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**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**Washington,      DC 20549**

**DYNEX      CAPITAL, INC.**

| **Virginia**                                                                                       | **52-1549373**                                           |
|----------------------------------------------------------------------------------------------------|----------------------------------------------------------|
| (State                or other jurisdiction of incorporation or organization)                      | (I.R.S.                Employer Identification No.)      |
|                                                                                               |                                                     |
| **4551                Cox Road, Suite 300, Glen Allen, Virginia**                                  | **23060-6740**                                           |
| (Address                of principal executive offices)                                            | (Zip                Code)                                |
|                                                                                               |
| Registrant’s                telephone number, including area code (804) 217-5800             |
|                                                                                               |
| Securities                registered pursuant to Section 12(b) of the Act:                         |
| Title                of each class                                                                 | Name                of each exchange on which registered |
| Common                Stock, $.01 par value                                                        | New                York Stock Exchange                   |
| Series                D 9.50% Cumulative Convertible Preferred Stock,$.01                par value | New                York Stock Exchange                   |
|                                                                                               |
| Securities                registered pursuant to Section 12(g) of the                Act:          |

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**DYNEX      CAPITAL, INC.**

**2006      FORM 10-K ANNUAL REPORT**

|                     |                    |                                                                                                                         | Page                Number |
|--------------------------|-------------------------|------------------------------------------------------------------------------------------------------------------------------|----------------------------|
| PART                I.   |                    |                                                                                                                         |                       |
|                     | Item                1.  | Business                                                                                                                     | 1                          |
|                     | Item                1A. | Risk                Factors                                                                                                  | 4                          |
|                     | Item                1B. | Unresolved                Staff Comments                                                                                     | 8                          |
|                     | Item                2.  | Properties                                                                                                                   | 8                          |
|                     | Item                3.  | Legal                Proceedings                                                                                             | 8                          |
|                     | Item                4.  | Submission                of Matters to a Vote of Security Holders                                                           | 10                         |
|                     |                    |                                                                                                                         |                       |
| PART                II.  |                    |                                                                                                                         |                       |
|                     | Item                5.  | Market                for Registrant’s Common Equity and Related Stockholder Matters                                   | 10                         |
|                     | Item                6.  | Selected                Financial Data                                                                                       | 12                         |
|                     | Item                7.  | Management’s                Discussion and Analysis of Financial Condition and Results of                Operations    | 13                         |
|                     | Item                7A. | Quantitative                and Qualitative Disclosures about Market Risk                                                    | 31                         |
|                     | Item                8.  | Financial                Statements and Supplementary Data                                                                   | 32                         |
|                     | Item                9.  | Changes                in and Disagreements with Accountants on Accounting and Financial                Disclosure           | 32                         |
|                     | Item                9A. | Controls                and Procedures                                                                                       | 33                         |
|                     | Item                9B. | Other                Information                                                                                             | 33                         |
|                     |                    |                                                                                                                         |                       |
| PART                III. | Item                10. | Directors,                Executive Officers and Corporate Governance                                                        | 33                         |
|                     | Item                11. | Executive                Compensation                                                                                        | 33                         |
|                     | Item                12. | Security                Ownership of Certain Beneficial Owners and Management and Related                Stockholder Matters | 33                         |
|                     | Item                13. | Certain                Relationships and Related Transactions, and Director                Independence                      | 34                         |
|                     | Item                14. | Principal                Accounting Fees and Services                                                                        | 34                         |
|                     |                    |                                                                                                                         |                       |
| PART                IV.  | Item                15. | Exhibits,                Financial Statement Schedules                                                                       | 34                         |
|                     |                    |                                                                                                                         |                       |
| SIGNATURES               |                    | 36                                                                                                                           |
|                     |                    |                                                                                                                         |

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**PART      I**

*In      this annual report on Form 10-K, we refer to Dynex Capital, Inc. and its      subsidiaries as “we,” “us,” “Dynex,” or “the Company,” unless specifically      indicated otherwise.*

**ITEM      1. BUSINESS**

**GENERAL**

|   | · | inversion                of the yield curve, making it more difficult for us to earn net interest                income on leveraged investments; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | low                risk premiums on these assets, resulting in lower risk-adjusted returns;                and |
|--------|--------|----------------------------------------------------------------------------------------------------------------|

|   | · | competition                for these assets, primarily from hedge funds, financial institutions,                foreign investors, other REITS and money                managers. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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**BUSINESS      MODEL AND STRATEGY**

*Federal      Income Tax Considerations *
*.*

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**COMPETITION**

**AVAILABLE      INFORMATION**

**FEDERAL      INCOME TAX CONSIDERATIONS**

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*Sources      of Income*

*Nature      and Diversification of Assets*

*Ownership*

**EMPLOYEES**

**ITEM      1A. RISK FACTORS**

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***Our      ownership of certain subordinate interests in securitization trusts subjects      us      to credit risk on the underlying loans, and we provide for loss reserves on      these loans as required under GAAP.***

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

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

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

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***Prepayments      of principal on our investments, and the timing of prepayments, may impact      our      reported earnings and our cash flows.***

*i.e.*

***We      finance a portion of our investment portfolio with short-term recourse      repurchase agreements which subjects us to margin calls if the assets pledged      subsequently decline in value.***

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

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

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

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

***Maintaining      REIT status may reduce our flexibility to manage our      operations.***

|   | · If                we make frequent asset sales from our REIT entities to persons deemed                customers, we could be viewed as a “dealer,” and thus subject to 100%                prohibited transaction taxes or other entity level taxes on income                from                such transactions.                                                                                                                                   |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | · Compliance                with the REIT income and asset rules may limit the type or extent                of                hedging that we can undertake.                                                                                                                                                                                                                                                                                                        |
|   | · Our                ability to own non-real estate related assets and earn non-real estate                related income is limited. Our ability to own equity interests in                other                entities is limited. If we fail to comply with these limits, we may                be                forced to liquidate attractive assets on short notice on unfavorable                terms                in order to maintain our REIT status. |
|   | · Our                ability to invest in taxable subsidiaries is limited under the REIT                rules.                Maintaining compliance with this limit could require us to constrain                the                growth of our taxable REIT affiliates in the future.                                                                                                                                                                            |
|   | · Meeting                minimum REIT dividend distribution requirements could reduce our                liquidity. Earning non-cash REIT taxable income could necessitate                our                selling assets, incurring debt, or raising new equity in order to                fund                dividend distributions.                                                                                                                            |
|   | · Stock                ownership tests may limit our ability to raise significant amounts                of                equity capital from one source.                                                                                                                                                                                                                                                                                                           |

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

***We      are dependent on certain key personnel.***

**ITEM      1B. UNRESOLVED STAFF COMMENTS**

**ITEM      2.**
**      PROPERTIES**

**ITEM      3.**
**      LEGAL PROCEEDINGS**

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**ITEM      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

**PART      II**

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

|                          |   |  **High** |   |  **Low** |   | **Dividends****Declared** |   |
|-------------------------------|--------|----------------|--------|---------------|--------|---------------------------|--------|
| **2006:**                     |   |           |   |          |   |                      |   |
| First                quarter  |   | $              | 6.98   |          | $      | 6.50                      |   | $ | - |   |
| Second                quarter |   | $              | 6.99   |          | $      | 6.57                      |   | $ | - |   |
| Third                quarter  |   | $              | 7.45   |          | $      | 6.60                      |   | $ | - |   |
| Fourth                quarter |   | $              | 7.16   |          | $      | 6.72                      |   | $ | - |   |
|                          |   |           |   |          |   |                      |   |   |   |   |
| **2005:**                     |   |           |   |          |   |                      |   |   |   |   |
| First                quarter  |   | $              | 8.08   |          | $      | 7.12                      |   | $ | - |   |
| Second                quarter |   | $              | 7.69   |          | $      | 7.10                      |   | $ | - |   |
| Third                quarter  |   | $              | 7.75   |          | $      | 6.85                      |   | $ | - |   |
| Fourth                quarter |   | $              | 7.24   |          | $      | 6.70                      |   | $ | - |   |

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**STOCK      PERFORMANCE GRAPH**

**Comparative      Five-Year Total Returns **
***(1)***

**Dynex      Capital, Inc., S&P 500, and Bloomberg Mortgage REIT Index**

**(Performance      Results through December 31, 2006)**

|                                               |   | ***Cumulative                Total Stockholder Returns as of December 31,*** |   |
|----------------------------------------------------|--------|------------------------------------------------------------------------------|--------|
| ***Index***                                        |   | **2001**                                                                     |   | **2002** |   | **2003** |   | **2004** |   | **2005** |   | **2006** |   |
| Dynex                Capital Inc.                  |   | $                                                                            | 100.00 |   | $ | 230.48 |   | $ | 290.48 |   | $ | 372.38 |   | $ | 328.57 |   | $ | 337.62 |   |
| S&P                500 *(1)*                   |   | $                                                                            | 100.00 |   | $ | 77.90 |   | $ | 100.25 |   | $ | 111.15 |   | $ | 116.61 |   | $ | 135.03 |   |
| Bloomberg                Mortgage REIT Index *(1)* |   | $                                                                            | 100.00 |   | $ | 122.96 |   | $ | 162.21 |   | $ | 205.58 |   | $ | 172.72 |   | $ | 206.10 |   |

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

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**ITEM        6. SELECTED FINANCIAL DATA**

| **Years                ended December 31,**                                            |   | **2006** |   | **2005** |   | **2004** |   | **2003** |    | **2002** |   |
|----------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|---------|----------|--------|
| *(amounts                in thousands except share and per share data)*                |   |     |   |     |   |     |   |     |    |     |   |
| Net                interest income*(1)*                                                |   | $        | 11,087 |     | $      | 11,889   |   | $        | 23,281  |     | $      | 38,971 |   | $ | 49,153 |   |
| Net                interest income after recapture of (provision for) loan losses*(2)* |   |     | 11,102 |     |   | 6,109    |   |     | 4,818   |     |   | 1,889 |   |   | 20,670 |   |
| Impairment                charges*(3)*                                                 |   |     | (60    | )        |   | (2,474   | )      |     | (14,756 | )        |   | (16,355 | ) |   | (18,477 | ) |
| Equity                in loss of joint venture                                         |   |     | (852   | )        |   | -        |   |     | -       |     |   | - |   |   | - |   |
| Loss                on capitalization of joint venture                                 |   |     | (1,194 | )        |   | -        |   |     | -       |     |   | - |   |   | - |   |
| (Loss)                gain on sale of investments                                      |   |     | (183   | )        |   | 9,609    |   |     | 14,490  |     |   | 1,555 |   |   | (150 | ) |
| Other                income (expense)                                                  |   |     | 617    |     |   | 2,022    |   |     | (179    | )        |   | 436 |   |   | 1,397 |   |
| General                and administrative expenses                                     |   |     | (4,521 | )        |   | (5,681   | )      |     | (7,748  | )        |   | (8,632 | ) |   | (9,493 | ) |
| Net                income (loss)                                                       |   | $        | 4,909  |     | $      | 9,585    |   | $        | (3,375  | )        | $      | (21,107 | ) | $ | (9,360 | ) |
| Net                income (loss) to common shareholders                                |   | $        | 865    |     | $      | 4,238    |   | $        | (5,194  | )        | $      | (14,260 | ) | $ | (18,946 | ) |
| Net                income (loss) per common share:                                     |   |     |   |     |   |     |   |     |    |     |   |   |   |   |   |   |
| Basic                & diluted* *                                             |   | $        | 0.07   |     | $      | 0.35     |   | $        | (0.46   | )        | $      | (1.31 | ) | $ | (1.74 | ) |
| Dividends                declared per share:                                           |   |     |   |     |   |     |   |     |    |     |   |   |   |   |   |   |
| Common                                                                                 |   | $        | -      |     | $      | -        |   | $        | -       |     | $      | - |   | $ | - |   |
| Series                A and B Preferred                                                |   | $        | -      |     | $      | -        |   | $        | -       |     | $      | 0.8775 |   | $ | 0.2925 |   |
| Series                C Preferred                                                      |   | $        | -      |     | $      | -        |   | $        | -       |     | $      | 1.0950 |   | $ | 0.3651 |   |
| Series                D Preferred                                                      |   | $        | 0.9500 |     | $      | 0.9500   |   | $        | 0.6993  |     | $      | - |   | $ | - |   |

| **December                31,**                       |   | **2006** |       | **2005** |   | **2004**   |   | **2003** |       | **2002** |   |
|-------------------------------------------------------|--------|----------|------------|----------|--------|------------|--------|----------|------------|----------|--------|
| Investments*(4)*                                      |   | $        | 403,566    |     | $      | 756,409    |   | $        | 1,343,448  |     | $      | 1,853,675 |   | $ | 2,185,746 |   |
| Total                assets*(4)*                      |   |     | 466,557    |     |   | 805,976    |   |     | 1,400,934  |     |   | 1,865,235 |   |   | 2,205,735 |   |
| Securitization                financing*(4)*          |   |     | 211,564    |     |   | 516,578    |   |     | 1,177,280  |     |   | 1,679,830 |   |   | 1,980,702 |   |
| Repurchase                agreements and senior notes |   |     | 95,978     |     |   | 133,315    |   |     | 70,468     |     |   | 33,933 |   |   | - |   |
| Total                liabilities*(4)*                 |   |     | 330,019    |     |   | 656,642    |   |     | 1,252,168  |     |   | 1,715,389 |   |   | 1,982,314 |   |
| Shareholders’                equity             |   |     | 136,538    |     |   | 149,334    |   |     | 148,766    |     |   | 149,846 |   |   | 223,421 |   |
| Number                of common shares outstanding    |   |     | 12,131,262 |     |   | 12,163,391 |   |     | 12,162,391 |     |   | 10,873,903 |   |   | 10,873,903 |   |
| Average                number of common shares        |   |     | 12,140,452 |     |   | 12,163,062 |   |     | 11,272,259 |     |   | 10,873,903 |   |   | 10,873,871 |   |
| Book                value per common share            |   | $        | 7.78       |     | $      | 7.65       |   | $        | 7.60       |     | $      | 7.55 |   | $ | 8.57 |   |

*(1)*

*Net      interest income declined due to a reduction in our investment portfolio      resulting from sales, transfer of assets and the receipt of principal. The      interest earning investment portfolio averaged $644 million in 2006, $1,039      million in 2005 and $1,658 million in 2004, *

*(2)*

*Net      interest income after provision for loan losses has increased due to asset      sales      and lower loan loss provisions associated with improved performance of      commercial mortgage loans and the derecognition in 2006 of a securitization      trust backed by commercial loans.*

*(3)*

*Impairment      charges have declined as a result of the sale of certain underperforming      securities and the stabilization in the value of our delinquent tax lien      investment.*

*(4)*

*Declines      have been due to the sale and derecognition of investments, receipt of principal      on investments we continue to hold and the derecognition of a securitization      trust backed by commercial mortgage loans during 2006. *

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

**SUMMARY**

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**FINANCIAL      CONDITION**

|                                                                                                            |   | **December                31,** |    |
|-----------------------------------------------------------------------------------------------------------------|--------|---------------------------------|---------|
| *(amounts                in thousands except per share data)*                                                   |   |  **2006**                  |    |  **2005** |   |
| Investments:                                                                                                    |   |                       |    |    |   |
| Securitized                finance receivables                                                                  |   | $                               | 346,304 |   | $ | 722,152 |   |
| Investment                in joint venture                                                                      |   |                            | 37,388  |   |   | - |   |
| Securities                                                                                                      |   |                            | 13,143  |   |   | 24,908 |   |
| Other                investments                                                                                |   |                            | 2,802   |   |   | 4,067 |   |
| Other                loans                                                                                      |   |                            | 3,929   |   |   | 5,282 |   |
|                                                                                                            |   |                            |    |   |   |   |   |
| Securitization                financing                                                                         |   |                            | 211,564 |   |   | 516,578 |   |
| Repurchase                agreements                                                                            |   |                            | 95,978  |   |   | 133,315 |   |
| Obligation                under payment agreement                                                               |   |                            | 16,299  |   |   | - |   |
|                                                                                                            |   |                            |    |   |   |   |   |
| Shareholders’                equity                                                                       |   |                            | 136,538 |   |   | 149,334 |   |
|                                                                                                            |   |                            |    |   |   |   |   |
| Book                value per common share (inclusive of preferred stock liquidation                preference) |        | $                               | 7.78    |  | $ | 7.65 |   |

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|                                                         |   | **December                31, 2006**       |    |
|--------------------------------------------------------------|--------|--------------------------------------------|---------|
|  *(amounts                in thousands)*                |   | **Amortized****cost                basis** |    | **Financing** |   | **Net                basis** |   | **Fair                value****of                net basis** |   |
| Securitized                finance receivables:** **(1) |   |                                       |    |   |   |   |   |   |   |
| Single                family mortgage loans                  |   | $                                          | 118,226 |   | $ | 95,978 |   | $ | 22,248 |   | $ | 22,965 |   |
| Commercial                mortgage loans                     |   |                                       | 232,573 |   |   | 211,564 |   |   | 21,009 |   |   | 20,466 |   |
| Allowance                for loan losses                     |   |                                       | (4,495  | ) |   | - |   |   | (4,495 | ) |   | - |   |
|                                                         |   |                                       | 346,304 |   |   | 307,542 |   |   | 38,762 |   |   | 43,431 |   |
| Securities:                (2)                               |   |                                       |    |   |   |   |   |   |   |   |   |   |   |
| Investment                grade single-family                |   |                                       | 10,874  |   |   | - |   |   | 10,874 |   |   | 11,145 |   |
| Non-investment                grade single-family            |   |                                       | 359     |   |   | - |   |   | 359 |   |   | 552 |   |
| Equity                and other                              |   |                                       | 1,280   |   |   | - |   |   | 1,280 |   |   | 1,446 |   |
|                                                         |   |                                       | 12,513  |   |   | - |   |   | 12,513 |   |   | 13,143 |   |
|                                                         |   |                                       |    |   |   |   |   |   |   |   |   |   |   |
| Investment                in joint venture(3)                |   |                                       | 37,388  |   |   | - |   |   | 37,388 |   |   | 36,520 |   |
| Obligation                under payment agreement(1)         |   |                                       | -       |   |   | 16,299 |   |   | (16,299 | ) |   | (16,541 | ) |
| Other                loans and investments(2)                |   |                                       | 6,690   |   |   | - |   |   | 6,690 |   |   | 7,507 |   |
| Net                unrealized gain                           |   |                                       | 671     |   |   | - |   |   | 671 |   |   | - |   |
|                                                         |   |                                       |    |   |   |   |   |   |   |   |   |   |   |
| Total                                                        |   | $                                          | 403,566 |   | $ | 323,841 |   | $ | 79,725 |   | $ | 84,060 |   |
|                                                         |   |                                       |    |   |   |   |   |   |   |   |   |   |   |

|   | *(1)* | *Fair                values for securitized finance receivables and the obligation under                payment agreement are based on discounted cash flows using assumptions                set                forth in the table below, inclusive of amounts invested in redeemed                securitization financing bonds.* |
|--------|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | *(2)* | *Fair                values of securities are based on dealer quotes, if available. Where                dealer quotes are not available, fair values are calculated as the                net                present value of expected future cash flows, discounted at 16%. Expected                cash flows for both securitized finance receivables and securities                were                based on the forward LIBOR curve as of December 31, 2006, and incorporate                the resetting of the interest rates on the adjustable rate assets                to a                level consistent with projected prevailing rates. Increases or decreases                in interest rates and index levels from those used would impact the                calculation of fair value, as would differences in actual prepayment                speeds and credit losses versus the assumptions set forth                above.* |
|--------|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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|                                        |   | **Fair                Value Assumptions**                |                   |             |   |
|---------------------------------------------|--------|----------------------------------------------------------|------------------------|------------------|--------|
| **Loan                type**                |   | **Weighted-average                prepayment****speeds** |                   |  **Losses** |   | **Weighted-****average****discount                rate****(5)** |   | **Projected                cash**** flow                termination****date** |   | *(amounts                in thousands)***2006                Cash Flows****(1)** |   |
|                                        |   |                                                     |                   |             |   |   |   |   |   |   |   |
| Single-family                mortgage loans |   |                                                     | 30%                CPR |             |   | 0.2%                annually |   |   | 16% |   |   | Anticipated                final maturity 2024 |   | $ | 3,080 |   |
|                                        |   |                                                     |                   |             |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                mortgage loans(2) |   |                                                     | (3)                    |             |   | 0.8%                annually |   |   | 16% |   |   | (4) |   | $ | 2,342 |   |

*(1)*

*Represents      the excess of the cash flows received on the collateral pledged over the cash      flow required to service the related securitization financing.*

*(2)*

*Includes      loans pledged to two different securitization trusts. *

*(3)*

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

*(4)*

*Cash      flow termination dates are modeled based on the repayment dates of the loans      or      optional redemption dates of the underlying securitization financing      bonds.*

*(5)*

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

|                                                            |   | **December                31,** |   |
|-----------------------------------------------------------------|--------|---------------------------------|--------|
| ***(amounts                in thousands)***                     |   | **2006**                        |   | **2005** |   |
|                                                            |   |                            |   |   |   |
| Cash                and cash equivalents                        |   | $                               | 56,880 |   | $ | 45,235 |   |
| Investments:                                                    |   |                            |   |   |   |   |   |
| AAA                rated and agency MBS fixed income securities |   | $                               | 20,876 |   | $ | 36,223 |   |
| AA                and A rated fixed income securities           |   |                            | 2,777  |   |   | 6,480 |   |
| Unrated                and non-investment grade                 |   |                            | 8,924  |   |   | 11,781 |   |
| Securitization                over-collateralization            |   |                            | 9,760  |   |   | 52,032 |   |
| Investment                in joint venture                      |   |                            | 37,388 |   |   | - |   |
|                                                            |   | $                               | 79,725 |   | $ | 106,516 |   |

**Supplemental      Discussion of Common Equity Book Value**

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|                                                                                               |   | **December                31, 2006** |    |
|----------------------------------------------------------------------------------------------------|--------|--------------------------------------|---------|
| ***(amounts                in thousands)***                                                        |   | **Book                Value**        |    | **Adjusted                Book Value** |   |
|                                                                                               |   |                                 |    |   |   |
| Total                investment assets (per table above)                                           |   | $                                    | 79,725  |   | $ | 84,060 |   |
| Cash                and cash equivalents                                                           |   |                                 | 56,880  |   |   | 56,880 |   |
| Other                assets and liabilities, net                                                   |   |                                 | (67     | ) |   | (67 | ) |
|                                                                                               |   |                                 | 136,538 |   |   | 140,873 |   |
| Less:                Preferred stock liquidation preference                                        |   |                                 | (42,215 | ) |   | (42,215 | ) |
| Common                equity book value and adjusted book value                                    |   | $                                    | 94,323  |   | $ | 98,658 |   |
|                                                                                               |   |                                 |    |   |   |   |   |
| Common                equity book value per share and adjusted book value per                share |   | $                                    | 7.78    |   | $ | 8.13 |   |

**RESULTS      OF OPERATIONS**

|                                                                                             |   | **Year                Ended December 31,** |   |
|--------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|
| ***(amounts                in thousands except per share information)***                         |   | **2006**                                   |   | **2005** |   | **2004** |   |
| Net                interest income                                                               |   | $                                          | 11,087 |   | $ | 11,889 |   | $ | 23,281 |   |
| Recapture                of (provision for) loan losses                                          |   |                                       | 15     |   |   | (5,780 | ) |   | (18,463 | ) |
| Net                interest income after recapture of (provision for) loan                losses |   |                                       | 11,102 |   |   | 6,109 |   |   | 4,818 |   |
| Equity                in loss of joint venture                                                   |   |                                       | (852   | ) |   | - |   |   | - |   |
| Loss                on capitalization of joint venture                                           |   |                                       | (1,194 | ) |   | - |   |   | - |   |
| Impairment                charges                                                                |   |                                       | (60    | ) |   | (2,474 | ) |   | (14,756 | ) |
| (Loss)                gain on sales of investments                                               |   |                                       | (183   | ) |   | 9,609 |   |   | 14,490 |   |
| Other                income (expense)                                                            |   |                                       | 617    |   |   | 2,022 |   |   | (179 | ) |
| General                and administrative expenses                                               |   |                                       | (4,521 | ) |   | (5,681 | ) |   | (7,748 | ) |
| Net                income (loss)                                                                 |   |                                       | 4,909  |   |   | 9,585 |   |   | (3,375 | ) |
| Preferred                stock charge                                                            |   |                                       | (4,044 | ) |   | (5,347 | ) |   | (1,819 | ) |
| Net                income (loss) to common shareholders                                          |   | $                                          | 865    |   | $ | 4,238 |   | $ | (5,194 | ) |
|                                                                                             |   |                                       |   |   |   |   |   |   |   |   |
| Basic                & diluted net income (loss) per common share                            |   | $                                          | 0.07   |   | $ | 0.35 |   | $ | (0.46 | ) |
|                                                                                             |   |                                       |   |   |   |   |   |   |   |   |
| Dividends                declared per share:                                                     |   |                                       |   |   |   |   |   |   |   |   |
| Common                                                                                           |   | $                                          | -      |   | $ | - |   | $ | - |   |
| Series                D Preferred                                                                |   | $                                          | 0.9500 |   | $ | 0.9500 |   | $ | 0.6993 |   |

----

----

----

**Average      Balances and Effective Interest Rates**

|                                                                                                                              |   | **Year                ended December 31,** |    |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|---------|
|                                                                                                                              |   | **2006**                                   |    | **2005** |   | **2004** |   |
|  *(amounts                in thousands)*                                                                                     |   | **Average****Balance**                     |    | **Effective****Rate** |   | **Average****Balance** |   | **Effective****Rate** |   | **Average****Balance** |   | **Effective****Rate** |   |
| Interest-earning                assets(1):                                                                                        |   |                                       |    |   |   |   |   |   |   |   |   |   |   |
| Securitized                finance receivables(2)(3)                                                                              |   | $                                          | 586,113 |   |   | 7.88% |   | $ | 931,777 |   |   | 7.19% |   | $ | 1,601,553 |   |   | 7.41% |   |
| Other                interest-bearing assets                                                                                      |   |                                       | 23,823  |   |   | 8.86% |   |   | 83,767 |   |   | 5.31% |   |   | 32,304 |   |   | 8.28% |   |
| Total                interest-earning assets                                                                                      |   | $                                          | 609,936 |   |   | 7.92% |   | $ | 1,015,544 |   |   | 7.10% |   | $ | 1,633,857 |   |   | 7.43% |   |
| Interest-bearing                liabilities:                                                                                      |   |                                       |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |  |
| Non-recourse securitization                financing(3)                                                                      |   | $                                          | 401,050 |   |   | 8.08% |   | $ | 735,910 |   |   | 7.40% |   | $ | 1,499,772 |   |   | 6.40% |   |
| Repurchase                agreements                                                                                              |   |                                       | 114,252 |   |   | 5.12% |   |   | 151,328 |   |   | 3.59% |   |   | 21,040 |   |   | 1.75% |   |
| Senior                notes                                                                                                       |   |                                       | -       |   |   | -% |   |   | - |   |   | -% |   |   | 2,020 |   |   | 9.90% |   |
| Total                interest-bearing liabilities                                                                                 |   | $                                          | 515,302 |   |   | 7.42% |   | $ | 887,238 |   |   | 6.75% |   | $ | 1,522,832 |   |   | 6.34% |   |
|  Net                interest spread(3)                                                                                       |   |                                       |    |   |   | 0.50% |   |   |   |   |   | 0.35% |   |   |   |   |   | 1.09% |   |
| Net                yield on average interest-earning assets(3)                                                                    |   |                                       |    |   |   | 1.64% |   |   |   |   |   | 1.20% |   |   |   |   |   | 1.51% |   |
| Cash                and cash equivalents                                                                                          |   | $                                          | 40,881  |   |   | 4.93% |   | $ | 29,962 |   |   | 2.56% |   | $ | 24,529 |   |   | 1.37% |   |
| Net                yield on average interest-earning assets(3),                including                cash and cash equivalents |   |                                       |    |   |   | 1.84% |   |   |   |   |   | 1.24% |   |   |   |   |   | 1.51% |   |

*(1)*

*Average      balances exclude adjustments made in accordance with SFAS No. 115, “Accounting      for Certain Investments in Debt and Equity Securities,” to record available for      sale securities at fair value.*

*(2)*

*Average      balances exclude funds held by trustees of $172, $218 and $342 for the years      ended December 31, 2006, 2005 and 2004, respectively.*

*(3)*

*Effective      rates are calculated excluding non-interest related non-recourse securitization      financing expenses and provision for credit losses*
*.*

----

**Rates      and Volume**

|                                           |   | **2006                to 2005** |   | **2005                to 2004** |   |
|------------------------------------------------|--------|---------------------------------|--------|---------------------------------|--------|
| *(amounts                in thousands)*        |   | **Rate**                        |   | **Volume**                      |   | **Total** |   | **Rate** |   | **Volume** |   | **Total** |   |
|                                           |   |                            |   |                            |   |   |   |   |   |   |   |   |   |
| Securitized                finance receivables |   | $                               | 5,973  |                            | $      | (26,805 | ) | $ | (20,832 | ) | $ | (3,409 | ) | $ | (48,202 | ) | $ | (51,611 | ) |
| Other                interest-bearing assets   |   |                            | 1,161  |                            |   | (4,103 | ) |   | (2,942 | ) |   | (785 | ) |   | 3,161 |   |   | 2,376 |   |
| Total                interest income           |   |                            | 7,134  |                            |   | (30,908 | ) |   | (23,774 | ) |   | (4,194 | ) |   | (45,041 | ) |   | (49,235 | ) |
|                                           |   |                            |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securitization                financing        |   |                            | 4,577  |                            |   | (26,675 | ) |   | (22,098 | ) |   | 13,195 |   |   | (54,776 | ) |   | (41,581 | ) |
| Senior                notes                    |   |                            | -      |                            |   | - |   |   | - |   |   | (100 | ) |   | (100 | ) |   | (200 | ) |
| Repurchase                agreements           |   |                            | 2,096  |                            |   | (1,591 | ) |   | 505 |   |   | 460 |   |   | 4,601 |   |   | 5,061 |   |
|                                           |   |                            |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                interest expense          |   |                            | 6,673  |                            |   | (28,266 | ) |   | (21,593 | ) |   | 13,555 |   |   | (50,275 | ) |   | (36,720 | ) |
|                                           |   |                            |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                interest income             |   | $                               | 461    |                            | $      | (2,642 | ) | $ | (2,181 | ) | $ | (17,749 | ) | $ | 5,234 |   | $ | (12,515 | ) |

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

----

**Credit      Reserves and Actual Credit Losses**

*(amounts      in millions)*

|   |   |  **Outstanding                Loan Principal Balance** |    | **Credit                Exposure, Net of Credit Reserves** |   | **Actual****Credit****Losses** |   | **Credit                Exposure, Net of Credit Reserves to Outstanding Loan                Balance** |   |
|--------|--------|-------------------------------------------------------------|---------|------------------------------------------------------------|--------|--------------------------------|--------|-------------------------------------------------------------------------------------------------------|--------|
| 2004   |   | $                                                           | 1,296.5 |                                                       | $      | 39.9                           |   | $                                                                                                     | 25.1   |   |   | 3.08 | % |
| 2005   |   | $                                                           | 751.1   |                                                       | $      | 28.9                           |   | $                                                                                                     | 3.6    |   |   | 3.85 | % |
| 2006   |   | $                                                           | 361.3   |                                                       | $      | 22.4                           |   | $                                                                                                     | 7.2    |   |   | 6.20 | % |

**Single-Family      Loan Delinquency Statistics**

|  **December                31,** | **30                to 59 days**** delinquent** | **60                to 89 days****delinquent** | **90                days and over****delinquent****(1)** |  **Total** |
|---------------------------------------|------------------------------------------------------|------------------------------------------------|----------------------------------------------------------|-----------------|
| 2004                                  | 4.30%                                                | 1.06%                                          | 3.35%                                                    | 8.71%           |
| 2005                                  | 4.28%                                                | 0.62%                                          | 2.60%                                                    | 7.50%           |
| 2006                                  | 4.90%                                                | 1.89%                                          | 3.05%                                                    | 9.84%           |

**Commercial      Mortgage Loan Delinquency Statistics **
**(1)**

|  **December                31,** | **30                to 59 days**** delinquent** | **60                to 89 days****delinquent** | **90                days and over****delinquent****(1)** |  **Total** |
|---------------------------------------|------------------------------------------------------|------------------------------------------------|----------------------------------------------------------|-----------------|
| 2004                                  | -%                                                   | -%                                             | 7.96%                                                    | 7.96%           |
| 2005                                  | -%                                                   | 0.25%                                          | 6.65%                                                    | 6.90%           |
| 2006                                  | -%                                                   | -%                                             | 1.36%                                                    | 1.36%           |

* *

*(1)*

*Includes      foreclosures and real estate owned*

----

**CRITICAL      ACCOUNTING POLICIES**

*Consolidation      of Subsidiaries. *

*Securitization.      *

*Impairments.      *

*Allowance      for Loan Losses.*

----

**LIQUIDITY      AND CAPITAL RESOURCES**

*i.e.*

----

|                                                    |   | **Payments                due by period** |    |
|---------------------------------------------------------|--------|-------------------------------------------|---------|
| **Contractual                Obligations****(1)**       |   | **Total**                                 |    | **<                1 year** |   | **1-3                years** |   | **3-5                years** |   | **>                5 years** |   |
| Long-Term                Debt Obligations:(2)           |   |                                      |    |   |   |   |   |   |   |   |   |
| Non-recourse                securitization financing(3) |   | $                                         | 317,808 |   | $ | 44,118 |   | $ | 84,116 |  | $ | 148,964 |   | $ | 40,610 |   |
| Repurchase                agreements                    |   |                                      | 95,978  |   |   | 95,978 |   |   | - |   |   | - |   |   | - |   |
| Operating                lease obligations              |   |                                      | 209     |   |   | 145 |   |   | 64 |   |   | - |   |   | - |   |
| Mortgage                servicing obligations           |   |                                      | 3,980   |   |   | 414 |   |   | 933 |   |   | 569 |   |   | 2,064 |  |
| Obligation                under payment agreement(4)    |   |                                      | 22,422  |   |   | 1,542 |   |   | 4,147 |   |   | 16,733 |   |   | - |   |
| Total                                                   |   | $                                         | 440,397 |   | $ | 142,197 |   | $ | 89,260 |   | $ | 166,266 |   | $ | 42,674 |   |

| *(1)* | *As                the master servicer for certain of the series of non-recourse                securitization financing securities which we have issued, and certain                loans which have been securitized but for which we are not the master                servicer, we have an obligation to advance scheduled principal and                interest on delinquent loans in accordance with the underlying servicing                agreements should the primary servicer fail to make such advance.                Such                advance amounts are generally repaid in the same month as they are                made,                or shortly thereafter, and the contractual obligation with respect                to                these advances is excluded from the above                table.* |
|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| *(2)* | *Amounts                presented for Long-Term Debt Obligations include estimated principal                and                interest on the related                obligations.* |
|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| *(3)* | *Securitization                financing is non-recourse to us as the bonds are payable solely from                loans                and securities pledged as securitized finance receivables. Payments                due by                period were estimated based on the principal repayments forecast                for the                underlying loans and securities, substantially all of which is used                to                repay the associated securitization financing                outstanding.* |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| *(4)* | *We                entered an agreement to contribute to a joint venture all of the                net                cashflows from our interests in a pool of securitized commercial                mortgage                loans. By agreement, the joint venture is scheduled to dissolve no                later                than 2011.* |
|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**Summary      of Selected Quarterly Results (unaudited)**

*(amounts      in thousands except share and per share data*
***)***

| **Year                Ended December 31, 2006**                                  |        | **First                Quarter** |         | **Second                Quarter** |        | **Third                Quarter** |        | **Fourth                Quarter**  |    |
|----------------------------------------------------------------------------------|--------|----------------------------------|---------|-----------------------------------|--------|----------------------------------|--------|-----------------------------------------|---------|
|                                                                             |   |                             |    |                              |   |                             |   |                                    |    |
| Operating                results:                                                |   |                             |    |                              |   |                             |   |                                    |    |
| Total                interest income                                             |   | $                                | 14,766  |                              | $      | 14,192                           |   | $                                       | 13,000  |   | $ | 8,491 |   |
| Net                interest income after provision for loan losses               |   |                             | 2,407   |                              |   | 2,543                            |   |                                    | 3,102   |   |   | 3,050 |   |
| Net                income (loss)                (2)                              |   |                             | 1,213   |                              |   | 1,615                            |   |                                    | (215    | ) |   | 2,297 |   |
| Basic                and diluted net income (loss) per common share              |   |                             | 0.01    |                              |   | 0.05                             |   |                                    | (0.10   | ) |   | 0.11 |   |
| Cash                dividends declared per common share                          |   |                             | -       |                              |   | -                                |   |                                    | -       |   |   | - |   |
|                                                                             |   |                             |    |                              |   |                             |   |                                    |    |   |   |   |   |
| Average                interest-earning assets                (4)                |   |                             | 764,682 |                              |   | 713,000                          |   |                                    | 588,306 |   |   | 375,152 |   |
| Average                borrowed funds                                            |   |                             | 635,877 |                              |   | 609,813                          |   |                                    | 502,842 |   |   | 316,388 |   |
|                                                                             |   |                             |    |                              |   |                             |   |                                    |    |   |   |   |   |
| Net                interest spread on interest-earning assets                (3) |   |                             | (0.13   | )%                                |   | 0.14                             | %      |                                    | 0.83    | % |   | 2.00 | % |
| Average                asset yield                                               |   |                             | 7.59    | %                                 |   | 7.68                             | %      |                                    | 8.39    | % |   | 8.28 | % |
| Net                yield on average interest-earning assets(1)                   |   |                             | 1.18    | %                                 |   | 1.22                             | %      |                                    | 1.90    | % |   | 2.95 | % |
| Cost                of funds                                                     |   |                             | 7.72    | %                                 |   | 7.54                             | %      |                                    | 7.56    | % |   | 6.28 | % |

|  **Year                Ended December****31, 2005**                         |   | **First****Quarter** |      | **Second****Quarter** |   | **Third****Quarter** |   | **Fourth****Quarter** |    |
|----------------------------------------------------------------------------------|--------|----------------------|-----------|-----------------------|--------|----------------------|--------|-----------------------|---------|
|                                                                             |   |                 |      |                  |   |                 |   |                  |    |
| Operating                results:                                                |   |                 |      |                  |   |                 |   |                  |    |
| Total                interest income                                             |   | $                    | 24,053    |                  | $      | 18,533               |   | $                     | 15,717  |   | $ | 16,092 |   |
| Net                interest income after provision for loan losses               |   |                 | 2,196     |                  |   | 2,068                |   |                  | 992     |   |   | 853 |   |
| Net                income (loss)                                                 |   |                 | 935       |                  |   | 9,594                |   |                  | (1,899  | ) |   | 955 |   |
| Basic                net (loss) income per common share                          |   |                 | (0.03     | )                     |   | 0.68                 |   |                  | (0.27   | ) |   | (0.03 | ) |
| Diluted                net (loss) income per common share                        |   |                 | (0.03     | )                     |   | 0.54                 |   |                  | (0.27   | ) |   | (0.03 | ) |
| Cash                dividends declared per common share                          |   |                 | -         |                  |   | -                    |   |                  | -       |   |   | - |   |
|                                                                             |   |                 |      |                  |   |                 |   |                  |    |   |   |   |   |
| Average                interest-earning assets (4)                               |   |                 | 1,320,065 |                  |   | 1,031,024            |   |                  | 884,336 |   |   | 817,944 |   |
| Average                borrowed funds                                            |   |                 | 1,214,329 |                  |   | 909,881              |   |                  | 745,776 |   |   | 678,966 |   |
|                                                                             |   |                 |      |                  |   |                 |   |                  |    |   |   |   |   |
| Net                interest spread on interest-earning assets                (3) |   |                 | 0.88      | %                     |   | 0.25                 | %      |                  | 0.22    | % |   | (0.23 | )% |
| Average                asset yield                                               |   |                 | 7.17      | %                     |   | 7.09                 | %      |                  | 7.04    | % |   | 7.13 | % |
| Net                yield on average interest-earning assets (1)                  |   |                 | 1.39      | %                     |   | 1.05                 | %      |                  | 1.26    | % |   | 1.01 | % |
| Cost                of funds                                                     |   |                 | 6.29      | %                     |   | 6.84                 | %      |                  | 6.82    | % |   | 7.37 | % |

*(1)*

*Computed      as net interest margin excluding non-interest non-recourse securitization      financing expenses divided by average interest earning assets.*

*(2)*

*The      decrease in net income during the third quarter of 2006 relates primarily to      loss of approximately $1.2 million recognized on the transfer of $279.0 million      of commercial mortgage loans to a joint venture and the derecognition of the      related non-recourse securitization financing of $254.5      million.*

*(3)*

*The      negative net interest spread on interest-earning assets resulted from the impact      of certain commercial loans being on non-accrual and an increase in amortization      expense related to deferred costs on our commercial securitizations resulting      from higher than anticipated prepayments on those      securitizations.*

*(4)*

*Excludes      cash and cash equivalents.*

----

**FORWARD-LOOKING      STATEMENTS**

*Reinvestment.*

*Economic      Conditions*

*Investment      Portfolio Cash Flow*

*Defaults.      *

----

*Interest      Rate Fluctuations.*

*Third-party      Servicers.*

*Prepayments.*

*Competition.*

*Regulatory      Changes.*

*Section      404 of the Sarbanes-Oxley Act of 2002*

*Other.*

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

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

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

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

----

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

|   | · | We                finance a portion of our investment portfolio with short-term recourse                repurchase agreements which subjects us to margin calls if the assets                pledged subsequently decline in                value. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

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

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

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

|   | · | We                are dependent on certain key                personnel. |
|--------|--------|--------------------------------------------------------------------------|

**RECENT      ACCOUNTING PRONOUNCEMENTS**

----

**ITEM      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET      RISK**

----

|                                                                 |   | **Projected                Change in Net Interest Margin Cash Flow From Base                Case** |   | **Projected                Change in Value, Expressed as a Percentage of Shareholders’                Equity** |
|----------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------|
| **Basis                Point Increase (Decrease) in Interest Rates** |   | **Excluding                Cash and Cash Equivalents**                                             |   | **Including                Cash and Cash Equivalents**                                                               |   |
|                                                                 |   |                                                                                               |   |                                                                                                                 |   |   |
| +200                                                                 |   | (3.9)%                                                                                             |   | 12.0%                                                                                                                |   | (0.3)% |
| +100                                                                 |   | (0.7)%                                                                                             |   | 6.8%                                                                                                                 |   | (0.0)% |
| Base                                                                 |   | -                                                                                                  |   | -                                                                                                                    |   | - |
| -100                                                                 |   | 0.7%                                                                                               |   | (6.8)%                                                                                                               |   | 0.0% |
| -200                                                                 |   | 4.5%                                                                                               |   | (11.6)%                                                                                                              |   | 0.3% |

**ITEM      8**
**.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

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

----

**ITEM      9A. CONTROLS AND PROCEDURES**

**ITEM      9B.**
**      OTHER INFORMATION**

**PART      III**

**ITEM      10.**
**      DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**

**ITEM      11.**
**      EXECUTIVE COMPENSATION**

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

----

**ITEM      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

**ITEM      14.**
**      PRINCIPAL ACCOUNTING FEES AND SERVICES**

**PART      IV**

**ITEM      15.**
**      EXHIBITS, FINANCIAL STATEMENT SCHEDULES **

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

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

| Number | Exhibit                                                                                                                                                                                                                                                                                                                         |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1    | Articles                of Incorporation of the Registrant, as amended, effective as of February                4, 1988. (Incorporated herein by reference to Dynex’s Amendment No. 1 to                the Registration Statement on Form S-3 (No. 333-10783) filed March                21,                1997.)  |
| 3.2    | Amended                and Restated Bylaws of the Registrant. (Incorporated by reference                to                Dynex’s Current Report on Form 8-K filed June 21, 2006.)                                                                                                                                   |
| 3.3    | Amendment                to Articles of Incorporation, effective December 29, 1989. (Incorporated                herein by reference to Dynex’s Amendment No. 1 to the Registration                Statement on Form S-3 (No. 333-10783) filed March 21, 1997.)                                                      |
| 3.4    | Amendment                to Articles of Incorporation, effective October 9, 1996. (Incorporated                herein by reference to the Registrant’s Current Report on Form 8-K, filed                October 15, 1996.)                                                                                           |
| 3.5    | Amendment                to Articles of Incorporation, effective October 19, 1992. (Incorporated                herein by reference to Dynex’s Amendment No. 1 to the Registration                Statement on Form S-3 (No. 333-10783) filed March 21,                1997.)                                   |
| 3.6    | Amendment                to Articles of Incorporation, effective April 25, 1997. (Incorporated                herein by reference to Dynex’s Quarterly Report on Form 10-Q for the                quarter ended March 31, 1997.)                                                                                     |

----

| 3.7  | Amendment                to Articles of Incorporation, effective June 17, 1998. (Incorporated                herein by reference to Dynex’s Annual Report on Form 10-K for the year                ended December 31, 2004.)                                                                                                                                                                                           |
|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.8  | Amendment                to Articles of Incorporation, effective August 2, 1999. (Incorporated                herein by reference to Dynex’s Annual Report on Form 10-K for the year                ended December 31, 2004.)                                                                                                                                                                                          |
| 3.9  | Amendment                to Articles of Incorporation, effective May 19, 2004. (Incorporated                herein                by reference to Dynex’s Quarterly Report on Form 10-Q for the quarter                ended June 30, 2004.)                                                                                                                                                                           |
| 3.10 | Amendments                to the Bylaws of Dynex. (Incorporated herein by reference to Dynex’s                Annual Report on Form 10-K for the year ended December 31, 2002,                as                amended.)                                                                                                                                                                                              |
| 10.1 | Dynex                Capital, Inc. 2004 Stock Incentive Plan. (Incorporated herein by                reference                to Dynex’s Annual Report on Form 10-K for the year ended December 31,                2004.)                                                                                                                                                                                              |
| 10.2 | Form                of Stock Option Agreement for Non-Employee Directors under the Dynex                Capital, Inc. 2004 Stock Incentive Plan. (Incorporated herein by                reference                to Dynex’s Quarterly Report on Form 10-Q for the quarter ended June 30,                2005.)                                                                                                         |
| 10.3 | Form                of Stock Appreciation Rights Agreement for Senior Executives under                the                Dynex Capital, Inc. 2004 Stock Incentive Plan. (Incorporated herein                by                reference to Dynex’s Quarterly Report on Form 10-Q for the quarter ended                June 30, 2005.)                                                                                  |
| 10.4 | Limited                Liability Company Agreement of Copperhead Ventures, LLC dated September                8,                2007 (portions of this exhibit have been omitted pursuant to a request                for                confidential treatment). (Incorporated herein by reference to Dynex’s                Quarterly Report on Form 10-Q for the quarter ended September 30,                2006.)  |
| 21.1 | List                of consolidated entities of Dynex (filed herewith).                                                                                                                                                                                                                                                                                                                                                      |
| 23.1 | Consent                of BDO Seidman, LLP (filed herewith).                                                                                                                                                                                                                                                                                                                                                                 |
| 23.2 | Consent                of Deloitte & Touche, LLP (filed herewith).                                                                                                                                                                                                                                                                                                                                                       |
| 31.1 | Certification                of Principal Executive Officer and Principal Financial Officer pursuant                to                Section 302 of the Sarbanes-Oxley Act of 2002 (filed                herewith).                                                                                                                                                                                                         |
| 32.1 | Certification                of Principal Executive Officer and Chief Financial Officer pursuant                to                Section 906 of the Sarbanes-Oxley Act of 2002 (filed                herewith).                                                                                                                                                                                                             |

----

**SIGNATURES**

|                         | **DYNEX                CAPITAL, INC.**                        |   |
|------------------------------|---------------------------------------------------------------|--------|
|                         | (Registrant)                                                  |   |
|                         |                                                          |   |
|                         |                                                          |   |
| April                2, 2007 | /s/                Stephen J. Benedetti                       |   |
|                         | Stephen                J. Benedetti, Executive Vice President |   |
|                         |                                                          |   |

| Signature                                 | Capacity                                    | Date                         |
|-------------------------------------------|---------------------------------------------|------------------------------|
|                                      |                                        |                         |
| /s/                Stephen J. Benedetti   | Principal                Executive Officer  | April                2, 2007 |
| Stephen                J. Benedetti       | Principal                Financial Officer  |                         |
|                                      |                                        |                         |
|                                      |                                        |                         |
| /s/                Jeffrey L. Childress   | Principal                Accounting Officer | April                2, 2007 |
| Jeffrey                L. Childress       |                                        |                         |
|                                      |                                        |                         |
|                                      |                                        |                         |
| /s/                Thomas B. Akin         | Director                                    | April                2, 2007 |
| Thomas                B. Akin             |                                        |                         |
|                                      |                                        |                         |
|                                      |                                        |                         |
| /s/                Leon A. Felman         | Director                                    | April                2, 2007 |
| Leon                A. Felman             |                                        |                         |
|                                      |                                        |                         |
|                                      |                                        |                         |
| /s/                Barry Igdaloff    | Director                                    | April                2, 2007 |
| Barry                Igdaloff             |                                        |                         |
|                                      |                                        |                         |
|                                      |                                        |                         |
| /s/                Daniel K. Osborne      | Director                                    | April                2, 2007 |
| Daniel                K. Osborne     |                                        |                         |
|                                      |                                        |                         |
|                                      |                                        |                         |
| /s/                Eric P. Von der Porten | Director                                    | April                2, 2007 |
| Eric                P. Von der Porten     |                                        |                         |
|                                      |                                        |                         |

----

----

**DYNEX      CAPITAL, INC.**

**INDEX      TO FINANCIAL STATEMENTS **

|   |                                                                                                                                 | Page   |
|--------|--------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |                                                                                                                                 |   |
|   | Report                of Independent Registered Public Accounting Firm for the Years ended                December 31, 2006 and 2005 | F-3    |
|   | Report                of Independent Registered Public Accounting Firm for the Year ended                December 31, 2004           | F-4    |
|   | Consolidated                Balance Sheets December 31, 2006 and 2005                                                                | F-5    |
|   | Consolidated                Statements of Operations -- Years ended December 31, 2006, 2005 and                2004                  | F-6    |
|   | Consolidated                Statements of Shareholders’ Equity -- Years ended December 31, 2006, 2005                and 2004  | F-7    |
|   | Consolidated                Statements of Cash Flows -- Years ended December 31, 2006, 2005 and                2004                  | F-8    |
|   | Notes                to Consolidated Financial Statements                                                                            | F-9    |

----

**REPORT      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

** **

**BDO      SEIDMAN LLP**

----

**REPORT      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

** **

**DELOITTE      & TOUCHE LLP**

----

**CONSOLIDATED      BALANCE SHEETS**

**DYNEX      CAPITAL, INC.**

*(amounts      in thousands except share data)*

|                                                                                                 |   |  **2006** |     |  **2005** |   |
|------------------------------------------------------------------------------------------------------|--------|----------------|----------|----------------|--------|
| **ASSETS**                                                                                           |   |      |     |      |   |
| Cash                and cash equivalents                                                             |   | $              | 56,880   |           | $      | 45,235 |   |
| Other                assets                                                                          |   |           | 6,111    |           |   | 4,332 |   |
|                                                                                                 |   |           | 62,991   |           |   | 49,567 |   |
| Investments:                                                                                         |   |           |     |           |   |   |   |
| Securitized                finance receivables, net                                                  |   |           | 346,304  |           |   | 722,152 |   |
| Investment                in joint venture                                                           |   |           | 37,388   |           |   | - |   |
| Securities                                                                                           |   |           | 13,143   |           |   | 24,908 |   |
| Other                investments                                                                     |   |           | 2,802    |           |   | 4,067 |   |
| Other                loans                                                                           |   |           | 3,929    |           |   | 5,282 |   |
|                                                                                                 |   |           | 403,566  |           |   | 756,409 |   |
|                                                                                                 |   | $              | 466,557  |           | $      | 805,976 |   |
| **LIABILITIES                AND SHAREHOLDERS’ EQUITY**                                        |   |           |     |           |   |   |   |
| LIABILITIES                                                                                          |   |           |     |           |   |   |   |
| Securitization                financing                                                              |   | $              | 211,564  |           | $      | 516,578 |   |
| Repurchase                agreements secured by securitization financing                             |   |           | 95,978   |           |   | 133,315 |   |
| Obligation                under payment agreement                                                    |   |           | 16,299   |           |   | - |   |
| Other                liabilities                                                                     |   |           | 6,178    |           |   | 6,749 |   |
|                                                                                                 |   |           | 330,019  |           |   | 656,642 |   |
|                                                                                                 |   |           |     |           |   |   |   |
| Commitments                and Contingencies (Note 15)                                               |   |           |     |           |   |   |   |
|                                                                                                 |   |           |     |           |   |   |   |
| SHAREHOLDERS’                EQUITY                                                            |   |           |     |           |   |   |   |
| Preferred                stock, par value $.01 per share,                                            |   |           |     |           |   |   |   |
| 50,000,000                shares authorized:                                                         |   |           |     |           |   |   |   |
| 9.5%                Cumulative Convertible Series D,                                                 |   |           |     |           |   |   |   |
| 4,221,539                and 5,628,737 shares issued and outstanding, respectively                   |   |           | 41,749   |           |   | 55,666 |   |
| ($43,218                and $57,624 aggregate liquidation preference,                respectively)   |   |           |     |           |   |   |   |
| Common                stock, par value $.01 per share, 100,000,000 shares                authorized, |   |           |     |           |   |   |   |
| 12,131,262                and 12,163,391 shares issued and outstanding, respectively                 |   |           | 121      |           |   | 122 |   |
| Additional                paid-in capital                                                            |   |           | 366,637  |           |   | 366,903 |   |
| Accumulated                other comprehensive income                                                |   |           | 663      |           |   | 140 |   |
| Accumulated                deficit                                                                   |   |           | (272,632 | )              |   | (273,497 | ) |
|                                                                                                 |   |           | 136,538  |           |   | 149,334 |   |
|                                                                                                 |   | $              | 466,557  |           | $      | 805,976 |   |

*See      notes to consolidated financial statements.*

----

**CONSOLIDATED      STATEMENTS OF OPERATIONS**

**DYNEX      CAPITAL, INC.**

*(amounts      in thousands except share data)*

|                                                                                             |   | **2006**     |   | **2005**     |   | **2004**     |   |
|--------------------------------------------------------------------------------------------------|--------|--------------|--------|--------------|--------|--------------|--------|
| Interest                income:                                                                  |   |    |   |    |   |    |   |
| Securitized                finance receivables                                                   |   | $            | 46,240 |         | $      | 68,387       |   | $ | 118,647 |   |
| Securities                                                                                       |   |         | 1,558  |         |   | 3,885        |   |   | 2,535 |   |
| Other                investments                                                                 |   |         | 2,015  |         |   | 1,369        |   |   | 335 |   |
| Other                loans                                                                       |   |         | 636    |         |   | 754          |   |   | 706 |   |
|                                                                                             |   |         | 50,449 |         |   | 74,395       |   |   | 122,223 |   |
|                                                                                             |   |         |   |         |   |         |   |   |   |   |
| Interest                and related expense:                                                     |   |         |   |         |   |         |   |   |   |   |
| Non-recourse                securitization financing                                             |   |         | 33,172 |         |   | 57,166       |   |   | 98,271 |   |
| Repurchase                agreements and senior notes                                            |   |         | 5,933  |         |   | 5,428        |   |   | 567 |   |
| Obligation                under payment agreement                                                |   |         | 489    |         |   | -            |   |   | - |   |
| Other                                                                                            |   |         | (232   | )            |   | (88          | )      |   | 104 |   |
|                                                                                             |   |         | 39,362 |         |   | 62,506       |   |   | 98,942 |   |
|                                                                                             |   |         |   |         |   |         |   |   |   |   |
| Net                interest income                                                               |   |         | 11,087 |         |   | 11,889       |   |   | 23,281 |   |
| Recapture                of (provision for) loan losses                                          |   |         | 15     |         |   | (5,780       | )      |   | (18,463 | ) |
| Net                interest income after recapture of (provision for) loan                losses |   |         | 11,102 |         |   | 6,109        |   |   | 4,818 |   |
|                                                                                             |   |         |   |         |   |         |   |   |   |   |
| Impairment                charges                                                                |   |         | (60    | )            |   | (2,474       | )      |   | (14,756 | ) |
| Equity                in loss of joint venture                                                   |   |         | (852   | )            |   | -            |   |   | - |   |
| Loss                on capitalization of joint venture                                           |   |         | (1,194 | )            |   | -            |   |   | - |   |
| (Loss)                gain on sale of investments, net                                           |   |         | (183   | )            |   | 9,609        |   |   | 14,490 |   |
| General                and administrative expenses                                               |   |         | (4,521 | )            |   | (5,681       | )      |   | (7,748 | ) |
| Other                income (expense)                                                            |   |         | 617    |         |   | 2,022        |   |   | (179 | ) |
| Net                income (loss)                                                                 |   |         | 4,909  |         |   | 9,585        |   |   | (3,375 | ) |
| Preferred                stock charge                                                            |   |         | (4,044 | )            |   | (5,347       | )      |   | (1,819 | ) |
| Net                income (loss) to common shareholders                                          |   | $            | 865    |         | $      | 4,238        |   | $ | (5,194 | ) |
|                                                                                             |   |         |   |         |   |         |   |   |   |   |
| Net                income (loss) per common share :                                              |   |         |   |         |   |         |   |   |   |   |
| Basic                and diluted                                                                 |   | $            | 0.07   |         | $      | 0.35         |   | $ | (0.46 | ) |
|                                                                                             |   |         |   |         |   |         |   |   |   |   |

*See      notes to consolidated financial statements.*

----

**CONSOLIDATED      STATEMENTS OF SHAREHOLDERS’ EQUITY**

**DYNEX      CAPITAL, INC.**

*(amounts      in thousands except share data)*

|                                                                  |        |  **Preferred****Stock** |    |  **Common****Stock** |   |  **Additional****Paid-in****Capital** |   | **Accumulated                Other****Comprehensive                (Loss) Income** |    |   **Accumulated****Deficit** |   |   **Total** |   |
|------------------------------------------------------------------|--------|------------------------------|---------|---------------------------|--------|--------------------------------------------|--------|------------------------------------------------------------------------------------|---------|----------------------------------------|--------|-----------------------|--------|
| Balance                at January 1, 2004                        |   | $                            | 47,014  |                      | $      | 109                                        |   | $                                                                                  | 360,684 |                                   | $      | (3,882                | )      | $ | (254,079 | ) | $ | 149,846 |   |
|                                                             |   |                         |    |                      |   |                                       |   |                                                                               |    |                                   |   |                  |   |   |   |   |   |   |   |
| Comprehensive                income:                             |   |                         |    |                      |   |                                       |   |                                                                               |    |                                   |   |                  |   |   |   |   |   |   |   |
| Net                loss - 2004                                   |   |                         | -       |                      |   | -                                          |   |                                                                               | -       |                                   |   | -                     |   |   | (3,375 | ) |   | (3,375 | ) |
| Change                in net unrealized gain on:                 |
| Investments                classified as available for sale      |   |                         | -       |                      |   | -                                          |   |                                                                               | -       |                                   |   | 4,681                 |   |   | - |   |   | 4,681 |   |
| Hedge                instruments                                 |   |                         | -       |                      |   | -                                          |   |                                                                               | -       |                                   |   | 3,018                 |   |   | - |   |   | 3,018 |   |
| Total                comprehensive income                        |   |                         |    |                      |   |                                       |   |                                                                               |    |                                   |   |                  |   |   |   |   |   | 4,324 |   |
|                                                             |   |                         |    |                      |   |                                       |   |                                                                               |    |                                   |   |                  |   |   |   |   |   |   |   |
| Recapitalization                                                 |   |                         | 8,652   |                      |   | 13                                         |   |                                                                               | 6,212   |                                   |   | -                     |   |   | (16,345 | ) |   | (1,468 | ) |
| Dividends                on preferred stock                      |   |                         | -       |                      |   | -                                          |   |                                                                               | -       |                                   |   | -                     |   |   | (3,936 | ) |   | (3,936 | ) |
|                                                             |   |                         |    |                      |   |                                       |   |                                                                               |    |                                   |   |                  |   |   |   |   |   |   |   |
| Balance                at December 31, 2004                      |   |                         | 55,666  |                      |   | 122                                        |   |                                                                               | 366,896 |                                   |   | 3,817                 |   |   | (277,735 | ) |   | 148,766 |   |
|                                                             |   |                         |    |                      |   |                                       |   |                                                                               |    |                                   |   |                  |   |   |   |   |   |   |   |
| Comprehensive                income:                             |   |                         |    |                      |   |                                       |   |                                                                               |    |                                   |   |                  |   |   |   |   |   |   |   |
| Net                income - 2005                                 |   |                         | -       |                      |   | -                                          |   |                                                                               | -       |                                   |   | -                     |   |   | 9,585 |   |   | 9,585 |   |
| Change                in net unrealized gain/(loss) on:          |
| Investments                classified as available for sale      |   |                         | -       |                      |   | -                                          |   |                                                                               | -       |                                   |   | (4,286                | )      |   | - |   |   | (4,286 | ) |
| Hedge                instruments                                 |   |                         | -       |                      |   | -                                          |   |                                                                               | -       |                                   |   | 609                   |   |   | - |   |   | 609 |   |
| Total                comprehensive income                        |   |                         |    |                      |   |                                       |   |                                                                               |    |                                   |   |                  |   |   |   |   |   | 5,908 |   |
|                                                             |   |                         |    |                      |   |                                       |   |                                                                               |    |                                   |   |                  |   |   |   |   |   |   |   |
| Issuance                of common stock                          |   |                         | -       |                      |   | -                                          |   |                                                                               | 7       |                                   |   | -                     |   |   | - |   |   | 7 |   |
| Dividends                on preferred stock                      |   |                         | -       |                      |   | -                                          |   |                                                                               | -       |                                   |   | -                     |   |   | (5,347 | ) |   | (5,347 | ) |
|                                                             |   |                         |    |                      |   |                                       |   |                                                                               |    |                                   |   |                  |   |   |   |   |   |   |   |
| Balance                at December 31, 2005                      |   |                         | 55,666  |                      |   | 122                                        |   |                                                                               | 366,903 |                                   |   | 140                   |   |   | (273,497 | ) |   | 149,334 |   |
|                                                             |   |                         |    |                      |   |                                       |   |                                                                               |    |                                   |   |                  |   |   |   |   |   |   |   |
| Comprehensive                income:                             |   |                         |    |                      |   |                                       |   |                                                                               |    |                                   |   |                  |   |   |   |   |   |   |   |
| Net                income - 2006                                 |   |                         | -       |                      |   | -                                          |   |                                                                               | -       |                                   |   | -                     |   |   | 4,909 |   |   | 4,909 |   |
| Change                in net unrealized gain/(loss) on:          |
| Investments                classified as available for sale, net |   |                         | -       |                      |   | -                                          |   |                                                                               | -       |                                   |   | 523                   |   |   | - |   |   | 523 |   |
| Total                comprehensive income                        |   |                         |    |                      |   |                                       |   |                                                                               |    |                                   |   |                  |   |   |   |   |   | 5,432 |   |
|                                                             |   |                         |    |                      |   |                                       |   |                                                                               |    |                                   |   |                  |   |   |   |   |   |   |   |
| Redemption                of preferred stock                     |   |                         | (13,917 | )                         |   | -                                          |   |                                                                               | (155    | )                                      |   | -                     |   |   | - |   |   | (14,072 | ) |
| Conversion                of preferred stock for common stock    |   |                         | -       |                      |   | -                                          |   |                                                                               | 4       |                                   |   | -                     |   |   | - |   |   | 4 |   |
| Repurchase                of common stock                        |   |                         | -       |                      |   | (1                                         | )      |                                                                               | (219    | )                                      |   | -                     |   |   | - |   |   | (220 | ) |
| Stock                option issuance                             |   |                         | -       |                      |   | -                                          |   |                                                                               | 104     |                                   |   | -                     |   |   | - |   |   | 104 |   |
| Dividends                on preferred stock                      |   |                         | -       |                      |   | -                                          |   |                                                                               | -       |                                   |   | -                     |   |   | (4,044 | ) |   | (4,044 | ) |
|                                                             |   |                         |    |                      |   |                                       |   |                                                                               |    |                                   |   |                  |   |   |   |   |   |   |   |
| Balance                at December 31, 2006                      |   | $                            | 41,749  |                      | $      | 121                                        |   | $                                                                                  | 366,637 |                                   | $      | 663                   |   | $ | (272,632 | ) | $ | 136,538 |   |

*See      notes to consolidated financial statements.*

----

**CONSOLIDATED      STATEMENTS OF CASH FLOWS**

**DYNEX      CAPITAL, INC.**

*(amounts      in thousands except share data)*

|                                                                                                               |   | **2006** |     | **2005** |   | **2004** |   |
|--------------------------------------------------------------------------------------------------------------------|--------|----------|----------|----------|--------|----------|--------|
| Operating                activities:                                                                               |   |     |     |     |   |     |   |
| Net                income (loss)                                                                                   |   | $        | 4,909    |     | $      | 9,585    |   | $ | (3,375 | ) |
| Adjustments                to reconcile net income (loss) to cash provided by operating                activities: |   |     |     |     |   |     |   |   |   |   |
| (Recapture                of) provision for loan loss                                                              |   |     | (15      | )        |   | 5,780    |   |   | 18,463 |   |
| Equity                in loss of joint venture                                                                     |   |     | 852      |     |   | -        |   |   | - |   |
| Loss                on capitalization of joint venture                                                             |   |     | 1,194    |     |   | -        |   |   | - |   |
| Impairment                charges                                                                                  |   |     | 60       |     |   | 2,474    |   |   | 14,756 |   |
| Loss                (gain) on sale of investments                                                                  |   |     | 183      |     |   | (9,609   | )      |   | (14,490 | ) |
| Amortization                and depreciation                                                                       |   |     | (538     | )        |   | 2,607    |   |   | 3,726 |   |
| Stock                based compensation expense                                                                    |   |     | 104      |     |   | -        |   |   | - |   |
| Net                change in other assets and other liabilities                                                    |   |     | 676      |     |   | 1,500    |   |   | 3,953 |   |
| Net                cash and cash equivalents provided by operating activities                                      |   |     | 7,425    |     |   | 12,337   |   |   | 23,033 |   |
|                                                                                                               |   |     |     |     |   |     |   |   |   |   |
| Investing                activities:                                                                               |   |     |     |     |   |     |   |   |   |   |
| Principal                payments received on investments                                                          |   |     | 93,945   |     |   | 144,532  |   |   | 286,212 |   |
| Purchase                of securities and other investments                                                        |   |     | (17,221  | )        |   | (56,246  | )      |   | (71,468 | ) |
| Payments                received on securities, other investments and loans                                        |   |     | 28,819   |     |   | 117,264  |   |   | 21,601 |   |
| Proceeds                from sales of securities and other investments                                             |   |     | 3,348    |     |   | 15,321   |   |   | 32,066 |   |
| Other                                                                                                              |   |     | (385     | )        |   | 168      |   |   | 180 |   |
| Net                cash and cash equivalents provided by investing activities                                      |   |     | 108,506  |     |   | 221,039  |   |   | 268,591 |   |
|                                                                                                               |   |     |     |     |   |     |   |   |   |   |
| Financing                activities:                                                                               |   |     |     |     |   |     |   |   |   |   |
| Proceeds                from issuance of securitization financing                                                  |   |     | -        |     |   | -        |   |   | 7,377 |   |
| Principal                payments on securitization financing                                                      |   |     | (48,283  | )        |   | (102,510 | )      |   | (286,330 | ) |
| Redemption                of securitization financing                                                              |   |     | -        |     |   | (195,653 | )      |   | - |   |
| Repayment                of senior notes                                                                           |   |     | -        |     |   | -        |   |   | (10,872 | ) |
| (Repayment                of) borrowings under repurchase agreements, net                                          |   |     | (37,337  | )        |   | 62,847   |   |   | 46,584 |   |
| Redemption                of preferred stock                                                                       |   |     | (14,068  | )        |   | -        |   |   | (648 | ) |
| Repurchase                of common stock                                                                          |   |     | (220     | )        |   | -        |   |   | - |   |
| Dividends                paid                                                                                      |   |     | (4,378   | )        |   | (5,347   | )      |   | (2,599 | ) |
| Net                cash and cash equivalents used for financing activities                                         |   |     | (104,286 | )        |   | (240,663 | )      |   | (246,488 | ) |
| Net                increase (decrease) in cash and cash equivalents                                                |   |     | 11,645   |     |   | (7,287   | )      |   | 45,136 |   |
| Cash                and cash equivalents at beginning of year                                                      |   |     | 45,235   |     |   | 52,522   |   |   | 7,386 |   |
| Cash                and cash equivalents at end of year                                                            |   | $        | 56,880   |     | $      | 45,235   |   | $ | 52,522 |   |

*See      notes to consolidated financial statements.*

----

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**DYNEX      CAPITAL, INC.**

*(amounts      in thousands except share and per share data)*

**NOTE      1 - BASIS OF PRESENTATION**

**Basis      of Presentation**

**NOTE      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

**Consolidation      of Subsidiaries**

**Federal      Income Taxes**

----

**Investments**

*Securitized      Finance Receivables.*

*Investment      in Joint Venture.*

*Other      Investments.*

*Securities.      *

*Other      loans*

*Interest      Income.*

----

**Premiums,      Discounts and Hedging Basis Adjustments**

**Debt      Issuance Costs**

**Derivative      Financial Instruments**

----

**Cash      Equivalents**

**Net      Income Per Common Share**

**Use      of Estimates**

*Fair      Value. *

*Allowance      for Loan Losses. *

----

*Impairments.      *

*Mortgage      Servicing Rights.*

*Contingencies.*
*Accounting      for Contingencies*

**Securitization      Transactions**

**Recent      Accounting Pronouncements**

----

----

**NOTE      3 - SECURITIZED FINANCE RECEIVABLES**

|                                                                       |   | **2006** | ** ** | **2005** |   |
|----------------------------------------------------------------------------|--------|----------|------------|----------|--------|
| Collateral:                                                                |   |     |       |     |   |
| Commercial                mortgage loans                                   |   | $        | 225,463    |     | $      | 570,199 |   |
| Single-family                mortgage loans                                |   |     | 116,060    |     |   | 161,058 |   |
|                                                                       |   |     | 341,523    |     |   | 731,257 |   |
| Funds                held by trustees, including funds held for defeasance |   |     | 7,351      |     |   | 6,648 |   |
| Accrued                interest receivable                                 |   |     | 2,380      |     |   | 5,114 |   |
| Unamortized                discounts and premiums, net                     |   |     | (455       | )        |   | (1,832 | ) |
| Loans,                at amortized cost                                    |   |     | 350,799    |     |   | 741,187 |   |
| Allowance                for loan losses                                   |   |     | (4,495     | )        |   | (19,035 | ) |
|                                                                       |   | $        | 346,304    |     | $      | 722,152 |   |

**NOTE      4 - ALLOWANCE FOR LOAN LOSSES**

|                                                    |   | **2006** |    | **2005** |   | **2004** |   |
|---------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
| Allowance                at beginning of year           |   | $        | 19,035  |     | $      | 28,014   |   | $ | 43,364 |   |
| (Recapture                of) provision for loan losses |   |     | (15     | )        |   | 5,780    |   |   | 18,463 |   |
| Credit                losses, net of recoveries         |   |     | (4,172  | )        |   | (3,450   | )      |   | (17,651 | ) |
| Loans                sold/transferred                   |   |     | (10,353 | )        |   | (11,309  | )      |   | (16,162 | ) |
| Allowance                at end of year                 |   | $        | 4,495   |     | $      | 19,035   |   | $ | 28,014 |   |

----

|   |   | **Total                Recorded Investment in Impaired Loans** |   | **Amount                for Which There is a Related Allowance for Credit                Losses** |   | **Amount                for Which There is no Related Allowance for Credit                Losses** |   |
|--------|--------|----------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------|--------|
| 2005   |   | $                                                              | 54,558 |                                                                                              | $      | 21,609                                                                                             |   | $ | 32,949 |   |
| 2006   |   |                                                           | 13,266 |                                                                                              |   | 4,107                                                                                              |   |   | 9,159 |   |

**NOTE      5 - SECURITIES**

|                                                             |   | **2006**        |   | **2005**                                   |   |
|------------------------------------------------------------------|--------|-----------------|--------|--------------------------------------------|--------|
|                                                             |   |  **Value** |   | **Effective                Interest Rate** |   |  **Value** |   | **Effective                Interest Rate** |   |
| Securities,                available-for-sale at amortized cost: |   |            |   |                                       |   |   |   |   |   |
| Fixed-rate                mortgage securities                    |   | $               | 11,362 |                                       |   | 7.22% |   | $ | 22,900 |   |   | 6.14% |   |
| Other                securities                                  |   |            | -      |                                       |   |   |   |   | 320 |   |   |   |   |
| Equity                securities                                 |   |            | 1,151  |                                       |   |   |   |   | 1,602 |   |   |   |   |
|                                                             |   |            | 12,513 |                                       |   |   |   |   | 24,822 |   |   |   |   |
| Gross                unrealized gains                            |   |            | 636    |                                       |   |   |   |   | 332 |   |   |   |   |
| Gross                unrealized losses                           |   |            | (6     | )                                          |   |   |   |   | (246 | ) |   |   |   |
| Securities,                available-for-sale at fair value      |   | $               | 13,143 |                                       |   |   |   | $ | 24,908 |   |   |   |   |

*Investment      activity.*

*Unrealized      gain/loss on securities.*

----

**NOTE      6 - OTHER INVESTMENTS**

|                                                            |   | **2006** |   | **2005** |   |
|-----------------------------------------------------------------|--------|----------|--------|----------|--------|
| Delinquent                property tax receivables and security |   | $        | 2,227  |     | $      | 3,220 |   |
| Real                estate owned                                |   |     | 575    |     |   | 847 |   |
|                                                            |   | $        | 2,802  |     | $      | 4,067 |   |

**NOTE      7 - OTHER LOANS**

|                                                                    |   | **2006** |   | **2005** |   |
|-------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Single-family                mortgage loans                             |   | $        | 3,345  |     | $      | 4,825 |   |
| Multifamily                and commercial mortgage loans participations |   |     | 962    |     |   | 995 |   |
|                                                                    |   |     | 4,307  |     |   | 5,820 |   |
| Unamortized                discounts                                    |   |     | (378   | )        |   | (538 | ) |
|                                                                    |   | $        | 3,929  |     | $      | 5,282 |   |

**NOTE      8 - SECURITIZATION FINANCING**

----

|                                           |   | **2006**                             |                     | **2005**                                                     |   |
|------------------------------------------------|--------|--------------------------------------|--------------------------|--------------------------------------------------------------|--------|
|                                           |   | **Bonds                Outstanding** |                     | **Range                of****Interest                Rates** |   | **Bonds                Outstanding** |   | **Range                of****Interest                Rates** |   |
| Fixed-rate                classes              |   | $                                    | 206,478                  |                                                         |   | 6.6%                - 8.8% |   | $ | 509,923 |   |   | 6.6%                - 8.8% |   |
| Accrued                interest payable        |   |                                 | 1,428                    |                                                         |   |   |   |   | 3,438 |   |   |   |   |
| Deferred                costs                  |   |                                 | (2,848                   | )                                                            |   |   |   |   | (16,912 | ) |   |   |   |
| Unamortized                net bond premium    |   |                                 | 6,506                    |                                                         |   |   |   |   | 20,129 |   |   |   |   |
|                                           |   | $                                    | 211,564                  |                                                         |   |   |   | $ | 516,578 |   |   |   |   |
|                                           |   |                                 |                     |                                                         |   |   |   |   |   |   |   |   |   |
| Range                of stated maturities      |   |                                 | 2024-2027                |                                                         |   |   |   |   | 2009-2028 |   |   |   |   |
| Estimated                weighted average life |   |                                 | 3.5                years |                                                         |   |   |   |   | 3.5                years |   |   |   |   |
| Number                of series                |   |                                 | 2                        |                                                         |   |   |   |   | 3 |   |   |   |   |

**NOTE      9 - REPURCHASE AGREEMENTS **

**NOTE      10 - FAIR VALUE AND ADDITIONAL INFORMATION ABOUT FINANCIAL      INSTRUMENTS**

|                                                  |   | **2006**              |    | **2005**          |   |
|-------------------------------------------------------|--------|-----------------------|---------|-------------------|--------|
|                                                  |   | **Recorded****Basis** |    | **Fair****Value** |   | **Recorded****Basis** |   | **Fair****Value** |   |
| Assets:                                               |   |                  |    |              |   |   |   |   |   |
| Securitized                  finance receivables, net |   | $                     | 346,304 |              | $      | 369,984 |   | $ | 722,152 |   | $ | 761,287 |   |
| Other                  investments                    |   |                  | 2,802   |              |   | 2,802 |   |   | 4,067 |   |   | 4,067 |   |
| Securities                                            |   |                  | 13,143  |              |   | 13,143 |   |   | 24,908 |   |   | 24,908 |   |
| Other                  loans                          |   |                  | 3,929   |              |   | 4,705 |   |   | 5,282 |   |   | 6,040 |   |
|                                                  |   |                  |    |              |   |   |   |   |   |   |   |   |   |
| Liabilities:                                          |   |                  |    |              |   |   |   |   |   |   |   |   |   |
| Securitization                  financing             |   |                  | 211,564 |              |   | 230,575 |   |   | 516,578 |   |   | 556,610 |   |
| Repurchase                  agreements                |   |                  | 95,978  |              |   | 95,978 |   |   | 133,315 |   |   | 133,315 |   |
| Obligation                  under payment agreement   |   |                  | 16,299  |              |   | 16,541 |   |   | - |   |   | - |   |

----

**NOTE      11 - INVESTMENT IN JOINT VENTURE**

----

| **Condensed                Statement of Operations** |   |   |   |
|------------------------------------------------------|--------|--------|--------|
| Interest                income                       |   | $      | 1,611  |   |
| Interest                expense                      |   |   | -      |   |
| Impairment                                           |   |   | (3,664 | ) |
| Trading                gains                         |   |   | 589    |   |
| Net                loss                              |   | $      | (1,508 | ) |

| **Condensed                Balance Sheet** |   |   |   |
|--------------------------------------------|--------|--------|--------|
| Total                assets                |   | $      | 73,219 |   |
| Total                liabilities           |   |   | -      |   |
| Total                equity                |   | $      | 73,219 |   |

**NOTE      12 - INCOME (LOSS) PER SHARE**

|                                                                                                                        |   | **2006**                         |   | **2005**                                             |   | **2004**                         |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|------------------------------------------------------|--------|----------------------------------|--------|
|                                                                                                                        |   |   **Income****(loss)** |   | **Weighted-Average                Number of Shares** |   |   **Income****(loss)** |   | **Weighted-Average                Number of Shares** |   |   **Income****(loss)** |   | **Weighted-Average****Number                of****Shares** |   |
|                                                                                                                        |   |                             |   |                                                 |   |                             |   |   |   |   |   |   |   |
| Net                income (loss)                                                                                            |   | $                                | 4,909  |                                                 |   |                             |   | $ | 9,585 |   |   |   |   | $ | (3,375 | ) |   |   |   |
| Preferred                stock charge                                                                                       |   |                             | (4,044 | )                                                    |   |                             |   |   | (5,347 | ) |   |   |   |   | (1,819 | ) |   |   |   |
| Net                income (loss) available to common shareholders                                                           |   | $                                | 865    |                                                 |   | 12,140,452                       |   | $ | 4,238 |   |   | 12,163,062 |   | $ | (5,194 | ) |   | 11,272,259 |   |
|                                                                                                                        |   |                             |   |                                                 |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                income (loss) per share:                                                                                 |   |                             |   |                                                 |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                and diluted                                                                                            |   |                             |   |                                                 | $      | 0.07                             |   |   |   |   | $ | 0.35 |   |   |   |   | $ | (0.46 | ) |
|                                                                                                                        |   |                             |   |                                                 |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividends                and potentially anti-dilutive common shares assuming conversion of                preferred stock: |   |                             |   |                                                 |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Series                A                                                                                                     |   | $                                | -      |                                                 |   | -                                |   | $ | - |   |   | - |   | $ | 337 |   |   | 94,403 |   |
| Series                B                                                                                                     |   |                             | -      |                                                 |   | -                                |   |   | - |   |   | - |   |   | 537 |   |   | 131,621 |   |
| Series                C                                                                                                     |   |                             | -      |                                                 |   | -                                |   |   | - |   |   | - |   |   | 666 |   |   | 130,990 |   |
| Series                D                                                                                                     |   |                             | 4,044  |                                                 |   | 4,256,237                        |   |   | 5,347 |   |   | 5,628,737 |   |   | 3,936 |   |   | 3,491,047 |   |
| Expense                and incremental shares of stock appreciation rights and                options                       |   |                             | -      |                                                 |   | 81,180                           |   |   | - |   |   | 64 |   |   | - |   |   | 21,045 |   |
|                                                                                                                        |   |                             |   |                                                 |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                        |   | $                                | 4,044  |                                                 |   | 4,337,417                        |   | $ | 5,347 |   |   | 5,628,801 |   | $ | 5,476 |   |   | 3,869,106 |   |

----

**NOTE      13 - PREFERRED AND COMMON STOCK**

|                                                      | **Issue                Price** | **Dividends                Paid Per Share** |
|-----------------------------------------------------------|--------------------------------|---------------------------------------------|
| **Cumulative                Convertible Preferred Stock** | **Per                share**   | **2006**                                    | **2005** | **2004** |
| Series                D 9.50% (“Series D”)    | $10.00                         | $0.9500                                     | $0.9500 | $0.6993 |

|                             |   | **Preferred                Shares** |     | **Common**                  |   |
|----------------------------------|--------|-------------------------------------|----------|-----------------------------|--------|
|                             |   | **Series                A**         |     | **Series                B** |   | **Series                C** |   | **Series                D** |   | **Total** |   | **Shares** |   |
| January                1, 2004   |   |                                | 493,595  |                        |   | 688,189 |   |   | 684,893 |   |   | - |   |   | 1,866,677 |   |   | 10,873,903 |   |
| Recapitalization                 |   |                                | (493,595 | )                           |   | (688,189 | ) |   | (684,893 | ) |   | 5,628,737 |   |   | 3,762,060 |   |   | 1,288,488 |   |
| December                31, 2004 |   |                                | -        |                        |   | - |   |   | - |   |   | 5,628,737 |   |   | 5,628,737 |   |   | 12,162,391 |   |
| Grant                            |   |                                | -        |                        |   | - |   |   | - |   |   | - |   |   | - |   |   | 1,000 |   |
| December                31, 2005 |   |                                | -        |                        |   | - |   |   | - |   |   | 5,628,737 |   |   | 5,628,737 |   |   | 12,163,391 |   |
| Redemption                       |   |                                | -        |                        |   | - |   |   | - |   |   | (1,406,767 | ) |   | (1,406,767 | ) |   | - |   |
| Conversion                       |   |                                | -        |                        |   | - |   |   | - |   |   | (431 | ) |   | (431 | ) |   | 431 |   |
| Repurchase                       |   |                                | -        |                        |   | - |   |   | - |   |   | - |   |   | - |   |   | (32,560 | ) |
| December                31, 2006 |   |                                | -        |                        |   | - |   |   | - |   |   | 4,221,539 |   |   | 4,221,539 |   |   | 12,131,262 |   |

----

**NOTE      14 - EMPLOYEE BENEFITS**

**Stock      Incentive Plan**

|                                                   |   | **SARs**                            |    | **Stock                Options**                   |   |
|--------------------------------------------------------|--------|-------------------------------------|---------|----------------------------------------------------|--------|
|                                                   |   | **Number                Of Shares** |    | **Weighted                Average Exercise Price** |   | **Number                Of Shares** |   | **Weighted                Average Exercise Price** |   |
| Shares                outstanding at beginning of year |   |                                | 126,297 |                                               | $      | 7.81 |   |   | 40,000 |   | $ | 8.46 |   |
| Shares                granted                          |   |                                | 77,000  |                                               |   | 6.61 |   |   | 35,000 |   |   | 7.43 |   |
| Shares                forfeited or redeemed            |   |                                | -       |                                               |   | - |   |   | - |   |   | - |   |
| Shares                exercised                        |   |                                | -       |                                               |   | - |   |   | - |   |   | - |   |
| Shares                outstanding at end of year       |   |                                | 203,297 |                                               |   | 7.36 |   |   | 75,000 |   |   | 7.98 |   |
|                                                   |   |                                |    |                                               |   |   |   |   |   |   |   |   |   |
| Shares                vested and exercisable           |   |                                | 31,574  |                                               | $      | 7.81 |   |   | 75,000 |   | $ | 7.98 |   |

----

|                                       |   | **SARs                Granted**    |       | **Options                Granted**  |   |
|--------------------------------------------|--------|------------------------------------|------------|-------------------------------------|--------|
|                                       |   | **January                3, 2005** |       | **January                12, 2006** |   | **June                17, 2005** |   | **June                16, 2006** |   |
| Expected                volatility         |   |                               | 14.6%-17.8 | %                                   |   | 17.2%-22.9 | % |   | 20.8 | % |   | 21.8 | % |
| Weighted-average                volatility |   |                               | 16.1       | %                                   |   | 19.4 | % |   | 20.8 | % |   | 21.8 | % |
| Expected                dividends          |   |                               | 0          | %                                   |   | 0 | % |   | 0 | % |   | 0 | % |
| Expected                term (in months)   |   |                               | 35         |                                |   | 45 |   |   | 26 |   |   | 30 |   |
| Risk-free                rate              |   |                               | 4.68       | %                                   |   | 4.68 | % |   | 4.80 | % |   | 5.11 | % |

**Employee      Savings Plan**

**401(k)      Overflow Plan**

----

**NOTE      15 - COMMITMENTS AND CONTINGENCIES**

| **Years                Ending December 31,** |   | **Leases** |   |
|----------------------------------------------|--------|------------|--------|
| 2007                                         |   | $          | 145    |   |
| 2008                                         |   |       | 64     |   |
| 2009                                         |   |       | -      |   |
| 2010                                         |   |       | -      |   |
| 2011                and thereafter           |   |       | -      |   |
| Total                                        |   | $          | 209    |   |

**NOTE      16 - LITIGATION **

----

**NOTE      17 - SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS      INFORMATION**

|                                                                                                                      |   | **Years                ended December 31,** |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|--------|
|                                                                                                                      |   | **2006**                                    |   | **2005** |   | **2004** |   |
| Cash                paid for interest                                                                                     |   | $                                           | 40,932 |   | $ | 61,824 |   | $ | 96,473 |   |
|                                                                                                                      |   |                                        |   |   |   |   |   |   |   |   |
| Supplemental                disclosure of non-cash activities:                                                            |   |                                        |   |   |   |   |   |   |   |   |
| 9.75%                senior unsecured notes due April 2007 issued in connection with                recapitalization plan |   | $                                           | -      |   | $ | - |   | $ | 823 |   |
| Formation                of joint venture with Deutsche Bank                                                              |   | $                                           | 38,248 |   | $ | - |   | $ | - |   |
| Conversion                of preferred shares to common shares                                                            |   | $                                           | 4      |   | $ | - |   | $ | - |   |

----

**NOTE      18 - RELATED PARTY TRANSACTIONS**

**NOTE      19 - NON-CONSOLIDATED AFFILIATES**

| **Condensed                Statement of Operations (Unaudited)** |   |
|------------------------------------------------------------------|--------|
|                                                             |   | **2006** |   | **2005** |   | **2004** |   |
| Total                revenues                                    |   | $ | 2,538 |   | $ | 2,538 |   | $ | 2,537 |   |
| Total                expenses                                    |   | $ | 1,594 |   | $ | 1,729 |   | $ | 1,831 |   |
| Net                income                                        |   | $ | 944 |   | $ | 809 |   | $ | 706 |   |

| **Condensed                Balance Sheet (Unaudited)** |   |
|--------------------------------------------------------|--------|
|                                                   |   | **2006** |   | **2005** |   |
| Total                assets                            |   | $ | 15,638 |   | $ | 16,103 |   |
| Total                liabilities                       |   | $ | 10,832 |   | $ | 12,240 |   |
| Total                equity                            |   | $ | 4,807 |   | $ | 3,863 |   |

----

**NOTE      20 - SUMMARY OF QUARTERLY RESULTS (UNAUDITED)**

| **Year                Ended December 31, 2006**                     |   | **First                Quarter** |   | **Second                Quarter** |   | **Third                Quarter** |   | **Fourth                Quarter** |   |
|---------------------------------------------------------------------|--------|----------------------------------|--------|-----------------------------------|--------|----------------------------------|--------|-----------------------------------|--------|
|                                                                |   |                             |   |                              |   |                             |   |                              |   |
| Operating                results:                                   |   |                             |   |                              |   |                             |   |                              |   |
| Total                interest income                                |   | $                                | 14,766 |                              | $      | 14,192                           |   | $                                 | 13,000 |   | $ | 8,491 |   |
| Net                interest income after provision for loan losses  |   |                             | 2,407  |                              |   | 2,543                            |   |                              | 3,102  |   |   | 3,050 |   |
| Net                income (loss)                                    |   |                             | 1,213  |                              |   | 1,615                            |   |                              | (215   | ) |   | 2,297 |   |
| Basic                and diluted net income (loss) per common share |   |                             | 0.01   |                              |   | 0.05                             |   |                              | (0.10  | ) |   | 0.11 |   |
| Cash                dividends declared per common share             |   |                             | -      |                              |   | -                                |   |                              | -      |   |   | - |   |

|  **Year                Ended December****31, 2005**           |   | **First****Quarter** |   | **Second****Quarter** |   | **Third****Quarter** |   | **Fourth****Quarter** |   |
|--------------------------------------------------------------------|--------|----------------------|--------|-----------------------|--------|----------------------|--------|-----------------------|--------|
|                                                               |   |                 |   |                  |   |                 |   |                  |   |
| Operating                results:                                  |   |                 |   |                  |   |                 |   |                  |   |
| Total                interest income                               |   | $                    | 24,053 |                  | $      | 18,533               |   | $                     | 15,717 |   | $ | 16,092 |   |
| Net                interest income after provision for loan losses |   |                 | 2,196  |                  |   | 2,068                |   |                  | 992    |   |   | 853 |   |
| Net                income (loss)                                   |   |                 | 935    |                  |   | 9,594                |   |                  | (1,899 | ) |   | 955 |   |
| Basic                net (loss) income per common share            |   |                 | (0.03  | )                     |   | 0.68                 |   |                  | (0.27  | ) |   | (0.03 | ) |
| Diluted                net (loss) income per common share          |   |                 | (0.03  | )                     |   | 0.54                 |   |                  | (0.27  | ) |   | (0.03 | ) |
| Cash                dividends declared per common share            |   |                 | -      |                  |   | -                    |   |                  | -      |   |   | - |   |

----

**EXHIBIT      INDEX**

| Number | Exhibit                                                                                                                                                                                                               |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 21.1   | List                of consolidated entities of Dynex (filed herewith).                                                                                                                                               |
| 23.1   | Consent                of BDO Seidman, LLP (filed herewith).                                                                                                                                                          |
| 23.2   | Consent                of Deloitte & Touche, LLP (filed herewith).                                                                                                                                                |
| 31.1   | Certification                of Principal Executive Officer and Principal Financial Officer pursuant                to                Section 302 of the Sarbanes-Oxley Act of 2002 (filed                herewith).  |
| 32.1   | Certification                of Principal Executive Officer and Chief Financial Officer pursuant                to                Section 906 of the Sarbanes-Oxley Act of 2002 (filed                herewith).      |