firm beginning at page F-1 of this annual report on Form      10-K.  The index to the Financial Statements is set forth at      page F-2 of this annual report on Form10-K. |
|----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

| Number  | Exhibit                                                                                                                                                                                                                                                                                                                                                          |
|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1     | Restated      Articles of Incorporation, effective July 9, 2008 (incorporated herein by      reference to Exhibit 3.1 to Dynex’s Current Report on Form 8-K filed July      11, 2008).                                                                                                                                                                |
| 3.2     | Amended      and Restated Bylaws, effective March 26, 2008 (incorporated herein by      reference to Exhibit 3.2 to Dynex’s Current Report on Form 8-K filed April      1, 2008).                                                                                                                                                                     |
| 8.1     | Opinion      of Troutman Sanders, LLP with respect to certain tax matters (filed      herewith).                                                                                                                                                                                                                                                            |
| 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).                                                                                                                                                           |
| 10.1.1* | 409A      Amendment to Dynex Capital, Inc. 2004 Stock Incentive Plan, dated December      31, 2008 (filed herewith).                                                                                                                                                                                                                                        |
| 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).  |

----

| Number  | Exhibit                                                                                                                                                                                                                                                     |
|---------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.5*   | Severance      Agreement between Dynex Capital, Inc. and Stephen J. Benedetti dated June      11, 2004 (incorporated herein by reference to Exhibit 10.5 to Dynex’s      Annual Report on Form 10-K for the year ended December 31,      2007).  |
| 10.5.1* | 409A      Amendment to Severance Agreement between Dynex Capital, Inc. and Stephen      J. Benedetti, dated December 31, 2008 (filed herewith).                                                                                                        |
| 10.6*   | Employment      Agreement, dated as of March 31, 2008, between Dynex Capital, Inc. and      Thomas B. Akin (incorporated herein by reference to Exhibit 10.6 to      Dynex’s Current Report on Form 8-K filed April 4, 2008).                    |
| 10.7*   | Dynex      Capital, Inc. 401(k) Overflow Plan, effective July 1, 1997 (incorporated      herein by reference to Exhibit 10.7 to Dynex’s Quarterly Report on Form      10-Q for the quarter ended March 31, 2008).                                |
| 10.8    | Sales      Agreement, dated as of March 16, 2009, between Dynex Capital, Inc. and      Cantor Fitzgerald & Co. (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)                                                                                                  |   |
|                |                                                                                                          |   |
|                |                                                                                                          |   |
| March      16, 2009 | /s/      Stephen J. Benedetti                                                                                 |   |
|                | Stephen      J. Benedetti, Executive Vice President, Chief Operating Officer and Chief      Financial Officer |   |
|                |                                                                                                          |   |

| Signature                     | Title                                              | Date                |
|-------------------------------|----------------------------------------------------|---------------------|
|                          |                                               |                |
| /s/      Thomas B. Akin       | Chairman      and Chief Executive Officer          | March      16, 2009 |
| Thomas      B. Akin           | and      Director                                  |                |
|                          | (Principal      Executive Officer)                 |                |
|                          |                                               |                |
| /s/      Stephen J. Benedetti | Executive      Vice President, Chief               | March      16, 2009 |
| Stephen      J. Benedetti     | Operating      Officer and Chief Financial Officer |                |
|                          | (Principal      Financial Officer)                 |                |
|                          |                                               |                |
|                          |                                               |                |
| /s/      Jeffrey L. Childress | Vice      President and Controller                 | March      16, 2009 |
| Jeffrey      L. Childress     | (Principal      Accounting Officer)                |                |
|                          |                                               |                |
|                          |                                               |                |
| /s/      Leon A. Felman       | Director                                           | March      16, 2009 |
| Leon      A. Felman           |                                               |                |
|                          |                                               |                |
|                          |                                               |                |
| /s/      Barry Igdaloff       | Director                                           | March      16, 2009 |
| Barry      Igdaloff           |                                               |                |
|                          |                                               |                |
|                          |                                               |                |
| /s/      Daniel K. Osborne    | Director                                           | March      16, 2009 |
| Daniel      K. Osborne        |                                               |                |
|                          |                                               |                |
|                          |                                               |                |
| /s/      James C. Wheat, III  | Director                                           | March      16, 2009 |
| James      C. Wheat, III      |                                               |                |
|                          |                                               |                |

----

----

|   |                                                                                                                 | Page   |
|--------|----------------------------------------------------------------------------------------------------------------------|--------|
|   |                                                                                                                 |   |
|   | Reports      of Independent Registered Public Accounting Firm                                                        | F-3    |
|   | Consolidated      Balance Sheets – As of December 31, 2008 and 2007                                            | F-5    |
|   | Consolidated      Statements of Income – Years ended December 31, 2008, 2007 and      2006                     | F-6    |
|   | Consolidated      Statements of Shareholders’ Equity – Years ended December 31, 2008, 2007      and 2006 | F-7    |
|   | Consolidated      Statements of Cash Flows – Years ended December 31, 2008, 2007 and      2006                 | F-8    |
|   | Notes      to Consolidated Financial Statements                                                                      | F-9    |

----

----

----

|                                                                               |   | 2008   |     |   | 2007   |   |
|------------------------------------------------------------------------------------|--------|--------|----------|--------|--------|--------|
| ASSETS                                                                             |   |   |     |   |   |   |
| Agency      MBS:                                                                   |   |   |     |   |   |   |
| Pledged to counterparties, at      fair value                                      |   | $      | 300,277  |   |   | $      | – |   |
| Unpledged, at fair      value                                                      |   |   | 11,299   |   |   |   | 7,456 |   |
|                                                                               |   |   | 311,576  |   |   |   | 7,456 |   |
|                                                                               |   |   |     |   |   |   |   |   |
|   Securitized      mortgage loans, net                                   |   |   | 243,827  |   |   |   | 278,463 |   |
|   Investment      in joint venture                                       |   |   | 5,655    |   |   |   | 19,267 |   |
|   Other      investments                                                 |   |   | 12,735   |   |   |   | 28,549 |   |
|                                                                               |   |   | 573,793  |   |   |   | 333,735 |   |
|                                                                               |   |   |     |   |   |   |   |   |
| Cash      and cash equivalents                                                     |   |   | 24,335   |   |   |   | 35,352 |   |
| Restricted      cash                                                               |   |   | 2,974    |   |   |   | – |   |
| Other      assets                                                                  |   |   | 6,089    |   |   |   | 5,671 |   |
|                                                                               |   | $      | 607,191  |   |   | $      | 374,758 |   |
| LIABILITIES      AND SHAREHOLDERS’ EQUITY                                    |   |   |     |   |   |   |   |   |
| LIABILITIES                                                                        |   |   |     |   |   |   |   |   |
| Repurchase      agreements                                                         |   | $      | 274,217  |   |   | $      | 4,612 |   |
| Securitization      financing                                                      |   |   | 178,165  |   |   |   | 204,385 |   |
| Obligation      under payment agreement                                            |   |   | 8,534    |   |   |   | 16,796 |   |
| Other      liabilities                                                             |   |   | 5,866    |   |   |   | 7,029 |   |
|                                                                               |   |   | 466,782  |   |   |   | 232,822 |   |
|                                                                               |   |   |     |   |   |   |   |   |
| Commitments      and Contingencies (Note 15 and 16)                                |   |   |     |   |   |   |   |   |
|                                                                               |   |   |     |   |   |   |   |   |
| 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 |   |   |     |   |   |   |   |   |
| outstanding ($43,218 aggregate      liquidation preference)                        |   |   | 41,749   |   |   |   | 41,749 |   |
| Common      stock, par value $.01 per share, 100,000,000 shares      authorized,   |   |   |     |   |   |   |   |   |
| 12,169,762 and 12,136,262 shares      issued and outstanding, respectively         |   |   | 122      |   |   |   | 121 |   |
| Additional      paid-in capital                                                    |   |   | 366,817  |   |   |   | 366,716 |   |
| Accumulated      other comprehensive (loss) income                                 |   |   | (3,949   | )      |   |   | 1,093 |   |
| Accumulated      deficit                                                           |   |   | (264,330 | )      |   |   | (267,743 | ) |
|                                                                               |   |   | 140,409  |   |   |   | 141,936 |   |
|                                                                               |   | $      | 607,191  |   |   | $      | 374,758 |   |

----

|                                                                       |   | 2008   |    |   | 2007   |   |    | 2006   |   |
|----------------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|---------|--------|--------|
| Interest      income:                                                      |   |   |    |   |   |   |    |   |   |
| Securitized      mortgage loans                                            |   | $      | 20,886  |   |   | $      | 26,424  |   |   | $ | 46,240 |   |
| Agency      MBS                                                            |   |   | 6,731   |   |   |   | 110     |   |   |   | 198 |   |
| Other      investments                                                     |   |   | 1,351   |   |   |   | 1,633   |   |   |   | 1,996 |   |
| Cash      and cash equivalents                                             |   |   | 685     |   |   |   | 2,611   |   |   |   | 2,015 |   |
|                                                                       |   |   | 29,653  |   |   |   | 30,778  |   |   |   | 50,449 |   |
| Interest      expense:                                                     |   |   |    |   |   |   |    |   |   |   |   |   |
| Securitization      financing                                              |   |   | 13,416  |   |   |   | 14,999  |   |   |   | 33,172 |   |
| Repurchase      agreements                                                 |   |   | 4,079   |   |   |   | 3,546   |   |   |   | 5,933 |   |
| Obligation      under payment agreement                                    |   |   | 1,608   |   |   |   | 1,525   |   |   |   | 489 |   |
| Other                                                                      |   |   | 3       |   |   |   | 25      |   |   |   | (232 | ) |
| Interest      expense                                                      |   |   | 19,106  |   |   |   | 20,095  |   |   |   | 39,362 |   |
|                                                                       |   |   |    |   |   |   |    |   |   |   |   |   |
| Net      interest income                                                   |   |   | 10,547  |   |   |   | 10,683  |   |   |   | 11,087 |   |
| (Provision      for) recapture of loan losses                              |   |   | (991    | )      |   |   | 1,281   |   |   |   | 15 |   |
| Net      interest income after (provision for) recapture of loan    losses |   |   | 9,556   |   |   |   | 11,964  |   |   |   | 11,102 |   |
|                                                                       |   |   |    |   |   |   |    |   |   |   |   |   |
| Equity      in (loss) income of joint venture, net                         |   |   | (5,733  | )      |   |   | 709     |   |   |   | (852 | ) |
| Loss      on capitalization of joint venture                               |   |   | – |   |   |   | – |   |   |   | (1,194 | ) |
| Gain      (loss) on sale of investments, net                               |   |   | 2,316   |   |   |   | 755     |   |   |   | (183 | ) |
| Fair      value adjustments, net                                           |   |   | 7,147   |   |   |   | – |   |   |   | – |   |
| Other      income (expense)                                                |   |   | 7,467   |   |   |   | (533    | )      |   |   | 557 |   |
| General      and administrative expenses                                   |   |   |    |   |   |   |    |   |   |   |   |   |
| Compensation      and benefits                                             |   |   | (2,341  | )      |   |   | (1,921  | )      |   |   | (2,140 | ) |
| Other      general and administrative expenses                             |   |   | (3,291  | )      |   |   | (2,075  | )      |   |   | (2,381 | ) |
| Net      income                                                            |   |   | 15,121  |   |   |   | 8,899   |   |   |   | 4,909 |   |
| Preferred      stock dividends                                             |   |   | (4,010  | )      |   |   | (4,010  | )      |   |   | (4,044 | ) |
| Net      income to common shareholders                                     |   | $      | 11,111  |   |   | $      | 4,889   |   |   | $ | 865 |   |
|                                                                       |   |   |    |   |   |   |    |   |   |   |   |   |
| Net      income per common share:                                          |   |   |    |   |   |   |    |   |   |   |   |   |
| Basic      and diluted                                                     |   | $      | 0.91    |   |   | $      | 0.40    |   |   | $ | 0.07 |   |
|                                                                       |   |   |    |   |   |   |    |   |   |   |   |   |

----

|                                                                    |   | PreferredStock |    |   | CommonStock |   |    | AdditionalPaid-inCapital |   |   | Accumulated      OtherCompre­hen­sive(Loss)      Income |   |   | AccumulatedDeficit |    |   | Total  |   |
|-------------------------------------------------------------------------|--------|----------------|---------|--------|-------------|--------|---------|--------------------------|--------|--------|-------------------------------------------------------------------|--------|--------|--------------------|---------|--------|--------|--------|
| Balance      at January 1, 2006                                         |   | $              | 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 |   |
|                                                                    |   |           |    |   |        |   |    |                     |   |   |                                                              |   |   |               |    |   |   |   |   |   |   |   |   |   |
| Cumulative      effect of adoption of SFAS 159                          |   |           | – |   |        |   | – |                     |   |   | –                                                           |   |   |               | – |   |   |   | 943 |   |   |   | 943 |   |
| Net      income                                                         |   |           | – |   |        |   | – |                     |   |   | –                                                           |   |   |               | – |   |   |   | 15,121 |   |   |   | 15,121 |   |
| Other      comprehensive income:                                        |   |
| Change      in market value of securities                               |   |           | – |   |        |   | – |                     |   |   | –                                                           |   |   |               | (2,725  | )      |   |   | – |   |   |   | (2,725 | ) |
| Reclassification      adjustment for net (gains) included in net income |   |           | – |   |        |   | – |                     |   |   | –                                                           |   |   |               | (2,317  | )      |   |   | – |   |   |   | (2,317 | ) |
| Total      comprehensive income                                         |   |           |    |   |        |   |    |                     |   |   |                                                              |   |   |               |    |   |   |   |   |   |   |   | 10,079 |   |
|                                                                    |   |           |    |   |        |   |    |                     |   |   |                                                              |   |   |               |    |   |   |   |   |   |   |   |   |   |
| Dividends      on common stock                                          |   |           | – |   |        |   | – |                     |   |   | –                                                           |   |   |               | – |   |   |   | (8,641 | ) |   |   | (8,641 | ) |
| Dividends      on preferred stock                                       |   |           | – |   |        |   | – |                     |   |   | –                                                           |   |   |               | – |   |   |   | (4,010 | ) |   |   | (4,010 | ) |
| Stock      option issuance                                              |   |           | – |   |        |   | – |                     |   |   | 13                                                                |   |   |               | – |   |   |   | – |   |   |   | 13 |   |
| Grant      and vesting of restricted stock                              |   |           | – |   |        |   | 1       |                     |   |   | 88                                                                |   |   |               | – |   |   |   | – |   |   |   | 89 |   |
|                                                                    |   |           |    |   |        |   |    |                     |   |   |                                                              |   |   |               |    |   |   |   |   |   |   |   |   |   |
| Balance      at December 31, 2008                                       |   | $              | 41,749  |   |        | $      | 122     |                     |   | $      | 366,817                                                           |   |   | $                  | (3,949  | )      |   | $      | (264,330 | ) |   | $ | 140,409 |   |

----

|                                                                                 |   | 2008   |     |   | 2007   |   |     | 2006   |   |
|--------------------------------------------------------------------------------------|--------|--------|----------|--------|--------|--------|----------|--------|--------|
| Operating      activities:                                                           |   |   |     |   |   |   |     |   |   |
| Net      income                                                                      |   | $      | 15,121   |   |   | $      | 8,899    |   |   | $ | 4,909 |   |
| Adjustments      to reconcile net income to cash provided byoperating    activities: |   |   |     |   |   |   |     |   |   |   |   |   |
| Provision      for (recapture of) loan loss                                          |   |   | 991      |   |   |   | (1,281   | )      |   |   | (15 | ) |
| Equity      in loss (earnings) of joint venture                                      |   |   | 5,733    |   |   |   | (709     | )      |   |   | 852 |   |
| Distribution      of joint venture earnings                                          |   |   | –  |   |   |   | 1,125    |   |   |   | – |   |
| Loss      on capitalization of joint venture                                         |   |   | –  |   |   |   | –  |   |   |   | 1,194 |   |
| (Gain)      loss on sale of investments                                              |   |   | (2,316   | )      |   |   | (755     | )      |   |   | 183 |   |
| Amortization      and depreciation                                                   |   |   | (1,585   | )      |   |   | (583     | )      |   |   | (538 | ) |
| Fair      value adjustments, net                                                     |   |   | (7,147   | )      |   |   | –  |   |   |   | – |   |
| Stock      based compensation (benefit) expense                                      |   |   | (271     | )      |   |   | 306      |   |   |   | 244 |   |
| Net      change in other assets and other liabilities                                |   |   | (3,735   | )      |   |   | 1,023    |   |   |   | 596 |   |
| Net      cash and cash equivalents provided by operatingactivities                   |   |   | 6,791    |   |   |   | 8,025    |   |   |   | 7,425 |   |
|                                                                                 |   |   |     |   |   |   |     |   |   |   |   |   |
| Investing      activities:                                                           |   |   |     |   |   |   |     |   |   |   |   |   |
| Principal      payments received on securitized mortgage loans                       |   |   | 33,614   |   |   |   | 68,787   |   |   |   | 93,945 |   |
| Purchase      of Agency MBS and other investments                                    |   |   | (375,425 | )      |   |   | (27,882  | )      |   |   | (17,221 | ) |
| Payments      received on Agency MBS and other investments                           |   |   | 36,548   |   |   |   | 9,871    |   |   |   | 28,819 |   |
| Proceeds      from sales of Agency MBS and other investments                         |   |   | 51,423   |   |   |   | 3,762    |   |   |   | 3,348 |   |
| Distributions      received from joint venture                                       |   |   | 4,183    |   |   |   | 17,095   |   |   |   | – |   |
| Other                                                                                |   |   | (816     | )      |   |   | 1,035    |   |   |   | (385 | ) |
| Net      cash and cash equivalents (used in) provided by investingactivities         |   |   | (250,473 | )      |   |   | 72,668   |   |   |   | 108,506 |   |
|                                                                                 |   |   |     |   |   |   |     |   |   |   |   |   |
| Financing      activities:                                                           |   |   |     |   |   |   |     |   |   |   |   |   |
| Principal      payments on securitization financing                                  |   |   | (24,114  | )      |   |   | (40,547  | )      |   |   | (48,283 | ) |
| Proceeds      from sale of securitization financing bonds                            |   |   | –  |   |   |   | 35,289   |   |   |   | – |   |
| Borrowings      under (repayment of) repurchase agreements, net                      |   |   | 269,605  |   |   |   | (92,990  | )      |   |   | (37,337 | ) |
| Increase      in restricted cash                                                     |   |   | (2,974   | )      |   |   | –  |   |   |   | – |   |
| Redemption      of preferred stock                                                   |   |   | –  |   |   |   | –  |   |   |   | (14,068 | ) |
| Proceeds      from issuance of common stock                                          |   |   | –  |   |   |   | 37       |   |   |   | – |   |
| Repurchase      of common stock                                                      |   |   | –  |   |   |   | –  |   |   |   | (220 | ) |
| Dividends      paid                                                                  |   |   | (9,852   | )      |   |   | (4,010   | )      |   |   | (4,378 | ) |
| Net      cash and cash equivalents provided by (used in) financing      activities   |   |   | 232,665  |   |   |   | (102,221 | )      |   |   | (104,286 | ) |
| Net      (decrease) increase in cash and cash equivalents                            |   |   | (11,017  | )      |   |   | (21,528  | )      |   |   | 11,645 |   |
| Cash      and cash equivalents at beginning of year                                  |   |   | 35,352   |   |   |   | 56,880   |   |   |   | 45,235 |   |
| Cash      and cash equivalents at end of year                                        |   | $      | 24,335   |   |   | $      | 35,352   |   |   | $ | 56,880 |   |

----

----

----

----

| ·   | Level      1 — Inputs are unadjusted, quoted prices in active markets for identical      assets or liabilities at the measurement date.  The Company’s      investments included in Level 1 fair value generally are equity securities      listed in active markets. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Level      2 — Inputs (other than quoted prices included in Level 1) are either      directly or indirectly observable for the asset or liability through      correlation with market data at the measurement date and for the duration      of the instrument’s anticipated life.  Fair valued assets and      liabilities that are generally included in this category are Agency MBS,      which are valued based on the average of multiple dealer quotes that are      active in the Agency MBS market. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| ·   | Level      3 — Inputs reflect management’s best estimate of what market participants      would use in pricing the asset or liability at the measurement      date.  Consideration is given to the risk inherent in the      valuation technique and the risk inherent in the inputs to the      model.  Generally, assets and liabilities carried at fair value      and included in this category are non-agency mortgage-backed securities,      delinquent property tax receivables and the obligation under payment      agreement liability. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

|                         |   | December      31, 2008 |    |   | December      31, 2007 |   |
|------------------------------|--------|------------------------|---------|--------|------------------------|--------|
| Principal/par      value     |   | $                      | 307,548 |   |                   | $      | 7,400 |   |
| Purchase      premiums       |   |                   | 3,585   |   |                   |   | 14 |   |
| Purchase      discounts      |   |                   | (59     | )      |                   |   | (4 | ) |
| Amortized cost               |   |                   | 311,074 |   |                   |   | 7,410 |   |
| Gross      unrealized gains  |   |                   | 1,355   |   |                   |   | 46 |   |
| Gross      unrealized losses |   |                   | (853    | )      |                   |   | – |   |
| Fair value                   |   | $                      | 311,576 |   |                   | $      | 7,456 |   |
|                         |   |                   |    |   |                   |   |   |   |
| Weighted      average coupon |   |                   | 5.06    | %      |                   |   | 5.43 | % |

----

|                                                             |   | 2008   |    |   | 2007   |   |
|------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|
| Securitized      mortgage loans:                                 |   |   |    |   |   |   |
| Commercial                                                       |   | $      | 164,032 |   |   | $      | 185,998 |   |
| Single-family                                                    |   |   | 70,607  |   |   |   | 86,088 |   |
|                                                             |   |   | 234,639 |   |   |   | 272,086 |   |
| Funds      held by trustees, including funds held for defeasance |   |   | 11,267  |   |   |   | 7,225 |   |
| Accrued      interest receivable                                 |   |   | 1,538   |   |   |   | 1,940 |   |
| Unamortized      discounts and premiums, net                     |   |   | 90      |   |   |   | (67 | ) |
| Loans,      at amortized cost                                    |   |   | 247,534 |   |   |   | 281,184 |   |
| Allowance      for loan losses                                   |   |   | (3,707  | )      |   |   | (2,721 | ) |
|                                                             |   | $      | 243,827 |   |   | $      | 278,463 |   |

|                                          |   | 2008   |    |   | 2007   |   |    | 2006   |   |
|-----------------------------------------------|--------|--------|---------|--------|--------|--------|---------|--------|--------|
| Allowance      at beginning of year           |   | $      | 2,721   |   |   | $      | 4,495   |   |   | $ | 19,035 |   |
| Provision      for (recapture of) loan losses |   |   | 991     |   |   |   | (1,281  | )      |   |   | (15 | ) |
| Credit      losses, net of recoveries         |   |   | (5      | )      |   |   | (493    | )      |   |   | (4,172 | ) |
| Loans      sold/transferred                   |   |   | – |   |   |   | – |   |   |   | (10,353 | ) |
| Allowance      at end of year                 |   | $      | 3,707   |   |   | $      | 2,721   |   |   | $ | 4,495 |   |

----

|   |   | Investment      in Impaired Loans |   |   | Reserves      on Impaired Loans |   |   | Investment      in Excess of Reserves |   |
|--------|--------|-----------------------------------|--------|--------|---------------------------------|--------|--------|---------------------------------------|--------|
| 2006   |   | $                                 | 13,266 |   |                            | $      | 4,107  |                                  |   | $ | 9,159 |   |
| 2007   |   |                              | 13,792 |   |                            |   | 2,590  |                                  |   |   | 11,202 |   |
| 2008   |   |                              | 17,253 |   |                            |   | 3,527  |                                  |   |   | 13,726 |   |

| Condensed      Statement of Operations  |   | 2008   |    |   | 2007   |   |
|-----------------------------------------|--------|--------|---------|--------|--------|--------|
| Interest      income                    |   | $      | 3,956   |   |   | $      | 5,819 |   |
| Impairment                              |   |   | (7,278  | )      |   |   | – |   |
| Fair      value adjustments, net        |   |   | (7,391  | )      |   |   | (3,275 | ) |
| General      and administrative expense |   |   | (59     | )      |   |   | – |   |
| Net      (loss) income                  |   | $      | (10,772 | )      |   | $      | 2,318 |   |

| Condensed      Balance Sheet |   | 2008   |   |   | 2007   |   |
|------------------------------|--------|--------|--------|--------|--------|--------|
| Total      assets            |   | $      | 11,240 |   |   | $      | 37,972 |   |
| Total      liabilities       |   |   | 21     |   |   |   | – |   |
| Total      equity            |   | $      | 11,219 |   |   | $      | 37,972 |   |

----

|                                                |   | December      31, 2008 |    |   | December      31, 2007      |   |
|-----------------------------------------------------|--------|------------------------|---------|--------|-----------------------------|--------|
|                                                |   | CarryingValue          |    |   | Weighted      Average Yield |   |   | CarryingValue |   |   | Weighted      Average Yield |   |
| Other      securities:                              |   |                   |    |   |                        |   |   |   |   |   |   |   |
| Non-Agency      MBS                                 |   | $                      | 6,959   |   |                        |   | 8.02 | % |   | $ | 7,684 |   |   |   | 6.85 | % |
| Corporate      debt securities                      |   |                   | – |   |                        |   | – | % |   |   | 4,722 |   |   |   | 11.75 | % |
| Equity      securities of publicly traded companies |   |                   | 3,441   |   |                        |   |   |   |   |   | 7,704 |   |   |   |   |   |
|                                                |   |                   | 10,400  |   |                        |   |   |   |   |   | 20,110 |   |   |   |   |   |
| Gross      unrealized gains                         |   |                   | 802     |   |                        |   |   |   |   |   | 2,361 |   |   |   |   |   |
| Gross      unrealized losses                        |   |                   | (1,335  | )      |                        |   |   |   |   |   | (696 | ) |   |   |   |   |
|                                                |   |                   | 9,867   |   |                        |   |   |   |   |   | 21,775 |   |   |   |   |   |
| Other      loans and investments                    |   |                   | 2,868   |   |                        |   |   |   |   |   | 6,774 |   |   |   |   |   |
|                                                |   | $                      | 12,735  |   |                        |   |   |   |   | $ | 28,549 |   |   |   |   |   |

| Original      Maturity |   | 2008   |    |   | 2007   |   |
|------------------------|--------|--------|---------|--------|--------|--------|
| 30      days or less   |   | $      | 38,617  |   |   | $      | 4,612 |   |
| 31      to 60 days     |   |   | 187,960 |   |   |   | – |   |
| 61      to 90 days     |   |   | 47,640  |   |   |   | – |   |
|                   |   | $      | 274,217 |   |   | $      | 4,612 |   |

----

|                                                 |   | 2008                   |      |   | 2007                             |   |
|------------------------------------------------------|--------|------------------------|-----------|--------|----------------------------------|--------|
|                                                 |   | Bonds      Outstanding |      |   | Range      ofInterest      Rates |   |   | Bonds      Outstanding |   |   | Range      of Interest      Rates |   |
| Fixed      rate classes                              |   | $                      | 149,598   |   |                             |   | 6.6%      - 8.8 | % |   | $ | 167,398 |   |   |   | 6.6%      - 8.8 | % |
| Variable      rate class                             |   |                   | 28,186    |   |                             |   | 1.7 | % |   |   | 34,500 |   |   |   | 5.1 | % |
| Accrued      interest payable                        |   |                   | 1,008     |   |                             |   |   |   |   |   | 1,186 |   |   |   |   |   |
| Unamortized      net bond premium and deferred costs |   |                   | (627      | )      |                             |   |   |   |   |   | 1,301 |   |   |   |   |   |
|                                                 |   | $                      | 178,165   |   |                             |   |   |   |   | $ | 204,385 |   |   |   |   |   |
|                                                 |   |                   |      |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Range      of stated maturities                      |   |                   | 2024-2027 |   |                             |   |   |   |   |   | 2024-2027 |   |   |   |   |   |
| Estimated      weighted average life                 |   | 2.6      years         |      |   |                             |   |   |   | 3.3      years |   |   |   |   |   |
| Number      of series                                |   |                   | 3         |   |                             |   |   |   |   |   | 3 |   |   |   |   |   |

----

----

|                                         |   |            |    |   | Fair      Value Measurements |   |
|----------------------------------------------|--------|-----------------|---------|--------|------------------------------|--------|
|                                         |   | Fair      Value |    |   | Level      1                 |   |   | Level      2 |   |   | Level      3 |   |
| Assets:                                      |   |            |    |   |                         |   |   |   |   |   |   |   |
| Agency MBS                                   |   | $               | 311,576 |   |                         | $      | – |   |   | $ | 311,576 |   |   | $ | – |   |
| Non-agency MBS                               |   |            | 6,259   |   |                         |   | – |   |   |   | – |   |   |   | 6,259 |   |
| Equity securities                            |   |            | 3,607   |   |                         |   | 3,607 |   |   |   | – |   |   |   | – |   |
| Other                                        |   |            | 211     |   |                         |   | – |   |   |   | – |   |   |   | 211 |   |
| Total assets carried at fair      value      |   | $               | 321,653 |   |                         | $      | 3,607 |   |   | $ | 311,576 |   |   | $ | 6,470 |   |
|                                         |   |            |    |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities:                                 |   |            |    |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Obligation under payment      agreement      |   | $               | 8,534   |   |                         | $      | – |   |   | $ | – |   |   | $ | 8,534 |   |
| Total liabilities carried at fair      value |   | $               | 8,534   |   |                         | $      | – |   |   | $ | – |   |   | $ | 8,534 |   |

|                                                                        |   | Level      3 Fair Values |    |
|-----------------------------------------------------------------------------|--------|--------------------------|---------|
|                                                                        |   | Non-Agency      MBS      |    |   | Corporate      debt securities |   |   | Other |   |   | Total      assets |   |   | Obligation      under payment agreement |   |
| Balance      at January 1, 2008                                             |   | $                        | 7,726   |   |   | $ | 4,347 |   |   | $ | 2,127 |   |   | $ | 14,200 |   |   | $ | (15,473 | ) |
| Total      realized and unrealized gains (losses)                           |   |                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Included in the statement of      operations in fair value adjustments, net |   |                     | – |   |   |   | (187 | ) |   |   | (9 | ) |   |   | (195 | ) |   |   | 6,939 |   |
| Included in other comprehensive      income (loss)                          |   |                     | (742    | ) |   |   | 375 |   |   |   | 15 |   |   |   | (351 | ) |   |   | – |   |
| Purchases,      sales, issuances and other settlements, net                 |   |                     | (725    | ) |   |   | (4,535 | ) |   |   | (1,922 | ) |   |   | (7,184 | ) |   |   | – |   |
| Transfers      in and/or out of Level 3                                     |   |                     | – |   |   |   | – |   |   |   | – |   |   |   | – |   |   |   | – |   |
| Balance      at December 31, 2008                                           |   | $                        | 6,259   |   |   | $ | – |   |   | $ | 211 |   |   | $ | 6,470 |   |   | $ | (8,534 | ) |

----

|                                                |   | 2008          |    |   | 2007      |   |
|-----------------------------------------------------|--------|---------------|---------|--------|-----------|--------|
|                                                |   | RecordedBasis |    |   | FairValue |   |   | RecordedBasis |   |   | FairValue |   |
| Assets:                                             |   |          |    |   |      |   |   |   |   |   |   |   |
|   Agency      MBS                         |   | $             | 311,576 |   |      | $      | 311,576 |   |   | $ | 7,456 |   |   | $ | 7,456 |   |
| Securitized      mortgage loans, net                |   |          | 243,827 |   |      |   | 201,252 |   |   |   | 278,463 |   |   |   | 282,242 |   |
|   Investment      in joint venture        |   |          | 5,655   |   |      |   | 5,595 |   |   |   | 19,267 |   |   |   | 18,847 |   |
|   Other      investments                  |   |          | 12,735  |   |      |   | 12,358 |   |   |   | 28,549 |   |   |   | 32,182 |   |
|                                                |   |          |    |   |      |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities:                                        |   |          |    |   |      |   |   |   |   |   |   |   |   |   |   |   |
|   Repurchase      agreements              |   |          | 274,217 |   |      |   | 274,217 |   |   |   | 4,612 |   |   |   | 4,612 |   |
|   Securitization      financing           |   |          | 178,165 |   |      |   | 153,370 |   |   |   | 204,385 |   |   |   | 212,327 |   |
|   Obligation      under payment agreement |   |          | 8,534   |   |      |   | 8,534 |   |   |   | 16,796 |   |   |   | 15,473 |   |

|                                             |   | 2008   |    |   | 2007                                |   |       | 2006   |   |
|--------------------------------------------------|--------|--------|---------|--------|-------------------------------------|--------|------------|--------|--------|
|                                             |   | Income |    |   | Weighted      Average Common Shares |   |       | Income |   |   | Weighted      Average Common Shares |   |   | Income |   |   | Weighted      Average Common Shares |   |
|                                             |   |   |    |   |                                |   |       |   |   |   |   |   |   |   |   |   |   |   |
| Net      income                                  |   | $      | 15,121  |   |                                |   |       |   | $      | 8,899 |   |   |   |   |   | $ | 4,909 |   |   |   |   |
| Preferred      stock dividends                   |   |   | (4,010  | )      |                                |   |       |   |   | (4,010 | ) |   |   |   |   |   | (4,044 | ) |   |   |   |
| Net      income available to common shareholders |   | $      | 11,111  |   |                                |   | 12,166,558 |   |   | $ | 4,889 |   |   |   | 12,135,495 |   |   | $ | 865 |   |   |   | 12,140,452 |   |
|                                             |   |   |    |   |                                |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net      income per share:                       |   |   |    |   |                                |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic and diluted                                |   |   |    |   |                                | $      | 0.91       |   |   |   |   |   |   | $ | 0.40 |   |   |   |   |   |   | $ | 0.07 |   |
|                                             |   |   |    |   |                                |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net      effect of dilutive stock options        |   |   | – |   |                                |   | 3,053      |   |   |   | – |   |   |   | 2,593 |   |   |   | – |   |   |   | – |   |
|                                             |   |   |    |   |                                |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                             |   | $      | 11,111  |   |                                |   | 12,169,611 |   |   | $ | 4,889 |   |   |   | 12,138,088 |   |   | $ | 865 |   |   |   | 12,140,452 |   |
|                                             |   |   |    |   |                                |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

|                                           |   | Year      ended December 31, |      |
|------------------------------------------------|--------|------------------------------|-----------|
|                                           |   | 2008                         |      |   | 2007 |   |   | 2006 |   |
| Shares      issuable under stock option awards |   |                         | 118,053   |   |   |   | 92,407 |   |   |   | 70,000 |   |
| Convertible      preferred shares              |   |                         | 4,221,539 |   |   |   | 4,221,539 |   |   |   | 4,256,237 |   |

----

|                                         |   | Shares        |       |
|----------------------------------------------|--------|---------------|------------|
|                                         |   | Preferred     |       |   |   |   |
|                                         |   | Series      D |       |   | Common |   |
| January      1, 2006                         |   |          | 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 |   |
| Restricted      shares granted               |   |          | -          |   |   |   | 33,500 |   |
| December      31, 2008                       |   |          | 4,221,539  |   |   |   | 12,169,762 |   |

----

| Declaration          | Record                  | Payment                 |   | Dividend      per Share |    |
|----------------------|-------------------------|-------------------------|--------|-------------------------|---------|
| Date                 | Date                    | Date                    |   | Common                  |    |   | Preferred |   |
| Common      Stock    |                    |                    |   |                    |    |   |   |   |
| February 5, 2008     | February      15, 2008  | February      29, 2008  |   | $                       | 0.10    |   |   |   | – |   |
| May 12, 2008         | May      22, 2008       | May      30, 2008       |   |                    | 0.15    |   |   |   | – |   |
| August 18, 2008      | August      29, 2008    | September      30, 2008 |   |                    | 0.23    |   |   |   | – |   |
| December 10,2008     | December      22, 2008  | January      30, 2009   |   |                    | 0.23    |   |   |   | – |   |
|                 |                    |                    |   |                    |    |   |   |   |   |   |
| Preferred      Stock |                    |                    |   |                    |    |   |   |   |   |   |
| March 19, 2008       | March      31, 2008     | April      30, 2008     |   |                    | – |   |   | $ | 0.2375 |   |
| June 18, 2008        | June      30, 2008      | July      31, 2008      |   |                    | – |   |   |   | 0.2375 |   |
| September 18, 2008   | September      30, 2008 | October      31, 2008   |   |                    | – |   |   |   | 0.2375 |   |
| December 22, 2008    | December      31, 2008  | February      2, 2009   |   |                    | – |   |   |   | 0.2375 |   |

----

|                                 | SARs      Fair Value |
|--------------------------------------|----------------------|
|                                 | December      31,    |
|                                 | 2008                 | 2007 | 2006 |
| Expected      volatility             | 21.3%-26.6%          | 15.0%-20.0% | 17.2%-22.9% |
| Weighted-average      volatility     | 24.4%                | 16.2% | 19.4% |
| Expected      dividends              | 14.1%                | 0% | 0% |
| Expected      term (in months)       | 43                   | 49 | 45 |
| Weighted-average      risk-free rate | 1.89%                | 3.5% | 4.7% |
| Range      of risk-free rates        | 1.73%-2.08%          | 3.3%-3.6% | 4.7% |

|                                         |   | Year      Ended        |    |
|----------------------------------------------|--------|------------------------|---------|
|                                         |   | December      31, 2008 |    |
|                                         |   | Number      of Shares  |    |   | Weighted-Average      Exercise      Price |   |
| SARs      outstanding at beginning of period |   |                   | 278,146 |   |   | $ | 7.27 |   |
| SARs      granted                            |   |                   | – |   |   |   | – |   |
| SARs      forfeited or redeemed              |   |                   | – |   |   |   | – |   |
| SARs      exercised                          |   |                   | – |   |   |   | – |   |
| SARs      outstanding at end of period       |   |                   | 278,146 |   |   | $ | 7.27 |   |
| SARs      vested and exercisable             |   |                   | 149,860 |   |   | $ | 7.41 |   |

|                                            |   | Year      Ended        |    |
|-------------------------------------------------|--------|------------------------|---------|
|                                            |   | December      31, 2008 |    |
|                                            |   | Number      of Shares  |    |   | Weighted-Average      Exercise      Price |   |
| Options      outstanding at beginning of period |   |                   | 90,000  |   |   | $ | 8.27 |   |
| Options      granted                            |   |                   | 25,000  |   |   |   | 9.81 |   |
| Options      forfeited or redeemed              |   |                   | (5,000  | ) |   |   | 9.81 |   |
| Options      exercised                          |   |                   | – |   |   |   | – |   |
| Options      outstanding at end of period       |   |                   | 110,000 |   |   | $ | 8.61 |   |
| Options      vested and exercisable             |   |                   | 110,000 |   |   | $ | 8.61 |   |

----

| 2009                     |   | $      | 145 |   |
|--------------------------|--------|--------|-----|--------|
| 2010                     |   |   | 149 |   |
| 2011                     |   |   | 154 |   |
| 2012                     |   |   | 158 |   |
| 2013      and thereafter |   |   | 163 |   |
|                     |   | $      | 769 |   |

----

|                                                 |   | Years      ended December 31, |    |
|------------------------------------------------------|--------|-------------------------------|---------|
|                                                 |   | 2008                          |    |   | 2007 |   |   | 2006 |   |
| Cash      paid for interest                          |   | $                             | 19,817  |   |   | $ | 20,082 |   |   | $ | 40,932 |   |
|                                                 |   |                          |    |   |   |   |   |   |   |   |   |   |
| 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, 2008                        |   | First      Quarter |   |   | Second      Quarter |   |   | Third      Quarter |   |   | Fourth      Quarter |   |
|----------------------------------------------------------|--------|--------------------|--------|--------|---------------------|--------|--------|--------------------|--------|--------|---------------------|--------|
| Operating      results:                                  |   |               |   |   |                |   |   |               |   |   |                |   |
| Net      interest income                                 |   | $                  | 2,421  |   |                | $      | 2,501  |               |   | $      | 2,787               |   |   | $ | 2,838 |   |
| Net      interest income after provision for loan losses |   |               | 2,395  |   |                |   | 2,180  |               |   |   | 2,338               |   |   |   | 2,643 |   |
| Net      income                                          |   |               | 5,319  |   |                |   | 4,296  |               |   |   | 3,045               |   |   |   | 2,461 |   |
| Basic      net income per common share                   |   |               | 0.36   |   |                |   | 0.27   |               |   |   | 0.17                |   |   |   | 0.12 |   |
| Diluted      net income per common share                 |   |               | 0.32   |   |                |   | 0.26   |               |   |   | 0.17                |   |   |   | 0.12 |   |
| Cash      dividends declared per common share            |   |               | 0.10   |   |                |   | 0.15   |               |   |   | 0.23                |   |   |   | 0.23 |   |

| Year      Ended December 31, 2007                        |   | First      Quarter |    |   | Second      Quarter |   |    | Third      Quarter |   |   | Fourth      Quarter |   |
|----------------------------------------------------------|--------|--------------------|---------|--------|---------------------|--------|---------|--------------------|--------|--------|---------------------|--------|
| Operating      results:                                  |   |               |    |   |                |   |    |               |   |   |                |   |
| Net      interest income                                 |   | $                  | 2,460   |   |                | $      | 2,963   |               |   | $      | 2,457               |   |   | $ | 2,803 |   |
| 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            |   |               | – |   |                |   | – |               |   |   | –             |   |   |   | – |   |

----