----

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| Commission      File Number: 1-9819 |
|-------------------------------------|

| Virginia                                                                                 | 52-1549373               |
|------------------------------------------------------------------------------------------|--------------------------|
| (State      or other jurisdiction of                                                     | (I.R.S.      Employer    |
| incorporation      or organization)                                                      | Identification      No.) |
|                                                                                     |                     |
| 4551      Cox Road, Suite 300, Glen Allen, Virginia                                      | 23060-6740               |
| (Address      of principal executive offices)                                            | (Zip      Code)          |
|                                                                                     |                     |
| (804)      217-5800(Registrant‘s      telephone number, including area code)  |

| 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   |
|---------------|----------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| PART      I.  | FINANCIAL      INFORMATION |                                                                                                                                                                     |
|          |                       |                                                                                                                                                                     |   |
|          | Item      1.               | Financial      Statements                                                                                                                                                |   |
|          |                       |                                                                                                                                                                     |   |
|          |                       | Condensed      Consolidated Balance Sheets at March 31, 2008 (unaudited) and December 31,      2007                                                                      | 1      |
|          |                       |                                                                                                                                                                     |   |
|          |                       | Condensed      Consolidated Statements of Operations and Comprehensive Income (Loss) for      the three months ended March 31, 2008 and      2007  (unaudited) | 2      |
|          |                       |                                                                                                                                                                     |   |
|          |                       | Condensed      Consolidated Statement of Shareholders’ Equity for the three months ended      March 31, 2008 (unaudited)                                           | 3      |
|          |                       |                                                                                                                                                                     |   |
|          |                       | Condensed      Consolidated Statements of Cash Flows for the three months ended March 31,      2008 and 2007  (unaudited)                                      | 4      |
|          |                       |                                                                                                                                                                     |   |
|          |                       | Notes      to Unaudited Condensed Consolidated Financial Statements                                                                                                      | 4      |
|          |                       |                                                                                                                                                                     |   |
|          | Item      2.               | Management’s      Discussion and Analysis of Financial Condition and Results of      Operations                                                                    | 15     |
|          |                       |                                                                                                                                                                     |   |
|          | Item      3.               | Quantitative      and Qualitative Disclosures about Market Risk                                                                                                          | 35     |
|          |                       |                                                                                                                                                                     |   |
|          | Item      4.               | Controls      and Procedures                                                                                                                                             | 37     |
|          |                       |                                                                                                                                                                     |   |
| PART      II. | OTHER      INFORMATION     |                                                                                                                                                                     |
|          |                       |                                                                                                                                                                     |   |
|          | Item      1.               | Legal      Proceedings                                                                                                                                                   | 37     |
|          |                       |                                                                                                                                                                     |   |
|          | Item      1A.              | Risk      Factors                                                                                                                                                        | 38     |
|          |                       |                                                                                                                                                                     |   |
|          | Item      2.               | Unregistered      Sales of Equity Securities and Use of Proceeds                                                                                                         | 38     |
|          |                       |                                                                                                                                                                     |   |
|          | Item      3.               | Defaults      Upon Senior Securities                                                                                                                                     | 38     |
|          |                       |                                                                                                                                                                     |   |
|          | Item      4.               | Submission      of Matters to a Vote of Security Holders                                                                                                                 | 38     |
|          |                       |                                                                                                                                                                     |   |
|          | Item      5.               | Other      Information                                                                                                                                                   | 39     |
|          |                       |                                                                                                                                                                     |   |
|          | Item      6.               | Exhibits                                                                                                                                                                 | 39     |
|          |                       |                                                                                                                                                                     |   |
| SIGNATURES    | 40                         |

----

FinancialStatements

BALANCE SHEETS

|                                                                                |   | March      31, |     |   | December      31, |   |
|-------------------------------------------------------------------------------------|--------|----------------|----------|--------|-------------------|--------|
|                                                                                |   | 2008           |     |   | 2007              |   |
|                                                                                |   | (Unaudited)    |     |   |              |   |
| ASSETS                                                                              |   |           |     |   |              |   |
| Cash      and cash equivalents                                                      |   | $              | 37,935   |   |              | $      | 35,352 |   |
| Other      assets                                                                   |   |           | 3,770    |   |              |   | 5,671 |   |
|                                                                                |   |           | 41,705   |   |              |   | 41,023 |   |
| Investments:                                                                        |   |           |     |   |              |   |   |   |
| Securitized      mortgage loans, net                                                |   |           | 271,537  |   |              |   | 278,463 |   |
| Securities                                                                          |   |           | 58,280   |   |              |   | 29,231 |   |
| Investment      in joint venture                                                    |   |           | 13,380   |   |              |   | 19,267 |   |
| Other      loans and investments                                                    |   |           | 3,549    |   |              |   | 6,774 |   |
|                                                                                |   |           | 346,746  |   |              |   | 333,735 |   |
|                                                                                |   |           |     |   |              |   |   |   |
|                                                                                |   | $              | 388,451  |   |              | $      | 374,758 |   |
|                                                                                |   |           |     |   |              |   |   |   |
| LIABILITIES      AND SHAREHOLDERS' EQUITY                                           |   |           |     |   |              |   |   |   |
| LIABILITIES                                                                         |   |           |     |   |              |   |   |   |
| Securitization      financing                                                       |   | $              | 200,313  |   |              | $      | 204,385 |   |
| Repurchase      agreements                                                          |   |           | 29,556   |   |              |   | 4,612 |   |
| Obligation      under payment agreement                                             |   |           | 11,244   |   |              |   | 16,796 |   |
| Other      liabilities                                                              |   |           | 6,972    |   |              |   | 7,029 |   |
|                                                                                |   |           | 248,085  |   |              |   | 232,822 |   |
|                                                                                |   |           |     |   |              |   |   |   |
| Commitments      and Contingencies (Note 13)                                        |   |           |     |   |              |   |   |   |
|                                                                                |   |           |     |   |              |   |   |   |
| SHAREHOLDERS'      EQUITY                                                           |   |           |     |   |              |   |   |   |
| Preferred      stock, par value $0.01 per share, 50,000,000 shares      authorized, |   |           |     |   |              |   |   |   |
| 9.5%      Cumulative Convertible Series D, 4,221,539 shares issued                  |   |           |     |   |              |   |   |   |
| and      outstanding, ($43,218 aggregate liquidation preference)                    |   |           | 41,749   |   |              |   | 41,749 |   |
| Common      stock, par value $0.01 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                                                     |   |           | 366,731  |   |              |   | 366,716 |   |
| Accumulated      other comprehensive (loss) income                                  |   |           | (4,916   | )      |              |   | 1,093 |   |
| Accumulated      deficit                                                            |   |           | (263,320 | )      |              |   | (267,743 | ) |
|                                                                                |   |           | 140,366  |   |              |   | 141,936 |   |
|                                                                                |   |           |     |   |              |   |   |   |
|                                                                                |   | $              | 388,451  |   |              | $      | 374,758 |   |
|                                                                                |   |           |     |   |              |   |   |   |
| See      notes to unaudited condensed consolidated financial      statements.       |   |           |     |   |              |   |   |   |

----

CONDENSED CONSOLIDATED STATEMENTS

|                                                                          |   | Three      Months Ended |   |
|-------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                          |   | March      31,          |   |
|                                                                          |   | 2008                    |   |   | 2007 |   |
|                                                                          |   |                    |   |   |   |   |
|                                                                          |   |                    |   |   |   |   |
| Interest      income:                                                         |   |                    |   |   |   |   |
| Securitized      mortgage loans                                               |   | $                       | 5,602  |   |   | $ | 7,025 |   |
| Securities                                                                    |   |                    | 428    |   |   |   | 324 |   |
| Cash      and cash equivalents                                                |   |                    | 324    |   |   |   | 739 |   |
| Other      loans and investments                                              |   |                    | 129    |   |   |   | 127 |   |
|                                                                          |   |                    | 6,483  |   |   |   | 8,215 |   |
|                                                                          |   |                    |   |   |   |   |   |   |
| Interest      and related expenses:                                           |   |                    |   |   |   |   |   |   |
| Securitization      financing                                                 |   |                    | 3,599  |   |   |   | 4,096 |   |
| Repurchase      agreements                                                    |   |                    | 54     |   |   |   | 1,258 |   |
| Obligation      to joint venture under payment agreement                      |   |                    | 401    |   |   |   | 367 |   |
| Other                                                                         |   |                    | 8      |   |   |   | 34 |   |
|                                                                          |   |                    | 4,062  |   |   |   | 5,755 |   |
|                                                                          |   |                    |   |   |   |   |   |   |
| Net      interest income                                                      |   |                    | 2,421  |   |   |   | 2,460 |   |
| (Provision      for) recapture of provision for loan losses                   |   |                    | (26    | ) |   |   | 523 |   |
|                                                                          |   |                    |   |   |   |   |   |   |
| Net      interest income after provision for loan losses                      |   |                    | 2,395  |   |   |   | 2,983 |   |
|                                                                          |   |                    |   |   |   |   |   |   |
| Equity      in (loss) income of joint venture                                 |   |                    | (2,251 | ) |   |   | 630 |   |
| Gain      (loss) on sale of investments, net                                  |   |                    | 2,093  |   |   |   | (6 | ) |
| Fair      value adjustments, net                                              |   |                    | 4,231  |   |   |   | – |   |
| Other      income (expense)                                                   |   |                    | 67     |   |   |   | (539 | ) |
| General      and administrative expenses                                      |   |                    | (1,216 | ) |   |   | (1,126 | ) |
|                                                                          |   |                    |   |   |   |   |   |   |
| Net      income                                                               |   |                    | 5,319  |   |   |   | 1,942 |   |
| Preferred      stock dividends                                                |   |                    | (1,003 | ) |   |   | (1,003 | ) |
|                                                                          |   |                    |   |   |   |   |   |   |
| Net      income to common shareholders                                        |   | $                       | 4,316  |   |   | $ | 939 |   |
|                                                                          |   |                    |   |   |   |   |   |   |
| Change      in net unrealized gain (loss) on :                                |   |                    |   |   |   |   |   |   |
| Investments      classified as available-for-sale                             |   |                    | (2,373 | ) |   |   | 126 |   |
| Investment      in joint venture                                              |   |                    | (3,636 | ) |   |   | 829 |   |
|                                                                          |   |                    |   |   |   |   |   |   |
| Comprehensive      (loss) income                                              |   | $                       | (690   | ) |   | $ | 2,897 |   |
|                                                                          |   |                    |   |   |   |   |   |   |
| Net      income per common share:                                             |   |                    |   |   |   |   |   |   |
| Basic                                                                         |   | $                       | 0.36   |   |   | $ | 0.08 |   |
| Diluted                                                                       |   | $                       | 0.32   |   |   | $ | 0.08 |   |
|                                                                          |   |                    |   |   |   |   |   |   |
| See      notes to unaudited condensed consolidated financial      statements. |   |

----

|                                                                  |   | PreferredStock |    |   | CommonStock |   |    | AdditionalPaid-inCapital |   |   | Accumulated      OtherCompre­hen­sive(Loss)      Income |   |   | AccumulatedDeficit |    |   | Total  |   |
|-----------------------------------------------------------------------|--------|----------------|---------|--------|-------------|--------|---------|--------------------------|--------|--------|-------------------------------------------------------------------|--------|--------|--------------------|---------|--------|--------|--------|
| Balance      at December 31, 2007                                     |   | $              | 41,749  |   |        | $      | 121     |                     |   | $      | 366,716                                                           |   |   | $                  | 1,093   |   |   | $      | (267,743 | ) |   | $ | 141,936 |   |
|                                                                  |   |           |    |   |        |   |    |                     |   |   |                                                              |   |   |               |    |   |   |   |   |   |   |   |   |   |
| Cumulative      effect of adoption of SFAS 159                        |   |           | – |   |        |   | – |                     |   |   | –                                                           |   |   |               | – |   |   |   | 1,323 |   |   |   | 1,323 |   |
|                                                                  |   |           |    |   |        |   |    |                     |   |   |                                                              |   |   |               |    |   |   |   |   |   |   |   |   |   |
| Net      income                                                       |   |           | – |   |        |   | – |                     |   |   | –                                                           |   |   |               | – |   |   |   | 5,319 |   |   |   | 5,319 |   |
| Other      comprehensive income (loss):                               |   |           |    |   |        |   |    |                     |   |   |                                                              |   |   |               |    |   |   |   |   |   |   |   |   |   |
| Change      in market value of securities and other investments       |   |           | – |   |        |   | – |                     |   |   | –                                                           |   |   |               | (3,916  | )      |   |   | – |   |   |   | (3,916 | ) |
| Reclassification      adjustment for net gains included in net income |   |           | – |   |        |   | – |                     |   |   | –                                                           |   |   |               | (2,093  | )      |   |   | – |   |   |   | (2,093 | ) |
| Total      comprehensive income (loss)                                |   |           |    |   |        |   |    |                     |   |   |                                                              |   |   |               |    |   |   |   |   |   |   |   | (690 | ) |
|                                                                  |   |           |    |   |        |   |    |                     |   |   |                                                              |   |   |               |    |   |   |   |   |   |   |   |   |   |
| Dividends      on common stock                                        |   |           | – |   |        |   | – |                     |   |   | –                                                           |   |   |               | – |   |   |   | (1,217 | ) |   |   | (1,217 | ) |
| Dividends      on preferred stock                                     |   |           | – |   |        |   | – |                     |   |   | –                                                           |   |   |               | – |   |   |   | (1,002 | ) |   |   | (1,002 | ) |
| Grant      and vesting of restricted stock                            |   |           | – |   |        |   | 1       |                     |   |   | 15                                                                |   |   |               | – |   |   |   | – |   |   |   | 16 |   |
|                                                                  |   |           |    |   |        |   |    |                     |   |   |                                                              |   |   |               |    |   |   |   |   |   |   |   |   |   |
| Balance      at March 31, 2008                                        |   | $              | 41,749  |   |        | $      | 122     |                     |   | $      | 366,731                                                           |   |   | $                  | (4,916  | )      |   | $      | (263,320 | ) |   | $ | 140,366 |   |

----

CONDENSED CONSOLIDATED STATEMENTS

|                                                                                    |   | Three      Months Ended |    |
|-----------------------------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                                    |   | March      31,          |    |
|                                                                                    |   | 2008                    |    |   | 2007 |   |
| Operating      activities:                                                              |   |                    |    |   |   |   |
| Net      income                                                                         |   | $                       | 5,319   |   |   | $ | 1,942 |   |
| Adjustments      to reconcile net income to cash provided by operating      activities: |   |                    |    |   |   |   |   |   |
| Equity      in (loss) income of joint venture                                           |   |                    | 2,251   |   |   |   | (630 | ) |
| Provision      for (recapture of provision for) loan losses                             |   |                    | 26      |   |   |   | (523 | ) |
| Gain      on sale of investments                                                        |   |                    | (2,093  | ) |   |   | 6 |   |
| Fair      value adjustments, net                                                        |   |                    | (4,231  | ) |   |   | – |   |
| Amortization      and depreciation                                                      |   |                    | (264    | ) |   |   | (335 | ) |
| Net      change in other assets and other liabilities                                   |   |                    | 1,912   |   |   |   | 1,407 |   |
| Net      cash and cash equivalents provided by operating activities                     |   |                    | 2,920   |   |   |   | 1,867 |   |
|                                                                                    |   |                    |    |   |   |   |   |   |
| Investing      activities:                                                              |   |                    |    |   |   |   |   |   |
| Principal      payments received on securitized mortgage loans                          |   |                    | 6,825   |   |   |   | 15,578 |   |
| Purchase      of securities and other investments                                       |   |                    | (37,730 | ) |   |   | (5,591 | ) |
| Payments      received on securities and other loans and investments                    |   |                    | 2,581   |   |   |   | 2,811 |   |
| Proceeds      from sales of securities and other investments                            |   |                    | 8,991   |   |   |   | 83 |   |
| Other                                                                                   |   |                    | 85      |   |   |   | 937 |   |
| Net      cash and cash equivalents (used for) provided by investing      activities     |   |                    | (19,248 | ) |   |   | 13,818 |   |
|                                                                                    |   |                    |    |   |   |   |   |   |
| Financing      activities:                                                              |   |                    |    |   |   |   |   |   |
| Principal      payments on securitization financing                                     |   |                    | (3,814  | ) |   |   | (4,657 | ) |
| Net      borrowings (repayments on) repurchase agreement                                |   |                    | 24,945  |   |   |   | (9,100 | ) |
| Proceeds      from sale of common stock                                                 |   |                    | -       |   |   |   | 37 |   |
| Dividends      paid                                                                     |   |                    | (2,220  | ) |   |   | (1,002 | ) |
| Net      cash and cash equivalents provided by (used for) financing      activities     |   |                    | 18,911  |   |   |   | (14,722 | ) |
| Net      increase in cash and cash equivalents                                          |   |                    | 2,583   |   |   |   | 963 |   |
| Cash      and cash equivalents at beginning of period                                   |   |                    | 35,352  |   |   |   | 56,880 |   |
| Cash      and cash equivalents at end of period                                         |   | $                       | 37,935  |   |   |   | 57,843 |   |
|                                                                                    |   |                    |    |   |   |   |   |   |
|                                                                                    |   |                    |    |   |   |   |   |   |
| See      notes to unaudited condensed consolidated financial      statements.           |   |                    |    |   |   |   |   |   |

----

NOTES TO UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

----

----

|                                                                                                     |   | Three      Months Ended March 31, |    |
|----------------------------------------------------------------------------------------------------------|--------|-----------------------------------|---------|
|                                                                                                     |   | 2008                              |    |   | 2007 |   |
|                                                                                                     |   | Income                            |    |   | Weighted-Average      Common Shares |   |   | Income |   |   | Weighted-AverageCommonShares |   |
|                                                                                                     |   |                              |    |   |   |   |   |   |   |   |   |   |
| Net      income                                                                                          |   | $                                 | 5,319   |   |   |   |   |   | $ | 1,942 |   |   |   |   |
| Preferred      stock charge                                                                              |   |                              | (1,003  | ) |   |   |   |   |   | (1,003 | ) |   |   |   |
| Net      income to common shareholders                                                                   |   | $                                 | 4,316   |   |   |   | 12,156,887 |   |   | $ | 939 |   |   |   | 12,133,151 |   |
| Effect      of dilutive items                                                                            |   |                              | 1,003   |   |   |   | 4,230,105 |   |   |   | – |   |   |   | 495 |   |
| Diluted                                                                                                  |   | $                                 | 5,319   |   |   |   | 16,386,992 |   |   | $ | 939 |   |   |   | 12,133,646 |   |
|                                                                                                     |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net      income per share:                                                                               |   |
| Basic                                                                                                    |   |                              |    |   |   | $ | 0.36 |   |   |   |   |   |   | $ | 0.08 |   |
| Diluted                                                                                                  |   |                              |    |   |   | $ | 0.32 |   |   |   |   |   |   | $ | 0.08 |   |
|                                                                                                     |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reconciliation      of shares included in calculation of earnings per share due to dilutive      effect: |   |                              |    |
| Net      effect of dilutive:                                                                             |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Preferred      stock                                                                                     |   |                              | 1,003   |   |   |   | 4,221,539 |   |   |   | – |   |   |   | – |   |
| Stock      options                                                                                       |   |                              | – |   |   |   | 8,566 |   |   |   | – |   |   |   | 495 |   |
|                                                                                                     |   | $                                 | 1,003   |   |   |   | 4,230,105 |   |   | $ | – |   |   |   | 495 |   |

|                                                                 |   | March      31,2008 |    |   | December      31, 2007 |   |
|----------------------------------------------------------------------|--------|--------------------|---------|--------|------------------------|--------|
| Securitized      mortgage loans:                                     |   |               |    |   |                   |   |
| Commercial      mortgage loans                                       |   | $                  | 184,040 |   |                   | $      | 185,998 |   |
| Single-family      mortgage loans                                    |   |               | 81,280  |   |                   |   | 86,088 |   |
|                                                                 |   |               | 265,320 |   |                   |   | 272,086 |   |
| Funds      held by trustees, including funds held for defeased loans |   |               | 7,166   |   |                   |   | 7,225 |   |
| Accrued      interest receivable                                     |   |               | 1,850   |   |                   |   | 1,940 |   |
| Unamortized      discounts and premiums, net                         |   |               | (54     | )      |                   |   | (67 | ) |
| Loans,      at amortized cost                                        |   |               | 274,282 |   |                   |   | 281,184 |   |
| Allowance      for loan losses                                       |   |               | (2,745  | )      |                   |   | (2,721 | ) |
|                                                                 |   | $                  | 271,537 |   |                   | $      | 278,463 |   |

----

|                                          |   | Three      Months Ended March 31, |   |
|-----------------------------------------------|--------|-----------------------------------|--------|
|                                          |   | 2008                              |   |   | 2007 |   |
| Allowance      at beginning of period         |   | $                                 | 2,721  |   |   | $ | 4,495 |   |
| Provision      for (recapture of) loan losses |   |                              | 26     |   |   |   | (523 | ) |
| Charge-offs,      net of recoveries           |   |                              | (2     | ) |   |   | (434 | ) |
| Allowance      at end of period               |   | $                                 | 2,745  |   |   | $ | 3,538 |   |

|                   |   | Investment      in Impaired Loans |   |   | Reserves      on Impaired Loans |   |   | Investment      in Excess of Reserves |   |
|------------------------|--------|-----------------------------------|--------|--------|---------------------------------|--------|--------|---------------------------------------|--------|
| December      31, 2007 |   | $                                 | 13,792 |   |                            | $      | 2,590  |                                  |   | $ | 11,202 |   |
| March      31, 2008    |   |                              | 12,148 |   |                            |   | 2,590  |                                  |   |   | 9,558 |   |

|                                                   |   | March      31, 2008 |   |   | December      31, 2007       |   |
|--------------------------------------------------------|--------|---------------------|--------|--------|------------------------------|--------|
|                                                   |   | Value               |   |   | Effective      Interest Rate |   |   | Value |   |   | Effective      Interest Rate |   |
| Securities,      available-for-sale at amortized cost: |   |                |   |   |                         |   |   |   |   |   |   |   |
| Agency      mortgage-backed securities                 |   | $                   | 34,545 |   |                         |   | 4.69 | % |   | $ | 7,410 |   |   |   | 9.03 | % |
| Non-agency      mortgage-backed securities             |   |                | 7,374  |   |                         |   | 10.56 | % |   |   | 7,684 |   |   |   | 9.41 | % |
| Equity      securities                                 |   |                | 12,423 |   |                         |   |   |   |   |   | 7,704 |   |   |   |   |   |
| Corporate      debt securities                         |   |                | 4,722  |   |                         |   |   |   |   |   | 4,722 |   |   |   |   |   |
|                                                   |   |                | 59,064 |   |                         |   |   |   |   |   | 27,520 |   |   |   |   |   |
| Gross      unrealized gains                            |   |                | 865    |   |                         |   |   |   |   |   | 2,406 |   |   |   |   |   |
| Gross      unrealized losses                           |   |                | (1,649 | )      |                         |   |   |   |   |   | (695 | ) |   |   |   |   |
| Securities,      available-for-sale at fair value      |   | $                   | 58,280 |   |                         |   |   |   |   | $ | 29,231 |   |   |   |   |   |

----

|                                                         |   | March      31, 2008 |   |   | December      31, 2007 |   |
|--------------------------------------------------------------|--------|---------------------|--------|--------|------------------------|--------|
| Single-family      mortgage loans                            |   | $                   | 2,323  |   |                   | $      | 2,486 |   |
| Multifamily      and commercial mortgage loan participations |   |                | 917    |   |                   |   | 927 |   |
| Unamortized      discounts on mortgage loans                 |   |                | (275   | )      |                   |   | (289 | ) |
| Mortgage      loans, net                                     |   |                | 2,965  |   |                   |   | 3,124 |   |
|                                                         |   |                |   |   |                   |   |   |   |
| Delinquent      property tax receivable securities           |   |                | 482    |   |                   |   | 2,127 |   |
| Notes      receivable and other investments                  |   |                | 102    |   |                   |   | 1,523 |   |
| Other      loans and investments                             |   | $                   | 3,549  |   |                   | $      | 6,774 |   |

----

|                                         |   |                |   |   | Fair      Value Measurements at March 31, 2008 |   |
|----------------------------------------------|--------|---------------------|--------|--------|------------------------------------------------|--------|
|                                         |   | March      31, 2008 |   |   | Level      1                                   |   |   | Level      2 |   |   | Level      3 |   |
| Assets                                       |   |                |   |   |                                           |   |   |   |   |   |   |   |
| Agency mortgage-backed      securities       |   | $                   | 34,670 |   |                                           | $      | – |   |   | $ | 34,670 |   |   | $ | – |   |
| Non-agency mortgage-backed      securities   |   |                | 7,402  |   |                                           |   | – |   |   |   | – |   |   |   | 7,402 |   |
| Equity securities                            |   |                | 12,186 |   |                                           |   | 12,186 |   |   |   | – |   |   |   | – |   |
| Corporate debt      securities               |   |                | 4,022  |   |                                           |   | – |   |   |   | – |   |   |   | 4,022 |   |
| Delinquent property tax      receivables     |   |                | 482    |   |                                           |   | – |   |   |   | – |   |   |   | 482 |   |
| Derivative    instrument                     |   |                | 103    |   |                                           |   | – |   |   |   | 103 |   |   |   | – |   |
| Total assets carried at fair      value      |   | $                   | 58,865 |   |                                           | $      | 12,186 |   |   | $ | 34,773 |   |   | $ | 11,906 |   |
|                                         |   |                |   |   |                                           |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities                                  |   |                |   |   |                                           |   |   |   |   |   |   |   |   |   |   |   |
| Obligation under payment      agreement      |   | $                   | 11,244 |   |                                           | $      | – |   |   | $ | – |   |   | $ | 11,244 |   |
| Total liabilities carried at fair      value |   | $                   | 11,244 |   |                                           | $      | – |   |   | $ | – |   |   | $ | 11,244 |   |

----

|                                                        |   | Level      3 Fair Values                   |    |
|-------------------------------------------------------------|--------|--------------------------------------------|---------|
|                                                        |   | Non-agency      mortgage-backed securities |    |   | Corporate      debt securities |   |   | Delinquent      property tax receivables |   |   | 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      earnings                                   |   |                                       | – |   |   |   | – |   |   |   | 5 |   |   |   | 5 |   |   |   | 4,229 |   |
| Included in other comprehensive      income                 |   |                                       | (16     | ) |   |   | (325 | ) |   |   | 123 |   |   |   | (218 | ) |   |   | – |   |
| Purchases,      sales, issuances and other settlements, net |   |                                       | (308    | ) |   |   | – |   |   |   | (1,773 | ) |   |   | (2,081 | ) |   |   | – |   |
| Transfers      in and/or out of Level 3                     |   |                                       | – |   |   |   | – |   |   |   | – |   |   |   | – |   |   |   | – |   |
| Balance      at March 31, 2008                              |   | $                                          | 7,402   |   |   | $ | 4,022 |   |   | $ | 482 |   |   | $ | 11,906 |   |   | $ | 11,244 |   |

----

|                                 |   | March      31, 2008    |      |   | December      31, 2007       |   |
|--------------------------------------|--------|------------------------|-----------|--------|------------------------------|--------|
|                                 |   | Bonds      Outstanding |      |   | Range      of Interest Rates |   |   | Bonds      Outstanding |   |   | Range      of Interest Rates |   |
| Fixed-rate      classes              |   | $                      | 165,381   |   |                         |   | 6.6%      - 8.8 | % |   | $ | 167,398 |   |   |   | 6.6%      - 8.8 | % |
| Variable      rate class             |   |                   | 32,703    |   |                         |   | 3.4 | % |   |   | 34,500 |   |   |   | 5.1 | % |
| Accrued      interest payable        |   |                   | 1,160     |   |                         |   |   |   |   |   | 1,186 |   |   |   |   |   |
| Deferred      costs                  |   |                   | (1,680    | )      |                         |   |   |   |   |   | (1,851 | ) |   |   |   |   |
| Unamortized      net bond premium    |   |                   | 2,749     |   |                         |   |   |   |   |   | 3,152 |   |   |   |   |   |
|                                 |   | $                      | 200,313   |   |                         |   |   |   |   | $ | 204,385 |   |   |   |   |   |
|                                 |   |                   |      |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Range      of stated maturities      |   |                   | 2024-2027 |   |                         |   |   |   |   |   | 2024-2027 |   |   |   |   |   |
| Estimated      weighted average life |   | 3.2 years              |      |   |                         |   |   |   | 3.3      years |   |   |   |   |   |
| Number      of series                |   |                   | 3         |   |                         |   |   |   |   |   | 3 |   |   |   |   |   |

----

|                           |   | Shares        |      |
|--------------------------------|--------|---------------|-----------|
|                           |   | Preferred     |      |   |   |   |
|                           |   | Series      D |      |   | Common |   |
| December      31, 2007         |   |          | 4,221,539 |   |   |   | 12,136,262 |   |
| Restricted      shares granted |   |          | -         |   |   |   | 33,500 |   |
| March      31, 2008            |   |          | 4,221,539 |   |   |   | 12,169,762 |   |

----

|                                         |   | Three      Months Ended |    |
|----------------------------------------------|--------|-------------------------|---------|
|                                         |   | March      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             |   |                    | 149,073 |   |   | $ | 7.41 |   |

----

|                                            |   | Three      Months Ended |    |
|-------------------------------------------------|--------|-------------------------|---------|
|                                            |   | March      31, 2008     |    |
|                                            |   | Number      of Shares   |    |   | Weighted-Average      Exercise Price |   |
| Options      outstanding at beginning of period |   |                    | 95,000  |   |   | $ | 8.28 |   |
| Options      granted                            |   |                    | – |   |   |   | – |   |
| Options      forfeited or redeemed              |   |                    | – |   |   |   | – |   |
| Options      exercised                          |   |                    | – |   |   |   | – |   |
| Options      outstanding at end of period       |   |                    | 95,000  |   |   | $ | 8.28 |   |
| Options      vested and exercisable             |   |                    | 95,000  |   |   | $ | 8.28 |   |

|                             | SARs      Fair Value |
|----------------------------------|----------------------|
|                             | March      31, 2008  |
| Expected      volatility         | 16.91%-20.01%        |
| Weighted-average      volatility | 17.48%               |
| Expected      dividends          | 4.26%                |
| Expected      term (in months)   | 48                   |
| Risk-free      rate              | 3.21%                |

Item2.                      Management’sDiscussion and Analysis of Financial Condition and Results ofOperations

----

----

----

| (amounts      in thousands except per share data) |   | March      31, 2008 |    |   | December      31, 2007 |   |
|---------------------------------------------------|--------|---------------------|---------|--------|------------------------|--------|
| Investments:                                      |   |                |    |   |                   |   |
| Securitized mortgage loans,      net              |   | $                   | 271,537 |   |                   | $      | 278,463 |   |
| Securities                                        |   |                | 58,280  |   |                   |   | 29,231 |   |
| Investment in joint      venture                  |   |                | 13,380  |   |                   |   | 19,267 |   |
| Other loans and      investments                  |   |                | 3,549   |   |                   |   | 6,774 |   |
|                                              |   |                |    |   |                   |   |   |   |
| Securitization      financing                     |   |                | 200,313 |   |                   |   | 204,385 |   |
| Repurchase      agreements                        |   |                | 29,556  |   |                   |   | 4,612 |   |
| Obligation      under payment agreement           |   |                | 11,244  |   |                   |   | 16,796 |   |
|                                              |   |                |    |   |                   |   |   |   |
| Shareholders’      equity                   |   |                | 140,366 |   |                   |   | 141,936 |   |
| Common      book value per share                  |   | $                   | 8.07    |   |                   | $      | 8.22 |   |

| (amounts      in thousands)           |   | March      31, 2008 |    |   | December      31, 2007 |   |
|---------------------------------------|--------|---------------------|---------|--------|------------------------|--------|
| Securitized      mortgage loans, net: |   |                |    |   |                   |   |
| Commercial                            |   | $                   | 188,638 |   |                   | $      | 190,570 |   |
| Single-family                         |   |                | 82,899  |   |                   |   | 87,893 |   |
|                                  |   |                | 271,537 |   |                   |   | 278,463 |   |

| (amounts      in thousands)    |   | March      31, 2008 |   |   | December      31, 2007 |   |
|--------------------------------|--------|---------------------|--------|--------|------------------------|--------|
| Securities:                    |   |                |   |   |                   |   |
| Non-agency RMBS                |   | $                   | 7,402  |   |                   | $      | 7,726 |   |
| Agency RMBS                    |   |                | 34,670 |   |                   |   | 7,456 |   |
| Equity securities              |   |                | 12,186 |   |                   |   | 9,701 |   |
| Corporate debt      securities |   |                | 4,022  |   |                   |   | 4,347 |   |
|                           |   | $                   | 58,280 |   |                   | $      | 29,230 |   |

----

| (amounts      in thousands)                            |   | March      31, 2008 |    |   | December      31, 2007 |   |
|--------------------------------------------------------|--------|---------------------|---------|--------|------------------------|--------|
| Securitization      financing bonds:                   |   |                |    |   |                   |   |
| Fixed, secured by commercial      mortgage loans       |   | $                   | 168,308 |   |                   | $      | 170,623 |   |
| Variable, secured by single-family      mortgage loans |   |                | 32,005  |   |                   |   | 33,762 |   |
|                                                   |   | $                   | 200,313 |   |                   | $      | 204,385 |   |

----

----

|                                                        |   | March      31, 2008       |    |
|-------------------------------------------------------------|--------|---------------------------|---------|
| (amounts      in thousands)                                 |   | Amortized      cost basis |    |   | Financing(4) |   |   | Net      investment |   |   | Fair      value of net investment |   |
| Securitized      mortgage loans: (1)                   |   |                      |    |   |   |   |   |   |   |   |   |   |
| Single-family      mortgage loans                           |   | $                         | 83,054  |   |   | $ | 36,618 |   |   | $ | 46,436 |   |   | $ | 40,487 |   |
| Commercial      mortgage loans                              |   |                      | 191,228 |   |   |   | 168,308 |   |   |   | 22,920 |   |   |   | 15,338 |   |
| Allowance      for loan losses                              |   |                      | (2,745  | ) |   |   | – |   |   |   | (2,745 | ) |   |   | – |   |
|                                                        |   |                      | 271,537 |   |   |   | 204,926 |   |   |   | 66,611 |   |   |   | 55,825 |   |
| Securities:      (2)                                        |   |                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment      grade single-family                         |   |                      | 41,645  |   |   |   | 24,944 |   |   |   | 16,701 |   |   |   | 16,739 |   |
| Non-investment      grade single-family                     |   |                      | 274     |   |   |   | – |   |   |   | 274 |   |   |   | 340 |   |
| Equity      and other                                       |   |                      | 17,145  |   |   |   | – |   |   |   | 17,145 |   |   |   | 16,257 |   |
| Net      unrealized loss                                    |   |                      | (784    | ) |   |   | – |   |   |   | (784 | ) |   |   | – |   |
|                                                        |   |                      | 58,280  |   |   |   | 24,944 |   |   |   | 33,336 |   |   |   | 33,336 |   |
|                                                        |   |                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment      in joint venture(3)                         |   |                      | 13,380  |   |   |   | – |   |   |   | 13,380 |   |   |   | 13,049 |   |
| Obligation      to joint venture under payment agreement(1) |   |                      | – |   |   |   | 11,244 |   |   |   | (11,244 | ) |   |   | (11,244 | ) |
| Other      loans and investments(2)                         |   |                      | 3,549   |   |   |   | – |   |   |   | 3,549 |   |   |   | 4,251 |   |
|                                                        |   |                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                                       |   | $                         | 346,746 |   |   | $ | 241,114 |   |   | $ | 105,632 |   |   | $ | 95,217 |   |
|                                                        |   |                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |

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

|   | (2) | Fair      values are based on dealer quotes, if available, and closing prices from a      national exchange where applicable.  Approximately $22 million      of fair value of securities were based on available dealer quotes or      closing prices from a national exchange.   Where dealer      quotes are not available, fair values are calculated as the net present      value of expected future cash flows, discounted at a weighted average      discount rate of 7.5% for investment grade securities and 35.3% for      non-investment grade securities. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

|                              | Fair      Value Assumptions             |               |
|-----------------------------------|-----------------------------------------|--------------------|
| Loan      type                    | Weighted-average      prepayment speeds | Losses             | Weighted-averagediscount      rate(6) | Projected      cash flow termination date | (amounts      in thousands)YTD      2008 Cash Flows (1) |
|                              |                                    |               |   |   |   |
| Single-family      mortgage loans | 20%      CPR                            | 0.2%      annually | 20% | Anticipated      final maturity 2024 | $         848 |
|                              |                                    |               |   |   |   |
| Commercial      mortgage loans(2) | (3)                                     | 0.8%      annually | (4) | (5) | $         517 |

| (1) | Represents      the excess of the cash flows received on the collateral pledged over the      cash flow required to service the related securitization      financing. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

----

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

| (4) | Weighed-average      discount rates for the two securitization trusts were 16.0% and 22.1%,      respectively. |
|-----|----------------------------------------------------------------------------------------------------------------|

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

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

| (amounts      in thousands)                           |   | March      31, 2008 |    |
|-------------------------------------------------------|--------|---------------------|---------|
|                                                  |   |                |    |
| Cash      and cash equivalents                        |   | $                   | 37,935  |   |
| Investments:                                          |   |                |    |   |
| AAA      rated and agency MBS fixed income securities |   |                | 52,783  |   |
| AA      and A rated fixed income securities           |   |                | 451     |   |
| Unrated      and non-investment grade                 |   |                | 20,327  |   |
| Securitization      over-collateralization            |   |                | 18,691  |   |
| Investment      in joint venture                      |   |                | 13,380  |   |
|                                                  |   | $                   | 105,632 |   |

----

|                                                                         |   | March      31, 2008 |    |
|------------------------------------------------------------------------------|--------|---------------------|---------|
| (amounts      in thousands, except per share information)                    |   | Book      Value     |    |   | Adjusted      Book Value |   |
|                                                                         |   |                |    |   |   |   |
| Total      investment assets (per table above)                               |   | $                   | 105,632 |   |   | $ | 95,217 |   |
| Cash      and cash equivalents                                               |   |                | 37,935  |   |   |   | 37,935 |   |
| Other      assets and liabilities, net                                       |   |                | (3,201  | ) |   |   | (3,201 | ) |
|                                                                         |   |                | 140,366 |   |   |   | 129,951 |   |
| Less:  Preferred      stock redemption value                       |   |                | (42,215 | ) |   |   | (42,215 | ) |
| Common      equity book value and adjusted book value                        |   | $                   | 98,151  |   |   | $ | 87,736 |   |
|                                                                         |   |                |    |   |   |   |   |   |
| Common      equity book value per share and adjusted book value per    share |   | $                   | 8.07    |   |   | $ | 7.21 |   |

| (amounts      in millions) |   | Credit      Exposure (1) |   |   | Credit      Exposure, Net of Allowance (2) |   |   | Actual      Credit      Losses |   |   | Credit      Exposure, Net of Allowance to Outstanding Loan Balance (3) |   |
|----------------------------|--------|--------------------------|--------|--------|--------------------------------------------|--------|--------|--------------------------------|--------|--------|------------------------------------------------------------------------|--------|
| 2007, Quarter1             |   | $                        | 25.8   |   |                                       | $      | 22.2   |                           |   | $      | 0.4                                                                    |   |   |   | 6.45 | % |
| 2007, Quarter2             |   |                     | 26.5   |   |                                       |   | 23.0   |                           |   |   | 0.0                                                                    |   |   |   | 6.95 |   |
| 2007, Quarter3             |   |                     | 26.9   |   |                                       |   | 24.3   |                           |   |   | 0.1                                                                    |   |   |   | 7.91 |   |
| 2007, Quarter4             |   |                     | 27.5   |   |                                       |   | 24.8   |                           |   |   | 0.0                                                                    |   |   |   | 8.58 |   |
| 2008, Quarter1             |   |                     | 27.9   |   |                                       |   | 25.2   |                           |   |   | 0.0                                                                    |   |   |   | 8.91 |   |

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

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

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

----

| Months      remaining to end of compliance period |   | As      a Percent of Unpaid Principal Balance |   |
|---------------------------------------------------|--------|-----------------------------------------------|--------|
| Compliance      period already exceeded           |   |                                          | 28.5   | % |
| Zero      through twelve months remaining         |   |                                          | 4.5    |   |
| Thirteen      through thirty six months remaining |   |                                          | 53.6   |   |
| Thirty      seven through sixty months remaining  |   |                                          | 13.4   |   |
|                                              |   |                                          | 100.0  | % |

| (amounts      in thousands) |   | 30      to 59 days delinquent |   |   | 60      to 89 daysdelinquent |   |   | 90      days and over delinquent (1) |   |   | Total |   |
|-----------------------------|--------|-------------------------------|--------|--------|------------------------------|--------|--------|--------------------------------------|--------|--------|-------|--------|
| 2007, Quarter1              |   | $                             | 5,389  |   |                         | $      | 937    |                                 |   | $      | 4,273 |   |   | $ | 10,599 |   |
| 2007, Quarter2              |   |                          | 4,180  |   |                         |   | 874    |                                 |   |   | 3,157 |   |   |   | 8,211 |   |
| 2007, Quarter3              |   |                          | 2,381  |   |                         |   | 551    |                                 |   |   | 3,058 |   |   |   | 5,990 |   |
| 2007, Quarter4              |   |                          | 5,003  |   |                         |   | 562    |                                 |   |   | 2,342 |   |   |   | 7,907 |   |
| 2008, Quarter1              |   |                          | 4,092  |   |                         |   | 761    |                                 |   |   | 2,543 |   |   |   | 7,396 |   |

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

----

|                                                        |   | Three      Months Ended |   |
|-------------------------------------------------------------|--------|-------------------------|--------|
|                                                        |   | March      31,          |   |
| (amounts      in thousands except per share information)    |   | 2008                    |   |   | 2007 |   |
|                                                        |   |                    |   |   |   |   |
| Net      interest income                                    |   | $                       | 2,421  |   |   | $ | 2,460 |   |
| (Provision      for) recapture of provision for loan losses |   |                    | (26    | ) |   |   | 523 |   |
| Net      interest income after recapture of loan losses     |   |                    | 2,395  |   |   |   | 2,983 |   |
| Gain      (loss) on sales of investments                    |   |                    | 2,093  |   |   |   | (6 | ) |
| Equity      in (loss) earnings of joint venture             |   |                    | (2,251 | ) |   |   | 630 |   |
| Fair      value adjustments, net                            |   |                    | 4,231  |   |   |   | – |   |
| Other      income (expense)                                 |   |                    | 67     |   |   |   | (539 | ) |
| General      and administrative expenses                    |   |                    | (1,216 | ) |   |   | (1,126 | ) |
| Net      income                                             |   |                    | 5,319  |   |   |   | 1,942 |   |
| Preferred      stock charge                                 |   |                    | (1,003 | ) |   |   | (1,003 | ) |
| Net      income to common shareholders                      |   |                    | 4,316  |   |   |   | 939 |   |
|                                                        |   |                    |   |   |   |   |   |   |
| Net      income per common share:                           |   |                    |   |   |   |   |   |   |
| Basic                                                       |   | $                       | 0.36   |   |   | $ | 0.08 |   |
| Diluted                                                     |   | $                       | 0.32   |   |   | $ | 0.08 |   |

|                             |   | Three      Months Ended March 31, |   |
|----------------------------------|--------|-----------------------------------|--------|
| (amounts      in thousands)      |   | 2008                              |   |   | 2007 |   |
| Interest      income:            |   |                              |   |   |   |   |
| Securitized mortgage      loans  |   | $                                 | 5,602  |   |   | $ | 7,025 |   |
| Securities                       |   |                              | 428    |   |   |   | 324 |   |
| Cash and cash      equivalents   |   |                              | 324    |   |   |   | 739 |   |
| Other loans and      investments |   |                              | 129    |   |   |   | 127 |   |
|                             |   | $                                 | 6,483  |   |   | $ | 8,215 |   |

----

|                             |   | Three      Months Ended March 31, |   |
|----------------------------------|--------|-----------------------------------|--------|
|                             |   | 2008                              |   |   | 2007 |   |
| (amounts      in thousands)      |   | Interest      Income              |   |   | Net      Amortization |   |   | Total      Interest Income |   |   | Interest      Income |   |   | Net      Amortization |   |   | Total      Interest Income |   |
| Securitized      mortgage loans: |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                       |   | $                                 | 3,985  |   |   | $ | 100 |   |   | $ | 4,085 |   |   | $ | 4,868 |   |   | $ | 87 |   |   | $ | 4,955 |   |
| Single-family                    |   |                              | 1,604  |   |   |   | (87 | ) |   |   | 1,517 |   |   |   | 2,205 |   |   |   | (135 | ) |   |   | 2,070 |   |
| Total      mortgage loans        |   | $                                 | 5,589  |   |   | $ | 13 |   |   | $ | 5,602 |   |   | $ | 7,073 |   |   | $ | (48 | ) |   | $ | 7,025 |   |

|                                                                 |   | Three      Months Ended March 31, |   |
|----------------------------------------------------------------------|--------|-----------------------------------|--------|
| (amounts      in thousands)                                          |   | 2008                              |   |   | 2007 |   |
| Non-agency      RMBS                                                 |   | $                                 | 176    |   |   | $ | 262 |   |
| Agency      RMBS                                                     |   |                              | 104    |   |   |   | 62 |   |
| Corporate      debt securities and other interest-bearing securities |   |                              | 148    |   |   |   | – |   |
|                                                                 |   | $                                 | 428    |   |   | $ | 324 |   |

----

|                                    |   | Three      Months Ended March 31, |   |
|-----------------------------------------|--------|-----------------------------------|--------|
| (amounts      in thousands)             |   | 2008                              |   |   | 2007 |   |
| Interest      expense:                  |   |                              |   |   |   |   |
| Securitization      financing           |   | $                                 | 3,599  |   |   | $ | 4,096 |   |
| Repurchase      agreements              |   |                              | 54     |   |   |   | 1,258 |   |
| Obligation under payment      agreement |   |                              | 401    |   |   |   | 367 |   |
| Other                                   |   |                              | 8      |   |   |   | 34 |   |
|                                    |   | $                                 | 4,062  |   |   | $ | 5,755 |   |

|                           |   | Three      Months Ended March 31, |   |
|--------------------------------|--------|-----------------------------------|--------|
|                           |   | 2008                              |   |   | 2007 |   |
| (amounts      in thousands)    |   | Interest      Expense             |   |   | Net      Amortization |   |   | Total      Interest Expense |   |   | Interest      Expense |   |   | Net      Amortization |   |   | Total      Interest Expense |   |
| Securitization      financing: |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                     |   | $                                 | 3,441  |   |   | $ | (325 | ) |   | $ | 3,116 |   |   | $ | 4,273 |   |   | $ | (286 | ) |   | $ | 3,987 |   |
| Single-family                  |   |                              | 338    |   |   |   | 52 |   |   |   | 390 |   |   |   | – |   |   |   | – |   |   |   | – |   |
| Other bond related      costs  |   |                              | 93     |   |   |   | – |   |   |   | 93 |   |   |   | 109 |   |   |   | – |   |   |   | 109 |   |
| Total      mortgage loans      |   | $                                 | 3,872  |   |   | $ | (273 | ) |   | $ | 3,599 |   |   | $ | 4,382 |   |   | $ | (286 | ) |   | $ | 4,096 |   |

----

----

|                                                                                        |   | Three      Months Ended March 31, |    |
|---------------------------------------------------------------------------------------------|--------|-----------------------------------|---------|
|                                                                                        |   | 2008                              |    |   | 2007 |   |
|  (amounts      in thousands)                                                           |   | Average      Balance              |    |   | Effective      Rate |   |   | Average      Balance |   |   | Effective      Rate |   |
|                                                                                        |   |                              |    |   |   |   |   |   |   |   |   |   |
| Interest-earning      assets:(1)                                                            |   |                              |    |   |   |   |   |   |   |   |   |   |
| Securitized      mortgage loans(2)(3)(5)                                                    |   | $                                 | 276,399 |   |   |   | 8.08 | % |   | $ | 342,238 |   |   |   | 8.17 | % |
| Securities                                                                                  |   |                              | 21,131  |   |   |   | 8.10 | % |   |   | 13,295 |   |   |   | 9.76 | % |
| Other      loans and investments                                                            |   |                              | 3,603   |   |   |   | 16.22 | % |   |   | 3,739 |   |   |   | 14.68 | % |
| Total      interest-earning assets                                                          |   | $                                 | 301,133 |   |   |   | 8.18 | % |   | $ | 359,272 |   |   |   | 8.30 | % |
|                                                                                        |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing      liabilities:                                                          |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securitization      financing(3)(4)(5)                                                      |   | $                                 | 201,443 |   |   |   | 7.09 | % |   | $ | 208,434 |   |   |   | 7.59 | % |
| Repurchase      agreements                                                                  |   |                              | 5,708   |   |   |   | 3.72 | % |   |   | 92,705 |   |   |   | 5.43 | % |
| Total      interest-bearing liabilities                                                     |   | $                                 | 207,151 |   |   |   | 7.00 | % |   | $ | 301,139 |   |   |   | 6.92 | % |
|                                                                                        |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net      interest spread (4)                                                                |   |                              |    |   |   |   | 1.18 | % |   |   |   |   |   |   | 1.37 | % |
| Net      yield on average interest-earning assets(3)(4)(5)                                  |   |                              |    |   |   |   | 3.36 | % |   |   |   |   |   |   | 2.49 | % |
| Cash      and cash equivalents                                                              |   | $                                 | 42,652  |   |   |   | 3.03 | % |   | $ | 56,595 |   |   |   | 5.22 | % |
| Net      yield on average interest-earning assets, including cash and cash      equivalents |   |                              |    |   |   |   | 3.32 | % |   |   |   |   |   |   | 2.87 | % |

| (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.   Also certain prepayment penalties and income      support payments received on the Company’s commercial mortgage loan      portfolio are not annualized. |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

| (5)   | Net      yield on average interest-earning assets reflects the annualized net      interest income excluding non-interest related securitization financing      expense divided by average interest-earning assets for the      period. |
|-----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                        |   | Three      Months Ended March 31, 2008 versus 2007 |   |
|---------------------------------------------|--------|----------------------------------------------------|--------|
| (amounts      in thousands)                 |   | Rate                                               |   |   | Volume |   |   | Total |   |
|                                        |   |                                               |   |   |   |   |   |   |   |
| Securitized      mortgage loans             |   | $                                                  | (87    | ) |   | $ | (1,334 | ) |   | $ | (1,421 | ) |
| Securities                                  |   |                                               | (63    | ) |   |   | 167 |   |   |   | 104 |   |
| Other      loans  and investments |   |                                               | 5      |   |   |   | (3 | ) |   |   | 2 |   |
|                                        |   |                                               |   |   |   |   |   |   |   |   |   |   |
| Total      interest income                  |   |                                               | (145   | ) |   |   | (1,170 | ) |   |   | (1,315 | ) |
|                                        |   |                                               |   |   |   |   |   |   |   |   |   |   |
| Securitization      financing               |   |                                               | (351   | ) |   |   | (131 | ) |   |   | (482 | ) |
| Repurchase      agreements                  |   |                                               | (157   | ) |   |   | (1,047 | ) |   |   | (1,204 | ) |
|                                        |   |                                               |   |   |   |   |   |   |   |   |   |   |
| Total      interest expense                 |   |                                               | (508   | ) |   |   | (1,178 | ) |   |   | (1,686 | ) |
|                                        |   |                                               |   |   |   |   |   |   |   |   |   |   |
| Net      interest income                    |   | $                                                  | 363    |   |   | $ | 8 |   |   | $ | 371 |   |

| 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 dividends on      equity securities, securitization financing costs, other interest expense      and provision for credit losses. |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

----

| ·   | The      Company may be unable to invest in new assets with attractive yields, and      yields on new assets in which it does invest may not generate attractive      yields, resulting in a decline in the Company’s earnings per share over      time. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | New      investments may entail risks that the Company does not currently have in      its investment portfolio or may substantially add risks to the investment      portfolio which the Company may or may not have managed in the past as      part of its investment strategy.  In addition, while the Company      has owned Agency RMBS in the past, it has never had a significant amount      of its capital invested in theseassets. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Competition      may prevent the Company from acquiring new investments at favorable yields      potentially negatively impacting its  profitability. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The      Company’s ownership of certain subordinate interests in securitization      trusts subjects it to credit risk on the underlying loans, and it provides      for loss reserves on these loans as required under generally accepted      accounting principles. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The      Company’s efforts to manage credit risk may not be successful in limiting      delinquencies and defaults in underlying loans or losses on its      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 the Company’s cash flows and reported  results. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

| ·   | Prepayments      of principal on the Company’s investments, and the timing of prepayments,      may impact its reported earnings and cashflows. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The      Company finances a portion of its investment portfolio with short-term      recourse repurchase agreements which subjects the Company to margin calls      if the assets pledged subsequently decline in value or if the repurchase      agreement financier chooses to reduce its position in financing afforded      the Company. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

| ·   | Hedging      against interest rate exposure may adversely affect the Company’s      earnings. |
|--------------------|-----------------------------------------------------------------------------------------------------|

| ·   | The      Company’s reported income depends on accounting conventions and      assumptions about the future that maychange. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------|

----

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

| ·   | Maintaining      REIT status may reduce the Company’s flexibility to manage its      operations. |
|--------------------|--------------------------------------------------------------------------------------------------------|

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

| ·   | The      Company is dependent on certain keypersonnel. |
|--------------------|--------------------------------------------------------|

Item 3.  Quantitative and QualitativeDisclosures about Market Risk

----

| (amounts      in thousands)                   |   | Investment      Portfolio |   | Investment      Portfolio, including Cash and Cash Equivalents |
|-----------------------------------------------|--------|---------------------------|--------|----------------------------------------------------------------|
| Basis      Point Change inInterest      Rates |   | Cash      Flow            |   | Percent                                                        |   | Cash      Flow |   | Percent |
|                                          |   |                      |   |                                                           |   |   |   |   |
| +200                                          |   | $(300.2)                  |   | (1.8)%                                                         |   | $1,346.3 |   | 7.1% |
| +100                                          |   | (245.2)                   |   | (1.5)%                                                         |   | 578.1 |   | 3.1% |
| Base                                          |   |                      |   | –                                                        |   |   |   | – |
| -100                                          |   | 336.3                     |   | 2.0%                                                           |   | (486.9) |   | (2.6)% |
| -200                                          |   | 704.5                     |   | 4.2%                                                           |   | (942.1) |   | (5.0)% |

----

Item 1.  LegalProceedings

----

Item 1A.  Risk Factors

Item 2.  Unregistered Sales ofEquity Securities and Use of Proceeds

Item 3.  Defaults Upon SeniorSecurities

Item 4.  Submission ofMatters to a Vote of Security Holders

----

Item 5.  OtherInformation

Item6.  Exhibits

| Exhibit      No. | Description                                                                                                                                                                                                                                                     |
|------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1              | Articles      of Incorporation, as amended, effective as of February 4, 1988      (incorporated herein by reference to Exhibit 4.9 to Dynex’s Amendment No.      1 to the Registration Statement on Form S-3 (No. 333-10783) filed March      21, 1997).  |
| 3.2              | Amended      and Restated Bylaws, 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).                                                                         |
| 3.3              | Amendment      to Articles of Incorporation, effective December 29, 1989 (incorporated      herein by reference to Exhibit 4.10 to Dynex’s Amendment No. 1 to the      Registration Statement on Form S-3 (No. 333-10783) filed March 21,      1997).     |
| 3.4              | Amendment      to Articles of Incorporation, effective October 19, 1992 (incorporated      herein by reference to Exhibit 4.2 to Dynex’s Amendment No. 1 to the      Registration Statement on Form S-3 (No. 333-10783) filed March 21,      1997).  |
| 3.5              | Amendment      to Articles of Incorporation, effective April 25, 1997 (incorporated      herein by reference to Exhibit 3.10 to Dynex’s Quarterly Report on Form      10-Q for the quarter ended March 31, 1997).                                         |
| 3.6              | Amendment      to Articles of Incorporation, effective June 17, 1998 (incorporated herein      by reference to Exhibit 3.7 to Dynex’s Annual Report on Form 10-K for the      year ended December 31, 2004).                                              |
| 3.7              | Amendment      to Articles of Incorporation, effective August 2, 1999 (incorporated      herein by reference to Exhibit 3.8 to Dynex’s Annual Report on Form 10-K      for the year ended December 31, 2004).                                             |
| 3.8              | Amendment      to Articles of Incorporation, effective May 18,      2004  (incorporated herein by reference to Exhibit 3.3 to      Dynex’s Quarterly Report on Form 10-Q for the quarter ended June 30,      2004).                             |
| 10.6             | Employment      Agreement, dated as of March 31, 2008, between Dynex 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 (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).                                                                                         |

----

SIGNATURE

|                               | DYNEX CAPITAL,      INC.                                                                                                                                                                                                                                   |
|------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                               |                                                                                                                                                                                                                                                       |
|                               |                                                                                                                                                                                                                                                       |
|                               |                                                                                                                                                                                                                                                       |
| Date:  May      12, 2008 | /s/      Thomas B. Akin                                                                                                                                                                                                                                    |
|                               | Thomas      B. Akin                                                                                                                                                                                                                                        |
|                               | Chief Executive      Officer                                                                                                                                                                                                                          |
|                               | (Principal      Executive Officer)                                     |

|   | /s/      Stephen J. Benedetti                                                                                                                                                                                                                              |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | Stephen      J. Benedetti                                                                                                                                                                                                                                  |
|   | Executive      Vice President and Chief Operating Officer                                                                                                                                                                                                  |
|   | (Principal      Financial Officer)                                     |

----

| Exhibit      No. |                                                                                                                                                                          |
|------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |                                                                                                                                                                          |
| 10.7             | Dynex      Capital, Inc. 401(k) Overflow Plan, effective July 1, 1997 (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).  |