----

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

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

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

| Virginia                                                                       | 52-1549373          |
|--------------------------------------------------------------------------------|---------------------|
| (State or other jurisdiction of                                                | (I.R.S. Employer    |
| incorporation or organization)                                                 | Identification No.) |
|                                                                           |                |
| 4991 Lake Brook Drive, Suite 100, Glen Allen, Virginia                         | 23060-9245          |
| (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, 2009 (unaudited) and December 31, 2008                                         | 1      |
|       |                  |                                                                                                                             |   |
|       |                  | Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008  (unaudited) | 2      |
|       |                  |                                                                                                                             |   |
|       |                  | Condensed Consolidated Statement of Shareholders’ Equity for the six months ended June 30, 2009 and 2008 (unaudited)       | 3      |
|       |                  |                                                                                                                             |   |
|       |                  | Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008  (unaudited)           | 4      |
|       |                  |                                                                                                                             |   |
|       |                  | Notes to Unaudited Condensed Consolidated Financial Statements                                                                   | 5      |
|       |                  |                                                                                                                             |   |
|       | Item 2.               | Management’s Discussion and Analysis of Financial Condition and Results of Operations                                      | 23     |
|       |                  |                                                                                                                             |   |
|       | Item 3.               | Quantitative and Qualitative Disclosures About Market Risk                                                                       | 46     |
|       |                  |                                                                                                                             |   |
|       | Item 4.               | Controls and Procedures                                                                                                          | 52     |
|       |                  |                                                                                                                             |   |
| PART II.   | OTHER INFORMATION     |                                                                                                                             |
|       |                  |                                                                                                                             |   |
|       | Item 1.               | Legal Proceedings                                                                                                                | 53     |
|       |                  |                                                                                                                             |   |
|       | Item 1A.              | Risk Factors                                                                                                                     | 53     |
|       |                  |                                                                                                                             |   |
|       | Item 2.               | Unregistered Sales of Equity Securities and Use of Proceeds                                                                      | 54     |
|       |                  |                                                                                                                             |   |
|       | Item 3.               | Defaults Upon Senior Securities                                                                                                  | 54     |
|       |                  |                                                                                                                             |   |
|       | Item 4.               | Submission of Matters to a Vote of Security Holders                                                                              | 54     |
|       |                  |                                                                                                                             |   |
|       | Item 5.               | Other Information                                                                                                                | 54     |
|       |                  |                                                                                                                             |   |
|       | Item 6.               | Exhibits                                                                                                                         | 55     |
|       |                  |                                                                                                                             |   |
| SIGNATURES | 56                    |

----

Item 1.                      Financial Statements 

CONDENSED CONSOLIDATED

BALANCE SHEETS

|                                                                                                                                                                                               |   | June 30,    |     |   | December 31, |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|----------|--------|--------------|--------|
|                                                                                                                                                                                               |   | 2009        |     |   | 2008         |   |
|                                                                                                                                                                                               |   | (unaudited) |     |   |         |   |
| ASSETS                                                                                                                                                                                             |   |        |     |   |         |   |
| Agency MBS:                                                                                                                                                                                        |   |        |     |   |         |   |
| Pledged to counterparties, at fair value                                                                                                                                                           |   | $           | 476,526  |   |         | $      | 300,277 |   |
| Unpledged, at fair value                                                                                                                                                                           |   |        | 31,506   |   |         |   | 11,299 |   |
| Pending settlement, at fair value                                                                                                                                                                  |   |        | 23,514   |   |         |   | – |   |
|                                                                                                                                                                                               |   |        | 531,546  |   |         |   | 311,576 |   |
|                                                                                                                                                                                               |   |        |     |   |         |   |   |   |
| Securitized mortgage loans, net                                                                                                                                                                    |   |        | 233,214  |   |         |   | 243,827 |   |
| Investment in joint venture                                                                                                                                                                        |   |        | 6,109    |   |         |   | 5,655 |   |
| Other investments                                                                                                                                                                                  |   |        | 8,298    |   |         |   | 12,735 |   |
|                                                                                                                                                                                               |   |        | 779,167  |   |         |   | 573,793 |   |
|                                                                                                                                                                                               |   |        |     |   |         |   |   |   |
| Cash and cash equivalents                                                                                                                                                                          |   |        | 32,200   |   |         |   | 24,335 |   |
| Restricted cash                                                                                                                                                                                    |   |        | –  |   |         |   | 2,974 |   |
| Other assets                                                                                                                                                                                       |   |        | 7,165    |   |         |   | 6,089 |   |
|                                                                                                                                                                                               |   | $           | 818,532  |   |         | $      | 607,191 |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                                         |   |        |     |   |         |   |   |   |
| LIABILITIES                                                                                                                                                                                        |   |        |     |   |         |   |   |   |
| Repurchase agreements                                                                                                                                                                              |   | $           | 472,532  |   |         | $      | 274,217 |   |
| Securitization financing                                                                                                                                                                           |   |        | 154,468  |   |         |   | 178,165 |   |
| Obligation under payment agreement                                                                                                                                                                 |   |        | 8,555    |   |         |   | 8,534 |   |
| Payable for securities pending settlement                                                                                                                                                          |   |        | 23,595   |   |         |   | – |   |
| Other liabilities                                                                                                                                                                                  |   |        | 4,755    |   |         |   | 5,866 |   |
|                                                                                                                                                                                               |   |        | 663,905  |   |         |   | 466,782 |   |
|                                                                                                                                                                                               |   |        |     |   |         |   |   |   |
| Commitments and Contingencies (Note 13)                                                                                                                                                            |   |        |     |   |         |   |   |   |
|                                                                                                                                                                                               |   |        |     |   |         |   |   |   |
| SHAREHOLDERS’ EQUITY                                                                                                                                                                         |   |        |     |   |         |   |   |   |
| Preferred stock, par value $0.01 per share, 50,000,000 shares authorized, 9.5% Cumulative Convertible Series D, 4,221,539 shares issued and outstanding ($43,218 aggregate liquidation preference) |   |        | 41,749   |   |         |   | 41,749 |   |
| Common stock, par value $0.01 per share, 100,000,000 shares authorized, 13,169,762 and 12,169,762 shares issued and outstanding, respectively                                                      |   |        | 132      |   |         |   | 122 |   |
| Additional paid-in capital                                                                                                                                                                         |   |        | 373,438  |   |         |   | 366,817 |   |
| Accumulated other comprehensive income (loss)                                                                                                                                                      |   |        | 3,968    |   |         |   | (3,949 | ) |
| Accumulated deficit                                                                                                                                                                                |   |        | (264,660 | )      |         |   | (264,330 | ) |
|                                                                                                                                                                                               |   |        | 154,627  |   |         |   | 140,409 |   |
|                                                                                                                                                                                               |   | $           | 818,532  |   |         | $      | 607,191 |   |
|                                                                                                                                                                                               |   |        |     |   |         |   |   |   |

----

CONDENSED CONSOLIDATED STATEMENTS

OF OPERATIONS 

|                                                |   | Three Months Ended |   |   | Six Months Ended |   |
|-----------------------------------------------------|--------|--------------------|--------|--------|------------------|--------|
|                                                |   | June 30,           |   |   | June 30,         |   |
|                                                |   | 2009               |   |   | 2008             |   |   | 2009 |   |   | 2008 |   |
| Interest income:                                    |   |               |   |   |             |   |   |   |   |   |   |   |
| Investments                                         |   | $                  | 9,816  |   |             | $      | 6,497 |   |   | $ | 19,287 |   |   | $ | 12,656 |   |
| Cash and cash equivalents                           |   |               | 3      |   |             |   | 177 |   |   |   | 9 |   |   |   | 501 |   |
|                                                |   |               | 9,819  |   |             |   | 6,674 |   |   |   | 19,296 |   |   |   | 13,157 |   |
| Interest expense                                    |   |               | 3,938  |   |             |   | 4,173 |   |   |   | 8,371 |   |   |   | 8,235 |   |
| Net interest income                                 |   |               | 5,881  |   |             |   | 2,501 |   |   |   | 10,925 |   |   |   | 4,922 |   |
| Provision for loan losses                           |   |               | (139   | )      |             |   | (321 | ) |   |   | (318 | ) |   |   | (347 | ) |
|                                                |   |               |   |   |             |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income after provision for loan losses |   |               | 5,742  |   |             |   | 2,180 |   |   |   | 10,607 |   |   |   | 4,575 |   |
|                                                |   |               |   |   |             |   |   |   |   |   |   |   |   |   |   |   |
| Equity in income (loss) of joint venture            |   |               | 610    |   |             |   | 560 |   |   |   | (144 | ) |   |   | (1,691 | ) |
| Gain (loss) on sale of investments, net             |   |               | 138    |   |             |   | (43 | ) |   |   | 221 |   |   |   | 2,050 |   |
| Fair value adjustments, net                         |   |               | (507   | )      |             |   | (173 | ) |   |   | 138 |   |   |   | 4,058 |   |
| Other income                                        |   |               | 143    |   |             |   | 3,025 |   |   |   | 164 |   |   |   | 3,092 |   |
| General and administrative expenses:                |   |               |   |   |             |   |   |   |   |   |   |   |   |   |   |   |
| Compensation and benefits                           |   |               | (1,069 | )      |             |   | (590 | ) |   |   | (1,953 | ) |   |   | (1,084 | ) |
| Other general and administrative expenses           |   |               | (687   | )      |             |   | (663 | ) |   |   | (1,530 | ) |   |   | (1,385 | ) |
|                                                |   |               |   |   |             |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                          |   |               | 4,370  |   |             |   | 4,296 |   |   |   | 7,503 |   |   |   | 9,615 |   |
| Preferred stock dividends                           |   |               | (1,003 | )      |             |   | (1,003 | ) |   |   | (2,005 | ) |   |   | (2,005 | ) |
|                                                |   |               |   |   |             |   |   |   |   |   |   |   |   |   |   |   |
| Net income to common shareholders                   |   | $                  | 3,367  |   |             | $      | 3,293 |   |   | $ | 5,498 |   |   | $ | 7,610 |   |
|                                                |   |               |   |   |             |   |   |   |   |   |   |   |   |   |   |   |
| Net income per common share:                        |   |               |   |   |             |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                               |   | $                  | 0.26   |   |             | $      | 0.27 |   |   | $ | 0.44 |   |   | $ | 0.63 |   |
| Diluted                                             |   | $                  | 0.25   |   |             | $      | 0.26 |   |   | $ | 0.44 |   |   | $ | 0.59 |   |
|                                                |   |               |   |   |             |   |   |   |   |   |   |   |   |   |   |   |

----

|                                                                                            |   | PreferredStock |    |   | CommonStock |   |    | AdditionalPaid-inCapital |   |   | Accumulated OtherCompre­hen­sive(Loss) Income |   |   | AccumulatedDeficit |    |   | Total  |   |
|-------------------------------------------------------------------------------------------------|--------|----------------|---------|--------|-------------|--------|---------|--------------------------|--------|--------|---------------------------------------------------------|--------|--------|--------------------|---------|--------|--------|--------|
| Balance at December 31, 2008                                                                    |   | $              | 41,749  |   |        | $      | 122     |                     |   | $      | 366,817                                                 |   |   | $                  | (3,949  | )      |   | $      | (264,330 | ) |   | $ | 140,409 |   |
|                                                                                            |   |           |    |   |        |   |    |                     |   |   |                                                    |   |   |               |    |   |   |   |   |   |   |   |   |   |
| Net income                                                                                      |   |           | – |   |        |   | – |                     |   |   | –                                                 |   |   |               | – |   |   |   | 7,503 |   |   |   | 7,503 |   |
| Other comprehensive income:                                                                     |   |           |    |   |        |   |    |                     |   |   |                                                    |   |   |               |    |   |   |   |   |   |   |   |   |   |
| Change in market value of securities and other investments                                      |   |           | – |   |        |   | – |                     |   |   | –                                                 |   |   |               | 7,431   |   |   |   | – |   |   |   | 7,431 |   |
| Reclassification adjustment for equity in joint venture’s other-than-temporary impairment |   |           | – |   |        |   | – |                     |   |   | –                                                 |   |   |               | 707     |   |   |   | – |   |   |   | 707 |   |
| Reclassification adjustment for net gains included in net income                                |   |           | – |   |        |   | – |                     |   |   | –                                                 |   |   |               | (221    | )      |   |   | – |   |   |   | (221 | ) |
| Total comprehensive income                                                                      |   |           |    |   |        |   |    |                     |   |   |                                                    |   |   |               |    |   |   |   |   |   |   |   | 15,420 |   |
|                                                                                            |   |           |    |   |        |   |    |                     |   |   |                                                    |   |   |               |    |   |   |   |   |   |   |   |   |   |
| Dividends on common stock                                                                       |   |           | – |   |        |   | – |                     |   |   | –                                                 |   |   |               | – |   |   |   | (5,828 | ) |   |   | (5,828 | ) |
| Dividends on preferred stock                                                                    |   |           | – |   |        |   | – |                     |   |   | –                                                 |   |   |               | – |   |   |   | (2,005 | ) |   |   | (2,005 | ) |
| Common stock issuance                                                                           |   |           | – |   |        |   | 10      |                     |   |   | 6,573                                                   |   |   |               | – |   |   |   | – |   |   |   | 6,583 |   |
| Vesting of restricted stock                                                                     |   |           | – |   |        |   | – |                     |   |   | 48                                                      |   |   |               | – |   |   |   | – |   |   |   | 48 |   |
|                                                                                            |   |           |    |   |        |   |    |                     |   |   |                                                    |   |   |               |    |   |   |   |   |   |   |   |   |   |
| Balance at June 30, 2009                                                                        |   | $              | 41,749  |   |        | $      | 132     |                     |   | $      | 373,438                                                 |   |   | $                  | 3,968   |   |   | $      | (264,660 | ) |   | $ | 154,627 |   |

|                                                             |   | 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,         |     |
|                                                                          |   | 2009             |     |   | 2008 |   |
| Operating activities:                                                         |   |             |     |   |   |   |
| Net income                                                                    |   | $                | 7,503    |   |   | $ | 9,615 |   |
| Adjustments to reconcile net income to cash provided by operating activities: |   |             |     |   |   |   |   |   |
| Equity in loss of joint venture                                               |   |             | 144      |   |   |   | 1,691 |   |
| Provision for loan losses                                                     |   |             | 318      |   |   |   | 347 |   |
| Gain on sale of investments, net                                              |   |             | (221     | ) |   |   | (2,050 | ) |
| Fair value adjustments, net                                                   |   |             | (138     | ) |   |   | (4,058 | ) |
| Amortization and depreciation                                                 |   |             | 1,093    |   |   |   | (1,729 | ) |
| Stock based compensation expense (benefit)                                    |   |             | 351      |   |   |   | (152 | ) |
| Net change in other assets and other liabilities                              |   |             | (2,813   | ) |   |   | (1,040 | ) |
| Net cash provided by operating activities                                     |   |             | 6,237    |   |   |   | 2,624 |   |
|                                                                          |   |             |     |   |   |   |   |   |
| Investing activities:                                                         |   |             |     |   |   |   |   |   |
| Principal payments received on securitized mortgage loans                     |   |             | 10,566   |   |   |   | 19,175 |   |
| Purchases of Agency MBS                                                       |   |             | (237,475 | ) |   |   | (142,911 | ) |
| Payments received on Agency MBS and other investments                         |   |             | 49,536   |   |   |   | 7,714 |   |
| Proceeds from sales of other investments                                      |   |             | 3,694    |   |   |   | 18,128 |   |
| Purchases of other investments                                                |   |             | –  |   |   |   | (9,987 | ) |
| Proceeds from sales of Agency MBS                                             |   |             | –  |   |   |   | 5,809 |   |
| Other                                                                         |   |             | (1,665   | ) |   |   | 86 |   |
| Net cash used by investing activities                                         |   |             | (175,344 | ) |   |   | (101,986 | ) |
|                                                                          |   |             |     |   |   |   |   |   |
| Financing activities:                                                         |   |             |     |   |   |   |   |   |
| Net borrowings under repurchase agreements                                    |   |             | 198,314  |   |   |   | 124,791 |   |
| Principal payments on securitization financing                                |   |             | (7,880   | ) |   |   | (13,233 | ) |
| Decrease in restricted cash                                                   |   |             | 2,974    |   |   |   | – |   |
| Redemption of securitization financing                                        |   |             | (15,492  | ) |   |   | – |   |
| Proceeds from sale of common stock                                            |   |             | 6,658    |   |   |   | – |   |
| Dividends paid                                                                |   |             | (7,602   | ) |   |   | (5,047 | ) |
| Net cash provided by financing activities                                     |   |             | 176,972  |   |   |   | 106,511 |   |
|                                                                          |   |             |     |   |   |   |   |   |
| Net increase in cash and cash equivalents                                     |   |             | 7,865    |   |   |   | 7,149 |   |
| Cash and cash equivalents at beginning of period                              |   |             | 24,335   |   |   |   | 35,352 |   |
| Cash and cash equivalents at end of period                                    |   | $                | 32,200   |   |   | $ | 42,501 |   |
|                                                                          |   |             |     |   |   |   |   |   |
| Supplemental disclosure of non-cash investing activities:                     |   |             |     |   |   |   |   |   |
| Increase in Agency MBS pending settlement                                     |   | $                | 23,514   |   |   | $ | – |   |
|                                                                          |   |             |     |   |   |   |   |   |
| Supplemental disclosure of non-cash financing activities:                     |   |             |     |   |   |   |   |   |
| Increase in payable for securities pending settlement                         |   | $                | 23,595   |   |   | $ | – |   |
|                                                                          |   |             |     |   |   |   |   |   |
| See notes to unaudited condensed consolidated financial statements.           |   |             |     |   |   |   |   |   |

----

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

----

----

|   | · | Level 1 — Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.  The types of assets and liabilities carried at Level 1 fair value generally are equity securities listed in active markets. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

----

----

----

----

|                                                                                                |   | Three Months Ended June 30, |    |
|-----------------------------------------------------------------------------------------------------|--------|-----------------------------|---------|
|                                                                                                |   | 2009                        |    |   | 2008 |   |
|                                                                                                |   | Income                      |    |   | Weighted-Average Common Shares |   |   | Income |   |   | Weighted-AverageCommonShares |   |
| Net income                                                                                          |   | $                           | 4,370   |   |   |   |   |   | $ | 4,296 |   |   |   |   |
| Preferred stock dividends                                                                           |   |                        | (1,003  | ) |   |   |   |   |   | (1,003 | ) |   |   |   |
| Net income to common shareholders                                                                   |   |                        | 3,367   |   |   |   | 12,987,784 |   |   |   | 3,293 |   |   |   | 12,169,762 |   |
| Effect of dilutive items                                                                            |   |                        | 1,003   |   |   |   | 4,222,001 |   |   |   | 1,003 |   |   |   | 4,228,905 |   |
| Diluted                                                                                             |   | $                           | 4,370   |   |   |   | 17,209,785 |   |   | $ | 4,296 |   |   |   | 16,398,667 |   |
|                                                                                                |   |                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income per common share:                                                                        |   |
| Basic                                                                                               |   |                        |    |   |   | $ | 0.26 |   |   |   |   |   |   | $ | 0.27 |   |
| Diluted                                                                                             |   |                        |    |   |   | $ | 0.25 |   |   |   |   |   |   | $ | 0.26 |   |
|                                                                                                |   |                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reconciliation of shares included in calculation of income per common share due to dilutive effect: |   |                        |    |
| Net effect of dilutive:                                                                             |   |                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Convertible preferred stock                                                                         |   | $                           | 1,003   |   |   |   | 4,221,539 |   |   | $ | 1,003 |   |   |   | 4,221,539 |   |
| Stock options                                                                                       |   |                        | – |   |   |   | 462 |   |   |   | – |   |   |   | 7,366 |   |
|                                                                                                |   | $                           | 1,003   |   |   |   | 4,222,001 |   |   | $ | 1,003 |   |   |   | 4,228,905 |   |

|                                                                                                |   | Six Months Ended June 30, |    |
|-----------------------------------------------------------------------------------------------------|--------|---------------------------|---------|
|                                                                                                |   | 2009                      |    |   | 2008 |   |
|                                                                                                |   | Income                    |    |   | Weighted-Average Common Shares |   |   | Income |   |   | Weighted-AverageCommonShares |   |
| Net income                                                                                          |   | $                         | 7,503   |   |   |   |   |   | $ | 9,615 |   |   |   |   |
| Preferred stock dividends                                                                           |   |                      | (2,005  | ) |   |   |   |   |   | (2,005 | ) |   |   |   |
| Net income to common shareholders                                                                   |   |                      | 5,498   |   |   |   | 12,581,033 |   |   |   | 7,610 |   |   |   | 12,163,320 |   |
| Effect of dilutive items                                                                            |   |                      | – |   |   |   | – |   |   |   | 2,005 |   |   |   | 4,229,464 |   |
| Diluted                                                                                             |   | $                         | 5,498   |   |   |   | 12,581,033 |   |   | $ | 9,615 |   |   |   | 16,392,784 |   |
|                                                                                                |   |                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income common per share:                                                                        |   |
| Basic                                                                                               |   |                      |    |   |   | $ | 0.44 |   |   |   |   |   |   | $ | 0.63 |   |
| Diluted                                                                                             |   |                      |    |   |   | $ | 0.44 |   |   |   |   |   |   | $ | 0.59 |   |
|                                                                                                |   |                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reconciliation of shares included in calculation of income per common share due to dilutive effect: |   |                      |    |
| Net effect of dilutive:                                                                             |   |                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Convertible preferred stock                                                                         |   | $                         | – |   |   |   | – |   |   | $ | 2,005 |   |   |   | 4,221,539 |   |
| Stock options                                                                                       |   |                      | – |   |   |   | – |   |   |   | – |   |   |   | 7,925 |   |
|                                                                                                |   | $                         | – |   |   |   | – |   |   | $ | 2,005 |   |   |   | 4,229,464 |   |

----

|                                      |   | Three Months Ended |    |   | Six Months Ended |   |
|-------------------------------------------|--------|--------------------|---------|--------|------------------|--------|
|                                      |   | June 30,           |    |   | June 30,         |   |
|                                      |   | 2009               |    |   | 2008             |   |   | 2009 |   |   | 2008 |   |
| Shares issuable under stock option awards |   |               | 70,000  |   |             |   | 50,000 |   |   |   | 95,000 |   |   |   | 50,000 |   |
| Convertible preferred stock               |   |               | – |   |             |   | – |   |   |   | 4,221,539 |   |   |   | – |   |

|                             |   | June 30, 2009 |    |   | December 31, 2008 |   |
|----------------------------------|--------|---------------|---------|--------|-------------------|--------|
| Principal/par value              |   | $             | 512,882 |   |              | $      | 307,548 |   |
| Purchase premiums                |   |          | 10,524  |   |              |   | 3,585 |   |
| Purchase discounts               |   |          | (50     | )      |              |   | (59 | ) |
| Amortized cost                   |   |          | 523,356 |   |              |   | 311,074 |   |
| Gross unrealized gains           |   |          | 8,452   |   |              |   | 1,355 |   |
| Gross unrealized losses          |   |          | (262    | )      |              |   | (853 | ) |
| Fair value                       |   | $             | 531,546 |   |              | $      | 311,576 |   |
|                             |   |          |    |   |              |   |   |   |
| Weighted average coupon          |   |          | 5.04    | %      |              |   | 5.06 | % |
| Weighted average months to reset |   |          | 25      |   |              |   | 21 |   |

----

|                                                        |   | June 30, 2009 |    |   | December 31, 2008 |   |
|-------------------------------------------------------------|--------|---------------|---------|--------|-------------------|--------|
| Securitized mortgage loans:                                 |   |          |    |   |              |   |
| Commercial mortgage loans                                   |   | $             | 157,320 |   |              | $      | 164,032 |   |
| Single-family mortgage loans                                |   |          | 66,131  |   |              |   | 70,607 |   |
|                                                        |   |          | 223,451 |   |              |   | 234,639 |   |
| Funds held by trustees, including funds held for defeasance |   |          | 12,015  |   |              |   | 11,267 |   |
| Accrued interest receivable                                 |   |          | 1,465   |   |              |   | 1,538 |   |
| Unamortized discounts and premiums, net                     |   |          | 378     |   |              |   | 90 |   |
| Other                                                       |   |          | (174    | )      |              |   | – |   |
| Loans, at amortized cost                                    |   |          | 237,135 |   |              |   | 247,534 |   |
| Allowance for loan losses                                   |   |          | (3,921  | )      |              |   | (3,707 | ) |
|                                                        |   | $             | 233,214 |   |              | $      | 243,827 |   |

|                             |   | Three Months EndedJune 30, |    |   | Six Months EndedJune 30, |   |
|----------------------------------|--------|----------------------------|---------|--------|--------------------------|--------|
|                             |   | 2009                       |    |   | 2008                     |   |   | 2009 |   |   | 2008 |   |
| Allowance at beginning of period |   | $                          | 3,782   |   |                     | $      | 2,745 |   |   | $ | 3,707 |   |   | $ | 2,721 |   |
| Provision for loan losses        |   |                       | 234     |   |                     |   | 321 |   |   |   | 318 |   |   |   | 347 |   |
| Charge-offs, net of recoveries   |   |                       | – |   |                     |   | – |   |   |   | (9 | ) |   |   | (2 | ) |
| Allowance at end of period       |   | $                          | 4,016   |   |                     | $      | 3,066 |   |   | $ | 4,016 |   |   | $ | 3,066 |   |

|                                     |   | June 30, 2009 |   |   | December 31, 2008 |   |
|------------------------------------------|--------|---------------|--------|--------|-------------------|--------|
| Securitized commercial mortgage loans    |   | $             | 3,660  |   |              | $      | 3,527 |   |
| Securitized single-family mortgage loans |   |          | 261    |   |              |   | 180 |   |
|                                     |   |          | 3,921  |   |              |   | 3,707 |   |
| Other mortgage loans                     |   |          | 95     |   |              |   | – |   |
|                                     |   | $             | 4,016  |   |              | $      | 3,707 |   |

----

|              |   | Investment in Impaired Loans |   |   | Allowance for Loan Losses |   |   | Investment in Excess of Allowance |   |
|-------------------|--------|------------------------------|--------|--------|---------------------------|--------|--------|-----------------------------------|--------|
| December 31, 2008 |   | $                            | 24,022 |   |                      | $      | 3,527  |                              |   | $ | 20,495 |   |
| June 30, 2009     |   | $                            | 23,658 |   |                      | $      | 3,655  |                              |   | $ | 20,003 |   |

| Condensed Statements of Operations |   |
|------------------------------------|--------|
|                               |   | Three Months EndedJune 30, |   |   | Six Months EndedJune 30, |   |
|                               |   | 2009 |   |   | 2008 |   |   | 2009 |   |   | 2008 |   |
| Interest income                    |   | $ | 613 |   |   | $ | 1,135 |   |   | $ | 1,248 |   |   | $ | 2,489 |   |
| Fair value adjustment              |   |   | 584 |   |   |   | 418 |   |   |   | 21 |   |   |   | (4,261 | ) |
| Other-than-temporary impairment    |   |   | – |   |   |   | (240 | ) |   |   | (1,417 | ) |   |   | (1,204 | ) |
| Other income (expense)             |   |   | 27 |   |   |   | (10 | ) |   |   | (20 | ) |   |   | (52 | ) |
| Net income (loss)                  |   | $ | 1,224 |   |   | $ | 1,303 |   |   | $ | (168 | ) |   | $ | (3,030 | ) |

| Condensed Balance Sheets     |   |          |   |   |              |   |
|------------------------------|--------|---------------|--------|--------|-------------------|--------|
|                         |   | June 30, 2009 |   |   | December 31, 2008 |   |
| Total assets                 |   | $             | 12,272 |   |              | $      | 11,240 |   |
| Total liabilities            |   | $             | 24     |   |              | $      | 21 |   |
| Total members’ capital |   | $             | 12,248 |   |              | $      | 11,219 |   |

----

|                                           |   | June 30, 2009 |    |   | December 31, 2008      |   |
|------------------------------------------------|--------|---------------|---------|--------|------------------------|--------|
|                                           |   | CarryingValue |    |   | Weighted Average Yield |   |   | Carrying Value |   |   | Weighted Average Yield |   |
| Non-Agency MBS                                 |   | $             | 6,697   |   |                   |   | 7.98 | % |   | $ | 6,959 |   |   |   | 8.02 | % |
| Equity securities of publicly traded companies |   |          | – |   |                   |   |   |   |   |   | 3,441 |   |   |   |   |   |
|                                           |   |          | 6,697   |   |                   |   |   |   |   |   | 10,400 |   |   |   |   |   |
| Gross unrealized gains                         |   |          | 372     |   |                   |   |   |   |   |   | 802 |   |   |   |   |   |
| Gross unrealized losses                        |   |          | (1,256  | )      |                   |   |   |   |   |   | (1,335 | ) |   |   |   |   |
|                                           |   |          | 5,813   |   |                   |   |   |   |   |   | 9,867 |   |   |   |   |   |
| Other mortgage loans, net                      |   |          | 2,328   |   |                   |   |   |   |   |   | 2,657 |   |   |   |   |   |
| Other                                          |   |          | 157     |   |                   |   |   |   |   |   | 211 |   |   |   |   |   |
|                                           |   | $             | 8,298   |   |                   |   |   |   |   | $ | 12,735 |   |   |   |   |   |

|                                        |   | June 30, 2009 |    |
|---------------------------------------------|--------|---------------|---------|
| Collateral Type                             |   | Balance       |    |   | Weighted Average Rate |   |   | Fair Value of Collateral |   |
| Agency MBS                                  |   | $             | 443,051 |   |   |   | 0.55 | % |   | $ | 476,526 |   |
| Securitization financing bonds (See Note 9) |   |          | 29,481  |   |   |   | 2.13 | % |   |   | 42,212 |   |
|                                        |   | $             | 472,532 |   |   |   | 0.64 | % |   | $ | 518,738 |   |

|                           |   | December 31, 2008 |    |
|--------------------------------|--------|-------------------|---------|
| Collateral Type                |   | Balance           |    |   | Weighted Average Rate |   |   | Fair Value of Collateral |   |
| Agency MBS                     |   | $                 | 274,217 |   |   |   | 2.70 | % |   | $ | 300,277 |   |
| Securitization financing bonds |   |              | – |   |   |   | – |   |   |   | – |   |
|                           |   | $                 | 274,217 |   |   |   | 2.70 | % |   | $ | 300,277 |   |

----

| Original Maturity |   | June 30, 2009 |    |   | December 31, 2008 |   |
|-------------------|--------|---------------|---------|--------|-------------------|--------|
| 30 days or less   |   | $             | 459,357 |   |              | $      | 38,617 |   |
| 31 to 60 days     |   |          | 13,175  |   |              |   | 187,960 |   |
| 61 to 90 days     |   |          | – |   |              |   | 47,640 |   |
|              |   | $             | 472,532 |   |              | $      | 274,217 |   |

----

|                                            |   | June 30, 2009     |      |   | December 31, 2008       |   |
|-------------------------------------------------|--------|-------------------|-----------|--------|-------------------------|--------|
|                                            |   | Bonds Outstanding |      |   | Range of Interest Rates |   |   | Bonds Outstanding |   |   | Range of Interest Rates |   |
| Fixed-rate classes                              |   | $                 | 128,239   |   |                    |   | 6.7% - 8.8 | % |   | $ | 149,598 |   |   |   | 6.6% - 8.8 | % |
| Variable-rate classes                           |   |              | 26,172    |   |                    |   | 0.6 | % |   |   | 28,186 |   |   |   | 1.7 | % |
| Accrued interest payable                        |   |              | 883       |   |                    |   |   |   |   |   | 1,008 |   |   |   |   |   |
| Unamortized net bond premium and deferred costs |   |              | (826      | )      |                    |   |   |   |   |   | (627 | ) |   |   |   |   |
|                                            |   | $                 | 154,468   |   |                    |   |   |   |   | $ | 178,165 |   |   |   |   |   |
|                                            |   |              |      |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Range of stated maturities                      |   |              | 2024-2027 |   |                    |   |   |   |   |   | 2024-2027 |   |   |   |   |   |
| Estimated weighted average life                 |   | 2.4 years         |      |   |                    |   |   |   | 2.6 years |   |   |   |   |   |
| Number of series                                |   |              | 3         |   |                    |   |   |   |   |   | 3 |   |   |   |   |   |

|                   |   | June 30, 2009 |   |   | December 31, 2008 |   |
|------------------------|--------|---------------|--------|--------|-------------------|--------|
| Discount rate          |   |          | 37.8   | %      |              |   | 36.5 | % |
| Annual loss rate       |   |          | 2.0    | %      |              |   | 0.8 | % |
| Prepayment speed (CPR) |   |          | 0.0    | %(1)   |              |   | 0.0 | % (1) |

| (1) | Although no prepayments are modeled, the estimated  cash flows assume the loans underlying the obligation prepay on the expiration of their lockout period, which is before their scheduled maturity. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                    |   |       |    |   | Fair Value Measurements |   |
|-----------------------------------------|--------|------------|---------|--------|-------------------------|--------|
|                                    |   | Fair Value |    |   | Level 1                 |   |   | Level 2 |   |   | Level 3 |   |
| Assets:                                 |   |       |    |   |                    |   |   |   |   |   |   |   |
| Agency MBS                              |   | $          | 531,546 |   |                    | $      | – |   |   | $ | 531,546 |   |   | $ | – |   |
| Non-Agency MBS                          |   |       | 5,813   |   |                    |   | – |   |   |   | – |   |   |   | 5,813 |   |
| Other                                   |   |       | 158     |   |                    |   | – |   |   |   | – |   |   |   | 158 |   |
| Total assets carried at fair value      |   | $          | 537,517 |   |                    | $      | – |   |   | $ | 531,546 |   |   | $ | 5,971 |   |
|                                    |   |       |    |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities:                            |   |       |    |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Obligation under payment agreement      |   | $          | 8,555   |   |                    | $      | – |   |   | $ | – |   |   | $ | 8,555 |   |
| Total liabilities carried at fair value |   | $          | 8,555   |   |                    | $      | – |   |   | $ | – |   |   | $ | 8,555 |   |

----

| Level 3 Fair Values                                    |   |
|--------------------------------------------------------|--------|
|                                                   |   | Non-Agency MBS |   |   | Other |   |   | Total assets |   |   | Obligation under payment agreement |   |
| Balance at March 31, 2009                              |   | $ | 6,070 |   |   | $ | 168 |   |   | $ | 6,238 |   |   | $ | (7,971 | ) |
| Total realized and unrealized gains (losses)           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Included in earnings                                   |   |   | – |   |   |   | – |   |   |   | – |   |   |   | (584 | ) |
| Included in other comprehensive income (loss)          |   |   | (124 | ) |   |   | (7 | ) |   |   | (131 | ) |   |   | – |   |
| Purchases, sales, issuances and other settlements, net |   |   | (133 | ) |   |   | (3 | ) |   |   | (136 | ) |   |   | – |   |
| Transfers in and/or out of Level 3                     |   |   | – |   |   |   | – |   |   |   | – |   |   |   | – |   |
| Balance at June 30, 2009                               |   | $ | 5,813 |   |   | $ | 158 |   |   | $ | 5,971 |   |   | $ | (8,555 | ) |

| Level 3 Fair Values                                    |   |
|--------------------------------------------------------|--------|
|                                                   |   | Non-Agency MBS |   |   | Other |   |   | Total assets |   |   | Obligation under payment agreement |   |
| Balance at December 31, 2008                           |   | $ | 6,259 |   |   | $ | 211 |   |   | $ | 6,470 |   |   | $ | (8,534 | ) |
| Total realized and unrealized gains (losses)           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Included in earnings                                   |   |   | – |   |   |   | 1 |   |   |   | 1 |   |   |   | (21 | ) |
| Included in other comprehensive income (loss)          |   |   | (184 | ) |   |   | (17 | ) |   |   | (201 | ) |   |   | – |   |
| Purchases, sales, issuances and other settlements, net |   |   | (262 | ) |   |   | (37 | ) |   |   | (299 | ) |   |   | – |   |
| Transfers in and/or out of Level 3                     |   |   | – |   |   |   | – |   |   |   | – |   |   |   | – |   |
| Balance at June 30, 2009                               |   | $ | 5,813 |   |   | $ | 158 |   |   | $ | 5,971 |   |   | $ | (8,555 | ) |

|                                      |   | June 30, 2009 |    |   | December 31, 2008 |   |
|-------------------------------------------|--------|---------------|---------|--------|-------------------|--------|
|                                      |   | RecordedBasis |    |   | FairValue         |   |   | RecordedBasis |   |   | FairValue |   |
| Assets:                                   |   |          |    |   |              |   |   |   |   |   |   |   |
| Agency MBS                                |   | $             | 531,546 |   |              | $      | 531,546 |   |   | $ | 311,576 |   |   | $ | 311,576 |   |
| Securitized mortgage loans, net           |   |          | 233,214 |   |              |   | 193,946 |   |   |   | 243,827 |   |   |   | 201,252 |   |
| Investment in joint venture               |   |          | 6,109   |   |              |   | 6,109 |   |   |   | 5,655 |   |   |   | 5,595 |   |
| Other investments                         |   |          | 8,298   |   |              |   | 8,054 |   |   |   | 12,735 |   |   |   | 12,358 |   |
|                                      |   |          |    |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities:                              |   |          |    |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Repurchase agreements                     |   |          | 472,532 |   |              |   | 472,532 |   |   |   | 274,217 |   |   |   | 274,217 |   |
| Securitization financing                  |   |          | 154,468 |   |              |   | 132,540 |   |   |   | 178,165 |   |   |   | 153,370 |   |
| Payable for securities pending settlement |   |          | 23,595  |   |              |   | 23,595 |   |   |   | – |   |   |   | – |   |
| Obligation under payment agreement        |   |          | 8,555   |   |              |   | 8,555 |   |   |   | 8,534 |   |   |   | 8,534 |   |

----

| Declaration     | Record         | Payment        |   | Dividend per Share |    |
|-----------------|----------------|----------------|--------|--------------------|---------|
| Date            | Date           | Date           |   | Common             |    |   | Preferred |   |
| Common Stock    |           |           |   |               |    |   |   |   |
| March 20, 2009  | March 31, 2009 | April 30, 2009 |   |               | 0.23    |   |   |   | – |   |
| June 16, 2009   | June 30, 2009  | July 31, 2009  |   |               | 0.23    |   |   |   | – |   |
|            |           |           |   |               |    |   |   |   |   |   |
| Preferred Stock |           |           |   |               |    |   |   |   |   |   |
| March 20, 2009  | March 31, 2009 | April 30, 2009 |   |               | – |   |   |   | 0.2375 |   |
| June 16, 2009   | June 30, 2009  | July 31, 2009  |   |               | – |   |   |   | 0.2375 |   |

|                                    |   | Shares    |      |
|-----------------------------------------|--------|-----------|-----------|
|                                    |   | Preferred |      |   |   |   |
|                                    |   | Series D  |      |   | Common |   |
| December 31, 2008                       |   |      | 4,221,539 |   |   |   | 12,169,762 |   |
| Issuance of shares under the CEOP       |   |      | -         |   |   |   | 990,000 |   |
| Restricted shares granted (See Note 14) |   |      | -         |   |   |   | 10,000 |   |
| June 30, 2009                           |   |      | 4,221,539 |   |   |   | 13,169,762 |   |

----

----

|                                    |   | Three Months Ended |    |   | Six Months Ended                |   |
|-----------------------------------------|--------|--------------------|---------|--------|---------------------------------|--------|
|                                    |   | June 30, 2009      |    |   | June 30, 2009                   |   |
|                                    |   | Number of Shares   |    |   | Weighted-Average Exercise Price |   |   | Number of Shares |   |   | Weighted-AverageExercisePrice |   |
| SARs outstanding at beginning of period |   |               | 278,146 |   |                            | $      | 7.27 |   |   |   | 278,146 |   |   | $ | 7.27 |   |
| SARs granted                            |   |               | – |   |                            |   | – |   |   |   | – |   |   |   | – |   |
| SARs forfeited or redeemed              |   |               | – |   |                            |   | – |   |   |   | – |   |   |   | – |   |
| SARs exercised                          |   |               | – |   |                            |   | – |   |   |   | – |   |   |   | – |   |
| SARs outstanding at end of period       |   |               | 278,146 |   |                            | $      | 7.27 |   |   |   | 278,146 |   |   | $ | 7.27 |   |
| SARs vested and exercisable             |   |               | 219,396 |   |                            | $      | 7.37 |   |   |   | 219,396 |   |   | $ | 7.37 |   |

|                                       |   | Three Months Ended |    |   | Six Months Ended                |   |
|--------------------------------------------|--------|--------------------|---------|--------|---------------------------------|--------|
|                                       |   | June 30, 2009      |    |   | June 30, 2009                   |   |
|                                       |   | Number of Shares   |    |   | Weighted-Average Exercise Price |   |   | Number of Shares |   |   | Weighted-AverageExercisePrice |   |
| Options outstanding at beginning of period |   |               | 110,000 |   |                            | $      | 8.55 |   |   |   | 110,000 |   |   | $ | 8.55 |   |
| Options granted                            |   |               | – |   |                            |   | – |   |   |   | – |   |   |   | – |   |
| Options forfeited or redeemed              |   |               | (15,000 | )      |                            |   | 8.30 |   |   |   | (15,000 | )  |   |   | 8.30 |   |
| Options exercised                          |   |               | – |   |                            |   | – |   |   |   | – |   |   |   | – |   |
| Options outstanding at end of period       |   |               | 95,000  |   |                            | $      | 8.59 |   |   |   | 95,000 |   |   | $ | 8.59 |   |
| Options vested and exercisable             |   |               | 95,000  |   |                            | $      | 8.59 |   |   |   | 95,000 |   |   | $ | 8.59 |   |

|                                          |   | Number of Shares   |    |
|-----------------------------------------------|--------|--------------------|---------|
|                                          |   | Three Months Ended |    |   | Six Months Ended |   |
|                                          |   | June 30, 2009      |    |   | June 30, 2009 |   |
| Restricted stock at beginning of period       |   |               | 22,500  |   |   |   | 30,000 |   |
| Restricted stock granted                      |   |               | 10,000  |   |   |   | 10,000 |   |
| Restricted stock forfeited or redeemed        |   |               | – |   |   |   | – |   |
| Restricted stock vested                       |   |               | – |   |   |   | (7,500 | ) |
| Restricted stock outstanding at end of period |   |               | 32,500  |   |   |   | 32,500 |   |

----

|                        | SARs Fair Value |
|-----------------------------|-----------------|
|                        | June 30, 2009   |
| Expected volatility         | 24.17% - 31.47% |
| Weighted-average volatility | 29.17%          |
| Expected dividend yield     | 10.92% - 11.17% |
| Expected term (in months)   | 38              |
| Risk-free rate              | 1.84%           |

Item 2.                      Management’s Discussion and Analysis of Financial Condition and Results of Operations 

----

----

| (amounts in thousands)                                                        |   | June 30, 2009 |         |   | December 31, 2008 |   |
|-------------------------------------------------------------------------------|--------|---------------|--------------|--------|-------------------|--------|
|                                                                          |   |          |         |   |              |   |
| Agency MBS, at fair value                                                     |   | $             | 531,546      |   |              | $      | 311,576 |   |
| Securitized mortgage loans, net                                               |   |          | 233,214      |   |              |   | 243,827 |   |
| Investment in joint venture                                                   |   |          | 6,109        |   |              |   | 5,655 |   |
| Other investments                                                             |   |          | 8,298        |   |              |   | 12,735 |   |
|                                                                          |   |          |         |   |              |   |   |   |
| Repurchase agreements                                                         |   |          | 472,532      |   |              |   | 274,217 |   |
| Securitization financing                                                      |   |          | 154,468      |   |              |   | 178,165 |   |
| Obligation under payment agreement                                            |   |          | 8,555        |   |              |   | 8,534 |   |
| Payable for securities pending settlement       |   |          | 23.595  |   |              |   | – |   |
| Shareholders’ equity                                                    |   |          | 154,627      |   |              |   | 140,409 |   |

| (amounts in thousands) |   | June 30, 2009 |    |   | December 31, 2008 |   |
|------------------------|--------|---------------|---------|--------|-------------------|--------|
| Agency MBS:            |   |          |    |   |              |   |
| Hybrid Agency ARMs     |   | $             | 362,710 |   |              | $      | 217,800 |   |
| Agency ARMs            |   |          | 166,178 |   |              |   | 92,626 |   |
|                   |   |          | 528,888 |   |              |   | 310,426 |   |
| Fixed-rate             |   |          | 147     |   |              |   | 194 |   |
|                   |   |          | 529,035 |   |              |   | 310,620 |   |
| Principal receivable   |   |          | 2,511   |   |              |   | 956 |   |
|                   |   | $             | 531,546 |   |              | $      | 311,576 |   |

----

| (amounts in thousands)           |   | June 30, 2009 |    |   | December 31, 2008 |   |
|----------------------------------|--------|---------------|---------|--------|-------------------|--------|
| Securitized mortgage loans, net: |   |          |    |   |              |   |
| Commercial                       |   | $             | 165,883 |   |              | $      | 171,963 |   |
| Single-family                    |   |          | 67,331  |   |              |   | 71,864 |   |
|                             |   | $             | 233,214 |   |              | $      | 243,827 |   |

----

| (amounts in thousands)                         |   | June 30, 2009 |    |   | December 31, 2008 |   |
|------------------------------------------------|--------|---------------|---------|--------|-------------------|--------|
| Non-Agency MBS                                 |   | $             | 6,697   |   |              | $      | 6,959 |   |
| Equity securities of publicly traded companies |   |          | – |   |              |   | 3,441 |   |
|                                           |   |          | 6,697   |   |              |   | 10,400 |   |
| Gross unrealized gains                         |   |          | 372     |   |              |   | 802 |   |
| Gross unrealized losses                        |   |          | (1,256  | )      |              |   | (1,335 | ) |
|                                           |   |          | 5,813   |   |              |   | 9,867 |   |
| Other loans, net                               |   |          | 2,328   |   |              |   | 2,657 |   |
| Other                                          |   |          | 157     |   |              |   | 211 |   |
|                                           |   | $             | 8,298   |   |              | $      | 12,735 |   |

----

| (amounts in thousands)                                 |   | June 30, 2009 |    |   | December 31, 2008 |   |
|--------------------------------------------------------|--------|---------------|---------|--------|-------------------|--------|
| Securitization financing:                              |   |          |    |   |              |   |
| Fixed-rate, secured by commercial mortgage loans       |   | $             | 128,841 |   |              | $      | 150,588 |   |
| Variable-rate, secured by single-family mortgage loans |   |          | 25,627  |   |              |   | 27,577 |   |
|                                                   |   | $             | 154,468 |   |              | $      | 178,165 |   |

----

|                                            |   | June 30, 2009(amounts in thousands) |    |
|-------------------------------------------------|--------|-------------------------------------|---------|
| Investment                                      |   | Investment basis                    |    |   | Financing(1) |   |   | Net invested capital |   |   | Estimated fair value of net invested capital |   |
| Agency MBS  (2)                       |   | $                                   | 531,546 |   |   | $ | 466,646 |   |   | $ | 64,900 |   |   | $ | 64,900 |   |
|                                            |   |                                |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securitized mortgage loans: (3)            |   |                                |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Single-family mortgage loans – 2002 Trust |   |                                | 67,331  |   |   |   | 44,136 |   |   |   | 23,195 |   |   |   | 15,364 |   |
| Commercial mortgage loans – 1993 Trust    |   |                                | 18,863  |   |   |   | 11,270 |   |   |   | 7,593 |   |   |   | 8,006 |   |
| Commercial mortgage loans – 1997 Trust    |   |                                | 147,020 |   |   |   | 137,099 |   |   |   | 9,921 |   |   |   | – |   |
|                                            |   |                                | 233,214 |   |   |   | 192,505 |   |   |   | 40,709 |   |   |   | 23,370 |   |
|                                            |   |                                |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment in joint venture (4)                 |   |                                | 6,109   |   |   |   | – |   |   |   | 6,109 |   |   |   | 6,109 |   |
|                                            |   |                                |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other investments:  (5)               |   |                                |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-Agency MBS                                  |   |                                | 5,813   |   |   |   | – |   |   |   | 5,813 |   |   |   | 5,813 |   |
| Other loans and investments                     |   |                                | 2,485   |   |   |   | – |   |   |   | 2,485 |   |   |   | 2,241 |   |
|                                            |   |                                | 8,298   |   |   |   | – |   |   |   | 8,298 |   |   |   | 8,054 |   |
|                                            |   |                                |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                           |   | $                                   | 779,167 |   |   | $ | 659,150 |   |   | $ | 120,017 |   |   | $ | 102,433 |   |

|   | (1) | Financing includes repurchase agreements, payable for securities pending settlement, and securitization financing issued to third parties.  Financing for the 1997 Trust also includes the obligation under payment agreement, which at June 30, 2009 had a balance of $8,555. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

|   | (4) | Fair value for investment in joint venture represents our share of the fair value of the joint venture’s assets valued using methodologies and assumptions consistent with note 3 above. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (5) | Fair values are calculated as the net present value of expected future cash flows. |
|--------|-----|------------------------------------------------------------------------------------|

----

|                                            | Fair Value Assumptions               |                                  |
|-------------------------------------------------|--------------------------------------|---------------------------------------|
| Loan type                                       | Approximate year of loan origination | Weighted-average prepayment speeds(1) | Projected annual losses (2) | Weighted-averagediscount rate(3) | YTD 2009 Cash Flows (4)(amounts in thousands) |
|                                            |                                 |                                  |   |   |   |
| Single-family mortgage loans – 2002 Trust | 1994                                 | 15% CPR                               | 0.2% | 12% | $       4,316 |
|                                            |                                 |                                  |   |   |   |
| Commercial mortgage loans – 1993 Trust    | 1993                                 | 0% CPR                                | 0.8% | 10% | $       2,816 |
|                                            |                                 |                                  |   |   |   |
| Commercial mortgage loans – 1997 Trust    | 1997                                 | (5)                                   | 2.0% | 38% | $             – |

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

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

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

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

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

| (amounts in thousands)                |   | June 30, 2009 |    |
|---------------------------------------|--------|---------------|---------|
| Investments:                          |   |          |    |
| Agency MBS                            |   | $             | 64,900  |   |
| AAA rated non-Agency MBS              |   |          | 19,293  |   |
| AA and A rated non-Agency MBS         |   |          | 319     |   |
| Unrated and non-investment grade      |   |          | 2,863   |   |
| Securitization over collateralization |   |          | 26,533  |   |
| Investment in joint venture           |   |          | 6,109   |   |
|                                  |   | $             | 120,017 |   |

| (amounts in thousands)                    |   | Book Value |    |
|-------------------------------------------|--------|------------|---------|
| Total investment assets (per table above) |   | $          | 120,017 |   |
| Cash and cash equivalents                 |   |       | 32,200  |   |
| Other assets and liabilities, net         |   |       | 2,410   |   |
|                                      |   | $          | 154,627 |   |

----

|                                                |   | Three Months EndedJune 30, |   |   | Six Months EndedJune 30, |   |
|-----------------------------------------------------|--------|----------------------------|--------|--------|--------------------------|--------|
| (amounts in thousands except per share information) |   | 2009                       |   |   | 2008                     |   |   | 2009 |   |   | 2008 |   |
| Interest income                                     |   | $                          | 9,819  |   |                     | $      | 6,674 |   |   | $ | 19,296 |   |   | $ | 13,157 |   |
| Interest expense                                    |   |                       | 3,938  |   |                     |   | 4,173 |   |   |   | 8,371 |   |   |   | 8,235 |   |
| Provision for loan losses                           |   |                       | (139   | )      |                     |   | (321 | ) |   |   | (318 | ) |   |   | (347 | ) |
| Net interest income after provision for loan losses |   |                       | 5,742  |   |                     |   | 2,180 |   |   |   | 10,607 |   |   |   | 4,575 |   |
| Equity in income (loss) of joint venture            |   |                       | 610    |   |                     |   | 560 |   |   |   | (144 | ) |   |   | (1,691 | ) |
| Gain (loss) on sale of investments, net             |   |                       | 138    |   |                     |   | (43 | ) |   |   | 221 |   |   |   | 2,050 |   |
| Fair value adjustments, net                         |   |                       | (507   | )      |                     |   | (173 | ) |   |   | 138 |   |   |   | 4,058 |   |
| Other income                                        |   |                       | 143    |   |                     |   | 3,025 |   |   |   | 164 |   |   |   | 3,092 |   |
| General and administrative expenses:                |   |                       |   |   |                     |   |   |   |   |   |   |   |   |   |   |   |
| Compensation and benefits                           |   |                       | (1,069 | )      |                     |   | (590 | ) |   |   | (1,953 | ) |   |   | (1,084 | ) |
| Other administrative and general expenses           |   |                       | (687   | )      |                     |   | (663 | ) |   |   | (1,530 | ) |   |   | (1,385 | ) |
| Net income                                          |   |                       | 4,370  |   |                     |   | 4,296 |   |   |   | 7,503 |   |   |   | 9,615 |   |
|                                                |   |                       |   |   |                     |   |   |   |   |   |   |   |   |   |   |   |
| Net income per common share:                        |   |                       |   |   |                     |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                               |   | $                          | 0.26   |   |                     | $      | 0.27 |   |   | $ | 0.44 |   |   | $ | 0.63 |   |
| Diluted                                             |   | $                          | 0.25   |   |                     | $      | 0.26 |   |   | $ | 0.44 |   |   | $ | 0.59 |   |
|                                                |   |                       |   |   |                     |   |   |   |   |   |   |   |   |   |   |   |

|                                              |   | Three Months EndedJune 30, |   |
|---------------------------------------------------|--------|----------------------------|--------|
| (amounts in thousands)                            |   | 2009                       |   |   | 2008 |   |
| Interest income - Investments:                    |   |                       |   |   |   |   |
| Agency MBS                                        |   | $                          | 5,097  |   |   | $ | 750 |   |
| Securitized mortgage loans                        |   |                       | 4,485  |   |   |   | 5,381 |   |
| Other investments                                 |   |                       | 234    |   |   |   | 366 |   |
|                                              |   |                       | 9,816  |   |   |   | 6,497 |   |
| Interest income – Cash and cash equivalents |   |                       | 3      |   |   |   | 177 |   |
|                                              |   | $                          | 9,819  |   |   | $ | 6,674 |   |

----

|                        |   | Three Months Ended June 30, |   |
|-----------------------------|--------|-----------------------------|--------|
|                        |   | 2009                        |   |   | 2008 |   |
| (amounts in thousands)      |   | Interest Income             |   |   | Net Amortization |   |   | Total Interest Income |   |   | Interest Income |   |   | Net Amortization |   |   | Total Interest Income |   |
| Securitized mortgage loans: |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                  |   | $                           | 3,463  |   |   | $ | 78 |   |   | $ | 3,541 |   |   | $ | 3,876 |   |   | $ | 117 |   |   | $ | 3,993 |   |
| Single-family               |   |                        | 973    |   |   |   | (29 | ) |   |   | 944 |   |   |   | 1,454 |   |   |   | (66 | ) |   |   | 1,388 |   |
|                        |   | $                           | 4,436  |   |   | $ | 49 |   |   | $ | 4,485 |   |   | $ | 5,330 |   |   | $ | 51 |   |   | $ | 5,381 |   |

|                               |   | Three Months EndedJune 30, |   |
|------------------------------------|--------|----------------------------|--------|
| (amounts in thousands)             |   | 2009                       |   |   | 2008 |   |
| Interest expense:                  |   |                       |   |   |   |   |
| Securitization financing           |   | $                          | 2,711  |   |   | $ | 3,337 |   |
| Repurchase agreements              |   |                       | 829    |   |   |   | 427 |   |
| Obligation under payment agreement |   |                       | 400    |   |   |   | 402 |   |
| Other                              |   |                       | (2     | ) |   |   | 7 |   |
|                               |   | $                          | 3,938  |   |   | $ | 4,173 |   |

----

|                                    |   | Three Months Ended June 30, |   |
|-----------------------------------------|--------|-----------------------------|--------|
|                                    |   | 2009                        |   |   | 2008 |   |
| (amounts in thousands)                  |   | Interest Expense            |   |   | Net Amortization |   |   | Total Interest Expense |   |   | Interest Expense |   |   | Net Amortization |   |   | Total Interest Expense |   |
| Securitization financing:               |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Secured by commercial mortgage loans    |   | $                           | 2,739  |   |   | $ | (153 | ) |   | $ | 2,586 |   |   | $ | 3,301 |   |   | $ | (349 | ) |   | $ | 2,952 |   |
| Secured by single-family mortgage loans |   |                        | 47     |   |   |   | 25 |   |   |   | 72 |   |   |   | 238 |   |   |   | 51 |   |   |   | 289 |   |
| Other bond related costs                |   |                        | 53     |   |   |   | – |   |   |   | 53 |   |   |   | 96 |   |   |   | – |   |   |   | 96 |   |
|                                    |   | $                           | 2,839  |   |   | $ | (128 | ) |   | $ | 2,711 |   |   | $ | 3,635 |   |   | $ | (298 | ) |   | $ | 3,337 |   |

|                                                                  |   | Three Months EndedJune 30, |   |
|-----------------------------------------------------------------------|--------|----------------------------|--------|
| (amounts in thousands)                                                |   | 2009                       |   |   | 2008 |   |
| Interest expense:                                                     |   |                       |   |   |   |   |
| Repurchase agreements collateralized by Agency MBS                    |   | $                          | 708    |   |   | $ | 395 |   |
| Repurchase agreements collateralized by securitizationfinancing bonds |   |                       | 121    |   |   |   | 32 |   |
|                                                                  |   | $                          | 829    |   |   | $ | 427 |   |

----

----

|                                              |   | Six Months Ended June 30, |   |
|---------------------------------------------------|--------|---------------------------|--------|
| (amounts in thousands)                            |   | 2009                      |   |   | 2008 |   |
| Interest income - Investments:                    |   |                      |   |   |   |   |
| Agency MBS                                        |   | $                         | 9,531  |   |   | $ | 854 |   |
| Securitized mortgage loans                        |   |                      | 9,306  |   |   |   | 10,983 |   |
| Other investments                                 |   |                      | 450    |   |   |   | 819 |   |
|                                              |   |                      | 19,287 |   |   |   | 12,656 |   |
| Interest income – Cash and cash equivalents |   |                      | 9      |   |   |   | 501 |   |
|                                              |   | $                         | 19,296 |   |   | $ | 13,157 |   |

|                        |   | Six Months Ended June 30, |   |
|-----------------------------|--------|---------------------------|--------|
|                        |   | 2009                      |   |   | 2008 |   |
| (amounts in thousands)      |   | Interest Income           |   |   | Net Amortization |   |   | Total Interest Income |   |   | Interest Income |   |   | Net Amortization |   |   | Total Interest Income |   |
| Securitized mortgage loans: |   |                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                  |   | $                         | 6,982  |   |   | $ | 204 |   |   | $ | 7,186 |   |   | $ | 7,861 |   |   | $ | 218 |   |   | $ | 8,079 |   |
| Single-family               |   |                      | 2,036  |   |   |   | 84 |   |   |   | 2,120 |   |   |   | 3,058 |   |   |   | (154 | ) |   |   | 2,904 |   |
|                        |   | $                         | 9,018  |   |   | $ | 288 |   |   | $ | 9,306 |   |   | $ | 10,919 |   |   | $ | 64 |   |   | $ | 10,983 |   |

----

|                               |   | Six Months Ended June 30, |   |
|------------------------------------|--------|---------------------------|--------|
| (amounts in thousands)             |   | 2009                      |   |   | 2008 |   |
| Interest expense:                  |   |                      |   |   |   |   |
| Securitization financing           |   | $                         | 5,686  |   |   | $ | 6,936 |   |
| Repurchase agreements              |   |                      | 1,893  |   |   |   | 480 |   |
| Obligation under payment agreement |   |                      | 801    |   |   |   | 804 |   |
| Other                              |   |                      | (9     | ) |   |   | 15 |   |
|                               |   | $                         | 8,371  |   |   | $ | 8,235 |   |

|                                    |   | Six Months Ended June 30, |   |
|-----------------------------------------|--------|---------------------------|--------|
|                                    |   | 2009                      |   |   | 2008 |   |
| (amounts in thousands)                  |   | Interest Expense          |   |   | Net Amortization |   |   | Total Interest Expense |   |   | Interest Expense |   |   | Net Amortization |   |   | Total Interest Expense |   |
| Securitization financing:               |   |                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Secured by commercial mortgage loans    |   | $                         | 5,722  |   |   | $ | (340 | ) |   | $ | 5,382 |   |   | $ | 6,741 |   |   | $ | (673 | ) |   | $ | 6,068 |   |
| Secured by single-family mortgage loans |   |                      | 98     |   |   |   | 64 |   |   |   | 162 |   |   |   | 576 |   |   |   | 103 |   |   |   | 679 |   |
| Other bond related costs                |   |                      | 142    |   |   |   | – |   |   |   | 142 |   |   |   | 189 |   |   |   | – |   |   |   | 189 |   |
|                                    |   | $                         | 5,962  |   |   | $ | (276 | ) |   | $ | 5,686 |   |   | $ | 7,506 |   |   | $ | (570 | ) |   | $ | 6,936 |   |

----

|                                                                  |   | Six Months EndedJune 30, |   |
|-----------------------------------------------------------------------|--------|--------------------------|--------|
| (amounts in thousands)                                                |   | 2009                     |   |   | 2008 |   |
| Interest expense:                                                     |   |                     |   |   |   |   |
| Repurchase agreements collateralized by Agency MBS                    |   | $                        | 1,729  |   |   | $ | 403 |   |
| Repurchase agreements collateralized by securitizationfinancing bonds |   |                     | 164    |   |   |   | 77 |   |
|                                                                  |   | $                        | 1,893  |   |   | $ | 480 |   |

----

----

|                                           |   | Three Months Ended June 30, |    |
|------------------------------------------------|--------|-----------------------------|---------|
|                                           |   | 2009                        |    |   | 2008 |   |
| (amounts in thousands, except for percentages) |   | AverageBalance(1)(2)        |    |   | EffectiveYield/Rate(3) |   |   | AverageBalance(1)(2) |   |   | EffectiveYield/Rate(3) |   |
| Agency MBS                                     |   |                        |    |   |   |   |   |   |   |   |   |   |
| Agency MBS                                     |   | $                           | 459,012 |   |   |   | 4.39 | % |   | $ | 72,276 |   |   |   | 4.25 | % |
| Repurchase agreements                          |   |                        | 413,714 |   |   |   | (0.69 | %) |   |   | 58,625 |   |   |   | (2.71 | %) |
| Net interest spread                            |   |                        |    |   |   |   | 3.70 | % |   |   |   |   |   |   | 1.54 | % |
|                                           |   |                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securitized Mortgage Loans                     |   |                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securitized mortgage loans                     |   | $                           | 237,785 |   |   |   | 7.37 | % |   | $ | 267,505 |   |   |   | 7.99 | % |
| Securitization financing (4)                   |   |                        | 159,571 |   |   |   | (6.72 | %) |   |   | 195,198 |   |   |   | (6.86 | %) |
| Repurchase agreements                          |   |                        | 21,194  |   |   |   | (2.29 | %) |   |   | 4,612 |   |   |   | (2.77 | %) |
| Net interest spread                            |   |                        |    |   |   |   | 1.17 | % |   |   |   |   |   |   | 1.22 | % |
|                                           |   |                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other investments                              |   | $                           | 9,275   |   |   |   | 9.29 | % |   | $ | 13,408 |   |   |   | 11.39 | % |
|                                           |   |                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                          |   |                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest earning assets                        |   | $                           | 706,072 |   |   |   | 5.46 | % |   | $ | 353,189 |   |   |   | 7.35 | % |
| Interest bearing liabilities                   |   |                        | 594,478 |   |   |   | (2.36 | %) |   |   | 258,435 |   |   |   | (5.85 | %) |
| Net interest spread                            |   |                        |    |   |   |   | 3.10 | % |   |   |   |   |   |   | 1.50 | % |

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

|   | (2) | Average balances exclude funds held by trustees except collateral received on defeased loans held by trustees. |
|--------|-----|----------------------------------------------------------------------------------------------------------------|

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

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

----

|                                           |   | Six Months Ended June 30, |    |
|------------------------------------------------|--------|---------------------------|---------|
|                                           |   | 2009                      |    |   | 2008 |   |
| (amounts in thousands, except for percentages) |   | AverageBalance(1) (2)     |    |   | EffectiveYield/Rate(3) |   |   | AverageBalance(1) (2) |   |   | EffectiveYield/Rate(3) |   |
|                                           |   |                      |    |   |   |   |   |   |   |   |   |   |
| Agency MBS                                     |   |                      |    |   |   |   |   |   |   |   |   |   |
| Agency MBS                                     |   | $                         | 430,451 |   |   |   | 4.43 | % |   | $ | 40,569 |   |   |   | 4.30 | % |
| Repurchase agreements                          |   |                      | 391,560 |   |   |   | (0.89 | %) |   |   | 29,861 |   |   |   | (2.71 | )% |
| Net interest spread                            |   |                      |    |   |   |   | 3.54 | % |   |   |   |   |   |   | 1.59 | % |
|                                           |   |                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securitized Mortgage Loans                     |   |                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securitized mortgage loans                     |   | $                         | 240,461 |   |   |   | 7.59 | % |   | $ | 271,952 |   |   |   | 8.05 | % |
| Securitization financing (4)                   |   |                      | 167,057 |   |   |   | (6.68 | %) |   |   | 198,320 |   |   |   | (6.93 | %) |
| Repurchase agreements                          |   |                      | 14,108  |   |   |   | (2.34 | %) |   |   | 4,612 |   |   |   | (3.38 | %) |
| Net interest spread                            |   |                      |    |   |   |   | 1.24 | % |   |   |   |   |   |   | 1.20 | % |
|                                           |   |                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other investments                              |   | $                         | 9,390   |   |   |   | 9.33 | % |   | $ | 14,639 |   |   |   | 11.49 | % |
|                                           |   |                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                          |   |                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest earning assets                        |   | $                         | 680,302 |   |   |   | 5.61 | % |   | $ | 327,160 |   |   |   | 7.74 | % |
| Interest bearing liabilities                   |   |                      | 572,725 |   |   |   | (2.62 | %) |   |   | 232,793 |   |   |   | (6.32 | %) |
| Net interest spread                            |   |                      |    |   |   |   | 2.99 | % |   |   |   |   |   |   | 1.44 | % |
|                                           |   |                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |

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

|   | (2) | Average balances exclude funds held by trustees except collateral received on defeased loans held by trustees. |
|--------|-----|----------------------------------------------------------------------------------------------------------------|

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

----

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

----

|                       |   | Three Months Ended June 30, 2009 vs. 2008 |   |
|----------------------------|--------|-------------------------------------------|--------|
| (amounts in thousands)     |   | Rate                                      |   |   | Volume |   |   | Total |   |
| Agency MBS                 |   | $                                         | 57     |   |   | $ | 4,290 |   |   | $ | 4,347 |   |
| Securitized mortgage loans |   |                                      | (323   | ) |   |   | (573 | ) |   |   | (896 | ) |
| Other investments          |   |                                      | (30    | ) |   |   | (102 | ) |   |   | (132 | ) |
|                       |   |                                      |   |   |   |   |   |   |   |   |   |   |
| Total interest income      |   |                                      | (296   | )  |   |   | 3,615 |   |   |   | 3,319 |   |
|                       |   |                                      |   |   |   |   |   |   |   |   |   |   |
| Repurchase agreements      |   |                                      | (486   | ) |   |   | 888 |   |   |   | 402 |   |
| Securitization financing   |   |                                      | 11     |   |   |   | (593 | ) |   |   | (582 | ) |
|                       |   |                                      |   |   |   |   |   |   |   |   |   |   |
| Total interest expense     |   |                                      | (475   | )  |   |   | 295 |   |   |   | (180 | ) |
|                       |   |                                      |   |   |   |   |   |   |   |   |   |   |
| Net interest income        |   | $                                         | 180    |   |   | $ | 3,320 |   |   | $ | 3,500 |   |

|                       |   | Six Months Ended June 30, 2009 vs. 2008 |   |
|----------------------------|--------|-----------------------------------------|--------|
| (amounts in thousands)     |   | Rate                                    |   |   | Volume |   |   | Total |   |
| Agency MBS                 |   | $                                       | 47     |   |   | $ | 8,630 |   |   | $ | 8,677 |   |
| Securitized mortgage loans |   |                                    | (444   | ) |   |   | (1,231 | ) |   |   | (1,675 | ) |
| Other investments          |   |                                    | (108   | ) |   |   | (261 | ) |   |   | (369 | ) |
|                       |   |                                    |   |   |   |   |   |   |   |   |   |   |
| Total interest income      |   |                                    | (505   | )  |   |   | 7,138 |   |   |   | 6,633 |   |
|                       |   |                                    |   |   |   |   |   |   |   |   |   |   |
| Repurchase agreements      |   |                                    | (456   | )  |   |   | 1,869 |   |   |   | 1,413 |   |
| Securitization financing   |   |                                    | (161   | )  |   |   | (1,041 | ) |   |   | (1,202 | ) |
|                       |   |                                    |   |   |   |   |   |   |   |   |   |   |
| Total interest expense     |   |                                    | (617   | )  |   |   | 828 |   |   |   | 211 |   |
|                       |   |                                    |   |   |   |   |   |   |   |   |   |   |
| Net interest income        |   | $                                       | 112    |   |   | $ | 6,310 |   |   | $ | 6,422 |   |

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

----

----

----

|   | · | risks associated with investing in real estate assets, including changes in general economic and market conditions, including the ongoing volatility in the credit markets which impacts assets prices and the cost and availability of financing, |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | our ability to borrow to continue to finance our assets, |
|--------|--------|----------------------------------------------------------|

|   | · | availability of suitable reinvestment opportunities, |
|--------|--------|------------------------------------------------------|

|   | · | fluctuations in interest rates and the market value of our investments, particularly in response to changes in government policy, |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------|

|   | · | defaults by borrowers and/or guarantors of our investments, |
|--------|--------|-------------------------------------------------------------|

|   | · | fluctuations in property capitalization rates and values of commercial real estate, |
|--------|--------|------------------------------------------------------------------------------------------|

|   | · | uncertainty around government policy, and the impact of regulatory changes, the full impact of which is unknown at this time, |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------|

----

|   | · | defaults by third-party servicers, |
|--------|--------|------------------------------------|

|   | · | actual or expected changes in the rate of prepayments on our investments, particularly those that we own at a premium to their principal balance, |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | other general competitive factors, |
|--------|--------|------------------------------------|

|   | · | our ability to maintain our qualification as a REIT for federal income tax purposes, |
|--------|--------|--------------------------------------------------------------------------------------|

|   | · | our ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended, |
|--------|--------|---------------------------------------------------------------------------------------------------------------|

|   | · | the impact of Section 404 of the Sarbanes-Oxley Act of 2002, |
|--------|--------|--------------------------------------------------------------|

|   | · | changes in government regulations affecting our business; and |
|--------|--------|---------------------------------------------------------------|

|   | · | the impact of new accounting pronouncements or changes in current accounting estimates and assumptions on our financial results. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------|

Item 3.                      Quantitative and Qualitative Disclosures About Market Risk 

----

----

| Investment(amounts in thousands) |   | Amortized Cost Basis |    |   | Amount of Guaranty |   | Guarantor |   | Average Credit Rating of Guarantor (1)               |   |
|----------------------------------|--------|----------------------|---------|--------|--------------------|--------|-----------|--------|------------------------------------------------------|--------|
| With Guaranty of Payment         |   |                 |    |   |               |   |      |   |                                                 |   |
| Agency MBS                       |   | $                    | 531,546 |   |               | $      | 510,372   |   | Fannie Mae/Freddie Mac                               |   | AAA |   |
| Securitized mortgage loans:      |   |                 |    |   |               |   |      |   |                                                 |   |   |   |
| Commercial                       |   |                 | 64,093  |   |               |   | 6,935     |   | American International Group (“AIG”) (2) |   |  A3 |   |
| Single-family                    |   |                 | 21,713  |   |               |   | 21,244    |   | PMI/GEMICO “Pool” Insurance              |   | Ba3/Baa2 |   |
| Defeased commercial loans        |   |                 | 11,900  |   |               |   | 11,866    |   | Fully secured with cash                              |   |   |   |   |
|                             |   |                 |    |   |               |   |      |   |                                                 |   |   |   |   |
| Without Guaranty of Payment      |   |                 |    |   |               |   |      |   |                                                 |   |   |   |   |
| Securitized mortgage loans:      |   |                 |    |   |               |   |      |   |                                                 |   |   |   |   |
| Commercial                       |   |                 | 93,550  |   |               |   | –   |   |                                                 |   |   |   |   |
| Single-family                    |   |                 | 45,879  |   |               |   | –   |   |                                                 |   |   |   |   |
| Investment in joint venture      |   |                 | 6,109   |   |               |   | –   |   |                                                 |   |   |   |   |
| Other investments                |   |                 | 8,393   |   |               |   | –   |   |                                                 |   |   |   |   |
|                             |   |                 |    |   |               |   |      |   |                                                 |   |   |   |   |
|                             |   |                 | 783,183 |   |               |   | 550,417   |   |                                                 |   |   |   |   |
| Allowance for loan losses        |   |                 | (4,016  | )      |               |   | –   |   |                                                 |   |   |   |   |
|                             |   |                 |    |   |               |   |      |   |                                                 |   |   |   |   |
| Total investments                |   | $                    | 779,167 |   |               | $      | 550,447   |   |                                                 |   |   |   |   |

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

| (2) | AIG,  through its subsidiary AIG Retirement Services, Inc., will reimburse us for any loss on these loans as a pool up to the amount indicated. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| Investment(amounts in thousands) |   | Amortized Cost Basis of Loans |    |   | Average Seasoning (in years) |   |   | Current Loan-to-Value based on Original Appraised Value |   |   | Amortized Cost Basis of Delinquent Loans(1) |   |   | Delinquency % |   |
|----------------------------------|--------|-------------------------------|---------|--------|-----------------------------------|--------|--------|---------------------------------------------------------|--------|--------|---------------------------------------------|--------|--------|---------------|--------|
| Commercial mortgage loans        |   | $                             | 165,883 |   |                              |   | 13     |                                                    |   |   | 49                                          | %      |   | $             | 9,409  |   |   |   | 5.51 | % |
| Single-family mortgage loans     |   |                          | 67,331  |   |                              |   | 15     |                                                    |   |   | 52                                          | %      |   |          | 5,626  | (2) |   |   | 8.14 | % |

| (1) | Loans contractually delinquent by 30 or more days.  A commercial mortgage loan with an unpaid principal balance of $2,508 paid-off after  June 30, 2009. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Of the $5,626 of delinquent single-family loans, approximately $1,740 are pool insured and, of the remaining $3,886, $1,445 of the loans made at least one payment within the 90 days prior to June 30, 2009.  No delinquent commercial loans have a guarantee of payment. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Months remaining to end of compliance period |   | As a Percent of Unpaid Principal Balance |    |
|----------------------------------------------|--------|------------------------------------------|---------|
| Compliance period already exceeded           |   |                                     | 33.7    | % |
| Up to one year remaining                     |   |                                     | 16.1    |   |
| Between one and three years remaining        |   |                                     | 50.2    |   |
| Between four and six years remaining         |   |                                     | – |   |
| Total                                        |   |                                     | 100.0   | % |

----

|                                       |   | Investments |    |   | Borrowings |   |
|--------------------------------------------|--------|-------------|---------|--------|------------|--------|
| (amounts in thousands)                     |   | Amounts (1) |    |   | Percent    |   |   | Amounts |   |   | Percent |   |
| Fixed-Rate Investments/Obligations         |   | $           | 178,717 |   |       |   | 23.2 | % |   | $ | 136,793 |   |   |   | 21.5 | % |
|                                       |   |        |    |   |       |   |   |   |   |   |   |   |   |   |   |   |
| Adjustable-Rate Investments/Obligations:   |   |        |    |   |       |   |   |   |   |   |   |   |   |   |   |   |
| Less than 3 months                         |   |        | 16,708  |   |       |   | 2.2 |   |   |   | 498,704 |   |   |   | 78.5 |   |
| Greater than 3 months and less than 1 year |   |        | 210,730 |   |       |   | 27.3 |   |   |   | – |   |   |   | – |   |
| Greater than 1 year and less than 2 years  |   |        | 111,310 |   |       |   | 14.5 |   |   |   | – |   |   |   | – |   |
| Greater than 2 years and less than 3 years |   |        | 168,119 |   |       |   | 21.8 |   |   |   | – |   |   |   | – |   |
| Greater than 3 years and less than 5 years |   |        | 84,677  |   |       |   | 11.0 |   |   |   | – |   |   |   | – |   |
| Total                                      |   | $           | 770,261 |   |       |   | 100.0 | % |   | $ | 635,497 |   |   |   | 100.0 | % |

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

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

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

----

| Lifetime Interest Rate Caps on ARM MBS |   | Interim Interest Rate Caps on ARM MBS |
|----------------------------------------|--------|---------------------------------------|
|                                   |   | % of Total                            |   |   |   | % of Total |
| 9.0% to 10.0%                          |   | 26.95%                                |   | 1.0% |   | 2.61% |
| 10.1% to 11.0%                         |   | 55.77%                                |   | 2.0% |   | 27.98% |
| 11.1% to 12.0%                         |   | 17.28%                                |   | 5.0% |   | 69.41% |
|                                   |   | 100.00%                               |   |   |   | 100.00% |

| CPR    | Estimated Months to AssetReset or Expected Prepayment | Estimated Months to Liabilities Reset  | RepricingGap in Months |
|--------|-------------------------------------------------------|---------------------------------------------|------------------------|
| 0% (1) | 25 months                                             | 1 month                                     | 24 months              |
| 15%    | 21 months                                             | 1 month                                     | 20 months              |
| 25%    | 18 months                                             | 1 month                                     | 17 months              |
| 35%    | 16 months                                             | 1 month                                     | 15 months              |

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

----

| Basis Point Change in Interest Rates |   | Percentage change in projected net interest income |   | Percentage change in projected market value |   |
|--------------------------------------|--------|----------------------------------------------------|--------|---------------------------------------------|--------|
|                                 |   |                                               |   |                                        |   |
| +200                                 |   | (24.15)%                                           |   | (10.90)%                                    |   |
| +100                                 |   | (9.51)%                                            |   | (4.84)%                                     |   |
| 0                                    |   | –                                            |   | –                                     |   |
| -100                                 |   | (0.57)%                                            |   | 3.03%                                       |   |
| -200                                 |   | (15.53)%                                           |   | 4.11%                                       |   |

----

Item 1.                      Legal Proceedings 

Item 1A.                   Risk Factors 

----

Item 2.                      Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.                      Defaults Upon Senior Securities 

Item 4.                      Submission of Matters to a Vote of Security Holders 

| Director              |   |   | For        | Withheld |
|-----------------------|--------|--------|------------|----------|
|                  |
| Common Share Votes    |
| Thomas B. Akin        |   |   | 10,751,755 | 179,851  |
| Daniel K. Osborne     |   |   | 10,750,840 | 180,766  |
| James C. Wheat, III\  |   |   | 10,751,783 | 179,823  |
|                  |   |   |       |     |
| Preferred Share Votes |
| Leon A. Felman        |   |   | 4,049,537  | 63,627   |
| Barry Igdaloff        |   |   | 4,047,528  | 65,636   |
|                  |   |   |       |     |

Item 5.                      Other Information 

----

Item 6.                      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).                |
| 10.11       | Dynex Capital, Inc. 2009 Stock and Incentive Plan, effective as of May 13, 2009 (incorporated herein by reference to Appendix A to Dynex’s Proxy Statement filed April 3, 2009).  |
| 31.1        | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                |
| 31.2        | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                |
| 32.1        | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                |

----

|                             | DYNEX CAPITAL, INC.                                                           |
|----------------------------------|-------------------------------------------------------------------------------|
|                             |                                                                          |
|                             |                                                                          |
| Date:  August 10, 2009 | /s/ Thomas B. Akin                                                            |
|                             | Thomas B. Akin                                                                |
|                             | Chairman and Chief Executive Officer                                          |
|                             | (Principal Executive Officer)                                                 |
|                             |                                                                          |
|                             |                                                                          |
| Date:  August 10, 2009 | /s/ Stephen J. Benedetti                                                      |
|                             | Stephen J. Benedetti                                                          |
|                             | Executive Vice President, Chief Operating Officer and Chief Financial Officer |
|                             | (Principal Financial Officer)                                                 |
|                             |                                                                          |