----

----

| 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 the Securities      Exchange Act of1934 |
|---|---------------------------------------------------------------------------------------------------|

| 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 June 30, 2008 (unaudited) and December 31,      2007                                                                                  | 1      |
|          |                       |                                                                                                                                                                                |   |
|          |                       | Condensed      Consolidated Statements of Operations and Comprehensive      Income  for the three and six months ended June 30, 2008 and      2007  (unaudited) | 2      |
|          |                       |                                                                                                                                                                                |   |
|          |                       | Condensed      Consolidated Statement of Shareholders’ Equity for the six months ended      June 30, 2008 (unaudited)                                                         | 3      |
|          |                       |                                                                                                                                                                                |   |
|          |                       | Condensed      Consolidated Statements of Cash Flows for the six months ended June 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                                                                                                                                                        | 47     |
|          |                       |                                                                                                                                                                                |   |
| 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                                                                                                                    | 58     |
|          |                       |                                                                                                                                                                                |   |
|          | Item      3.               | Defaults      Upon Senior Securities                                                                                                                                                | 58     |
|          |                       |                                                                                                                                                                                |   |
|          | Item      4.               | Submission      of Matters to a Vote of Security Holders                                                                                                                            | 58     |
|          |                       |                                                                                                                                                                                |   |
|          | Item      5.               | Other      Information                                                                                                                                                              | 58     |
|          |                       |                                                                                                                                                                                |   |
|          | Item      6.               | Exhibits                                                                                                                                                                            | 59     |
|          |                       |                                                                                                                                                                                |   |
| SIGNATURES    | 60                         |

----

Item 1.    FinancialStatements

CONDENSED CONSOLIDATED

BALANCE SHEETS

|                                                                                                                                                                                                              |   | June      30, |     |   | December      31, |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------|----------|--------|-------------------|--------|
|                                                                                                                                                                                                              |   | 2008          |     |   | 2007              |   |
|                                                                                                                                                                                                              |   | (unaudited)   |     |   |              |   |
| ASSETS                                                                                                                                                                                                            |   |          |     |   |              |   |
| Cash      and cash equivalents                                                                                                                                                                                    |   | $             | 42,501   |   |              | $      | 35,352 |   |
| Other      assets                                                                                                                                                                                                 |   |          | 5,378    |   |              |   | 5,671 |   |
|                                                                                                                                                                                                              |   |          | 47,879   |   |              |   | 41,023 |   |
| Investments:                                                                                                                                                                                                      |   |          |     |   |              |   |   |   |
| Securitized mortgage loans,      net                                                                                                                                                                              |   |          | 258,826  |   |              |   | 278,463 |   |
| Agency mortgage-backed      securities                                                                                                                                                                            |   |          | 139,187  |   |              |   | 7,456 |   |
| Othersecurities                                                                                                                                                                                                   |   |          | 15,690   |   |              |   | 21,775 |   |
| Investment in joint      venture                                                                                                                                                                                  |   |          | 13,273   |   |              |   | 19,267 |   |
| Other loans and      investments                                                                                                                                                                                  |   |          | 3,336    |   |              |   | 6,774 |   |
|                                                                                                                                                                                                              |   |          | 430,312  |   |              |   | 333,735 |   |
|                                                                                                                                                                                                              |   | $             | 478,191  |   |              | $      | 374,758 |   |
| LIABILITIES      AND SHAREHOLDERS’ EQUITY                                                                                                                                                                   |   |          |     |   |              |   |   |   |
| LIABILITIES                                                                                                                                                                                                       |   |          |     |   |              |   |   |   |
| Securitization      financing                                                                                                                                                                                     |   | $             | 189,304  |   |              | $      | 204,385 |   |
| Repurchase      agreements                                                                                                                                                                                        |   |          | 129,403  |   |              |   | 4,612 |   |
| Obligation      under payment agreement                                                                                                                                                                           |   |          | 11,663   |   |              |   | 16,796 |   |
| Other      liabilities                                                                                                                                                                                            |   |          | 5,366    |   |              |   | 7,029 |   |
|                                                                                                                                                                                                              |   |          | 335,736  |   |              |   | 232,822 |   |
|                                                                                                                                                                                                              |   |          |     |   |              |   |   |   |
| Commitments      and Contingencies (Note 14)                                                                                                                                                                      |   |          |     |   |              |   |   |   |
|                                                                                                                                                                                                              |   |          |     |   |              |   |   |   |
| 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                                                                                                                                                                                   |   |          | 366,769  |   |              |   | 366,716 |   |
| Accumulated      other comprehensive (loss) income                                                                                                                                                                |   |          | (3,953   | )      |              |   | 1,093 |   |
| Accumulated      deficit                                                                                                                                                                                          |   |          | (262,232 | )      |              |   | (267,743 | ) |
|                                                                                                                                                                                                              |   |          | 142,455  |   |              |   | 141,936 |   |
|                                                                                                                                                                                                              |   | $             | 478,191  |   |              | $      | 374,758 |   |
|                                                                                                                                                                                                              |   |          |     |   |              |   |   |   |

----

CONDENSED CONSOLIDATED STATEMENTS

OF OPERATIONS AND COMPREHENSIVE INCOME

|                                                     |   | Three      Months Ended |   |   | Six      Months Ended |   |
|----------------------------------------------------------|--------|-------------------------|--------|--------|-----------------------|--------|
|                                                     |   | June      30,           |   |   | June      30,         |   |
|                                                     |   | 2008                    |   |   | 2007                  |   |   | 2008 |   |   | 2007 |   |
| Interest      income:                                    |   |                    |   |   |                  |   |   |   |   |   |   |   |
| Investments                                              |   | $                       | 6,497  |   |                  | $      | 7,236 |   |   | $ | 12,656 |   |   | $ | 14,712 |   |
| Cash and cash      equivalents                           |   |                    | 177    |   |                  |   | 787 |   |   |   | 501 |   |   |   | 1,526 |   |
|                                                     |   |                    | 6,674  |   |                  |   | 8,023 |   |   |   | 13,157 |   |   |   | 16,238 |   |
| Interest      expense                                    |   |                    | 4,173  |   |                  |   | 5,060 |   |   |   | 8,235 |   |   |   | 10,814 |   |
| Net      interest income                                 |   |                    | 2,501  |   |                  |   | 2,963 |   |   |   | 4,922 |   |   |   | 5,424 |   |
| (Provision      for) recapture of loan losses            |   |                    | (321   | )      |                  |   | 702 |   |   |   | (347 | ) |   |   | 1,225 |   |
|                                                     |   |                    |   |   |                  |   |   |   |   |   |   |   |   |   |   |   |
| Net      interest income after provision for loan losses |   |                    | 2,180  |   |                  |   | 3,665 |   |   |   | 4,575 |   |   |   | 6,649 |   |
|                                                     |   |                    |   |   |                  |   |   |   |   |   |   |   |   |   |   |   |
| Equity      in income (loss) of joint venture            |   |                    | 560    |   |                  |   | 672 |   |   |   | (1,691 | ) |   |   | 1,302 |   |
| (Loss)      gain on sale of investments, net             |   |                    | (43    | )      |                  |   | 6 |   |   |   | 2,050 |   |   |   | – |   |
| Fair      value adjustments, net                         |   |                    | (173   | )      |                  |   | – |   |   |   | 4,058 |   |   |   | – |   |
| Other      income (expense)                              |   |                    | 3,025  |   |                  |   | (478 | ) |   |   | 3,092 |   |   |   | (1,018 | ) |
| General      and administrative expenses                 |   |                    | (1,253 | )      |                  |   | (1,163 | ) |   |   | (2,469 | ) |   |   | (2,290 | ) |
|                                                     |   |                    |   |   |                  |   |   |   |   |   |   |   |   |   |   |   |
| Net      income                                          |   |                    | 4,296  |   |                  |   | 2,702 |   |   |   | 9,615 |   |   |   | 4,643 |   |
| Preferred      stock dividends                           |   |                    | (1,003 | )      |                  |   | (1,003 | ) |   |   | (2,005 | ) |   |   | (2,005 | ) |
|                                                     |   |                    |   |   |                  |   |   |   |   |   |   |   |   |   |   |   |
| Net      income to common shareholders                   |   | $                       | 3,293  |   |                  | $      | 1,699 |   |   | $ | 7,610 |   |   | $ | 2,638 |   |
|                                                     |   |                    |   |   |                  |   |   |   |   |   |   |   |   |   |   |   |
| Change      in net unrealized gain (loss) on :           |   |                    |   |   |                  |   |   |   |   |   |   |   |   |   |   |   |
| Investments classified as      available-for-sale        |   |                    | 1,250  |   |                  |   | (602 | ) |   |   | (1,123 | ) |   |   | (476 | ) |
| Investment in joint      venture                         |   |                    | (287   | )      |                  |   | (223 | ) |   |   | (3,923 | ) |   |   | 606 |   |
|                                                     |   |                    |   |   |                  |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive      income                                |   | $                       | 5,259  |   |                  | $      | 1,877 |   |   | $ | 4,569 |   |   | $ | 4,773 |   |
|                                                     |   |                    |   |   |                  |   |   |   |   |   |   |   |   |   |   |   |
| Net      income per common share:                        |   |                    |   |   |                  |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                    |   | $                       | 0.27   |   |                  | $      | 0.14 |   |   | $ | 0.63 |   |   | $ | 0.22 |   |
| Diluted                                                  |   | $                       | 0.26   |   |                  | $      | 0.14 |   |   | $ | 0.59 |   |   | $ | 0.22 |   |
|                                                     |   |                    |   |   |                  |   |   |   |   |   |   |   |   |   |   |   |

----

|                                                                  |   | 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                                                       |   |           | – |   |        |   | – |                     |   |   | –                                                           |   |   |               | – |   |   |   | 9,615 |   |   |   | 9,615 |   |
| Other      comprehensive income:                                      |   |           |    |   |        |   |    |                     |   |   |                                                              |   |   |               |    |   |   |   |   |   |   |   |   |   |
| Change      in market value of securities and other investments       |   |           | – |   |        |   | – |                     |   |   | –                                                           |   |   |               | (2,995  | )      |   |   | – |   |   |   | (2,995 | ) |
| Reclassification      adjustment for net gains included in net income |   |           | – |   |        |   | – |                     |   |   | –                                                           |   |   |               | (2,051  | )      |   |   | – |   |   |   | (2,051 | ) |
| Total      comprehensive income                                       |   |           |    |   |        |   |    |                     |   |   |                                                              |   |   |               |    |   |   |   |   |   |   |   | 4,569 |   |
|                                                                  |   |           |    |   |        |   |    |                     |   |   |                                                              |   |   |               |    |   |   |   |   |   |   |   |   |   |
| Dividends      on common stock                                        |   |           | – |   |        |   | – |                     |   |   | –                                                           |   |   |               | – |   |   |   | (3,042 | ) |   |   | (3,042 | ) |
| Dividends      on preferred stock                                     |   |           | – |   |        |   | – |                     |   |   | –                                                           |   |   |               | – |   |   |   | (2,005 | ) |   |   | (2,005 | ) |
| Stock      option issuance                                            |   |           | – |   |        |   | – |                     |   |   | 13                                                                |   |   |               | – |   |   |   | – |   |   |   | 13 |   |
| Grant      and vesting of restricted stock                            |   |           | – |   |        |   | 1       |                     |   |   | 40                                                                |   |   |               | – |   |   |   | – |   |   |   | 41 |   |
|                                                                  |   |           |    |   |        |   |    |                     |   |   |                                                              |   |   |               |    |   |   |   |   |   |   |   |   |   |
| Balance      at June 30, 2008                                         |   | $              | 41,749  |   |        | $      | 122     |                     |   | $      | 366,769                                                           |   |   | $                  | (3,953  | )      |   | $      | (262,232 | ) |   | $ | 142,455 |   |

----

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

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

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

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

|                                                                                    |   | Six      Months Ended |     |
|-----------------------------------------------------------------------------------------|--------|-----------------------|----------|
|                                                                                    |   | June      30,         |     |
|                                                                                    |   | 2008                  |     |   | 2007 |   |
| Operating      activities:                                                              |   |                  |     |   |   |   |
| Net      income                                                                         |   | $                     | 9,615    |   |   | $ | 4,643 |   |
| Adjustments      to reconcile net income to cash provided by operating      activities: |   |                  |     |   |   |   |   |   |
| Equity      in loss (income) of joint venture                                           |   |                  | 1,691    |   |   |   | (1,302 | ) |
| Provision      for (recapture of) loan losses                                           |   |                  | 347      |   |   |   | (1,225 | ) |
| Gain      on sale of investments                                                        |   |                  | (2,050   | ) |   |   | – |   |
| Fair      value adjustments, net                                                        |   |                  | (4,058   | ) |   |   | – |   |
| Amortization      and depreciation                                                      |   |                  | (1,729   | ) |   |   | (183 | ) |
| Stock      based compensation (benefit) expense                                         |   |                  | (152     | ) |   |   | 79 |   |
| Net      change in other assets and other liabilities                                   |   |                  | (1,040   | ) |   |   | 2,615 |   |
| Net      cash provided by operating activities                                          |   |                  | 2,624    |   |   |   | 4,627 |   |
|                                                                                    |   |                  |     |   |   |   |   |   |
| Investing      activities:                                                              |   |                  |     |   |   |   |   |   |
| Principal      payments received on securitized mortgage loans                          |   |                  | 19,175   |   |   |   | 27,702 |   |
| Purchases      of securities and other investments                                      |   |                  | (152,898 | ) |   |   | (5,590 | ) |
| Payments      received on securities, other investments and other loans                 |   |                  | 7,714    |   |   |   | 5,836 |   |
| Proceeds      from sales of securities and other investments                            |   |                  | 23,937   |   |   |   | 129 |   |
| Other                                                                                   |   |                  | 86       |   |   |   | 268 |   |
| Net      cash (used) provided by investing activities                                   |   |                  | (101,986 | ) |   |   | 28,345 |   |
|                                                                                    |   |                  |     |   |   |   |   |   |
| Financing      activities:                                                              |   |                  |     |   |   |   |   |   |
| Principal      payments on securitization financing                                     |   |                  | (13,233  | ) |   |   | (9,496 | ) |
| Net      borrowings under  (repayments on) repurchase      agreements         |   |                  | 124,791  |   |   |   | (15,832 | ) |
| Proceeds      from sale of common stock                                                 |   |                  | –  |   |   |   | 37 |   |
| Dividends      paid                                                                     |   |                  | (5,047   | ) |   |   | (2,005 | ) |
| Net      cash provided (used) by financing activities                                   |   |                  | 106,511  |   |   |   | (27,296 | ) |
|                                                                                    |   |                  |     |   |   |   |   |   |
| Net      increase in cash and cash equivalents                                          |   |                  | 7,149    |   |   |   | 5,676 |   |
| Cash      and cash equivalents at beginning of period                                   |   |                  | 35,352   |   |   |   | 56,880 |   |
| Cash      and cash equivalents at end of period                                         |   | $                     | 42,501   |   |   | $ | 62,556 |   |
|                                                                                    |   |                  |     |   |   |   |   |   |
|                                                                                    |   |                  |     |   |   |   |   |   |
| See      notes to unaudited condensed consolidated financial      statements.           |   |                  |     |   |   |   |   |   |

----

NOTES TO UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

----

----

|                                                                                                   |   | Three      Months Ended June 30, |    |
|--------------------------------------------------------------------------------------------------------|--------|----------------------------------|---------|
|                                                                                                   |   | 2008                             |    |   | 2007 |   |
|                                                                                              |   | Income                           |    |   | Weighted-Average      Common Shares |   |   | Income |   |   | Weighted-AverageCommonShares |   |
| Net      income                                                                                        |   | $                                | 4,296   |   |   |   |   |   | $ | 2,702 |   |   |   |   |
| Preferred      stock dividends                                                                         |   |                             | (1,003  | ) |   |   |   |   |   | (1,003 | ) |   |   |   |
| Net      income to common shareholders                                                                 |   |                             | 3,293   |   |   |   | 12,169,762 |   |   |   | 1,699 |   |   |   | 12,136,262 |   |
| Effect      of dilutive items                                                                          |   |                             | 1,003   |   |   |   | 4,228,905 |   |   |   | – |   |   |   | 3,173 |   |
| Diluted                                                                                                |   | $                                | 4,296   |   |   |   | 16,398,667 |   |   | $ | 1,699 |   |   |   | 12,139,435 |   |
|                                                                                                   |   |                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net      income per share:                                                                             |   |
| Basic                                                                                                  |   |                             |    |   |   | $ | 0.27 |   |   |   |   |   |   | $ | 0.14 |   |
| Diluted                                                                                                |   |                             |    |   |   | $ | 0.26 |   |   |   |   |   |   | $ | 0.14 |   |
|                                                                                                   |   |                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reconciliation      of shares included in calculation of income per share due to dilutive      effect: |   |                             |    |
| Net      effect of dilutive:                                                                           |   |                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Convertible      preferred stock                                                                       |   |                             | 1,003   |   |   |   | 4,221,539 |   |   |   | – |   |   |   | – |   |
| Stock      options                                                                                     |   |                             | – |   |   |   | 7,366 |   |   |   | – |   |   |   | 3,173 |   |
|                                                                                                   |   | $                                | 1,003   |   |   |   | 4,228,905 |   |   | $ | – |   |   |   | 3,173 |   |

----

|                                                                                                   |   | Six      Months Ended June 30, |    |
|--------------------------------------------------------------------------------------------------------|--------|--------------------------------|---------|
|                                                                                                   |   | 2008                           |    |   | 2007 |   |
|                                                                                                   |   | Income                         |    |   | Weighted-Average      Common Shares |   |   | Income |   |   | Weighted-AverageCommonShares |   |
| Net      income                                                                                        |   | $                              | 9,615   |   |   |   |   |   | $ | 4,643 |   |   |   |   |
| Preferred      stock dividends                                                                         |   |                           | (2,005  | ) |   |   |   |   |   | (2,005 | ) |   |   |   |
| Net      income to common shareholders                                                                 |   |                           | 7,610   |   |   |   | 12,163,320 |   |   |   | 2,638 |   |   |   | 12,134,715 |   |
| Effect      of dilutive items                                                                          |   |                           | 2,005   |   |   |   | 4,229,464 |   |   |   | – |   |   |   | 1,909 |   |
| Diluted                                                                                                |   | $                              | 9,615   |   |   |   | 16,392,784 |   |   | $ | 2,638 |   |   |   | 12,136,624 |   |
|                                                                                                   |   |                           |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net      income per share:                                                                             |   |
| Basic                                                                                                  |   |                           |    |   |   | $ | 0.63 |   |   |   |   |   |   | $ | 0.22 |   |
| Diluted                                                                                                |   |                           |    |   |   | $ | 0.59 |   |   |   |   |   |   | $ | 0.22 |   |
|                                                                                                   |   |                           |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reconciliation      of shares included in calculation of income per share due to dilutive      effect: |   |                           |    |
| Net      effect of dilutive:                                                                           |   |                           |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Convertible      preferred stock                                                                       |   |                           | 2,005   |   |   |   | 4,221,539 |   |   |   | – |   |   |   | – |   |
| Stock      options                                                                                     |   |                           | – |   |   |   | 7,925 |   |   |   | – |   |   |   | 1,909 |   |
|                                                                                                   |   | $                              | 2,005   |   |   |   | 4,229,464 |   |   | $ | – |   |   |   | 1,909 |   |

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

----

|                                                                 |   | June      30,2008 |    |   | December      31, 2007 |   |
|----------------------------------------------------------------------|--------|-------------------|---------|--------|------------------------|--------|
| Securitized      mortgage loans:                                     |   |              |    |   |                   |   |
| Commercial      mortgage loans                                       |   | $                 | 176,021 |   |                   | $      | 185,998 |   |
| Single-family      mortgage loans                                    |   |              | 77,012  |   |                   |   | 86,088 |   |
|                                                                 |   |              | 253,033 |   |                   |   | 272,086 |   |
| Funds      held by trustees, including funds held for defeased loans |   |              | 7,125   |   |                   |   | 7,225 |   |
| Accrued      interest receivable                                     |   |              | 1,737   |   |                   |   | 1,940 |   |
| Unamortized      discounts and premiums, net                         |   |              | (3      | )      |                   |   | (67 | ) |
| Loans,      at amortized cost                                        |   |              | 261,892 |   |                   |   | 281,184 |   |
| Allowance      for loan losses                                       |   |              | (3,066  | )      |                   |   | (2,721 | ) |
|                                                                 |   | $                 | 258,826 |   |                   | $      | 278,463 |   |

|                                          |   | Three      Months EndedJune      30, |    |   | Six      Months EndedJune      30, |   |
|-----------------------------------------------|--------|--------------------------------------|---------|--------|------------------------------------|--------|
|                                          |   | 2008                                 |    |   | 2007                               |   |   | 2008 |   |   | 2007 |   |
| Allowance      at beginning of period         |   | $                                    | 2,745   |   |                               | $      | 3,538 |   |   | $ | 2,721 |   |   | $ | 4,495 |   |
| Provision      for (recapture of) loan losses |   |                                 | 321     |   |                               |   | (702 | ) |   |   | 347 |   |   |   | (1,225 | ) |
| Charge-offs,      net of recoveries           |   |                                 | – |   |                               |   | (31 | ) |   |   | (2 | ) |   |   | (465 | ) |
| Allowance      at end of period               |   | $                                    | 3,066   |   |                               | $      | 2,805 |   |   | $ | 3,066 |   |   | $ | 2,805 |   |

|                   |   | Investment      in Impaired Loans |   |   | Allowance      for Loan Losses |   |   | Investment      in Excess of Allowance |   |
|------------------------|--------|-----------------------------------|--------|--------|--------------------------------|--------|--------|----------------------------------------|--------|
| December      31, 2007 |   | $                                 | 13,792 |   |                           | $      | 2,590  |                                   |   | $ | 11,202 |   |
| June      30, 2008     |   |                              | 11,500 |   |                           |   | 2,921  |                                   |   |   | 8,579 |   |

----

|                         |   | June      30,2008 |    |   | December      31, 2007 |   |
|------------------------------|--------|-------------------|---------|--------|------------------------|--------|
| Principal/par      value     |   | $                 | 137,573 |   |                   | $      | 7,400 |   |
| Purchase      premiums       |   |              | 1,637   |   |                   |   | 15 |   |
| Purchase      discounts      |   |              | (3      | )      |                   |   | (4 | ) |
| Amortized cost               |   |              | 139,207 |   |                   |   | 7,411 |   |
| Gross      unrealized gains  |   |              | 140     |   |                   |   | 45 |   |
| Gross      unrealized losses |   |              | (160    | )      |                   |   | – |   |
| Fair value                   |   | $                 | 139,187 |   |                   | $      | 7,456 |   |
|                         |   |              |    |   |                   |   |   |   |
| Weighted      average yield  |   |              | 4.85    | %      |                   |   | 5.43 | % |

|                                                |   | June      30, 2008 |    |   | December      31, 2007      |   |
|-----------------------------------------------------|--------|--------------------|---------|--------|-----------------------------|--------|
|                                                |   | Value              |    |   | Weighted      Average Yield |   |   | Value |   |   | Weighted      Average Yield |   |
| Non-agency      mortgage-backed securities          |   | $                  | 7,149   |   |                        |   | 7.11 | % |   | $ | 7,684 |   |   |   | 6.85 | % |
| Corporate      debt securities                      |   |               | – |   |                        |   | – | % |   |   | 4,722 |   |   |   | 11.75 | % |
| Equity      securities of publicly traded companies |   |               | 8,237   |   |                        |   |   |   |   |   | 7,704 |   |   |   |   |   |
|                                                |   |               | 15,386  |   |                        |   |   |   |   |   | 20,110 |   |   |   |   |   |
| Gross      unrealized gains                         |   |               | 929     |   |                        |   |   |   |   |   | 2,361 |   |   |   |   |   |
| Gross      unrealized losses                        |   |               | (625    | )      |                        |   |   |   |   |   | (696 | ) |   |   |   |   |
| Securities,      available-for-sale at fair value   |   | $                  | 15,690  |   |                        |   |   |   |   | $ | 21,775 |   |   |   |   |   |

----

|                                                         |   | June      30, 2008 |    |   | December      31, 2007 |   |
|--------------------------------------------------------------|--------|--------------------|---------|--------|------------------------|--------|
| Single-family      mortgage loans                            |   | $                  | 2,143   |   |                   | $      | 2,486 |   |
| Multifamily      and commercial mortgage loan participations |   |               | 907     |   |                   |   | 927 |   |
| Unamortized      discounts on mortgage loans                 |   |               | (261    | )      |                   |   | (289 | ) |
| Mortgage      loans, net                                     |   |               | 2,789   |   |                   |   | 3,124 |   |
|                                                         |   |               |    |   |                   |   |   |   |
| Delinquent      property tax receivable securities           |   |               | 547     |   |                   |   | 2,127 |   |
| Notes      receivable and other investments                  |   |               | – |   |                   |   | 1,523 |   |
| Other      loans and investments                             |   | $                  | 3,336   |   |                   | $      | 6,774 |   |

----

|                                         |   |            |    |   | Fair      Value Measurements |   |
|----------------------------------------------|--------|-----------------|---------|--------|------------------------------|--------|
|                                         |   | Fair      Value |    |   | Level      1                 |   |   | Level      2 |   |   | Level      3 |   |
| Assets                                       |   |            |    |   |                         |   |   |   |   |   |   |   |
| Agency RMBS                                  |   | $               | 139,187 |   |                         | $      | – |   |   | $ | 139,187 |   |   | $ | – |   |
| Non-agency mortgage-backed      securities   |   |            | 7,012   |   |                         |   | – |   |   |   | – |   |   |   | 7,012 |   |
| Equity securities                            |   |            | 8,678   |   |                         |   | 8,678 |   |   |   | – |   |   |   | – |   |
| Other                                        |   |            | 547     |   |                         |   | – |   |   |   | – |   |   |   | 547 |   |
| Total assets carried at fair      value      |   | $               | 155,424 |   |                         | $      | 8,678 |   |   | $ | 139,187 |   |   | $ | 7,559 |   |
|                                         |   |            |    |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities                                  |   |            |    |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Obligation under payment      agreement      |   | $               | 11,663  |   |                         | $      | – |   |   | $ | – |   |   | $ | 11,663 |   |
| Total liabilities carried at fair      value |   | $               | 11,663  |   |                         | $      | – |   |   | $ | – |   |   | $ | 11,663 |   |

|                                                        |   | Level      3 Fair Values                   |    |
|-------------------------------------------------------------|--------|--------------------------------------------|---------|
|                                                        |   | Non-agency      mortgage-backed securities |    |   | Corporate      debt securities |   |   | Other |   |   | Total      assets |   |   | Obligation      under payment agreement |   |
| Balance      at April 1, 2008                               |   | $                                          | 7,402   |   |   | $ | 4,022 |   |   | $ | 482 |   |   | $ | 11,906 |   |   | $ | 11,244 |   |
| Total      realized and unrealized gains (losses)           |   |                                       |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Included in      earnings                                   |   |                                       | – |   |   |   | (187 | ) |   |   | (7 | ) |   |   | (194 | ) |   |   | 419 |   |
| Included in other comprehensive      income (loss)          |   |                                       | (138    | ) |   |   | – |   |   |   | 304 |   |   |   | 166 |   |   |   | – |   |
| Purchases,      sales, issuances and other settlements, net |   |                                       | (252    | ) |   |   | (3,835 | ) |   |   | (232 | ) |   |   | (4,319 | ) |   |   | – |   |
| Transfers      in and/or out of Level 3                     |   |                                       | – |   |   |   | – |   |   |   | – |   |   |   | – |   |   |   | – |   |
| Balance      at June 30, 2008                               |   | $                                          | 7,012   |   |   | $ | – |   |   | $ | 547 |   |   | $ | 7,559 |   |   | $ | 11,663 |   |

----

|                                                        |   | Level      3 Fair Values                   |    |
|-------------------------------------------------------------|--------|--------------------------------------------|---------|
|                                                        |   | Non-agency      mortgage-backed securities |    |   | 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 | ) |   |   | (2 | ) |   |   | (189 | ) |   |   | (3,810 | ) |
| Included in other comprehensive      income (loss)          |   |                                       | (180    | ) |   |   | 375 |   |   |   | 304 |   |   |   | 499 |   |   |   | – |   |
| Purchases,      sales, issuances and other settlements, net |   |                                       | (534    | ) |   |   | (4,535 | ) |   |   | (1,882 | ) |   |   | (6,951 | ) |   |   | – |   |
| Transfers      in and/or out of Level 3                     |   |                                       | – |   |   |   | – |   |   |   | – |   |   |   | – |   |   |   | – |   |
| Balance      at June 30, 2008                               |   | $                                          | 7,012   |   |   | $ | – |   |   | $ | 547 |   |   | $ | 7,559 |   |   | $ | 11,663 |   |

----

|                                 |   | June      30, 2008     |      |   | December      31, 2007       |   |
|--------------------------------------|--------|------------------------|-----------|--------|------------------------------|--------|
|                                 |   | Bonds      Outstanding |      |   | Range      of Interest Rates |   |   | Bonds      Outstanding |   |   | Range      of Interest Rates |   |
| Fixed-rate      classes              |   | $                      | 157,284   |   |                         |   | 6.6%      - 8.8 | % |   | $ | 167,398 |   |   |   | 6.6%      - 8.8 | % |
| Variable-rate      classes           |   |                   | 31,381    |   |                         |   | 2.7 | % |   |   | 34,500 |   |   |   | 5.1 | % |
| Accrued      interest payable        |   |                   | 1,067     |   |                         |   |   |   |   |   | 1,186 |   |   |   |   |   |
| Deferred      costs                  |   |                   | (1,483    | )      |                         |   |   |   |   |   | (1,851 | ) |   |   |   |   |
| Unamortized      net bond premium    |   |                   | 1,055     |   |                         |   |   |   |   |   | 3,152 |   |   |   |   |   |
|                                 |   | $                      | 189,304   |   |                         |   |   |   |   | $ | 204,385 |   |   |   |   |   |
|                                 |   |                   |      |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Range      of stated maturities      |   |                   | 2024-2027 |   |                         |   |   |   |   |   | 2024-2027 |   |   |   |   |   |
| Estimated      weighted average life |   | 3.6      years         |      |   |                         |   |   |   | 3.3      years |   |   |   |   |   |
| Number      of series                |   |                   | 3         |   |                         |   |   |   |   |   | 3 |   |   |   |   |   |

|                   |   | June      30, 2008 |    |   | December      31, 2007     |   |
|------------------------|--------|--------------------|---------|--------|----------------------------|--------|
| Maturity               |   | Balance            |    |   | Weighted      Average Rate |   |   | Balance |   |   | Weighted      Average Rate |   |
| Less      than 30 days |   | $                  | 99,077  |   |                       |   | 2.56 | % |   | $ | 4,612 |   |   |   | 5.07 | % |
| 31      to 90 days     |   |               | 30,326  |   |                       |   | 2.50 |   |   |   | – |   |   |   | – |   |
|                   |   | $                  | 129,403 |   |                       |   | 2.54 | % |   | $ | 4,612 |   |   |   | 5.07 | % |

----

|                           |   | Shares        |      |
|--------------------------------|--------|---------------|-----------|
|                           |   | Preferred     |      |   |   |   |
|                           |   | Series      D |      |   | Common |   |
| December      31, 2007         |   |          | 4,221,539 |   |   |   | 12,136,262 |   |
| Restricted      shares granted |   |          | -         |   |   |   | 33,500 |   |
| June      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                    | – |
|                 |                   |                   |                    |   |
| Preferred      Stock |                   |                   |                    |   |
| March 19, 2008       | March      31, 2008    | April      30, 2008    | –                 | $0.2375 |
| June 18, 2008        | June      30, 2008     | July      31, 2008     | –                 | 0.2375 |

----

----

|                                         |   | Three      Months Ended |    |   | Six      Months Ended                |   |
|----------------------------------------------|--------|-------------------------|---------|--------|--------------------------------------|--------|
|                                         |   | June      30, 2008      |    |   | June      30, 2008                   |   |
|                                         |   | Number      of Shares   |    |   | Weighted-Average      Exercise Price |   |   | Number      of Shares |   |   | Weighted-Average      Exercise      Price |   |
| 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 |    |   | Six      Months Ended                |   |
|-------------------------------------------------|--------|-------------------------|---------|--------|--------------------------------------|--------|
|                                            |   | June      30, 2008      |    |   | June      30, 2008                   |   |
|                                            |   | Number      of Shares   |    |   | Weighted-Average      Exercise Price |   |   | Number      of Shares |   |   | Weighted-Average      Exercise      Price |   |
| Options      outstanding at beginning of period |   |                    | 95,000  |   |                                 | $      | 8.28 |   |   |   | 95,000 |   |   | $ | 8.28 |   |
| Options      granted                            |   |                    | 25,000  |   |                                 |   | 9.81 |   |   |   | 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 |
|----------------------------------|----------------------|
|                             | June      30, 2008   |
| Expected      volatility         | 16.73%-17.69%        |
| Weighted-average      volatility | 17.07%               |
| Expected      dividends          | 6.980%               |
| Expected      term (in months)   | 46                   |
| Risk-free      rate              | 3.21%                |

----

----

----

----

| (amounts      in thousands except per share data) |   | June      30, 2008 |    |   | December      31, 2007 |   |
|---------------------------------------------------|--------|--------------------|---------|--------|------------------------|--------|
| Investments:                                      |   |               |    |   |                   |   |
| Securitized      mortgage loans, net              |   | $                  | 258,826 |   |                   | $      | 278,463 |   |
| Agency      RMBS                                  |   |               | 139,187 |   |                   |   | 7,456 |   |
| Other      securities                             |   |               | 15,690  |   |                   |   | 21,775 |   |
| Investment      in joint venture                  |   |               | 13,273  |   |                   |   | 19,267 |   |
| Other      loans and investments                  |   |               | 3,336   |   |                   |   | 6,774 |   |
|                                              |   |               |    |   |                   |   |   |   |
| Securitization      financing                     |   |               | 189,304 |   |                   |   | 204,385 |   |
| Repurchase      agreements                        |   |               | 129,403 |   |                   |   | 4,612 |   |
| Obligation      under payment agreement           |   |               | 11,663  |   |                   |   | 16,796 |   |

| (amounts      in thousands)           |   | June      30, 2008 |    |   | December      31, 2007 |   |
|---------------------------------------|--------|--------------------|---------|--------|------------------------|--------|
| Securitized      mortgage loans, net: |   |               |    |   |                   |   |
| Commercial                            |   | $                  | 180,306 |   |                   | $      | 190,570 |   |
| Single-family                         |   |               | 78,520  |   |                   |   | 87,893 |   |
|                                  |   |               | 258,826 |   |                   |   | 278,463 |   |

----

| (amounts      in thousands)   |   | June      30, 2008 |    |   | December      31, 2007 |   |
|-------------------------------|--------|--------------------|---------|--------|------------------------|--------|
| Hybrid      Agency RMBS:      |   |               |    |   |                   |   |
| Fannie Mae      Certificates  |   | $                  | 109,879 |   |                   | $      | – |   |
| Freddie Mac      Certificates |   |               | 28,905  |   |                   |   | – |   |
|                          |   |               | 138,784 |   |                   |   | – |   |
| Fixed      Rate Agency RMBS   |   |               | 403     |   |                   |   | 7,456 |   |
|                          |   | $                  | 139,187 |   |                   | $      | 7,456 |   |

| (amounts      in thousands)                         |   | June      30, 2008 |    |   | December      31, 2007 |   |
|-----------------------------------------------------|--------|--------------------|---------|--------|------------------------|--------|
| Other      Securities:                              |   |               |    |   |                   |   |
| Non-agency RMBS                                     |   | $                  | 7,012   |   |                   | $      | 7,727 |   |
| Corporate debt      securities                      |   |               | – |   |                   |   | 4,347 |   |
| Equity securities of publicly      traded companies |   |               | 8,678   |   |                   |   | 9,701 |   |
|                                                |   | $                  | 15,690  |   |                   | $      | 21,775 |   |

----

| (amounts      in thousands)                            |   | June      30, 2008 |    |   | December      31, 2007 |   |
|--------------------------------------------------------|--------|--------------------|---------|--------|------------------------|--------|
| Securitization      financing:                         |   |               |    |   |                   |   |
| Fixed, secured by commercial      mortgage loans       |   | $                  | 158,573 |   |                   | $      | 170,623 |   |
| Variable, secured by single-family      mortgage loans |   |               | 30,731  |   |                   |   | 33,762 |   |
|                                                   |   | $                  | 189,304 |   |                   | $      | 204,385 |   |

----

----

|                                        |   | June      30, 2008        |    |
|---------------------------------------------|--------|---------------------------|---------|
| (amounts      in thousands)                 |   | Amortized      cost basis |    |   | Financing(6) |   |   | Net      investment |   |   | Estimated      fair value of net investment |   |
| Securitized      mortgage loans: (1)   |   |                      |    |   |   |   |   |   |   |   |   |   |
| Single-family      mortgage loans           |   | $                         | 78,519  |   |   | $ | 35,343 |   |   | $ | 43,176 |   |   | $ | 38,699 |   |
| Commercial      mortgage loans              |   |                      | 180,307 |   |   |   | 170,236 |   |   |   | 10,071 |   |   |   | 4,265 |   |
|                                        |   |                      | 258,826 |   |   |   | 205,579 |   |   |   | 53,247 |   |   |   | 42,964 |   |
|                                        |   |                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Agency      RMBS (2)                        |   |                      | 139,187 |   |   |   | 124,791 |   |   |   | 14,396 |   |   |   | 14,396 |   |
| Other      securities:                      |   |                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment      grade single-family (3)     |   |                      | 6,692   |   |   |   | – |   |   |   | 6,692 |   |   |   | 6,692 |   |
| Non-investment      grade single-family (3) |   |                      | 320     |   |   |   | – |   |   |   | 320 |   |   |   | 320 |   |
| Equity      securities  (4)       |   |                      | 8,678   |   |   |   | – |   |   |   | 8,678 |   |   |   | 8,678 |   |
|                                        |   |                      | 15,690  |   |   |   | – |   |   |   | 15,690 |   |   |   | 15,690 |   |
|                                        |   |                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment      in joint venture(5)         |   |                      | 13,273  |   |   |   | – |   |   |   | 13,273 |   |   |   | 13,033 |   |
| Other      loans and investments(3)         |   |                      | 3,336   |   |   |   | – |   |   |   | 3,336 |   |   |   | 3,902 |   |
|                                        |   |                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                       |   | $                         | 430,312 |   |   | $ | 330,370 |   |   | $ | 99,942 |   |   | $ | 89,985 |   |

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

| (2) | Fair      values for Agency RMBS are based on dealer  quotes. |
|-----|---------------------------------------------------------------|

| (3) | Fair      values are calculated as the net present value of expected future cash      flows, discounted at a weighted average discount rate of 8.35% for      investment grade securities and 41.6% for non-investment grade      securities. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | Fair      values for equity securities represent the closing price from a national      exchange. |
|-----|---------------------------------------------------------------------------------------------------|

| (5) | Fair      value for investment in joint venture represents our share of the      joint venture’s assets valued using methodologies and assumptions      consistent with Note 1 above. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (6) | Financing      includes securitization financing issued to third parties and repurchase      agreements.  All repurchase agreements have maturities of less      than 90 days  and their fair value is assumed to equal their      cost basis.  Financing also includes our obligation under      payment agreement, which at June 30, 2008 had a balance of      $11,663,000. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                              | Fair      Value Assumptions             |               |
|-----------------------------------|-----------------------------------------|--------------------|
| Loan      type                    | Weighted-average      prepayment speeds | Losses             | Weighted-averagediscount      rate(6) | Projected      cash flow termination date | YTD      2008 Cash Flows (1)(amounts      in thousands) |
|                              |                                    |               |   |   |   |
| Single-family      mortgage loans | 20%      CPR                            | 0.2%      annually | 20% | Anticipated      final maturity 2024 | $      1,786 |
|                              |                                    |               |   |   |   |
| Commercial      mortgage loans(2) | (3)                                     | 0.8%      annually | (4) | (5) | $      1,058 |

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

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

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

| (4) | Weighed-average      discount rates for the two securitization trusts were 16.0% and 25.5%,      respectively. |
|-----|----------------------------------------------------------------------------------------------------------------|

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

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

| (amounts      in thousands)                            |   | June      30, 2008 |   |
|--------------------------------------------------------|--------|--------------------|--------|
| Investments:                                           |   |               |   |
| AAA      rated and Agency RMBS fixed income securities |   | $                  | 54,195 |   |
| AA      and A rated fixed income securities            |   |               | 407    |   |
| Unrated      and non-investment grade                  |   |               | 12,552 |   |
| Securitization      over-collateralization             |   |               | 19,515 |   |
| Investment      in joint venture                       |   |               | 13,273 |   |
|                                                   |   | $                  | 99,942 |   |

----

|                                                                         |   | June      30, 2008 |    |
|------------------------------------------------------------------------------|--------|--------------------|---------|
| (amounts      in thousands, except per share information)                    |   | Book      Value    |    |   | Adjusted      Common Equity Book Value |   |
| Total      investment assets (per table above)                               |   | $                  | 99,942  |   |   | $ | 89,985 |   |
| Cash      and cash equivalents                                               |   |               | 42,501  |   |   |   | 42,501 |   |
| Other      assets and liabilities, net                                       |   |               | 12      |   |   |   | 12 |   |
|                                                                         |   |               | 142,455 |   |   |   | 132,498 |   |
| Less:  Preferred      stock redemption value                       |   |               | (42,215 | ) |   |   | (42,215 | ) |
| Common      equity book value and adjusted book value                        |   | $                  | 100,240 |   |   | $ | 90,283 |   |
|                                                                         |   |               |    |   |   |   |   |   |
| Common      equity book value per share and adjusted book value per    share |   | $                  | 8.24    |   |   | $ | 7.42 |   |

----

| (amounts      in millions) |   | Credit      Exposure (1) |   |   | Credit      Exposure, Net of Allowance |   |   | ActualCreditLosses |   |   | Credit      Exposure, Net of Allowance to Outstanding Loan Balance (2) |   |
|----------------------------|--------|--------------------------|--------|--------|----------------------------------------|--------|--------|--------------------|--------|--------|------------------------------------------------------------------------|--------|
| 2007, Quarter2             |   | $                        | 26.5   |   |                                   | $      | 23.0   |               |   | $      | 0.0                                                                    |   |   |   | 6.95 | % |
| 2007, Quarter3             |   |                     | 26.9   |   |                                   |   | 24.3   |               |   |   | 0.1                                                                    |   |   |   | 7.91 |   |
| 2007, Quarter4             |   |                     | 27.5   |   |                                   |   | 24.8   |               |   |   | 0.0                                                                    |   |   |   | 8.58 |   |
| 2008, Quarter1             |   |                     | 27.9   |   |                                   |   | 25.2   |               |   |   | 0.0                                                                    |   |   |   | 8.91 |   |
| 2008, Quarter2             |   |                     | 29.6   |   |                                   |   | 26.5   |               |   |   | 0.0                                                                    |   |   |   | 9.84 |   |

| (1) | Represents      the overcollateralization pledged to various  securitization      trusts and subordinate securities we own net of any premiums      and  discounts.  Overcollateralization generally      equals the excess of the unpaid principal balance of securitized mortgage      loans over the remaining unpaid principal balance of securitization      financing bonds outstanding. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  (2) | Represents      Credit Exposure Net of Allowance divided by current unpaid principal      balance of loans in the securitizationtrust. |
|-----------|----------------------------------------------------------------------------------------------------------------------------------------|

| Months      remaining to end of compliance period |   | As      a Percent of Unpaid Principal Balance |   |
|---------------------------------------------------|--------|-----------------------------------------------|--------|
| Compliance      period already exceeded           |   |                                          | 25.6   | % |
| Zero      through twelve months remaining         |   |                                          | 10.5   |   |
| Thirteen      through thirty six months remaining |   |                                          | 55.2   |   |
| Thirty      seven through sixty months remaining  |   |                                          | 8.7    |   |
|                                              |   |                                          | 100.0  | % |

----

|                                                     |   | Three      Months EndedJune      30, |   |   | Six      Months EndedJune      30, |   |
|----------------------------------------------------------|--------|--------------------------------------|--------|--------|------------------------------------|--------|
| (amounts      in thousands except per share information) |   | 2008                                 |   |   | 2007                               |   |   | 2008 |   |   | 2007 |   |
| Net      interest income                                 |   | $                                    | 2,501  |   |                               | $      | 2,963 |   |   | $ | 4,922 |   |   | $ | 5,424 |   |
| (Provision      for) recapture of loan losses            |   |                                 | (321   | )      |                               |   | 702 |   |   |   | (347 | ) |   |   | 1,225 |   |
| Net      interest income after provision for loan losses |   |                                 | 2,180  |   |                               |   | 3,665 |   |   |   | 4,575 |   |   |   | 6,649 |   |
| Equity      in income (loss) of joint venture            |   |                                 | 560    |   |                               |   | 672 |   |   |   | (1,691 | ) |   |   | 1,302 |   |
| (Loss)      gain on sale of investments, net             |   |                                 | (43    | )      |                               |   | 6 |   |   |   | 2,050 |   |   |   | – |   |
| Fair      value adjustments, net                         |   |                                 | (173   | )      |                               |   | – |   |   |   | 4,058 |   |   |   | – |   |
| Other      income (expense)                              |   |                                 | 3,025  |   |                               |   | (478 | ) |   |   | 3,092 |   |   |   | (1,018 | ) |
| General      and administrative expenses                 |   |                                 | (1,253 | )      |                               |   | (1,163 | ) |   |   | (2,469 | ) |   |   | (2,290 | ) |
| Net      income                                          |   |                                 | 4,296  |   |                               |   | 2,702 |   |   |   | 9,615 |   |   |   | 4,643 |   |
| Preferred      stock dividends                           |   |                                 | (1,003 | )      |                               |   | (1,003 | ) |   |   | (2,005 | ) |   |   | (2,005 | ) |
| Net      income to common shareholders                   |   |                                 | 3,293  |   |                               |   | 1,699 |   |   |   | 7,610 |   |   |   | 2,638 |   |
|                                                     |   |                                 |   |   |                               |   |   |   |   |   |   |   |   |   |   |   |
| Net      income per common share:                        |   |                                 |   |   |                               |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                    |   | $                                    | 0.27   |   |                               | $      | 0.14 |   |   | $ | 0.63 |   |   | $ | 0.22 |   |
| Diluted                                                  |   | $                                    | 0.26   |   |                               | $      | 0.14 |   |   | $ | 0.59 |   |   | $ | 0.22 |   |
|                                                     |   |                                 |   |   |                               |   |   |   |   |   |   |   |   |   |   |   |

|                                                   |   | Three      Months Ended June 30, |   |
|--------------------------------------------------------|--------|----------------------------------|--------|
| (amounts      in thousands)                            |   | 2008                             |   |   | 2007 |   |
| Interest      income - Investments:                    |   |                             |   |   |   |   |
| Securitized mortgage      loans                        |   | $                                | 5,381  |   |   | $ | 6,848 |   |
| Agency RMBS                                            |   |                             | 750    |   |   |   | 29 |   |
| Othersecurities                                        |   |                             | 280    |   |   |   | 255 |   |
| Other loans and      investments                       |   |                             | 86     |   |   |   | 104 |   |
|                                                   |   |                             | 6,497  |   |   |   | 7,236 |   |
| Interest      income – Cash and cash equivalents |   |                             | 177    |   |   |   | 787 |   |
|                                                   |   | $                                | 6,674  |   |   | $ | 8,023 |   |

----

|                             |   | Three      Months Ended June 30, |   |
|----------------------------------|--------|----------------------------------|--------|
|                             |   | 2008                             |   |   | 2007 |   |
| (amounts      in thousands)      |   | Interest      Income             |   |   | Net      Amortization |   |   | Total      Interest Income |   |   | Interest      Income |   |   | Net      Amortization |   |   | Total      Interest Income |   |
| Securitized      mortgage loans: |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                       |   | $                                | 3,876  |   |   | $ | 117 |   |   | $ | 3,993 |   |   | $ | 4,731 |   |   | $ | 188 |   |   | $ | 4,919 |   |
| Single-family                    |   |                             | 1,454  |   |   |   | (66 | ) |   |   | 1,388 |   |   |   | 2,018 |   |   |   | (89 | ) |   |   | 1,929 |   |
| Total      mortgage loans        |   | $                                | 5,330  |   |   | $ | 51 |   |   | $ | 5,381 |   |   | $ | 6,749 |   |   | $ | 99 |   |   | $ | 6,848 |   |

----

|                                    |   | Three      Months Ended June 30, |   |
|-----------------------------------------|--------|----------------------------------|--------|
| (amounts      in thousands)             |   | 2008                             |   |   | 2007 |   |
| Interest      expense:                  |   |                             |   |   |   |   |
| Securitization      financing           |   | $                                | 3,337  |   |   | $ | 3,537 |   |
| Repurchase      agreements              |   |                             | 427    |   |   |   | 1,162 |   |
| Obligation under payment      agreement |   |                             | 402    |   |   |   | 386 |   |
| Other                                   |   |                             | 7      |   |   |   | (25 | ) |
|                                    |   | $                                | 4,173  |   |   | $ | 5,060 |   |

|                                |   | Three      Months Ended June 30, |   |
|-------------------------------------|--------|----------------------------------|--------|
|                                |   | 2008                             |   |   | 2007 |   |
| (amounts      in thousands)         |   | Interest      Expense            |   |   | Net      Amortization |   |   | Total      Interest Expense |   |   | Interest      Expense |   |   | Net      Amortization |   |   | Total      Interest Expense |   |
| Securitization      financing:      |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                          |   | $                                | 3,301  |   |   | $ | (349 | ) |   | $ | 2,952 |   |   | $ | 4,156 |   |   | $ | (820 | ) |   | $ | 3,336 |   |
| Single-family                       |   |                             | 238    |   |   |   | 51 |   |   |   | 289 |   |   |   | – |   |   |   | – |   |   |   | – |   |
| Other bond related      costs       |   |                             | 96     |   |   |   | – |   |   |   | 96 |   |   |   | 201 |   |   |   | – |   |   |   | 201 |   |
| Total      securitization financing |   | $                                | 3,635  |   |   | $ | (298 | ) |   | $ | 3,337 |   |   | $ | 4,357 |   |   | $ | (820 | ) |   | $ | 3,537 |   |

----

|                                                   |   | Six      Months Ended June 30, |   |
|--------------------------------------------------------|--------|--------------------------------|--------|
| (amounts      in thousands)                            |   | 2008                           |   |   | 2007 |   |
| Interest      income - Investments:                    |   |                           |   |   |   |   |
| Securitized mortgage      loans                        |   | $                              | 10,983 |   |   | $ | 13,873 |   |
| Agency RMBS                                            |   |                           | 854    |   |   |   | 63 |   |
| Othersecurities                                        |   |                           | 604    |   |   |   | 545 |   |
| Other loans and      investments                       |   |                           | 215    |   |   |   | 231 |   |
|                                                   |   |                           | 12,656 |   |   |   | 14,712 |   |
| Interest      income – Cash and cash equivalents |   |                           | 501    |   |   |   | 1,526 |   |
|                                                   |   | $                              | 13,157 |   |   | $ | 16,238 |   |

----

|                             |   | Six      Months Ended June 30, |   |
|----------------------------------|--------|--------------------------------|--------|
|                             |   | 2008                           |   |   | 2007 |   |
| (amounts      in thousands)      |   | Interest      Income           |   |   | Net      Amortization |   |   | Total      Interest Income |   |   | Interest      Income |   |   | Net      Amortization |   |   | Total      Interest Income |   |
| Securitized      mortgage loans: |   |                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                       |   | $                              | 7,861  |   |   | $ | 218 |   |   | $ | 8,079 |   |   | $ | 9,599 |   |   | $ | 274 |   |   | $ | 9,873 |   |
| Single-family                    |   |                           | 3,058  |   |   |   | (154 | ) |   |   | 2,904 |   |   |   | 4,223 |   |   |   | (223 | ) |   |   | 4,000 |   |
| Total      mortgage loans        |   | $                              | 10,919 |   |   | $ | 64 |   |   | $ | 10,983 |   |   | $ | 13,822 |   |   | $ | 51 |   |   | $ | 13,873 |   |

|                                    |   | Six      Months Ended June 30, |   |
|-----------------------------------------|--------|--------------------------------|--------|
| (amounts      in thousands)             |   | 2008                           |   |   | 2007 |   |
| Interest      expense:                  |   |                           |   |   |   |   |
| Securitization      financing           |   | $                              | 6,936  |   |   | $ | 7,632 |   |
| Repurchase      agreements              |   |                           | 480    |   |   |   | 2,420 |   |
| Obligation under payment      agreement |   |                           | 804    |   |   |   | 753 |   |
| Other                                   |   |                           | 15     |   |   |   | 9 |   |
|                                    |   | $                              | 8,235  |   |   | $ | 10,814 |   |

----

|                                |   | Six      Months Ended June 30, |   |
|-------------------------------------|--------|--------------------------------|--------|
|                                |   | 2008                           |   |   | 2007 |   |
| (amounts      in thousands)         |   | Interest      Expense          |   |   | Net      Amortization |   |   | Total      Interest Expense |   |   | Interest      Expense |   |   | Net      Amortization |   |   | Total      Interest Expense |   |
| Securitization      financing:      |   |                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                          |   | $                              | 6,741  |   |   | $ | (673 | ) |   | $ | 6,068 |   |   | $ | 8,429 |   |   | $ | (1,107 | ) |   | $ | 7,322 |   |
| Single-family                       |   |                           | 576    |   |   |   | 103 |   |   |   | 679 |   |   |   | – |   |   |   | – |   |   |   | – |   |
| Other bond related      costs       |   |                           | 189    |   |   |   | – |   |   |   | 189 |   |   |   | 310 |   |   |   | – |   |   |   | 310 |   |
| Total      securitization financing |   | $                              | 7,506  |   |   | $ | (570 | ) |   | $ | 6,936 |   |   | $ | 8,739 |   |   | $ | (1,107 | ) |   | $ | 7,632 |   |

----

----

|                                                |   | Three      Months Ended June 30, |    |
|-----------------------------------------------------|--------|----------------------------------|---------|
|                                                |   | 2008                             |    |   | 2007 |   |
| (amounts      in thousands, except for percentages) |   | AverageBalance                   |    |   | EffectiveRate |   |   | AverageBalance |   |   | EffectiveRate |   |
| Securitized Mortgage      Loans                     |   |                             |    |   |   |   |   |   |   |   |   |   |
| Securitized      mortgage loans(1) (2) (3)      (4) |   | $                                | 267,505 |   |   |   | 7.99 | % |   | $ | 326,560 |   |   |   | 8.25 | % |
| Securitization      financing(3)(4)(5)              |   |                             | 195,198 |   |   |   | (6.86 | %) |   |   | 202,470 |   |   |   | (7.32 | %) |
| Repurchase      agreements                          |   |                             | 4,612   |   |   |   | (2.77 | %) |   |   | 84,794 |   |   |   | (5.50 | %) |
| Net interest      spread                            |   |                             |    |   |   |   | 1.22 | % |   |   |   |   |   |   | 1.47 | % |
|                                                |   |                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Agency      RMBS                                    |   |                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Agency RMBS(1)                                      |   | $                                | 72,276  |   |   |   | 4.25 | % |   | $ | 1,161 |   |   |   | 9.89 | % |
| Repurchase      agreements                          |   |                             | 58,625  |   |   |   | (2.71 | %) |   |   | – |   |   |   | – | % |
| Net interest      spread                            |   |                             |    |   |   |   | 1.54 | % |   |   |   |   |   |   | 9.89 | % |
|                                                |   |                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other      Investments                              |   |                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other      securities(1)                            |   | $                                | 10,532  |   |   |   | 10.63 | % |   | $ | 12,186 |   |   |   | 8.15 | % |
| Other loans and      investments                    |   |                             | 2,876   |   |   |   | 14.20 | % |   |   | 3,516 |   |   |   | 14.00 | % |
|                                                |   |                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                               |   |                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest earning      assets                        |   | $                                | 353,189 |   |   |   | 7.35 | % |   | $ | 343,423 |   |   |   | 8.31 | % |
| Interest bearing      liabilities                   |   |                             | 258,435 |   |   |   | (5.85 | %) |   |   | 287,264 |   |   |   | (6.78 | %) |
| Net interest spread(5)                              |   |                             |    |   |   |   | 1.50 | % |   |   |   |   |   |   | 1.53 | % |

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

| (5)   | Effective      rates are calculated excluding non-interest related securitization      financing expenses. |
|-----------------|------------------------------------------------------------------------------------------------------------|

----

----

|                                                |   | Six      Months Ended June 30, |    |
|-----------------------------------------------------|--------|--------------------------------|---------|
|                                                |   | 2008                           |    |   | 2007 |   |
| (amounts      in thousands, except for percentages) |   | AverageBalance                 |    |   | EffectiveRate |   |   | AverageBalance |   |   | EffectiveRate |   |
| Securitized Mortgage      Loans                     |   |                           |    |   |   |   |   |   |   |   |   |   |
| Securitized mortgage loans(1) (2) (3)      (4)      |   | $                              | 271,952 |   |   |   | 8.05 | % |   | $ | 334,356 |   |   |   | 8.24 | % |
| Securitization financing(3)(4)(5)                   |   |                           | 198,320 |   |   |   | (6.93 | %) |   |   | 205,435 |   |   |   | (7.35 | %) |
| Repurchase      agreements                          |   |                           | 4,612   |   |   |   | (3.38 | %) |   |   | 88,728 |   |   |   | (5.50 | %) |
| Net interest    spread                              |   |                           |    |   |   |   | 1.20 | % |   |   |   |   |   |   | 1.45 | % |
|                                                |   |                           |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Agency      RMBS                                    |   |                           |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Agency RMBS(1)                                      |   | $                              | 40,569  |   |   |   | 4.28 | % |   | $ | 1,295 |   |   |   | 9.75 | % |
| Repurchase      agreements                          |   |                           | 29,861  |   |   |   | (2.71 | %) |   |   | – |   |   |   | – | % |
| Net interest    spread                              |   |                           |    |   |   |   | 1.57 | % |   |   |   |   |   |   | 9.75 | % |
|                                                |   |                           |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other      Investments                              |   |                           |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other securities(1)                                 |   | $                              | 11,400  |   |   |   | 10.59 | % |   | $ | 12,026 |   |   |   | 8.96 | % |
| Other loans and      investments                    |   |                           | 3,239   |   |   |   | 14.65 | % |   |   | 3,627 |   |   |   | 13.82 | % |
|                                                |   |                           |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                               |   |                           |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest earning      assets                        |   | $                              | 327,160 |   |   |   | 7.76 | % |   | $ | 351,304 |   |   |   | 8.32 | % |
| Interest bearing      liabilities                   |   |                           | 232,793 |   |   |   | (6.32 | %) |   |   | 294,163 |   |   |   | (6.79 | %) |
| Net interest spread(5)                              |   |                           |    |   |   |   | 1.44 | % |   |   |   |   |   |   | 1.53 | % |

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

| (5)   | Effective      rates are calculated excluding non-interest related securitization      financing expenses. |
|-----------------|------------------------------------------------------------------------------------------------------------|

----

|                                         |   | Three      Months Ended June 30, 2008 vs. 2007 |   |
|----------------------------------------------|--------|------------------------------------------------|--------|
| (amounts      in thousands)                  |   | Rate                                           |   |   | Volume |   |   | Total |   |
| Securitized      mortgage loans              |   | $                                              | (270   | ) |   | $ | (1,196 | ) |   | $ | (1,466 | ) |
| Agency      RMBS                             |   |                                           | (27    | ) |   |   | 748 |   |   |   | 721 |   |
| Other      securities, loans and investments |   |                                           | 64     |   |   |   | (57 | ) |   |   | 7 |   |
|                                         |   |                                           |   |   |   |   |   |   |   |   |   |   |
| Total      interest income                   |   |                                           | (233   | )  |   |   | (505 | ) |   |   | (738 | ) |
|                                         |   |                                           |   |   |   |   |   |   |   |   |   |   |
| Securitization      financing                |   |                                           | 25     |   |   |   | (121 | ) |   |   | (96 | ) |
| Repurchase      agreements                   |   |                                           | (189   | ) |   |   | (546 | ) |   |   | (735 | ) |
|                                         |   |                                           |   |   |   |   |   |   |   |   |   |   |
| Total      interest expense                  |   |                                           | (164   | )  |   |   | (667 | ) |   |   | (831 | ) |
|                                         |   |                                           |   |   |   |   |   |   |   |   |   |   |
| Net      interest income                     |   | $                                              | (69    | ) |   | $ | 162 |   |   | $ | 93 |   |

----

|                                         |   | Six      months Ended June 30, 2008 vs. 2007 |   |
|----------------------------------------------|--------|----------------------------------------------|--------|
| (amounts      in thousands)                  |   | Rate                                         |   |   | Volume |   |   | Total |   |
| Securitized      mortgage loans              |   | $                                            | (361   | ) |   | $ | (2,526 | ) |   | $ | (2,887 | ) |
| Agency      RMBS                             |   |                                         | (56    | ) |   |   | 847 |   |   |   | 791 |   |
| Other      securities, loans and investments |   |                                         | 93     |   |   |   | (50 | ) |   |   | 43 |   |
|                                         |   |                                         |   |   |   |   |   |   |   |   |   |   |
| Total      interest income                   |   |                                         | (324   | )  |   |   | (1,729 | ) |   |   | (2,053 | ) |
|                                         |   |                                         |   |   |   |   |   |   |   |   |   |   |
| Securitization      financing                |   |                                         | (329   | )  |   |   | (249 | ) |   |   | (578 | ) |
| Repurchase      agreements                   |   |                                         | (475   | )  |   |   | (1,465 | ) |   |   | (1,940 | ) |
|                                         |   |                                         |   |   |   |   |   |   |   |   |   |   |
| Total      interest expense                  |   |                                         | (804   | )  |   |   | (1,714 | ) |   |   | (2,518 | ) |
|                                         |   |                                         |   |   |   |   |   |   |   |   |   |   |
| Net      interest income                     |   | $                                            | 480    |   |   | $ | (15 | ) |   | $ | 465 |   |

| 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. |
|-------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

----

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

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

Item 3.    Quantitative andQualitative Disclosures About Market Risk

----

| (amounts      in thousands)                    |   | Investment      Portfolio |     |   | Investment      Portfolio, including Cash and Cash Equivalents |   |
|------------------------------------------------|--------|---------------------------|----------|--------|----------------------------------------------------------------|--------|
| Basis      Point Change in Interest      Rates |   | Cash      Flow            |     |   | Percent                                                        |   |   | Cash      Flow |   |   | Percent |   |
|                                           |   |                      |     |   |                                                           |   |   |   |   |   |   |   |
| +200                                           |   | $                         | (2,404.7 | )      |                                                           |   | (12.7 | )% |   | $ | (704.7 | ) |   |   | (3.4 | )% |
| +100                                           |   |                      | (1,104.5 | )      |                                                           |   | (5.8 | )% |   |   | (254.5 | ) |   |   | (1.2 | )% |
| Base                                           |   |                      | –  |   |                                                           |   | – |   |   |   | – |   |   |   | – |   |
| -100                                           |   |                      | 896.8    |   |                                                           |   | 4.7 | % |   |   | 46.8 |   |   |   | 0.2 | % |
| -200                                           |   |                      | 1,435.4  |   |                                                           |   | 7.6 | % |   |   | (179.6 | ) |   |   | (0.9 | )% |

----

Item1.                      LegalProceedings

----

Item 1A.     RiskFactors

----

----

----

----

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

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

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

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

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

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

----

----

----

----

----

Item2.                      UnregisteredSales of Equity Securities and Use of Proceeds

Item3.                      DefaultsUpon Senior Securities

Item4.                      Submissionof Matters to a Vote of Security Holders

| Director                   |   |   | For        | Withheld |
|----------------------------|--------|--------|------------|----------|
|                       |
| Common Share      Votes    |
| Thomas      B. Akin        |   |   | 10,800,815 | 14,780   |
| Daniel      K. Osborne     |   |   | 10,766,699 | 48,896   |
| Jay      Buck (1)          |   |   | 10,767,154 | 48,441   |
|                       |   |   |       |     |
| Preferred Share      Votes |
| Leon      A. Felman        |   |   | 3,460,590  | 32,890   |
| Barry      Igdaloff        |   |   | 3,460,845  | 32,635   |
|                       |   |   |       |     |

| (1) | The      Board of Directors originally nominated Eric P. Von der Porten for      re-election as a director at the Annual Meeting.  Although he      had intended to continue serving as a director if elected, on May 13,      2008, Mr. Von der Porten resigned from the Company’s Board of Directors in      order to pursue new opportunities.  As a result of the vacancy      created by Mr. Von der Porten’s resignation and the fact that one of the      original director nominees had become unavailable to serve, on May 13,      2008 the Board of Directors by unanimous consent designated Mr. Jay Buck,      a strategic analyst for the Company, to be nominated for the seat vacated      by Mr. Von der  Porten.  In accordance with the      Company’s proxy statement and the rules of the SEC, all proxies voted in      favor of the election of Mr. Von der Porten were voted in favor of the      election of Mr. Buck. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Item5.                      OtherInformation

----

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).                       |

----

SIGNATURES

|                                  | DYNEX CAPITAL, INC.                                                                     |
|---------------------------------------|-----------------------------------------------------------------------------------------|
|                                  |                                                                                    |
|                                  |                                                                                    |
| Date:  August      11, 2008 | /s/      Thomas B. Akin                                                                 |
|                                  | Thomas      B. Akin                                                                     |
|                                  | Chief      Executive Officer                                                            |
|                                  | (Principal      Executive Officer)                                                      |
|                                  |                                                                                    |
|                                  |                                                                                    |
| Date:  August      11, 2008 | /s/      Stephen J. Benedetti                                                           |
|                                  | Stephen      J. Benedetti                                                               |
|                                  | Executive      Vice President, Chief Operating Officer and Chief Financial      Officer |
|                                  | (Principal      Financial Officer)                                                      |
|                                  |                                                                                    |

----

| Exhibit      No. |                                                                                                                                                                          |
|------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |                                                                                                                                                                          |
| 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).  |

----