----

----

|  þ | Quarterly Report Pursuant to Section 13 or 15(d) of the      Securities      Exchange Act of 1934 |
|--------------|---------------------------------------------------------------------------------------------------|

|  o | Transition      Report Pursuant to Section 13 or 15(d) of theSecurities      Exchange Act of 1934 |
|---------|---------------------------------------------------------------------------------------------------|

| 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      |

----

INDEX

|          |                       |                                                                                                                                             | Page   |
|---------------|----------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| PART      I.  | FINANCIAL      INFORMATION |                                                                                                                                             |
|          |                       |                                                                                                                                             |   |
|          | Item      1.               | Financial      Statements                                                                                                                        |   |
|          |                       |                                                                                                                                             |   |
|          |                       | Condensed      Consolidated Balance Sheets at September 30, 2008 (unaudited) and December      31, 2007                                          | 1      |
|          |                       |                                                                                                                                             |   |
|          |                       | Condensed      Consolidated Statements of Operations for the three and nine months ended      September 30, 2008 and 2007  (unaudited) | 2      |
|          |                       |                                                                                                                                             |   |
|          |                       | Condensed      Consolidated Statement of Shareholders’ Equity for the nine months ended      September 30, 2008 and 2007 (unaudited)       | 3      |
|          |                       |                                                                                                                                             |   |
|          |                       | Condensed      Consolidated Statements of Cash Flows for the nine months ended September      30, 2008 and 2007  (unaudited)           | 4      |
|          |                       |                                                                                                                                             |   |
|          |                       | Notes      to Unaudited Condensed Consolidated Financial Statements                                                                              | 5      |
|          |                       |                                                                                                                                             |   |
|          | Item      2.               | Management’s      Discussion and Analysis of Financial Condition and Results of      Operations                                            | 19     |
|          |                       |                                                                                                                                             |   |
|          | Item      3.               | Quantitative      and Qualitative Disclosures About Market Risk                                                                                  | 46     |
|          |                       |                                                                                                                                             |   |
|          | Item      4.               | Controls      and Procedures                                                                                                                     | 48     |
|          |                       |                                                                                                                                             |   |
| PART      II. | OTHER      INFORMATION     |                                                                                                                                             |
|          |                       |                                                                                                                                             |   |
|          | Item      1.               | Legal      Proceedings                                                                                                                           | 48     |
|          |                       |                                                                                                                                             |   |
|          | Item      1A.              | Risk      Factors                                                                                                                                | 49     |
|          |                       |                                                                                                                                             |   |
|          | Item      2.               | Unregistered      Sales of Equity Securities and Use of Proceeds                                                                                 | 49     |
|          |                       |                                                                                                                                             |   |
|          | Item      3.               | Defaults      Upon Senior Securities                                                                                                             | 49     |
|          |                       |                                                                                                                                             |   |
|          | Item      4.               | Submission      of Matters to a Vote of Security Holders                                                                                         | 49     |
|          |                       |                                                                                                                                             |   |
|          | Item      5.               | Other      Information                                                                                                                           | 50     |
|          |                       |                                                                                                                                             |   |
|          | Item      6.               | Exhibits                                                                                                                                         | 50     |
|          |                       |                                                                                                                                             |   |
| SIGNATURES    |                       |

----

Item1.                      FinancialStatements

CONDENSED CONSOLIDATED

BALANCE SHEETS

|                                                                                                                                                                                                              |   | September      30, |     |   | December      31, |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|----------|--------|-------------------|--------|
|                                                                                                                                                                                                              |   | 2008               |     |   | 2007              |   |
|                                                                                                                                                                                                              |   | (unaudited)        |     |   |              |   |
| ASSETS                                                                                                                                                                                                            |   |               |     |   |              |   |
| Agency      RMBS:                                                                                                                                                                                                 |   |               |     |   |              |   |
| Pledged to counterparties, at      fair value                                                                                                                                                                     |   | $                  | 283,976  |   |              | $      | – |   |
| Unpledged, at fair      value                                                                                                                                                                                     |   |               | 16,916   |   |              |   | 7,456 |   |
|                                                                                                                                                                                                              |   |               | 300,892  |   |              |   | 7,456 |   |
|                                                                                                                                                                                                              |   |               |     |   |              |   |   |   |
| Securitized      mortgage loans, net                                                                                                                                                                              |   |               | 252,507  |   |              |   | 278,463 |   |
| Investment      in joint venture                                                                                                                                                                                  |   |               | 10,448   |   |              |   | 19,267 |   |
| Other      investments                                                                                                                                                                                            |   |               | 17,340   |   |              |   | 28,549 |   |
|                                                                                                                                                                                                              |   |               | 581,187  |   |              |   | 333,735 |   |
|                                                                                                                                                                                                              |   |               |     |   |              |   |   |   |
| Cash      and cash equivalents                                                                                                                                                                                    |   |               | 16,411   |   |              |   | 35,352 |   |
| Other      assets                                                                                                                                                                                                 |   |               | 5,495    |   |              |   | 5,671 |   |
|                                                                                                                                                                                                              |   | $                  | 603,093  |   |              | $      | 374,758 |   |
| LIABILITIES      AND SHAREHOLDERS’ EQUITY                                                                                                                                                                   |   |               |     |   |              |   |   |   |
| LIABILITIES                                                                                                                                                                                                       |   |               |     |   |              |   |   |   |
| Repurchase      agreements                                                                                                                                                                                        |   | $                  | 265,819  |   |              | $      | 4,612 |   |
| Securitization      financing                                                                                                                                                                                     |   |               | 185,184  |   |              |   | 204,385 |   |
| Obligation      under payment agreement                                                                                                                                                                           |   |               | 10,079   |   |              |   | 16,796 |   |
| Other      liabilities                                                                                                                                                                                            |   |               | 2,377    |   |              |   | 7,029 |   |
|                                                                                                                                                                                                              |   |               | 463,459  |   |              |   | 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                                                                                                                                                                                   |   |               | 366,793  |   |              |   | 366,716 |   |
| Accumulated      other comprehensive (loss) income                                                                                                                                                                |   |               | (6,041   | )      |              |   | 1,093 |   |
| Accumulated      deficit                                                                                                                                                                                          |   |               | (262,989 | )      |              |   | (267,743 | ) |
|                                                                                                                                                                                                              |   |               | 139,634  |   |              |   | 141,936 |   |
|                                                                                                                                                                                                              |   | $                  | 603,093  |   |              | $      | 374,758 |   |
|                                                                                                                                                                                                              |   |               |     |   |              |   |   |   |

----

CONDENSED CONSOLIDATED STATEMENTS

OF OPERATIONS 

|                                                                       |   | Three      Months Ended |   |   | Nine      Months Ended |   |
|----------------------------------------------------------------------------|--------|-------------------------|--------|--------|------------------------|--------|
|                                                                       |   | September      30,      |   |   | September      30,     |   |
|                                                                       |   | 2008                    |   |   | 2007                   |   |   | 2008 |   |   | 2007 |   |
| Interest      income:                                                      |   |                    |   |   |                   |   |   |   |   |   |   |   |
| Investments                                                                |   | $                       | 7,719  |   |                   | $      | 6,836 |   |   | $ | 20,375 |   |   | $ | 21,548 |   |
| Cash and cash      equivalents                                             |   |                    | 158    |   |                   |   | 637 |   |   |   | 659 |   |   |   | 2,163 |   |
|                                                                       |   |                    | 7,877  |   |                   |   | 7,473 |   |   |   | 21,034 |   |   |   | 23,711 |   |
| Interest      expense                                                      |   |                    | 5,090  |   |                   |   | 5,016 |   |   |   | 13,325 |   |   |   | 15,830 |   |
| Net      interest income                                                   |   |                    | 2,787  |   |                   |   | 2,457 |   |   |   | 7,709 |   |   |   | 7,881 |   |
| (Provision      for) recapture of loan losses                              |   |                    | (449   | )      |                   |   | 127 |   |   |   | (796 | ) |   |   | 1,352 |   |
|                                                                       |   |                    |   |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Net      interest income after (provision for) recapture of loan    losses |   |                    | 2,338  |   |                   |   | 2,584 |   |   |   | 6,913 |   |   |   | 9,233 |   |
|                                                                       |   |                    |   |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Equity      in (loss) income of joint venture                              |   |                    | (3,462 | )      |                   |   | 576 |   |   |   | (5,153 | ) |   |   | 1,878 |   |
| Gain      on sale of investments, net                                      |   |                    | 331    |   |                   |   | 21 |   |   |   | 2,381 |   |   |   | 21 |   |
| Fair      value adjustments, net                                           |   |                    | 1,461  |   |                   |   | – |   |   |   | 5,519 |   |   |   | – |   |
| Other      income (expense)                                                |   |                    | 3,862  |   |                   |   | 305 |   |   |   | 6,954 |   |   |   | (713 | ) |
| General      and administrative expenses                                   |   |                    | (1,485 | )      |                   |   | (800 | ) |   |   | (3,954 | ) |   |   | (3,089 | ) |
|                                                                       |   |                    |   |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Net      income                                                            |   |                    | 3,045  |   |                   |   | 2,686 |   |   |   | 12,660 |   |   |   | 7,330 |   |
| Preferred      stock dividends                                             |   |                    | (1,003 | )      |                   |   | (1,003 | ) |   |   | (3,008 | ) |   |   | (3,008 | ) |
|                                                                       |   |                    |   |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Net      income to common shareholders                                     |   | $                       | 2,042  |   |                   | $      | 1,683 |   |   | $ | 9,652 |   |   | $ | 4,322 |   |
|                                                                       |   |                    |   |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Net      income per common share:                                          |   |                    |   |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                      |   | $                       | 0.17   |   |                   | $      | 0.14 |   |   | $ | 0.79 |   |   | $ | 0.36 |   |
| Diluted                                                                    |   | $                       | 0.17   |   |                   | $      | 0.14 |   |   | $ | 0.77 |   |   | $ | 0.36 |   |
|                                                                       |   |                    |   |   |                   |   |   |   |   |   |   |   |   |   |   |   |

----

|                                                                  |   | 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                        |   |           | – |   |        |   | – |                     |   |   | –                                                           |   |   |               | – |   |   |   | 943 |   |   |   | 943 |   |
| Net      income                                                       |   |           | – |   |        |   | – |                     |   |   | –                                                           |   |   |               | – |   |   |   | 12,660 |   |   |   | 12,660 |   |
| Other      comprehensive income:                                      |   |           |    |   |        |   |    |                     |   |   |                                                              |   |   |               |    |   |   |   |   |   |   |   |   |   |
| Change      in market value of securities and other investments       |   |           | – |   |        |   | – |                     |   |   | –                                                           |   |   |               | (4,753  | )      |   |   | – |   |   |   | (4,753 | ) |
| Reclassification      adjustment for net gains included in net income |   |           | – |   |        |   | – |                     |   |   | –                                                           |   |   |               | (2,381  | )      |   |   | – |   |   |   | (2,381 | ) |
| Total      comprehensive income                                       |   |           |    |   |        |   |    |                     |   |   |                                                              |   |   |               |    |   |   |   |   |   |   |   | 5,526 |   |
|                                                                  |   |           |    |   |        |   |    |                     |   |   |                                                              |   |   |               |    |   |   |   |   |   |   |   |   |   |
| Dividends      on common stock                                        |   |           | – |   |        |   | – |                     |   |   | –                                                           |   |   |               | – |   |   |   | (5,841 | ) |   |   | (5,841 | ) |
| Dividends      on preferred stock                                     |   |           | – |   |        |   | – |                     |   |   | –                                                           |   |   |               | – |   |   |   | (3,008 | ) |   |   | (3,008 | ) |
| Stock      option issuance                                            |   |           | – |   |        |   | – |                     |   |   | 13                                                                |   |   |               | – |   |   |   | – |   |   |   | 13 |   |
| Grant      and vesting of restricted stock                            |   |           | – |   |        |   | 1       |                     |   |   | 64                                                                |   |   |               | – |   |   |   | – |   |   |   | 65 |   |
|                                                                  |   |           |    |   |        |   |    |                     |   |   |                                                              |   |   |               |    |   |   |   |   |   |   |   |   |   |
| Balance      at September 30, 2008                                    |   | $              | 41,749  |   |        | $      | 122     |                     |   | $      | 366,793                                                           |   |   | $                  | (6,041  | )      |   | $      | (262,989 | ) |   | $ | 139,634 |   |

|                                                                  |   | PreferredStock |    |   | CommonStock |   |    | AdditionalPaid-inCapital |   |   | Accumulated      OtherCompre­hen­sive(Loss)      Income |   |   | AccumulatedDeficit |    |   | Total  |   |
|-----------------------------------------------------------------------|--------|----------------|---------|--------|-------------|--------|---------|--------------------------|--------|--------|-------------------------------------------------------------------|--------|--------|--------------------|---------|--------|--------|--------|
| Balance      at December 31, 2006                                     |   | $              | 41,749  |   |        | $      | 121     |                     |   | $      | 366,637                                                           |   |   | $                  | 663     |   |   | $      | (272,632 | ) |   | $ | 136,538 |   |
|                                                                  |   |           |    |   |        |   |    |                     |   |   |                                                              |   |   |               |    |   |   |   |   |   |   |   |   |   |
| Net      income                                                       |   |           | – |   |        |   | – |                     |   |   | –                                                           |   |   |               | – |   |   |   | 7,330 |   |   |   | 7,330 |   |
| Other      comprehensive income:                                      |   |           |    |   |        |   |    |                     |   |   |                                                              |   |   |               |    |   |   |   |   |   |   |   |   |   |
| Change      in market value of securities and other investments       |   |           | – |   |        |   | – |                     |   |   | –                                                           |   |   |               | 433     |   |   |   | – |   |   |   | 433 |   |
| Reclassification      adjustment for net gains included in net income |   |           | – |   |        |   | – |                     |   |   | –                                                           |   |   |               | (21     | )      |   |   | – |   |   |   | (21 | ) |
| Total      comprehensive income                                       |   |           |    |   |        |   |    |                     |   |   |                                                              |   |   |               |    |   |   |   |   |   |   |   | 7,742 |   |
|                                                                  |   |           |    |   |        |   |    |                     |   |   |                                                              |   |   |               |    |   |   |   |   |   |   |   |   |   |
| Dividends      on preferred stock                                     |   |           | – |   |        |   | – |                     |   |   | –                                                           |   |   |               | – |   |   |   | (3,008 | ) |   |   | (3,008 | ) |
| Stock      option exercise                                            |   |           | – |   |        |   | – |                     |   |   | 37                                                                |   |   |               | – |   |   |   | – |   |   |   | 37 |   |
| Stock      option issuance                                            |   |           | – |   |        |   | – |                     |   |   | 42                                                                |   |   |               | – |   |   |   | – |   |   |   | 42 |   |
|                                                                  |   |           |    |   |        |   |    |                     |   |   |                                                              |   |   |               |    |   |   |   |   |   |   |   |   |   |
| Balance      at September 30, 2007                                    |   | $              | 41,749  |   |        | $      | 121     |                     |   | $      | 366,716                                                           |   |   | $                  | 1,075   |   |   | $      | (268,310 | ) |   | $ | 141,351 |   |

----

|   | DYNEX      CAPITAL, INC. |
|--------|--------------------------|

|   | CONDENSED CONSOLIDATED  STATEMENTS |
|--------|------------------------------------|

|   | OF CASH FLOWS(UNAUDITED) |
|--------|--------------------------|

|   | (amounts      in thousands) |
|--------|-----------------------------|

|                                                                                    |   | Nine      Months Ended |     |
|-----------------------------------------------------------------------------------------|--------|------------------------|----------|
|                                                                                    |   | September      30,     |     |
|                                                                                    |   | 2008                   |     |   | 2007 |   |
| Operating      activities:                                                              |   |                   |     |   |   |   |
| Net      income                                                                         |   | $                      | 12,660   |   |   | $ | 7,330 |   |
| Adjustments      to reconcile net income to cash provided by operating      activities: |   |                   |     |   |   |   |   |   |
| Equity      in loss (income) of joint venture                                           |   |                   | 5,153    |   |   |   | (1,878 | ) |
| Distribution      of joint venture earnings                                             |   |                   | –  |   |   |   | 1,125 |   |
| Provision      for (recapture of) loan losses                                           |   |                   | 796      |   |   |   | (1,352 | ) |
| Gain      on sale of investments, net                                                   |   |                   | (2,381   | ) |   |   | (21 | ) |
| Fair      value adjustments, net                                                        |   |                   | (5,519   | ) |   |   | – |   |
| Amortization      and depreciation                                                      |   |                   | (1,694   | ) |   |   | (1,518 | ) |
| Stock      based compensation (benefit) expense                                         |   |                   | (263     | ) |   |   | 42 |   |
| Net      change in other assets and other liabilities                                   |   |                   | (4,134   | ) |   |   | 2,883 |   |
| Net      cash provided by operating activities                                          |   |                   | 4,618    |   |   |   | 6,611 |   |
|                                                                                    |   |                   |     |   |   |   |   |   |
| Investing      activities:                                                              |   |                   |     |   |   |   |   |   |
| Principal      payments received on securitized mortgage loans                          |   |                   | 28,008   |   |   |   | 51,517 |   |
| Purchases      of Agency RMBS                                                           |   |                   | (343,941 | ) |   |   | – |   |
| Purchases      of other investments                                                     |   |                   | (9,988   | ) |   |   | (16,398 | ) |
| Payments      received on Agency RMBS and other investments                             |   |                   | 21,171   |   |   |   | 8,230 |   |
| Proceeds      from sales of Agency RMBS                                                 |   |                   | 29,744   |   |   |   | – |   |
| Proceeds      from sales of other investments                                           |   |                   | 19,188   |   |   |   | 452 |   |
| Return      of capital from joint venture                                               |   |                   | –  |   |   |   | 17,095 |   |
| Other                                                                                   |   |                   | (2,882   | ) |   |   | 931 |   |
| Net      cash (used) provided by investing activities                                   |   |                   | (258,700 | ) |   |   | 61,827 |   |
|                                                                                    |   |                   |     |   |   |   |   |   |
| Financing      activities:                                                              |   |                   |     |   |   |   |   |   |
| Principal      payments on securitization financing                                     |   |                   | (17,217  | ) |   |   | (27,119 | ) |
| Net      borrowings under  (repayments of) repurchase      agreements         |   |                   | 261,207  |   |   |   | (59,781 | ) |
| Proceeds      from sale of common stock                                                 |   |                   | –  |   |   |   | 37 |   |
| Dividends      paid                                                                     |   |                   | (8,849   | ) |   |   | (3,008 | ) |
| Net      cash provided (used) by financing activities                                   |   |                   | 235,141  |   |   |   | (89,871 | ) |
|                                                                                    |   |                   |     |   |   |   |   |   |
| Net      decrease in cash and cash equivalents                                          |   |                   | (18,941  | ) |   |   | (21,433 | ) |
| Cash      and cash equivalents at beginning of period                                   |   |                   | 35,352   |   |   |   | 56,880 |   |
| Cash      and cash equivalents at end of period                                         |   | $                      | 16,411   |   |   | $ | 35,447 |   |
|                                                                                    |   |                   |     |   |   |   |   |   |
|                                                                                    |   |                   |     |   |   |   |   |   |
| See      notes to unaudited condensed consolidated financial      statements.           |   |                   |     |   |   |   |   |   |

----

NOTES TO UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

----

----

----

|                                                                                                   |   | Three      Months Ended September 30, |    |
|--------------------------------------------------------------------------------------------------------|--------|---------------------------------------|---------|
|                                                                                                   |   | 2008                                  |    |   | 2007 |   |
|                                                                                              |   | Income                                |    |   | Weighted-Average      Common Shares |   |   | Income |   |   | Weighted-AverageCommonShares |   |
| Net      income                                                                                        |   | $                                     | 3,045   |   |   |   |   |   | $ | 2,686 |   |   |   |   |
| Preferred      stock dividends                                                                         |   |                                  | (1,003  | ) |   |   |   |   |   | (1,003 | ) |   |   |   |
| Net      income to common shareholders                                                                 |   |                                  | 2,042   |   |   |   | 12,169,762 |   |   |   | 1,683 |   |   |   | 12,136,262 |   |
| Effect      of dilutive items                                                                          |   |                                  | – |   |   |   | 2,761 |   |   |   | – |   |   |   | 2,369 |   |
| Diluted                                                                                                |   | $                                     | 2,042   |   |   |   | 12,172,523 |   |   | $ | 1,683 |   |   |   | 12,138,631 |   |
|                                                                                                   |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net      income per share:                                                                             |   |
| Basic                                                                                                  |   |                                  |    |   |   | $ | 0.17 |   |   |   |   |   |   | $ | 0.14 |   |
| Diluted                                                                                                |   |                                  |    |   |   | $ | 0.17 |   |   |   |   |   |   | $ | 0.14 |   |
|                                                                                                   |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reconciliation      of shares included in calculation of income per share due to dilutive      effect: |   |                                  |    |
| Net      effect of dilutive:                                                                           |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Convertible      preferred stock                                                                       |   |                                  | – |   |   |   | – |   |   |   | – |   |   |   | – |   |
| Stock      options                                                                                     |   |                                  | – |   |   |   | 2,761 |   |   |   | – |   |   |   | 2,369 |   |
|                                                                                                   |   | $                                     | – |   |   |   | 2,761 |   |   | $ | – |   |   |   | 2,369 |   |

|                                                                                                   |   | Nine      Months Ended September 30, |    |
|--------------------------------------------------------------------------------------------------------|--------|--------------------------------------|---------|
|                                                                                                   |   | 2008                                 |    |   | 2007 |   |
|                                                                                                   |   | Income                               |    |   | Weighted-Average      Common Shares |   |   | Income |   |   | Weighted-AverageCommonShares |   |
| Net      income                                                                                        |   | $                                    | 12,660  |   |   |   |   |   | $ | 7,330 |   |   |   |   |
| Preferred      stock dividends                                                                         |   |                                 | (3,008  | ) |   |   |   |   |   | (3,008 | ) |   |   |   |
| Net      income to common shareholders                                                                 |   |                                 | 9,652   |   |   |   | 12,165,483 |   |   |   | 4,322 |   |   |   | 12,135,236 |   |
| Effect      of dilutive items                                                                          |   |                                 | 3,008   |   |   |   | 4,227,296 |   |   |   | – |   |   |   | 2,079 |   |
| Diluted                                                                                                |   | $                                    | 12,660  |   |   |   | 16,392,779 |   |   | $ | 4,322 |   |   |   | 12,137,315 |   |
|                                                                                                   |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net      income per share:                                                                             |   |
| Basic                                                                                                  |   |                                 |    |   |   | $ | 0.79 |   |   |   |   |   |   | $ | 0.36 |   |
| Diluted                                                                                                |   |                                 |    |   |   | $ | 0.77 |   |   |   |   |   |   | $ | 0.36 |   |
|                                                                                                   |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reconciliation      of shares included in calculation of income per share due to dilutive      effect: |   |                                 |    |
| Net      effect of dilutive:                                                                           |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Convertible      preferred stock                                                                       |   |                                 | 3,008   |   |   |   | 4,221,539 |   |   |   | – |   |   |   | – |   |
| Stock      options                                                                                     |   |                                 | – |   |   |   | 5,757 |   |   |   | – |   |   |   | 2,079 |   |
|                                                                                                   |   | $                                    | 3,008   |   |   |   | 4,227,296 |   |   | $ | – |   |   |   | 2,079 |   |

----

|                                           |   | Three      Months Ended |      |   | Nine      Months Ended |   |
|------------------------------------------------|--------|-------------------------|-----------|--------|------------------------|--------|
|                                           |   | September      30,      |      |   | September      30,     |   |
|                                           |   | 2008                    |      |   | 2007                   |   |   | 2008 |   |   | 2007 |   |
| Shares      issuable under stock option awards |   |                    | 85,000    |   |                   |   | 60,000 |   |   |   | 50,000 |   |   |   | 60,000 |   |
| Convertible      preferred stock               |   |                    | 4,221,539 |   |                   |   | 4,221,539 |   |   |   | – |   |   |   | 4,221,539 |   |

|                                                                                          |   | September      30,2008 |    |   | December      31, 2007 |   |
|-----------------------------------------------------------------------------------------------|--------|------------------------|---------|--------|------------------------|--------|
| Securitized      mortgage loans:                                                              |   |                   |    |   |                   |   |
| Commercial      mortgage loans                                                                |   | $                      | 171,028 |   |                   | $      | 185,998 |   |
| Single-family      mortgage loans                                                             |   |                   | 73,230  |   |                   |   | 86,088 |   |
|                                                                                          |   |                   | 244,258 |   |                   |   | 272,086 |   |
| Funds      held by trustees, including funds held for defeased commercial mortgage      loans |   |                   | 10,091  |   |                   |   | 7,225 |   |
| Accrued      interest receivable                                                              |   |                   | 1,664   |   |                   |   | 1,940 |   |
| Unamortized      discounts and premiums, net                                                  |   |                   | 6       |   |                   |   | (67 | ) |
| Loans,      at amortized cost                                                                 |   |                   | 256,019 |   |                   |   | 281,184 |   |
| Allowance      for loan losses                                                                |   |                   | (3,512  | )      |                   |   | (2,721 | ) |
|                                                                                          |   | $                      | 252,507 |   |                   | $      | 278,463 |   |

|                                          |   | Three      Months EndedSeptember      30, |   |   | Nine      Months EndedSeptember      30, |   |
|-----------------------------------------------|--------|-------------------------------------------|--------|--------|------------------------------------------|--------|
|                                          |   | 2008                                      |   |   | 2007                                     |   |   | 2008 |   |   | 2007 |   |
| Allowance      at beginning of period         |   | $                                         | 3,066  |   |                                     | $      | 2,805 |   |   | $ | 2,721 |   |   | $ | 4,495 |   |
| Provision      for (recapture of) loan losses |   |                                      | 449    |   |                                     |   | (127 | ) |   |   | 796 |   |   |   | (1,352 | ) |
| Charge-offs,      net of recoveries           |   |                                      | (3     | )      |                                     |   | (30 | ) |   |   | (5 | ) |   |   | (495 | ) |
| Allowance      at end of period               |   | $                                         | 3,512  |   |                                     | $      | 2,648 |   |   | $ | 3,512 |   |   | $ | 2,648 |   |

----

|                    |   | Investment      in Impaired Loans |   |   | Allowance      for Loan Losses |   |   | Investment      in Excess of Allowance |   |
|-------------------------|--------|-----------------------------------|--------|--------|--------------------------------|--------|--------|----------------------------------------|--------|
| December      31, 2007  |   | $                                 | 13,792 |   |                           | $      | 2,590  |                                   |   | $ | 11,202 |   |
| September      30, 2008 |   |                              | 16,853 |   |                           |   | 3,341  |                                   |   |   | 13,512 |   |

|                         |   | September      30,2008 |    |   | December      31, 2007 |   |
|------------------------------|--------|------------------------|---------|--------|------------------------|--------|
| Principal/par      value     |   | $                      | 299,012 |   |                   | $      | 7,400 |   |
| Purchase      premiums       |   |                   | 3,688   |   |                   |   | 14 |   |
| Purchase      discounts      |   |                   | (3      | )      |                   |   | (4 | ) |
| Amortized cost               |   |                   | 302,697 |   |                   |   | 7,410 |   |
| Gross      unrealized gains  |   |                   | 68      |   |                   |   | 46 |   |
| Gross      unrealized losses |   |                   | (1,873  | )      |                   |   | – |   |
| Fair value                   |   | $                      | 300,892 |   |                   | $      | 7,456 |   |
|                         |   |                   |    |   |                   |   |   |   |
| Weighted      average yield  |   |                   | 5.15    | %      |                   |   | 5.43 | % |

----

| Condensed      Statements of Operations                                             |   |                                      |   |   |                                     |   |
|-------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|--------|------------------------------------------|--------|
|                                                                                |   | Three      Months EndedSeptember      30, |   |   | Nine      Months EndedSeptember      30, |   |
|                                                                                |   | 2008                                      |   |   | 2007                                     |   |   | 2008 |   |   | 2007 |   |
| Interest      income                                                                |   | $                                         | 903    |   |                                     | $      | 1,551 |   |   | $ | 3,392 |   |   | $ | 4,468 |   |
| Fair      value adjustment                                                          |   |                                      | (1,584 | )      |                                     |   | (57 | ) |   |   | (5,846 | ) |   |   | 75 |   |
| Other-than-temporary      impairment                                                |   |                                      | (6,073 | )      |                                     |   | – |   |   |   | (7,277 | ) |   |   | – |   |
| Other      expense                                                                  |   |                                      | (6     | )      |                                     |   | (25 | ) |   |   | (59 | ) |   |   | (62 | ) |
| Net      (loss) income                                                              |   | $                                         | (6,760 | )      |                                     | $      | 1,469 |   |   | $ | (9,790 | ) |   | $ | 4,481 |   |
|                                                                                |   |                                      |   |   |                                     |   |   |   |   |   |   |   |   |   |   |   |
| Change      in unrealized loss on investments classified as available for      sale |   |                                      | 1,276  |   |                                     |   | (591 | ) |   |   | (6,589 | ) |   |   | 624 |   |
| Comprehensive      (loss) income                                                    |   | $                                         | (5,484 | )      |                                     | $      | 878 |   |   | $ | (16,379 | ) |   | $ | 5,105 |   |

| Condensed      Balance Sheets                     |   |                   |    |   |                   |   |
|---------------------------------------------------|--------|------------------------|---------|--------|------------------------|--------|
|                                              |   | September      30,2008 |    |   | December      31, 2007 |   |
| Assets:                                           |   |                   |    |   |                   |   |
| Cash      and cash equivalents                    |   | $                      | 7,582   |   |                   | $      | 5,592 |   |
| Investments                                       |   |                   | 12,801  |   |                   |   | 32,207 |   |
| Accrued      interest receivable and other assets |   |                   | 264     |   |                   |   | 173 |   |
|                                              |   | $                      | 20,647  |   |                   | $      | 37,972 |   |
|                                              |   |                   |    |   |                   |   |   |   |
| Total      liabilities                            |   | $                      | – |   |                   | $      | – |   |
| Members’      capital:                      |   |                   |    |   |                   |   |   |   |
| Members      capital                              |   |                   | 38,402  |   |                   |   | 38,402 |   |
| Accumulated      other comprehensive loss         |   |                   | (7,829  | )      |                   |   | (1,239 | ) |
| Retained      (deficit) earnings                  |   |                   | (9,926  | )      |                   |   | 809 |   |
|                                              |   | $                      | 20,647  |   |                   | $      | 37,972 |   |

----

|                                                |   | September      30, 2008 |    |   | December      31, 2007      |   |
|-----------------------------------------------------|--------|-------------------------|---------|--------|-----------------------------|--------|
|                                                |   | CarryingValue           |    |   | Weighted      Average Yield |   |   | Carrying      Value |   |   | Weighted      Average Yield |   |
| Other      securities:                              |   |                    |    |   |                        |   |   |   |   |   |   |   |
| Non-agency mortgage-backed      securities          |   | $                       | 7,051   |   |                        |   | 7.17 | % |   | $ | 7,684 |   |   |   | 6.85 | % |
| Corporate debt      securities                      |   |                    | – |   |                        |   | – | % |   |   | 4,722 |   |   |   | 11.75 | % |
| Equity securities of publicly      traded companies |   |                    | 7,653   |   |                        |   |   |   |   |   | 7,704 |   |   |   |   |   |
|                                                |   |                    | 14,704  |   |                        |   |   |   |   |   | 20,110 |   |   |   |   |   |
| Gross unrealized      gains                         |   |                    | 448     |   |                        |   |   |   |   |   | 2,361 |   |   |   |   |   |
| Gross unrealized      losses                        |   |                    | (923    | )      |                        |   |   |   |   |   | (696 | ) |   |   |   |   |
|                                                |   |                    | 14,229  |   |                        |   |   |   |   |   | 21,775 |   |   |   |   |   |
| Other      loans and investments                    |   |                    | 3,111   |   |                        |   |   |   |   |   | 6,774 |   |   |   |   |   |
|                                                |   | $                       | 17,340  |   |                        |   |   |   |   | $ | 28,549 |   |   |   |   |   |

----

|                                         |   |            |    |   | Fair      Value Measurements |   |
|----------------------------------------------|--------|-----------------|---------|--------|------------------------------|--------|
|                                         |   | Fair      Value |    |   | Level      1                 |   |   | Level      2 |   |   | Level      3 |   |
| Assets:                                      |   |            |    |   |                         |   |   |   |   |   |   |   |
| Agency RMBS                                  |   | $               | 300,892 |   |                         | $      | – |   |   | $ | 300,892 |   |   | $ | – |   |
| Non-agency RMBS                              |   |            | 6,822   |   |                         |   | – |   |   |   | – |   |   |   | 6,822 |   |
| Equity securities                            |   |            | 7,407   |   |                         |   | 7,407 |   |   |   | – |   |   |   | – |   |
| Other                                        |   |            | 375     |   |                         |   | – |   |   |   | – |   |   |   | 375 |   |
| Total assets carried at fair      value      |   | $               | 315,496 |   |                         | $      | 7,407 |   |   | $ | 300,892 |   |   | $ | 7,197 |   |
|                                         |   |            |    |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities:                                 |   |            |    |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Obligation under payment      agreement      |   | $               | 10,079  |   |                         | $      | – |   |   | $ | – |   |   | $ | 10,079 |   |
| Total liabilities carried at fair      value |   | $               | 10,079  |   |                         | $      | – |   |   | $ | – |   |   | $ | 10,079 |   |

|                                                        |   | Level      3 Fair Values |    |
|-------------------------------------------------------------|--------|--------------------------|---------|
|                                                        |   | Non-agency      RMBS     |    |   | Corporate      debt securities |   |   | Other |   |   | Total      assets |   |   | Obligation      under payment agreement |   |
| Balance      at July 1, 2008                                |   | $                        | 7,012   |   |   | $ | – |   |   | $ | 547 |   |   | $ | 7,559 |   |   | $ | 11,663 |   |
| Total      realized and unrealized gains (losses)           |   |                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Included in      earnings                                   |   |                     | – |   |   |   | – |   |   |   | (2 | ) |   |   | (2 | ) |   |   | (1,584 | ) |
| Included in other comprehensive      income (loss)          |   |                     | (229    | ) |   |   | – |   |   |   | 143 |   |   |   | (86 | ) |   |   | – |   |
| Purchases,      sales, issuances and other settlements, net |   |                     | 39      |   |   |   | – |   |   |   | (313 | ) |   |   | (274 | ) |   |   | – |   |
| Transfers      in and/or out of Level 3                     |   |                     | – |   |   |   | – |   |   |   | – |   |   |   | – |   |   |   | – |   |
| Balance      at September 30, 2008                          |   | $                        | 6,822   |   |   | $ | – |   |   | $ | 375 |   |   | $ | 7,197 |   |   | $ | 10,079 |   |

----

|                                                        |   | Level      3 Fair Values |    |
|-------------------------------------------------------------|--------|--------------------------|---------|
|                                                        |   | Non-agency      RMBS     |    |   | Corporate      debt securities |   |   | Other |   |   | Total      assets |   |   | Obligation      under payment agreement |   |
| Balance      at January 1, 2008                             |   | $                        | 7,726   |   |   | $ | 4,347 |   |   | $ | 2,127 |   |   | $ | 14,200 |   |   | $ | 15,473 |   |
| Total      realized and unrealized gains (losses)           |   |                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Included in      earnings                                   |   |                     | – |   |   |   | (187 | ) |   |   | (4 | ) |   |   | (191 | ) |   |   | (5,394 | ) |
| Included in other comprehensive      income (loss)          |   |                     | (272    | ) |   |   | 375 |   |   |   | 143 |   |   |   | 246 |   |   |   | – |   |
| Purchases,      sales, issuances and other settlements, net |   |                     | (632    | ) |   |   | (4,535 | ) |   |   | (1,891 | ) |   |   | (7,058 | ) |   |   | – |   |
| Transfers      in and/or out of Level 3                     |   |                     | – |   |   |   | – |   |   |   | – |   |   |   | – |   |   |   | – |   |
| Balance      at September 30, 2008                          |   | $                        | 6,822   |   |   | $ | – |   |   | $ | 375 |   |   | $ | 7,197 |   |   | $ | 10,079 |   |

----

|                                                 |   | September      30, 2008 |      |   | December      31, 2007       |   |
|------------------------------------------------------|--------|-------------------------|-----------|--------|------------------------------|--------|
|                                                 |   | Bonds      Outstanding  |      |   | Range      of Interest Rates |   |   | Bonds      Outstanding |   |   | Range      of Interest Rates |   |
| Fixed-rate      classes                              |   | $                       | 155,305   |   |                         |   | 6.6%      - 8.8 | % |   | $ | 167,398 |   |   |   | 6.6%      - 8.8 | % |
| Variable-rate      classes                           |   |                    | 29,376    |   |                         |   | 2.8 | % |   |   | 34,500 |   |   |   | 5.1 | % |
| Accrued      interest payable                        |   |                    | 1,056     |   |                         |   |   |   |   |   | 1,186 |   |   |   |   |   |
| Unamortized      net bond premium and deferred costs |   |                    | (553      | )      |                         |   |   |   |   |   | 1,301 |   |   |   |   |   |
|                                                 |   | $                       | 185,184   |   |                         |   |   |   |   | $ | 204,385 |   |   |   |   |   |
|                                                 |   |                    |      |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Range      of stated maturities                      |   |                    | 2024-2027 |   |                         |   |   |   |   |   | 2024-2027 |   |   |   |   |   |
| Estimated      weighted average life                 |   | 3.0      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 |   |
| September      30, 2008        |   |          | 4,221,539 |   |   |   | 12,169,762 |   |

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

----

----

|                                         |   | Three      Months Ended |    |   | Nine      Months Ended               |   |
|----------------------------------------------|--------|-------------------------|---------|--------|--------------------------------------|--------|
|                                         |   | September      30, 2008 |    |   | September      30, 2008              |   |
|                                         |   | Number      of Shares   |    |   | Weighted-Average      Exercise Price |   |   | Number      of Shares |   |   | Weighted-AverageExercisePrice |   |
| SARs      outstanding at beginning of period |   |                    | 278,146 |   |                                 | $      | 7.27 |   |   |   | 278,146 |   |   | $ | 7.27 |   |
| SARs      granted                            |   |                    | – |   |                                 |   | – |   |   |   | – |   |   |   | – |   |
| SARs      forfeited or redeemed              |   |                    | – |   |                                 |   | – |   |   |   | – |   |   |   | – |   |
| SARs      exercised                          |   |                    | – |   |                                 |   | – |   |   |   | – |   |   |   | – |   |
| SARs      outstanding at end of period       |   |                    | 278,146 |   |                                 | $      | 7.27 |   |   |   | 278,146 |   |   | $ | 7.27 |   |
| SARs      vested and exercisable             |   |                    | 149,860 |   |                                 | $      | 7.41 |   |   |   | 149,860 |   |   | $ | 7.41 |   |

|                                            |   | Three      Months Ended |    |   | Nine      Months Ended               |   |
|-------------------------------------------------|--------|-------------------------|---------|--------|--------------------------------------|--------|
|                                            |   | September      30, 2008 |    |   | September      30, 2008              |   |
|                                            |   | Number      of Shares   |    |   | Weighted-Average      Exercise Price |   |   | Number      of Shares |   |   | Weighted-AverageExercisePrice |   |
| Options      outstanding at beginning of period |   |                    | 120,000 |   |                                 | $      | 8.60 |   |   |   | 95,000 |   |   | $ | 8.28 |   |
| Options      granted                            |   |                    | – |   |                                 |   | – |   |   |   | 25,000 |   |   |   | 9.81 |   |
| Options      forfeited or redeemed              |   |                    | – |   |                                 |   | – |   |   |   | – |   |   |   | – |   |
| Options      exercised                          |   |                    | – |   |                                 |   | – |   |   |   | – |   |   |   | – |   |
| Options      outstanding at end of period       |   |                    | 120,000 |   |                                 | $      | 8.60 |   |   |   | 120,000 |   |   | $ | 8.60 |   |
| Options      vested and exercisable             |   |                    | 120,000 |   |                                 | $      | 8.60 |   |   |   | 120,000 |   |   | $ | 8.60 |   |

----

|                             | SARs      Fair Value    |
|----------------------------------|-------------------------|
|                             | September      30, 2008 |
| Expected      volatility         | 18.06%-19.45%           |
| Weighted-average      volatility | 18.71%                  |
| Expected      dividends          | 11.93%                  |
| Expected      term (in months)   | 45                      |
| Risk-free      rate              | 3.97%                   |

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

----

----

----

----

| (amounts      in thousands)             |   | September      30, 2008 |    |   | December      31, 2007 |   |
|-----------------------------------------|--------|-------------------------|---------|--------|------------------------|--------|
|                                    |   |                    |    |   |                   |   |
| Agency      RMBS, at fair value         |   | $                       | 300,892 |   |                   | $      | 7,456 |   |
| Securitized      mortgage loans, net    |   |                    | 252,507 |   |                   |   | 278,463 |   |
| Investment      in joint venture        |   |                    | 10,448  |   |                   |   | 19,267 |   |
| Other      investments                  |   |                    | 17,340  |   |                   |   | 28,549 |   |
|                                    |   |                    |    |   |                   |   |   |   |
| Repurchase      agreements              |   |                    | 265,819 |   |                   |   | 4,612 |   |
| Securitization      financing           |   |                    | 185,184 |   |                   |   | 204,385 |   |
| Obligation      under payment agreement |   |                    | 10,079  |   |                   |   | 16,796 |   |

| (amounts      in thousands)              |   | September      30, 2008 |    |   | December      31, 2007 |   |
|------------------------------------------|--------|-------------------------|---------|--------|------------------------|--------|
| Hybrid      Agency RMBS:                 |   |                    |    |   |                   |   |
| Fannie Mae      Certificates             |   | $                       | 209,534 |   |                   | $      | – |   |
| Freddie Mac      Certificates            |   |                    | 89,078  |   |                   |   | – |   |
|                                     |   |                    | 298,612 |   |                   |   | – |   |
| Fixed      Rate                          |   |                    | 266     |   |                   |   | 7,456 |   |
|                                     |   |                    | 298,878 |   |                   |   | 7,456 |   |
| Principal      receivable on Agency RMBS |   |                    | 2,014   |   |                   |   | – |   |
|                                     |   | $                       | 300,892 |   |                   | $      | 7,456 |   |

----

| Lifetime      Caps on ARM RMBS                  |   | Interim      Interest Rate Caps on ARM RMBS |
|-------------------------------------------------|--------|---------------------------------------------|
|                                            |   | %      of Total                             |   |   |   | %      of Total |
|     9.0% to      10.0%      |   | 19.79%                                      |   |     2.0% |   | 44.90% |
|     >10.0% to      11.0% |   | 54.27%                                      |   |     5.0% |   | 55.10% |
|     >11.0% to      12.0% |   | 25.94%                                      |   |   |   | 100.00% |
|                                            |   | 100.00%                                     |   |   |   |   |

| (amounts      in thousands)           |   | September      30, 2008 |    |   | December      31, 2007 |   |
|---------------------------------------|--------|-------------------------|---------|--------|------------------------|--------|
| Securitized      mortgage loans, net: |   |                    |    |   |                   |   |
| Commercial                            |   | $                       | 177,922 |   |                   | $      | 190,570 |   |
| Single-family                         |   |                    | 74,585  |   |                   |   | 87,893 |   |
|                                  |   |                    | 252,507 |   |                   |   | 278,463 |   |

----

| (amounts      in thousands)                         |   | September      30, 2008 |    |   | December      31, 2007 |   |
|-----------------------------------------------------|--------|-------------------------|---------|--------|------------------------|--------|
| Other      securities, at fair value:               |   |                    |    |   |                   |   |
| Non-Agency RMBS                                     |   | $                       | 6,822   |   |                   | $      | 7,726 |   |
| Corporate debt      securities                      |   |                    | – |   |                   |   | 4,348 |   |
| Equity securities of publicly      traded companies |   |                    | 7,407   |   |                   |   | 9,701 |   |
|                                                |   |                    | 14,229  |   |                   |   | 21,775 |   |
| Other      loans and investments, at amortized cost |   |                    | 3,111   |   |                   |   | 6,774 |   |
|                                                |   | $                       | 17,340  |   |                   | $      | 28,549 |   |

----

| (amounts      in thousands)                            |   | September      30, 2008 |    |   | December      31, 2007 |   |
|--------------------------------------------------------|--------|-------------------------|---------|--------|------------------------|--------|
| Securitization      financing:                         |   |                    |    |   |                   |   |
| Fixed, secured by commercial      mortgage loans       |   | $                       | 156,443 |   |                   | $      | 170,623 |   |
| Variable, secured by single-family      mortgage loans |   |                    | 28,741  |   |                   |   | 33,762 |   |
|                                                   |   | $                       | 185,184 |   |                   | $      | 204,385 |   |

----

|                                                 |   | September      30, 2008(amounts      in thousands) |    |
|------------------------------------------------------|--------|----------------------------------------------------|---------|
| Investment                                           |   | Investment      basis                              |    |   | Financing(1) |   |   | Net      invested capital |   |   | Estimated      fair value of net invested capital |   |
| Agency      RMBS                                     |   | $                                                  | 300,892 |   |   | $ | 265,819 |   |   | $ | 35,073 |   |   | $ | 35,073 |   |
|                                                 |   |                                               |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securitized      mortgage loans:                     |   |                                               |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Single-family      mortgage loans – 2002 Trust |   |                                               | 74,585  |   |   |   | 28,741 |   |   |   | 45,844 |   |   |   | 39,851 |   |
| Commercial      mortgage loans – 1993 Trust    |   |                                               | 25,578  |   |   |   | 22,386 |   |   |   | 3,192 |   |   |   | 3,523 |   |
| Commercial      mortgage loans – 1997 Trust    |   |                                               | 152,344 |   |   |   | 144,136 |   |   |   | 8,208 |   |   |   | – |   |
|                                                 |   |                                               | 252,507 |   |   |   | 195,263 |   |   |   | 57,244 |   |   |   | 43,374 |   |
|                                                 |   |                                               |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment      in joint venture                     |   |                                               | 10,448  |   |   |   | – |   |   |   | 10,448 |   |   |   | 10,298 |   |
|                                                 |   |                                               |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other      investments:                              |   |                                               |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-agency      RMBS                                 |   |                                               | 6,792   |   |   |   | – |   |   |   | 6,792 |   |   |   | 6,792 |   |
| Equity      securities                               |   |                                               | 7,437   |   |   |   | – |   |   |   | 7,437 |   |   |   | 7,437 |   |
| Other      loans and property tax receivables        |   |                                               | 3,111   |   |   |   | – |   |   |   | 3,111 |   |   |   | 2,715 |   |
|                                                 |   |                                               | 17,340  |   |   |   | – |   |   |   | 17,340 |   |   |   | 16,974 |   |
|                                                 |   |                                               |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                                |   | $                                                  | 581,187 |   |   | $ | 461,082 |   |   | $ | 120,105 |   |   | $ | 105,719 |   |

| (1)   | Financing      includes securitization financing issued to third parties including our      obligation under payment agreement, which at September 30, 2008 had a      balance of $10,079. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

| (1) | Assumed      CPR speeds generally are governed by underlying pool      characteristics.  Loans currently delinquent in excess of 30      days are assumed to be liquidated in six months at a loss amount that is      calculated for each loan based on its specific  facts. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

| (4) | Represents      total cash flows received on the investment including principal and      interest.  Cash flows from the Commercial mortgage loans – 1997      Trust are paid by the Company to the joint venture pursuant to the      Obligation Under Payment Agreement (see Note 11 in the consolidated      financial statements). |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

| (amounts      in thousands)                 |   | September      30, 2008 |    |
|---------------------------------------------|--------|-------------------------|---------|
| Investments:                                |   |                    |    |
| Agency      RMBS                            |   | $                       | 35,072  |   |
| AAA      rated fixed income securities      |   |                    | 42,546  |   |
| AA      and A rated fixed income securities |   |                    | 372     |   |
| Unrated      and non-investment grade       |   |                    | 10,993  |   |
| Securitization      over-collateralization  |   |                    | 20,674  |   |
| Investment      in joint venture            |   |                    | 10,448  |   |
|                                        |   | $                       | 120,105 |   |

----

| (amounts      in thousands)                    |   | Book      Value |    |
|------------------------------------------------|--------|-----------------|---------|
| Total      investment assets (per table above) |   | $               | 120,105 |   |
| Cash      and cash equivalents                 |   |            | 16,411  |   |
| Other      assets and liabilities, net         |   |            | 3,118   |   |
|                                           |   | $               | 139,634 |   |

| Months      remaining to end of compliance period |   | As      a Percent of Unpaid Principal Balance |   |
|---------------------------------------------------|--------|-----------------------------------------------|--------|
| Compliance      period already exceeded           |   |                                          | 26.1   | % |
| Zero      through twelve months remaining         |   |                                          | 14.2   |   |
| Thirteen      through thirty six months remaining |   |                                          | 56.7   |   |
| Thirty      seven through sixty months remaining  |   |                                          | 3.0    |   |
|                                              |   |                                          | 100.0  | % |

----

|                                                     |   | Three      Months EndedSeptember      30, |   |   | Nine      Months EndedSeptember      30, |   |
|----------------------------------------------------------|--------|-------------------------------------------|--------|--------|------------------------------------------|--------|
| (amounts      in thousands except per share information) |   | 2008                                      |   |   | 2007                                     |   |   | 2008 |   |   | 2007 |   |
| Interest      income                                     |   | $                                         | 7,877  |   |                                     | $      | 7,473 |   |   | $ | 21,034 |   |   | $ | 23,711 |   |
| Interest      expense                                    |   |                                      | 5,090  |   |                                     |   | 5,016 |   |   |   | 13,325 |   |   |   | 15,830 |   |
| (Provision      for) recapture of loan losses            |   |                                      | (449   | )      |                                     |   | 127 |   |   |   | (796 | ) |   |   | 1,352 |   |
| Net      interest income after provision for loan losses |   |                                      | 2,338  |   |                                     |   | 2,584 |   |   |   | 6,913 |   |   |   | 9,233 |   |
| Equity      in (loss) income of joint venture            |   |                                      | (3,462 | )      |                                     |   | 576 |   |   |   | (5,153 | ) |   |   | 1,878 |   |
| Gain      on sale of investments, net                    |   |                                      | 331    |   |                                     |   | 21 |   |   |   | 2,381 |   |   |   | 21 |   |
| Fair      value adjustments, net                         |   |                                      | 1,461  |   |                                     |   | – |   |   |   | 5,519 |   |   |   | – |   |
| Other      income (expense)                              |   |                                      | 3,862  |   |                                     |   | 305 |   |   |   | 6,954 |   |   |   | (713 | ) |
| General      and administrative expenses                 |   |                                      | (1,485 | )      |                                     |   | (800 | ) |   |   | (3,954 | ) |   |   | (3,089 | ) |
| Net      income                                          |   |                                      | 3,045  |   |                                     |   | 2,686 |   |   |   | 12,660 |   |   |   | 7,330 |   |
|                                                     |   |                                      |   |   |                                     |   |   |   |   |   |   |   |   |   |   |   |
| Net      income per common share:                        |   |                                      |   |   |                                     |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                    |   | $                                         | 0.17   |   |                                     | $      | 0.14 |   |   | $ | 0.79 |   |   | $ | 0.36 |   |
| Diluted                                                  |   | $                                         | 0.17   |   |                                     | $      | 0.14 |   |   | $ | 0.77 |   |   | $ | 0.36 |   |
|                                                     |   |                                      |   |   |                                     |   |   |   |   |   |   |   |   |   |   |   |

|                                                   |   | Three      Months EndedSeptember      30, |   |
|--------------------------------------------------------|--------|-------------------------------------------|--------|
| (amounts      in thousands)                            |   | 2008                                      |   |   | 2007 |   |
| Interest      income - Investments:                    |   |                                      |   |   |   |   |
| Agency RMBS                                            |   | $                                         | 2,408  |   |   | $ | 22 |   |
| Securitized mortgage      loans                        |   |                                      | 5,037  |   |   |   | 6,445 |   |
| Other    investments                                   |   |                                      | 274    |   |   |   | 369 |   |
|                                                   |   |                                      | 7,719  |   |   |   | 6,836 |   |
| Interest      income – Cash and cash equivalents |   |                                      | 158    |   |   |   | 637 |   |
|                                                   |   | $                                         | 7,877  |   |   | $ | 7,473 |   |

----

|                             |   | Three      Months Ended September 30, |   |
|----------------------------------|--------|---------------------------------------|--------|
|                             |   | 2008                                  |   |   | 2007 |   |
| (amounts      in thousands)      |   | Interest      Income                  |   |   | Net      Amortization |   |   | Total      Interest Income |   |   | Interest      Income |   |   | Net      Amortization |   |   | Total      Interest Income |   |
| Securitized      mortgage loans: |   |                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                       |   | $                                     | 3,767  |   |   | $ | 77 |   |   | $ | 3,844 |   |   | $ | 4,405 |   |   | $ | 82 |   |   | $ | 4,487 |   |
| Single-family                    |   |                                  | 1,261  |   |   |   | (68 | ) |   |   | 1,193 |   |   |   | 1,892 |   |   |   | 66 |   |   |   | 1,958 |   |
|                             |   | $                                     | 5,028  |   |   | $ | 9 |   |   | $ | 5,037 |   |   | $ | 6,297 |   |   | $ | 148 |   |   | $ | 6,445 |   |

----

|                                    |   | Three      Months EndedSeptember      30, |   |
|-----------------------------------------|--------|-------------------------------------------|--------|
| (amounts      in thousands)             |   | 2008                                      |   |   | 2007 |   |
| Interest      expense:                  |   |                                      |   |   |   |   |
| Securitization      financing           |   | $                                         | 3,276  |   |   | $ | 3,685 |   |
| Repurchase      agreements              |   |                                      | 1,417  |   |   |   | 937 |   |
| Obligation under payment      agreement |   |                                      | 402    |   |   |   | 386 |   |
| Other                                   |   |                                      | (5     | ) |   |   | 8 |   |
|                                    |   | $                                         | 5,090  |   |   | $ | 5,016 |   |

|                           |   | Three      Months Ended September 30, |   |
|--------------------------------|--------|---------------------------------------|--------|
|                           |   | 2008                                  |   |   | 2007 |   |
| (amounts      in thousands)    |   | Interest      Expense                 |   |   | Net      Amortization |   |   | Total      Interest Expense |   |   | Interest      Expense |   |   | Net      Amortization |   |   | Total      Interest Expense |   |
| Securitization      financing: |   |                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                     |   | $                                     | 3,131  |   |   | $ | (156 | ) |   | $ | 2,975 |   |   | $ | 3,853 |   |   | $ | (254 | ) |   | $ | 3,599 |   |
| Single-family                  |   |                                  | 219    |   |   |   | 13 |   |   |   | 232 |   |   |   | – |   |   |   | – |   |   |   | – |   |
| Other bond related      costs  |   |                                  | 69     |   |   |   | – |   |   |   | 69 |   |   |   | 86 |   |   |   | – |   |   |   | 86 |   |
|                           |   | $                                     | 3,419  |   |   | $ | (143 | ) |   | $ | 3,276 |   |   | $ | 3,939 |   |   | $ | (254 | ) |   | $ | 3,685 |   |

----

|                                                   |   | Nine      Months Ended September 30, |   |
|--------------------------------------------------------|--------|--------------------------------------|--------|
| (amounts      in thousands)                            |   | 2008                                 |   |   | 2007 |   |
| Interest      income - Investments:                    |   |                                 |   |   |   |   |
| Agency RMBS                                            |   | $                                    | 3,262  |   |   | $ | 85 |   |
| Securitized mortgage      loans                        |   |                                 | 16,020 |   |   |   | 20,318 |   |
| Other    investments                                   |   |                                 | 1,093  |   |   |   | 1,145 |   |
|                                                   |   |                                 | 20,375 |   |   |   | 21,548 |   |
| Interest      income – Cash and cash equivalents |   |                                 | 659    |   |   |   | 2,163 |   |
|                                                   |   | $                                    | 21,034 |   |   | $ | 23,711 |   |

----

|                             |   | Nine      Months Ended September 30, |   |
|----------------------------------|--------|--------------------------------------|--------|
|                             |   | 2008                                 |   |   | 2007 |   |
| (amounts      in thousands)      |   | Interest      Income                 |   |   | Net      Amortization |   |   | Total      Interest Income |   |   | Interest      Income |   |   | Net      Amortization |   |   | Total      Interest Income |   |
| Securitized      mortgage loans: |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                       |   | $                                    | 11,628 |   |   | $ | 295 |   |   | $ | 11,923 |   |   | $ | 14,004 |   |   | $ | 356 |   |   | $ | 14,360 |   |
| Single-family                    |   |                                 | 4,318  |   |   |   | (221 | ) |   |   | 4,097 |   |   |   | 6,115 |   |   |   | (157 | ) |   |   | 5,958 |   |
|                             |   | $                                    | 15,946 |   |   | $ | 74 |   |   | $ | 16,020 |   |   | $ | 20,119 |   |   | $ | 199 |   |   | $ | 20,318 |   |

----

|                                    |   | Nine      Months Ended September 30, |   |
|-----------------------------------------|--------|--------------------------------------|--------|
| (amounts      in thousands)             |   | 2008                                 |   |   | 2007 |   |
| Interest      expense:                  |   |                                 |   |   |   |   |
| Securitization      financing           |   | $                                    | 10,212 |   |   | $ | 11,317 |   |
| Repurchase      agreements              |   |                                 | 1,897  |   |   |   | 3,357 |   |
| Obligation under payment      agreement |   |                                 | 1,207  |   |   |   | 1,139 |   |
| Other                                   |   |                                 | 9      |   |   |   | 17 |   |
|                                    |   | $                                    | 13,325 |   |   | $ | 15,830 |   |

|                           |   | Nine      Months Ended September 30, |   |
|--------------------------------|--------|--------------------------------------|--------|
|                           |   | 2008                                 |   |   | 2007 |   |
| (amounts      in thousands)    |   | Interest      Expense                |   |   | Net      Amortization |   |   | Total      Interest Expense |   |   | Interest      Expense |   |   | Net      Amortization |   |   | Total      Interest Expense |   |
| Securitization      financing: |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                     |   | $                                    | 9,873  |   |   | $ | (830 | ) |   | $ | 9,043 |   |   | $ | 12,282 |   |   | $ | (1,360 | ) |   | $ | 10,922 |   |
| Single-family                  |   |                                 | 795    |   |   |   | 116 |   |   |   | 911 |   |   |   | – |   |   |   | – |   |   |   | – |   |
| Other bond related      costs  |   |                                 | 258    |   |   |   | – |   |   |   | 258 |   |   |   | 395 |   |   |   | – |   |   |   | 395 |   |
|                           |   | $                                    | 10,926 |   |   | $ | (714 | ) |   | $ | 10,212 |   |   | $ | 12,677 |   |   | $ | (1,360 | ) |   | $ | 11,317 |   |

----

----

|                                                |   | Three      Months Ended September 30, |    |
|-----------------------------------------------------|--------|---------------------------------------|---------|
|                                                |   | 2008                                  |    |   | 2007 |   |
| (amounts      in thousands, except for percentages) |   | AverageBalance(1)(2)                  |    |   | EffectiveRate(3) |   |   | AverageBalance(1)(2) |   |   | EffectiveRate(3) |   |
| Agency      RMBS                                    |   |                                  |    |   |   |   |   |   |   |   |   |   |
| Agency RMBS                                         |   | $                                     | 213,574 |   |   |   | 4.45 | % |   | $ | 935 |   |   |   | 9.43 | % |
| Repurchase      agreements                          |   |                                  | 201,863 |   |   |   | (2.75 | %) |   |   | – |   |   |   | – | % |
| Net interest    spread                              |   |                                  |    |   |   |   | 1.70 | % |   |   |   |   |   |   | 9.43 | % |
|                                                |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securitized Mortgage      Loans                     |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securitized mortgage      loans                     |   | $                                     | 257,310 |   |   |   | 7.81 | % |   | $ | 308,045 |   |   |   | 8.20 | % |
| Securitization financing      (4)                   |   |                                  | 185,882 |   |   |   | (6.94 | %) |   |   | 189,816 |   |   |   | (7.51 | %) |
| Repurchase      agreements                          |   |                                  | 3,609   |   |   |   | (2.58 | %) |   |   | 66,495 |   |   |   | (5.59 | %) |
| Net interest    spread                              |   |                                  |    |   |   |   | 0.95 | % |   |   |   |   |   |   | 1.19 | % |
|                                                |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other    investments                                |   | $                                     | 9,876   |   |   |   | 10.85 | % |   | $ | 15,107 |   |   |   | 10.42 | % |
|                                                |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                               |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest earning      assets                        |   | $                                     | 480,760 |   |   |   | 6.38 | % |   | $ | 324,087 |   |   |   | 8.30 | % |
| Interest bearing      liabilities                   |   |                                  | 391,354 |   |   |   | (4.74 | %) |   |   | 256,311 |   |   |   | (7.01 | %) |
| Net interest    spread                              |   |                                  |    |   |   |   | 1.64 | % |   |   |   |   |   |   | 1.29 | % |

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

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

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

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

----

|                                                |   | Nine      Months Ended September 30, |    |
|-----------------------------------------------------|--------|--------------------------------------|---------|
|                                                |   | 2008                                 |    |   | 2007 |   |
| (amounts      in thousands, except for percentages) |   | AverageBalance(1)      (2)           |    |   | EffectiveRate(3) |   |   | AverageBalance(1)      (2) |   |   | EffectiveRate(3) |   |
|                                                |   |                                 |    |   |   |   |   |   |   |   |   |   |
| Agency      RMBS                                    |   |                                 |    |   |   |   |   |   |   |   |   |   |
| Agency RMBS                                         |   | $                                    | 98,658  |   |   |   | 4.39 | % |   | $ | 1,174 |   |   |   | 9.68 | % |
| Repurchase      agreements                          |   |                                 | 87,613  |   |   |   | (2.74 | %) |   |   | – |   |   |   | – | % |
| Net interest    spread                              |   |                                 |    |   |   |   | 1.65 | % |   |   |   |   |   |   | 9.68 | % |
|                                                |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securitized Mortgage      Loans                     |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securitized mortgage      loans                     |   | $                                    | 267,036 |   |   |   | 7.98 | % |   | $ | 325,489 |   |   |   | 8.28 | % |
| Securitization financing      (4)                   |   |                                 | 194,144 |   |   |   | (6.88 | %) |   |   | 200,172 |   |   |   | (7.34 | %) |
| Repurchase      agreements                          |   |                                 | 4,275   |   |   |   | (3.15 | %) |   |   | 81,235 |   |   |   | (5.52 | %) |
| Net interest    spread                              |   |                                 |    |   |   |   | 1.18 | % |   |   |   |   |   |   | 1.46 | % |
|                                                |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other    investments                                |   | $                                    | 13,040  |   |   |   | 11.27 | % |   | $ | 15,469 |   |   |   | 10.01 | % |
|                                                |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                               |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest earning      assets                        |   | $                                    | 378,734 |   |   |   | 7.16 | % |   | $ | 342,132 |   |   |   | 8.36 | % |
| Interest bearing      liabilities                   |   |                                 | 286,032 |   |   |   | (5.56 | %) |   |   | 281,407 |   |   |   | (6.82 | %) |
| Net interest    spread                              |   |                                 |    |   |   |   | 1.60 | % |   |   |   |   |   |   | 1.54 | % |
|                                                |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |

| (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. |
|-----------------|---------------------------------------------------------------------------------------------------|

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

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

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|                            |   | Three      Months Ended September 30, 2008 vs. 2007 |   |
|---------------------------------|--------|-----------------------------------------------------|--------|
| (amounts      in thousands)     |   | Rate                                                |   |   | Volume |   |   | Total |   |
| Agency      RMBS                |   | $                                                   | (17    | ) |   | $ | 2,403 |   |   | $ | 2,386 |   |
| Securitized      mortgage loans |   |                                                | (396   | ) |   |   | (1,011 | ) |   |   | (1,407 | ) |
| Other      investments          |   |                                                | 37     |   |   |   | (132 | ) |   |   | (95 | ) |
|                            |   |                                                |   |   |   |   |   |   |   |   |   |   |
| Total      interest income      |   |                                                | (376   | )  |   |   | 1,260 |   |   |   | 884 |   |
|                            |   |                                                |   |   |   |   |   |   |   |   |   |   |
| Securitization      financing   |   |                                                | (320   | ) |   |   | (73 | ) |   |   | (393 | ) |
| Repurchase      agreements      |   |                                                | 240    |   |   |   | 240 |   |   |   | 480 |   |
|                            |   |                                                |   |   |   |   |   |   |   |   |   |   |
| Total      interest expense     |   |                                                | (80    | )  |   |   | 167 |   |   |   | 87 |   |
|                            |   |                                                |   |   |   |   |   |   |   |   |   |   |
| Net      interest income        |   | $                                                   | (296   | ) |   | $ | 1,093 |   |   | $ | 797 |   |

|                            |   | Nine Months      Ended September 30, 2008 vs. 2007 |   |
|---------------------------------|--------|---------------------------------------------------------|--------|
| (amounts      in thousands)     |   | Rate                                                    |   |   | Volume |   |   | Total |   |
| Agency      RMBS                |   | $                                                       | (71    | ) |   | $ | 3,248 |   |   | $ | 3,177 |   |
| Securitized      mortgage loans |   |                                                    | (766   | ) |   |   | (3,528 | ) |   |   | (4,294 | ) |
| Other      investments          |   |                                                    | 116    |   |   |   | (168 | ) |   |   | (52 | ) |
|                            |   |                                                    |   |   |   |   |   |   |   |   |   |   |
| Total      interest income      |   |                                                    | (721   | )  |   |   | (448 | ) |   |   | (1,169 | ) |
|                            |   |                                                    |   |   |   |   |   |   |   |   |   |   |
| Securitization      financing   |   |                                                    | (648   | )  |   |   | (323 | ) |   |   | (971 | ) |
| Repurchase      agreements      |   |                                                    | (117   | )  |   |   | (1,343 | ) |   |   | (1,460 | ) |
|                            |   |                                                    |   |   |   |   |   |   |   |   |   |   |
| Total      interest expense     |   |                                                    | (765   | )  |   |   | (1,666 | ) |   |   | (2,431 | ) |
|                            |   |                                                    |   |   |   |   |   |   |   |   |   |   |
| Net      interest income        |   | $                                                       | 44     |   |   | $ | 1,218 |   |   | $ | 1,262 |   |

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

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

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

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

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

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

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

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

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

| ·   | We      finance a portion of our investment portfolio with short-term recourse      repurchase agreements which subjects us 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      us. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

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

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

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

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

Item3.                      Quantitativeand Qualitative Disclosures About Market Risk

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| (amounts      in thousands)                   |   |   | Investment      Portfolio |   |     | Investment      Portfolio, including Cash and Cash Equivalents |   |
|-----------------------------------------------|--------|--------|---------------------------|--------|----------|----------------------------------------------------------------|--------|
| Basis      Point Change inInterest      Rates |   |   | Cash      Flow            |   |     | Percent                                                        |   |   | Cash      Flow |   |   | Percent |   |
|                                          |   |   |                      |   |     |                                                           |   |   |   |   |   |   |   |
|                                          | +200   |   |                      | $      | 19,213.8 |                                                           |   |   | (22.8 | )% |   | $ | 20,198.4 |   |   |   | (19.9 | )% |
|                                          | +100   |   |                      |   | 22,420.8 |                                                           |   |   | (9.9 | )% |   |   | 23,077.2 |   |   |   | (8.5 | )% |
|                                          | Base   |   |                      |   | 24,887.0 |                                                           |   |   | – |   |   |   | 25,215.2 |   |   |   | – |   |
|                                          | -100   |   |                      |   | 26,186.6 |                                                           |   |   | 5.2 | % |   |   | 26,186.6 |   |   |   | 3.9 | % |
|                                          | -200   |   |                      |   | 25,946.0 |                                                           |   |   | 4.3 | % |   |   | 25,946.0 |   |   |   | 2.9 | % |

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Item1.                      LegalProceedings

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Item2.                      UnregisteredSales of Equity Securities and Use of Proceeds

Item3.                      DefaultsUpon Senior Securities

Item4.                      Submissionof Matters to a Vote of Security Holders

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Item6.                      Exhibits

| Exhibit      No. | Description                                                                                                                                                                                        |
|------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1              | Restated      Articles of Incorporation, effective July 9, 2008 (incorporated herein by      reference to Exhibit 3.1 to Dynex’s Current Report on Form 8-K filed July      11, 2008).  |
| 3.2              | Amended      and Restated Bylaws, effective March 26, 2008 (incorporated herein by      reference to Exhibit 3.2 to Dynex’s Current Report on Form 8-K filed April      1, 2008).       |
| 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).                       |

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SIGNATURES

|                                    | DYNEX CAPITAL, INC.                                                                     |
|-----------------------------------------|-----------------------------------------------------------------------------------------|
|                                    |                                                                                    |
|                                    |                                                                                    |
| Date:  November      10, 2008 | /s/      Thomas B. Akin                                                                 |
|                                    | Thomas      B. Akin                                                                     |
|                                    | Chief      Executive Officer                                                            |
|                                    | (Principal      Executive Officer)                                                      |
|                                    |                                                                                    |
|                                    |                                                                                    |
| Date:  November      10, 2008 | /s/      Stephen J. Benedetti                                                           |
|                                    | Stephen      J. Benedetti                                                               |
|                                    | Executive      Vice President, Chief Operating Officer and Chief Financial      Officer |
|                                    | (Principal      Financial Officer)                                                      |
|                                    |                                                                                    |

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