**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.**

**2005          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                                                                                   | 9                              |
|                         |                        |                                                                                                                                                     |                           |
| PART                    II.  |                        |                                                                                                                                                     |                           |
|                         | Item                    5.  | Market                    for Registrant’s Common Equity, Related Stockholder Matters and Issuer                    Purchases of Equity Securities | 9                              |
|                         | Item                    6.  | Selected                    Financial Data                                                                                                               | 10                             |
|                         | Item                    7.  | Management’s                    Discussion and Analysis of Financial Condition and Results of                    Operations                        | 11                             |
|                         | Item                    7A. | Quantitative                    and Qualitative Disclosures about Market Risk                                                                            | 28                             |
|                         | Item                    8.  | Financial                    Statements and Supplementary Data                                                                                           | 29                             |
|                         | Item                    9.  | Changes                    in and Disagreements with Accountants on Accounting and Financial                    Disclosure                               | 29                             |
|                         | Item                    9A. | Controls                    and Procedures                                                                                                               | 29                             |
|                         | Item                    9B. | Other                    Information                                                                                                                     | 30                             |
|                         |                        |                                                                                                                                                     |                           |
| PART                    III. | Item                    10. | Directors                    and Executive Officers of the Registrant                                                                                    | 30                             |
|                         | Item                    11. | Executive                    Compensation                                                                                                                | 30                             |
|                         | Item                    12. | Security                    Ownership of Certain Beneficial Owners and Management and Related                    Stockholder Matters                     | 30                             |
|                         | Item                    13. | Certain                    Relationships and Related Transactions                                                                                        | 30                             |
|                         | Item                    14. | Principal                    Accounting Fees and Services                                                                                                | 31                             |
|                         |                        |                                                                                                                                                     |                           |
| PART                    IV.  | Item                    15. | Exhibits,                    Financial Statement Schedules                                                                                               | 31                             |
|                         |                        |                                                                                                                                                     |                           |
| SIGNATURES                   |                        | 33                                                                                                                                                       |
|                         |                        |                                                                                                                                                     |

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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**

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**BUSINESS        MODEL AND        STRATEGY**

*Risk        Factors*

*Federal        Income Tax Considerations.*

**COMPETITION**

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**AVAILABLE        INFORMATION**

**FEDERAL        INCOME TAX CONSIDERATIONS**

*Sources        of Income*

----

*Nature        and Diversification of Assets*

*Ownership*

**EMPLOYEES**

**ITEM        1A. RISK FACTORS**

***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.***

----

***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.***

----

***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.***

----

***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**

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|                            |   |  **High** |   |  **Low** |   | **Cash                  Dividends Declared** |   |
|---------------------------------|--------|----------------|--------|---------------|--------|----------------------------------------------|--------|
| **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                                         |   |   | - |   |
|                            |   |           |   |          |   |                                         |   |   |   |   |
| **2004:**                       |   |           |   |          |   |                                         |   |   |   |   |
| First                  quarter  |   | $              | 7.65   |          | $      | 6.15                                         |   | $ | - |   |
| Second                  quarter |   |           | 7.71   |          |   | 6.35                                         |   |   | - |   |
| Third                  quarter  |   |           | 7.24   |          |   | 6.48                                         |   |   | - |   |
| Fourth                  quarter |   |           | 7.83   |          |   | 6.70                                         |   |   | - |   |

**Item        6.**
**Selected        Financial Data**

| **Years                  ended December 31,**                             |   | **2005** |   | **2004** |   | **2003** |   | **2002** |    | **2001** |   |
|---------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|---------|----------|--------|
| *(amounts                  in thousands except share and per share data)* |   |     |   |     |   |     |   |     |    |     |   |
| Net                  interest income*(1)*                                 |   | $        | 11,889 |     | $      | 23,281   |   | $        | 38,971  |     | $      | 49,153 |   | $ | 48,082 |   |
| Net                  interest income after provision for loan losses*(2)* |   |     | 6,109  |     |   | 4,818    |   |     | 1,889   |     |   | 20,670 |   |   | 28,410 |   |
| Impairment                  charges*(3)*                                  |   |     | (2,474 | )        |   | (14,756  | )      |     | (16,355 | )        |   | (18,477 | ) |   | (43,439 | ) |
| Other                  income (expense) and trading losses                |   |     | 2,022  |     |   | (179     | )      |     | 436     |     |   | 1,397 |   |   | 7,876 |   |
| General                  and administrative expenses                      |   |     | (5,681 | )        |   | (7,748   | )      |     | (8,632  | )        |   | (9,493 | ) |   | (10,526 | ) |
| Net                  income (loss)                                        |   | $        | 9,585  |     | $      | (3,375   | )      | $        | (21,107 | )        | $      | (9,360 | ) | $ | (21,209 | ) |
| Net                  income (loss) to common shareholders                 |   | $        | 4,238  |     | $      | (5,194   | )      | $        | (14,260 | )        | $      | (18,946 | ) | $ | (13,492 | ) |
| Net                  income (loss) per common share:                      |   |     |   |     |   |     |   |     |    |     |   |   |   |   |   |   |
| Basic                  & diluted* *                              |   | $        | 0.35   |     | $      | (0.46    | )      | $        | (1.31   | )        | $      | (1.74 | ) | $ | (1.18 | ) |
| Dividends                  declared per share:                            |   |     |   |     |   |     |   |     |    |     |   |   |   |   |   |   |
| Common                                                                    |   | $        | -      |     | $      | -        |   | $        | -       |     | $      | - |   | $ | - |   |
| Series                  A and B Preferred                                 |   |     | -      |     |   | -        |   |     | 0.8775  |     |   | 0.2925 |   |   | 0.2925 |   |
| Series                  C Preferred                                       |   |     | -      |     |   | -        |   |     | 1.0950  |     |   | 0.3651 |   |   | 0.3649 |   |
| Series                  D Preferred                                       |   |     | 0.9500 |     |   | 0.6993   |   |     | -       |     |   | - |   |   | - |   |

----

| **December                  31,**                           |   | **2005** |       | **2004** |   | **2003**   |   | **2002** |       | **2001** |   |
|-------------------------------------------------------------|--------|----------|------------|----------|--------|------------|--------|----------|------------|----------|--------|
| Investments*(4)*                                            |   | $        | 756,409    |     | $      | 1,343,448  |   | $        | 1,853,675  |     | $      | 2,185,746 |   | $ | 2,511,229 |   |
| Total                  assets*(4)*                          |   |     | 805,976    |     |   | 1,400,934  |   |     | 1,865,235  |     |   | 2,205,735 |   |   | 2,531,509 |   |
| Non-recourse                  securitization financing*(4)* |   |     | 516,578    |     |   | 1,177,280  |   |     | 1,679,830  |     |   | 1,980,702 |   |   | 2,225,863 |   |
| Recourse                  debt                              |   |     | 133,315    |     |   | 70,468     |   |     | 33,933     |     |   | - |   |   | 58,134 |   |
| Total                  liabilities*(4)*                     |   |     | 656,642    |     |   | 1,252,168  |   |     | 1,715,389  |     |   | 1,982,314 |   |   | 2,289,399 |   |
| Shareholders’                  equity                 |   |     | 149,334    |     |   | 148,766    |   |     | 149,846    |     |   | 223,421 |   |   | 242,110 |   |
| Number                  of common shares outstanding        |   |     | 12,163,391 |     |   | 12,162,391 |   |     | 10,873,903 |     |   | 10,873,903 |   |   | 10,873,853 |   |
| Average                  number of common shares            |   |     | 12,163,062 |     |   | 11,272,259 |   |     | 10,873,903 |     |   | 10,873,871 |   |   | 11,430,471 |   |
| Book                  value per common share*(5)*           |   | $        | 7.65       |     | $      | 7.60       |   | $        | 7.55       |     | $      | 8.57 |   | $ | 11.06 |   |

*(1)*

*Net        interest income has declined due to a reduction in investments, declining        yields        on our interest-earning assets and an increase in our cost of funds.*

*(2)*

*Net        interest income after provision for loan losses has increased due to a reduction        in the manufactured housing loan loss provision associated with the        derecognition of the MERIT Series 12 securitization.*

*(3)*

*Impairment        charges have declined as a result of the sale of certain underperforming        securities.*

*(4)*

*Certain        deferred hedging gains and losses for 2002 and prior years were reclassified        from securitized finance receivables to non-recourse securitization        financing.*

*(5)*

*Inclusive        of the effects of the liquidation preference on our preferred        stock.*

**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)*                                                     |   | **2005**                          |    | **2004** |   |
| Investments:                                                                                                        |   |                              |    |   |   |
| Securitized                  finance receivables:                                                                   |   |                              |    |   |   |
| Loans,                  net                                                                                         |   | $                                 | 722,152 |   | $ | 1,036,123 |   |
| Debt                  securities                                                                                    |   |                              | -       |   |   | 206,434 |   |
| Securities                                                                                                          |   |                              | 24,908  |   |   | 87,706 |   |
| Other                  investments                                                                                  |   |                              | 4,067   |   |   | 7,596 |   |
| Other                  loans                                                                                        |   |                              | 5,282   |   |   | 5,589 |   |
|                                                                                                                |   |                              |    |   |   |   |   |
| Non-recourse                  securitization financing                                                              |   |                              | 516,578 |   |   | 1,177,280 |   |
| Repurchase                  agreements secured by securitization financing bonds                                    |   |                              | 133,104 |   |   | - |   |
| Repurchase                  agreements secured by securities                                                        |   |                              | 211     |   |   | 70,468 |   |
|                                                                                                                |   |                              |    |   |   |   |   |
| Shareholders’                  equity                                                                         |   |                              | 149,334 |   |   | 148,766 |   |
|                                                                                                                |   |                              |    |   |   |   |   |
| Book                  value per common share (inclusive of preferred stock liquidation                  preference) |   | $                                 | 7.65    |   | $ | 7.60 |   |

----

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| *(amounts                  in thousands)*           |   | **December                  31, 2005**    |    |
|-----------------------------------------------------|--------|-------------------------------------------|---------|
|                                                |   | **Amortized                  cost basis** |    | **Financing** |   | **Net                  basis** |   | **Fair                  value of net basis****(1)** |   |
| Securitized                  finance receivables:   |   |                                      |    |   |   |   |   |   |   |
| Single                  family mortgage loans       |   | $                                         | 163,892 |   | $ | 133,104 |   | $ | 30,788 |   | $ | 31,888 |   |
| Commercial                  mortgage loans          |   |                                      | 577,295 |   |   | 516,578 |   |   | 60,717 |   |   | 39,685 |   |
| Manufactured                  housing loans         |   |                                      | -       |   |   | - |   |   | - |   |   | - |   |
| Allowance                  for loan losses          |   |                                      | (19,035 | ) |   | - |   |   | (19,035 | ) |   | - |   |
|                                                |   |                                      | 722,152 |   |   | 649,682 |   |   | 72,470 |   |   | 71,573 |   |
| Securities:                                         |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| Investment                  grade single-family     |   |                                      | 22,702  |   |   | 211 |   |   | 22,491 |   |   | 22,491 |   |
| Non-investment                  grade single-family |   |                                      | 469     |   |   | - |   |   | 469 |   |   | 469 |   |
| Equity                  and other                   |   |                                      | 1,737   |   |   | - |   |   | 1,737 |   |   | 1,737 |   |
|                                                |   |                                      | 24,908  |   |   | 211 |   |   | 24,697 |   |   | 24,697 |   |
|                                                |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| Other                  loans and investments        |   |                                      | 9,349   |   |   | - |   |   | 9,349 |   |   | 10,107 |   |
|                                                |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| Total                                               |   | $                                         | 756,409 |   | $ | 649,893 |   | $ | 106,516 |   | $ | 106,377 |   |
|                                                |   |                                      |    |   |   |   |   |   |   |   |   |   |   |

|   | **(1)** | *Fair                  values are based on dealer quotes, where dealer quotes are not                  available                  fair values are calculated as the net present value of expected                  future                  cash flows, discounted at 16%. Fair value also includes our capital                  invested in redeemed securitization financing bonds. Expected cash                  flows                  were based on the forward LIBOR curve as of December 31, 2005,                  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.* |
|--------|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| *(amounts                  in thousands)*           |   | **December                  31, 2004** |      |
|-----------------------------------------------------|--------|----------------------------------------|-----------|
|                                                |   | **Carrying                  value**    |      | **Financing** |   | **Net                  basis** |   | **Fair                  value of net basis****(1)** |   |
| Securitized                  finance receivables:   |   |                                   |      |   |   |   |   |   |   |
| Single                  family mortgage loans       |   | $                                      | 284,786   |   | $ | 263,506 |   | $ | 21,280 |   | $ | 22,438 |   |
| Commercial                  mortgage loans          |   |                                   | 639,677   |   |   | 577,419 |   |   | 62,258 |   |   | 36,852 |   |
| Manufactured                  housing loans         |   |                                   | 346,108   |   |   | 336,355 |   |   | 9,753 |   |   | 706 |   |
| Allowance                  for loan losses          |   |                                   | (28,014   | ) |   | - |   |   | (28,014 | ) |   | - |   |
|                                                |   |                                   | 1,242,557 |   |   | 1,177,280 |   |   | 65,277 |   |   | 59,996 |   |
| Securities:                                         |   |                                   |      |   |   |   |   |   |   |   |   |   |   |
| Investment                  grade single-family     |   |                                   | 78,478    |   |   | 70,468 |   |   | 8,010 |   |   | 8,010 |   |
| Non-investment                  grade single-family |   |                                   | 712       |   |   | - |   |   | 712 |   |   | 712 |   |
|                                                |   |                                   |      |   |   |   |   |   |   |   |   |   |   |
| Other                  loans and investments        |   |                                   | 21,701    |   |   | - |   |   | 21,701 |   |   | 23,984 |   |
|                                                |   |                                   |      |   |   |   |   |   |   |   |   |   |   |
| Total                                               |   | $                                      | 1,343,448 |   | $ | 1,247,748 |   | $ | 95,700 |   | $ | 92,702 |   |
|                                                |   |                                   |      |   |   |   |   |   |   |   |   |   |   |

|   | **(1)** | *Calculated                  as the net present value of expected future cash flows, discounted                  at 16%.                  Expected cash flows were based on the forward LIBOR curve as of                  December                  31, 2004, 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.* |
|--------|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|                                          | **Fair                  Value Assumptions**             | **($                  in thousands)** |
|-----------------------------------------------|---------------------------------------------------------|---------------------------------------|
| **Loan                  type**                | **Weighted-average                  prepayment speeds** |  **Losses**                      | **Weighted-Average****Discount                  Rate** | **Projected                  cash flow termination date** | **Cash                  flows received in 2005****(1)** |
|                                          |                                                    |                                  |   |   |   |
| Single-family                  mortgage loans | 30%                  CPR                                | 0.2%                  annually        | 16% | Anticipated                  final maturity 2024 | $                   4,692.3 |
|                                          |                                                    |                                  |   |   |   |
| Commercial                  mortgage loans(2) | (3)                                                     | 0.8%                  annually        | 13% | (4) | $                   3,199.8 |
|                                          |                                                    |                                  |   |   |   |

*(1)*

*Represents        the excess of the cash flows received on the collateral pledged over the        cash        flow requirements of the securitization financing*
*bond        security.*

*(2)*

*Includes        loans pledged to three 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 month        six.*

*(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.*

**RESULTS        OF OPERATIONS**

|                                                                    |   | **For                  the Year Ended December 31,** |   |
|-------------------------------------------------------------------------|--------|------------------------------------------------------|--------|
| *(amounts                  in thousands except per share information)*  |   | **2005**                                             |   | **2004** |   | **2003** |   |
| Net                  interest income                                    |   | $                                                    | 11,889 |   | $ | 23,281 |   | $ | 38,971 |   |
| Provision                  for loan losses                              |   |                                                 | (5,780 | ) |   | (18,463 | ) |   | (37,082 | ) |
| Net                  interest income after provision for loan losses    |   |                                                 | 6,109  |   |   | 4,818 |   |   | 1,889 |   |
| Impairment                  charges                                     |   |                                                 | (2,474 | ) |   | (14,756 | ) |   | (16,355 | ) |
| Gain                  on sales of investments                           |   |                                                 | 9,609  |   |   | 14,490 |   |   | 1,555 |   |
| Other                  income (expense)                                 |   |                                                 | 2,022  |   |   | (179 | ) |   | 436 |   |
| General                  and administrative expenses                    |   |                                                 | (5,681 | ) |   | (7,748 | ) |   | (8,632 | ) |
| Net                  income (loss)                                      |   |                                                 | 9,585  |   |   | (3,375 | ) |   | (21,107 | ) |
| Preferred                  stock (charge) benefit                       |   |                                                 | (5,347 | ) |   | (1,819 | ) |   | 6,847 |   |
| Net                  income (loss) to common shareholders               |   | $                                                    | 4,238  |   | $ | (5,194 | ) | $ | (14,260 | ) |
|                                                                    |   |                                                 |   |   |   |   |   |   |   |   |
| Basic                  & diluted net income (loss) per common share |   | $                                                    | 0.35   |   | $ | (0.46 | ) | $ | (1.31 | ) |
|                                                                    |   |                                                 |   |   |   |   |   |   |   |   |
| Dividends                  declared per share:                          |   |                                                 |   |   |   |   |   |   |   |   |
| Common                                                                  |   | $                                                    | -      |   | $ | - |   | $ | - |   |
| Series                  A and B Preferred                               |   |                                                 | -      |   |   | - |   |   | 0.8775 |   |
| Series                  C Preferred                                     |   |                                                 | -      |   |   | - |   |   | 1.0950 |   |
| Series                  D Preferred                                     |   |                                                 | 0.9500 |   |   | 0.6993 |   |   | - |   |

----

----

----

**Average        Balances and Effective Interest        Rates**

|                                                                      |   | **Year                  ended December 31,** |      |
|---------------------------------------------------------------------------|--------|----------------------------------------------|-----------|
|                                                                      |   | **2005**                                     |      | **2004** |   | **2003** |   |
|  *(amounts                  in thousands)*                           |   | **Average****Balance**                       |      | **Effective****Rate** |   | **Average****Balance** |   | **Effective****Rate** |   | **Average****Balance** |   | **Effective****Rate** |   |
| Interest-earning                  assets(1):                              |   |                                         |      |   |   |   |   |   |   |   |   |   |   |
| Securitized                  finance receivables(2)(3)                    |   | $                                            | 925,172   |   |   | 7.25 | % | $ | 1,601,553 |   |   | 7.41 | % | $ | 1,948,204 |   |   | 7.56 | % |
| Other                  interest-bearing assets                            |   |                                         | 113,729   |   |   | 5.12 | % |   | 56,833 |   |   | 5.30 | % |   | 72,807 |   |   | 6.76 | % |
| Total                  interest-earning assets                            |   | $                                            | 1,038,901 |   |   | 7.01 | % | $ | 1,658,386 |   |   | 7.34 | % | $ | 2,021,011 |   |   | 7.53 | % |
| Interest-bearing                  liabilities:                            |   |                                         |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-recourse securitization                  financing(3)            |   | $                                            | 735,910   |   |   | 7.40 | % | $ | 1,499,772 |   |   | 6.40 | % | $ | 1,826,827 |   |   | 5.85 | % |
| Recourse                  debt secured by securitized finance receivables |   |                                         | 106,927   |   |   | 3.74 | % |   | - |   |   | - | % |   | - |   |   | - | % |
| Repurchase                  agreements                                    |   |                                         | 44,401    |   |   | 3.22 | % |   | 21,040 |   |   | 1.75 | % |   | 398 |   |   | 1.79 | % |
| Senior                  notes                                             |   |                                         | -         |   |   | - | % |   | 2,020 |   |   | 9.90 | % |   | 19,330 |   |   | 9.53 | % |
| Total                  interest-bearing liabilities                       |   | $                                            | 887,238   |   |   | 6.75 | % | $ | 1,522,832 |   |   | 6.34 | % | $ | 1,846,555 |   |   | 5.88 | % |
| Net                  interest spread(3)                                   |   |                                         |      |   |   | 0.26 | % |   |   |   |   | 1.00 | % |   |   |   |   | 1.65 | % |
| Net                  yield on average interest-earning assets(3)          |   |                                         |      |   |   | 1.24 | % |   |   |   |   | 1.51 | % |   |   |   |   | 2.15 | % |

*(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 $2,149, $342,and $374 for the        years        ended December 31, 2005, 2004, and 2003, respectively.*

*(3)*

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

----

|                                             |   | **2005                  to 2004** |    | **2004                  to 2003** |   |
|--------------------------------------------------|--------|-----------------------------------|---------|-----------------------------------|--------|
| *(amounts                  in thousands)*        |   | **Rate**                          |    | **Volume**                        |   | **Total** |   | **Rate** |   | **Volume** |   | **Total** |   |
|                                             |   |                              |    |                              |   |   |   |   |   |   |   |   |   |
| Securitized                  finance receivables |   | $                                 | (2,548  | )                                 | $      | (49,063 | ) | $ | (51,611 | ) | $ | (2,915 | ) | $ | (25,735 | ) | $ | (28,650 | ) |
| Other                  interest-bearing assets   |   |                              | 95      |                              |   | 2,712 |   |   | 2,807 |   |   | (2,032 | ) |   | 125 |   |   | (1,907 | ) |
| Total                  interest income           |   |                              | (2,453  | )                                 |   | (46,351 | ) |   | (48,804 | ) |   | (4,947 | ) |   | (25,610 | ) |   | (30,557 | ) |
|                                             |   |                              |    |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securitization                  financing        |   |                              | 7,448   |                              |   | (45,031 | ) |   | (37,583 | ) |   | 9,527 |   |   | (20,321 | ) |   | (10,794 | ) |
| Senior                  notes                    |   |                              | (100    | )                                 |   | (100 | ) |   | (200 | ) |   | 69 |   |   | (1,711 | ) |   | (1,642 | ) |
| Repurchase                  agreements           |   |                              | 460     |                              |   | 603 |   |   | 1,063 |   |   | (3 | ) |   | 361 |   |   | 358 |   |
|                                             |   |                              |    |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                  interest expense          |   |                              | 7,808   |                              |   | (44,528 | ) |   | (36,720 | ) |   | 9,593 |   |   | (21,671 | ) |   | (12,078 | ) |
|                                             |   |                              |    |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                  interest income             |   | $                                 | (10,261 | )                                 | $      | (1,823 | ) | $ | (12,084 | ) | $ | (14,540 | ) | $ | (3,939 | ) | $ | (18,479 | ) |

*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**

*($        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** |   |
|--------|--------|---------------------------------------------------------------|---------|--------------------------------------------------------------|--------|--------------------------------|--------|-----------------------------------------------------------------------------------------------------------|--------|
| 2003   |   | $                                                             | 1,859.1 |                                                         | $      | 66.1                           |   | $                                                                                                         | 25.5   |   |   | 3.56 | % |
| 2004   |   | $                                                             | 1,296.5 |                                                         | $      | 39.9                           |   | $                                                                                                         | 25.1   |   |   | 3.08 | % |
| 2005   |   | $                                                             | 751.1   |                                                         | $      | 28.9                           |   | $                                                                                                         | 3.6    |   |   | 3.85 | % |

**Single-Family        Loan Delinquency Statistics**

|  **December                  31,** | **30                  to 59 days delinquent** | **60                  to 89 days****delinquent** | **90                  days and over delinquent****(1)** |  **Total** |
|-----------------------------------------|-----------------------------------------------|--------------------------------------------------|---------------------------------------------------------|-----------------|
| 2003                                    | 4.84%                                         | 1.09%                                            | 4.75%                                                   | 10.68%          |
| 2004                                    | 4.30%                                         | 1.06%                                            | 3.35%                                                   | 8.71%           |
| 2005                                    | 4.28%                                         | 0.62%                                            | 2.60%                                                   | 7.50%           |

**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** |   |
|-----------------------------------------|--------|-----------------------------------------------|--------|--------------------------------------------------|--------|---------------------------------------------------------|--------|-----------------|--------|
| 2003                                    |   |                                          | -      | %                                                |   | -                                                       | %      |            | 1.90   | % |   | 1.90 | % |
| 2004                                    |   |                                          | -      | %                                                |   | -                                                       | %      |            | 7.96   | % |   | 7.96 | % |
| 2005                                    |   |                                          | -      | %                                                |   | 0.25                                                    | %      |            | 6.65   | % |   | 6.90 | % |

* *

*(1)*

*Includes        foreclosures and real estate owned*

----

**CRITICAL        ACCOUNTING POLICIES**

*Consolidation        of Subsidiaries. *

*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) |   | $                                                 | 666,531 |   | $ | 84,363 |   | $ | 374,771 |   | $ | 161,057 |   | $ | 46,340 |
| Repurchase                  agreements                    |   |                                                   | 133,315 |  |  | 133,31 |  |  | - |   |   | - |   |   | - |
| Operating                  lease obligations              |   |                                              | 358 |   |   | 146 |   |   | 212 |   |   | - |   |   | - |
| Mortgage                  servicing obligations           |   |                                              | 4,426 |   |   | 401 |   |   | 741 |   |   | 550 |   |  | 2,734 |
| Total                                                     |   | $                                                 | 804,630 |   | $ | 218,225 |   | $ | 375,724 |   | $ | 161,607 |   | $ | 49,074 |

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

----

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

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

|  **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)                  (2)                              |   |                               | 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                                     |   |                               | 1,368,346 |                                |   | 1,064,027                          |   |                                      | 890,384 |   |   | 819,217 |   |
| Average                  borrowed funds                                              |   |                               | 1,216,729 |                                |   | 912,383                            |   |                                      | 745,776 |   |   | 678,966 |   |
|                                                                                 |   |                               |      |                                |   |                               |   |                                      |    |   |   |   |   |
| Net                  interest spread on interest-earning assets                  (3) |   |                               | 0.73      | %                                   |   | 0.14                               | %      |                                      | 0.23    | % |   | (0.17 | )% |
| Average                  asset yield                                                 |   |                               | 7.00      | %                                   |   | 6.95                               | %      |                                      | 7.05    | % |   | 7.18 | % |
| Net                  yield on average interest-earning assets                        |   |                               | 1.43      | %                                   |   | 1.10                               | %      |                                      | 1.31    | % |   | 1.07 | % |
| Cost                  of funds                                                       |   |                               | 6.27      | %                                   |   | 6.81                               | %      |                                      | 6.82    | % |   | 7.35 | % |
|                                                                                 |   |                               |      |                                |   |                               |   |                                      |    |   |   |   |   |

|  **Year                  Ended December****31, 2004**           |   | **First****Quarter** |      | **Second****Quarter** |   | **Third****Quarter** |   | **Fourth****Quarter** |      |
|----------------------------------------------------------------------|--------|----------------------|-----------|-----------------------|--------|----------------------|--------|-----------------------|-----------|
|                                                                 |   |                 |      |                  |   |                 |   |                  |      |
| Operating                  results:                                  |   |                 |      |                  |   |                 |   |                  |      |
| Total                  interest income                               |   | $                    | 33,631    |                  | $      | 33,217               |   | $                     | 30,026    |   | $ | 25,349 |   |
| Net                  interest income after provision for loan losses |   |                 | (765      | )                     |   | (3,428               | )      |                  | 5,103     |   |   | 3,908 |   |
| Net                  (loss) income                                   |   |                 | (5,387    | )                     |   | (12,953              | )      |                  | (56       | ) |   | 15,021 |   |
| Basic                  net (loss) income per common share            |   |                 | (0.60     | )                     |   | (0.95                | )      |                  | (0.12     | ) |   | 1.13 |   |
| Diluted                  net (loss) income per common share          |   |                 | (0.60     | )                     |   | (0.95                | )      |                  | (0.12     | ) |   | 0.77 |   |
| Cash                  dividends declared per common share            |   |                 | -         |                  |   | -                    |   |                  | -         |   |   | - |   |
|                                                                 |   |                 |      |                  |   |                 |   |                  |      |   |   |   |   |
| Average                  interest-earning assets                     |   |                 | 1,813,282 |                  |   | 1,753,743            |   |                  | 1,635,146 |   |   | 1,431,374 |   |
| Average                  borrowed funds                              |   |                 | 1,710,843 |                  |   | 1,622,815            |   |                  | 1,503,468 |   |   | 1,282,657 |   |
|                                                                 |   |                 |      |                  |   |                 |   |                  |      |   |   |   |   |
| Net                  interest spread on interest-earning assets      |   |                 | 1.21      | %                     |   | 0.92                 | %      |                  | 1.21      | % |   | 0.71 | % |
| Average                  asset yield                                 |   |                 | 7.42      | %                     |   | 7.56                 | %      |                  | 7.32      | % |   | 6.98 | % |
| Net                  yield on average interest-earning assets (1)    |   |                 | 1.56      | %                     |   | 1.41                 | %      |                  | 1.69      | % |   | 1.35 | % |
| Cost                  of funds                                       |   |                 | 6.21      | %                     |   | 6.64                 | %      |                  | 6.11      | % |   | 6.27 | % |
|                                                                 |   |                 |      |                  |   |                 |   |                  |      |   |   |   |   |

*(1)*

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

*(2)*

*The        increase in net income during the second quarter of 2005 relates primarily        to        the gain of approximately $8.2 million recognized on the sale of $367.2 million        of manufactured housing loans and securities and the derecognition of the        related non-recourse securitization financing of $363.9        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.*

----

**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.*
*Risk        Factors*

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

*Accounting        for Transfers and Servicing of Financial Assets and Extinguishments of        Liabilities, *

----

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

----

|  **Basis                  Point****Increase                  (Decrease)****in                  Interest Rates** | **Projected                  Change in Net****Interest                  Margin****Cash                  Flow From****Base                  Case** | **Projected                  Change in Value, Expressed as a Percentage of Shareholders’                  Equity** |
|----------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------|
| +200                                                                                                                 | (4.2)%                                                                                                                                            | (1.1)%                                                                                                                   |
| +100                                                                                                                 | (1.8)%                                                                                                                                            | (0.4)%                                                                                                                   |
| Base                                                                                                                 |                                                                                                                                              |                                                                                                                     |
| -100                                                                                                                 | 0.6%                                                                                                                                              | 0.1%                                                                                                                     |
| -200                                                                                                                 | 1.1%                                                                                                                                              | 0.2%                                                                                                                     |

**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        AND EXECUTIVE OFFICERS OF THE REGISTRANT**

**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**

----

**PART        IV**

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

| 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                  Bylaws of the Registrant. (Incorporated by reference to Dynex’s Annual                  Report on Form 10-K for the year ended December 31, 1992, as                  amended.)                                                                                                                                       |
| 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.) |
| 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)                                                      |   |
|                              |                                                              |   |
|                              |                                                              |   |
| March                    31, 2006 | /s/                    Stephen J. Benedetti                       |   |
|                              | Stephen                    J. Benedetti, Executive Vice President |   |
|                              |                                                              |   |

| Signature                                                         | Capacity                                        | Date                              |
|-------------------------------------------------------------------|-------------------------------------------------|-----------------------------------|
|                                                              |                                            |                              |
|                                                              |                                            |                              |
| /s/                    Stephen J. Benedetti                       | Principal                    Executive Officer  | March                    31, 2006 |
| Stephen                    J. Benedetti                           | Principal                    Financial Officer  |                              |
|                                                              |                                            |                              |
|                                                              |                                            |                              |
| /s/                    Jeffrey L. Childress                       | Principal                    Accounting Officer | March                    31, 2006 |
| Jeffrey                    L. Childress                           |                                            |                              |
|                                                              |                                            |                              |
|                                                              |                                            |                              |
| /s/                    Thomas                    B. Akin          | Director                                        | March                    31, 2006 |
| Thomas                    B. Akin                                 |                                            |                              |
|                                                              |                                            |                              |
|                                                              |                                            |                              |
| /s/                    J.                    Sidney Davenport, IV | Director                                        | March                    31, 2006 |
| J.                    Sidney Davenport, IV                        |                                            |                              |
|                                                              |                                            |                              |
|                                                              |                                            |                              |
| /s/                    Leon                    A. Felman          | Director                                        | March                    31, 2006 |
| Leon                    A. Felman                                 |                                            |                              |
|                                                              |                                            |                              |
|                                                              |                                            |                              |
| /s/                    Barry Igdaloff                        | Director                                        | March                    31, 2006 |
| Barry                    Igdaloff                                 |                                            |                              |
|                                                              |                                            |                              |
|                                                              |                                            |                              |
| /s/                    Daniel K. Osborne                     | Director                                        | March                    31, 2006 |
| Daniel                    K. Osborne                         |                                            |                              |
|                                                              |                                            |                              |
|                                                              |                                            |                              |
| /s/                    Eric                    P. Von der Porten  | Director                                        | March                    31, 2006 |
| Eric                    P. Von der Porten                         |                                            |                              |
|                                                              |                                            |                              |

----

----

**DYNEX          CAPITAL, INC.**

**INDEX          TO FINANCIAL STATEMENTS **

|                                                                                                                                                            | Page   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                            |   |
| Report                    of Independent Registered Public Accounting Firm for the Year                    ended                    December 31, 2005           | F-3    |
| Report                    of Independent Registered Public Accounting Firm for the Years                    ended                    December 31, 2004 and 2003 | F-4    |
| Consolidated                    Balance Sheets December 31, 2005 and 2004                                                                                       | F-5    |
| Consolidated                    Statements of Operations -- Years ended December 31, 2005, 2004                    and                    2003                  | F-6    |
| Consolidated                    Statements of Shareholders’ Equity -- Years ended December 31, 2005, 2004                    and 2003                     | F-7    |
| Consolidated                    Statements of Cash Flows -- Years ended December 31, 2005, 2004                    and                    2003                  | F-8    |
| Notes                    to Consolidated Financial Statements December 31, 2005, 2004,                    and                    2003                           | 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)*

|                                                                                                                     |   |  **2005** |     |  **2004** |   |
|--------------------------------------------------------------------------------------------------------------------------|--------|----------------|----------|----------------|--------|
| **ASSETS**                                                                                                               |   |      |     |      |   |
| Cash                  and cash equivalents                                                                               |   | $              | 45,235   |           | $      | 52,522 |   |
| Other                  assets                                                                                            |   |           | 4,332    |           |   | 4,964 |   |
|                                                                                                                     |   |           | 49,567   |           |   | 57,486 |   |
| Investments:                                                                                                             |   |           |     |           |   |   |   |
| Securitized                  finance receivables:                                                                        |   |           |     |           |   |   |   |
| Loans,                  net                                                                                              |   |           | 722,152  |           |   | 1,036,123 |   |
| Debt                  securities                                                                                         |   |           | -        |           |   | 206,434 |   |
| Securities                                                                                                               |   |           | 24,908   |           |   | 87,706 |   |
| Other                  investments                                                                                       |   |           | 4,067    |           |   | 7,596 |   |
| Other                  loans                                                                                             |   |           | 5,282    |           |   | 5,589 |   |
|                                                                                                                     |   |           | 756,409  |           |   | 1,343,448 |   |
|                                                                                                                     |   | $              | 805,976  |           | $      | 1,400,934 |   |
| **LIABILITIES                  AND SHAREHOLDERS’ EQUITY**                                                          |   |           |     |           |   |   |   |
| LIABILITIES                                                                                                              |   |           |     |           |   |   |   |
| Securitization                  financing:                                                                               |   |           |     |           |   |   |   |
| Non-recourse                  securitization financing                                                                   |   | $              | 516,578  |           | $      | 1,177,280 |   |
| Repurchase                  agreements secured by securitization financing                                               |   |           | 133,104  |           |   | - |   |
| Repurchase                  agreements secured by securities                                                             |   |           | 211      |           |   | 70,468 |   |
| Other                  liabilities                                                                                       |   |           | 6,749    |           |   | 4,420 |   |
|                                                                                                                     |   |           | 656,642  |           |   | 1,252,168 |   |
|                                                                                                                     |   |           |     |           |   |   |   |
| Commitments                  and Contingencies (Note 16)                                                                 |   |           |     |           |   |   |   |
|                                                                                                                     |   |           |     |           |   |   |   |
| SHAREHOLDERS’                  EQUITY                                                                              |   |           |     |           |   |   |   |
| Preferred                  stock, par value $.01 per share,                                                              |   |           |     |           |   |   |   |
| 50,000,000                  shares authorized:                                                                           |   |           |     |           |   |   |   |
| 9.5%                  Cumulative Convertible Series D,                                                                   |   |           |     |           |   |   |   |
| 5,628,737                  shares issued and outstanding                                                                 |   |           | 55,666   |           |   | 55,666 |   |
| ($57,624                  aggregate liquidation preference)                                                              |   |           |     |           |   |   |   |
| Common                  stock, par value $.01 per share, 100,000,000 shares                  authorized,                 |   |           |     |           |   |   |   |
| 12,163,391                  and 12,162,391 shares issued and outstanding at 2005 and 2004,                  respectively |   |           | 122      |           |   | 122 |   |
| Additional                  paid-in capital                                                                              |   |           | 366,903  |           |   | 366,896 |   |
| Accumulated                  other comprehensive income                                                                  |   |           | 140      |           |   | 3,817 |   |
| Accumulated                  deficit                                                                                     |   |           | (273,497 | )              |   | (277,735 | ) |
|                                                                                                                     |   |           | 149,334  |           |   | 148,766 |   |
|                                                                                                                     |   | $              | 805,976  |           | $      | 1,400,934 |   |

*See        notes to consolidated financial statements.*

----

**CONSOLIDATED        STATEMENTS OF OPERATIONS**

**DYNEX        CAPITAL, INC.**

*(amounts        in thousands except share data)*

|                                                                 |   | **2005**     |   | **2004**     |   | **2003**     |   |
|----------------------------------------------------------------------|--------|--------------|--------|--------------|--------|--------------|--------|
| Interest                  income:                                    |   |    |   |    |   |    |   |
| Securitized                  finance receivables                     |   | $            | 68,387 |         | $      | 118,647      |   | $ | 147,297 |   |
| Securities                                                           |   |         | 3,885  |         |   | 2,535        |   |   | 773 |   |
| Other                  investments                                   |   |         | 1,369  |         |   | 335          |   |   | 3,537 |   |
| Other                  loans                                         |   |         | 754    |         |   | 706          |   |   | 608 |   |
|                                                                 |   |         | 74,395 |         |   | 122,223      |   |   | 152,215 |   |
|                                                                 |   |         |   |         |   |         |   |   |   |   |
| Interest                  and related expense:                       |   |         |   |         |   |         |   |   |   |   |
| Non-recourse                  securitization financing               |   |         | 57,166 |         |   | 98,271       |   |   | 111,056 |   |
| Repurchase                  agreements and senior notes              |   |         | 5,428  |         |   | 567          |   |   | 1,849 |   |
| Other                                                                |   |         | (88    | )            |   | 104          |   |   | 339 |   |
|                                                                 |   |         | 62,506 |         |   | 98,942       |   |   | 113,244 |   |
|                                                                 |   |         |   |         |   |         |   |   |   |   |
| Net                  interest income                                 |   |         | 11,889 |         |   | 23,281       |   |   | 38,971 |   |
| Provision                  for loan losses                           |   |         | (5,780 | )            |   | (18,463      | )      |   | (37,082 | ) |
| Net                  interest income after provision for loan losses |   |         | 6,109  |         |   | 4,818        |   |   | 1,889 |   |
|                                                                 |   |         |   |         |   |         |   |   |   |   |
| Impairment                  charges                                  |   |         | (2,474 | )            |   | (14,756      | )      |   | (16,355 | ) |
| Gain                  on sale of investments, net                    |   |         | 9,609  |         |   | 14,490       |   |   | 1,555 |   |
| General                  and administrative expenses                 |   |         | (5,681 | )            |   | (7,748       | )      |   | (8,632 | ) |
| Other                  income (expense)                              |   |         | 2,022  |         |   | (179         | )      |   | 436 |   |
| Net                  income (loss)                                   |   |         | 9,585  |         |   | (3,375       | )      |   | (21,107 | ) |
| Preferred                  stock (charge) benefit                    |   |         | (5,347 | )            |   | (1,819       | )      |   | 6,847 |   |
| Net                  income (loss) to common shareholders            |   | $            | 4,238  |         | $      | (5,194       | )      | $ | (14,260 | ) |
|                                                                 |   |         |   |         |   |         |   |   |   |   |
| Net                  income (loss) per common share :                |   |         |   |         |   |         |   |   |   |   |
| Basic                  and diluted                                   |   | $            | 0.35   |         | $      | (0.46        | )      | $ | (1.31 | ) |
|                                                                 |   |         |   |         |   |         |   |   |   |   |

*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****Compre-hen-sive                  (Loss) Income** |    |    **Accumulated****Deficit** |   |    **Total** |   |
|---------------------------------------------------------------|--------|------------------------------------|---------|---------------------------------|--------|--------------------------------------------|--------|------------------------------------------------------------------------------------------|---------|----------------------------------------------|--------|-----------------------------|--------|
| Balance                  at January 1, 2003                   |   | $                                  | 94,586  |                            | $      | 109                                        |   | $                                                                                        | 364,743 |                                         | $      | (4,832                      | )      | $ | (231,185 | ) | $ | 223,421 |   |
|                                                          |   |                               |    |                            |   |                                       |   |                                                                                     |    |                                         |   |                        |   |   |   |   |   |   |   |
| Comprehensive                  loss:                          |   |                               |    |                            |   |                                       |   |                                                                                     |    |                                         |   |                        |   |   |   |   |   |   |   |
|                                                          |   |                               |    |                            |   |                                       |   |                                                                                     |    |                                         |   |                        |   |   |   |   |   |   |   |
| Net                  loss - 2003                              |   |                               | -       |                            |   | -                                          |   |                                                                                     | -       |                                         |   | -                           |   |   | (21,107 | ) |   | (21,107 | ) |
| Change                  in net unrealized gain on:            |
| Investments                  classified as available for sale |   |                               | -       |                            |   | -                                          |   |                                                                                     | -       |                                         |   | 115                         |   |   | - |   |   | 115 |   |
| Hedge                  instruments                            |   |                               | -       |                            |   | -                                          |   |                                                                                     | -       |                                         |   | 835                         |   |   | - |   |   | 835 |   |
| Total                  comprehensive loss                     |   |                               |    |                            |   |                                       |   |                                                                                     |    |                                         |   |                        |   |   |   |   |   | (20,157 | ) |
|                                                          |   |                               |    |                            |   |                                       |   |                                                                                     |    |                                         |   |                        |   |   |   |   |   |   |   |
| Repurchase                  of preferred stock                |   |                               | (47,572 | )                               |   | -                                          |   |                                                                                     | (4,059  | )                                            |   | -                           |   |   | - |   |   | (51,631 | ) |
| Dividends                  on preferred stock                 |   |                               | -       |                            |   | -                                          |   |                                                                                     | -       |                                         |   | -                           |   |   | (1,787 | ) |   | (1,787 | ) |
|                                                          |   |                               |    |                            |   |                                       |   |                                                                                     |    |                                         |   |                        |   |   |   |   |   |   |   |
| Balance                  at December 31, 2003                 |   |                               | 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 |   |

*See        notes to consolidated financial statements.*

----

**CONSOLIDATED        STATEMENTS OF CASH FLOWS**

**DYNEX        CAPITAL, INC.**

*(amounts        in thousands except share data)*

|                                                                                                                   |   | **2005** |     | **2004** |   | **2003** |   |
|------------------------------------------------------------------------------------------------------------------------|--------|----------|----------|----------|--------|----------|--------|
| Operating                  activities:                                                                                 |   |     |     |     |   |     |   |
| Net                  income (loss)                                                                                     |   | $        | 9,585    |     | $      | (3,375   | )      | $ | (21,107 | ) |
| Adjustments                  to reconcile net income (loss) to cash provided by operating                  activities: |   |     |     |     |   |     |   |   |   |   |
| Provision                  for loan losses                                                                             |   |     | 5,780    |     |   | 18,463   |   |   | 37,082 |   |
| Impairment                  charges                                                                                    |   |     | 2,474    |     |   | 14,756   |   |   | 16,355 |   |
| Gain                  on sale of investments                                                                           |   |     | (9,609   | )        |   | (14,490  | )      |   | (1,555 | ) |
| Amortization                  and depreciation                                                                         |   |     | 2,607    |     |   | 3,726    |   |   | 3,072 |   |
| Net                  change in other assets and other liabilities                                                      |   |     | 1,500    |     |   | 3,953    |   |   | (4,031 | ) |
| Net                  cash and cash equivalents provided by operating activities                                        |   |     | 12,337   |     |   | 23,033   |   |   | 29,816 |   |
|                                                                                                                   |   |     |     |     |   |     |   |   |   |   |
| Investing                  activities:                                                                                 |   |     |     |     |   |     |   |   |   |   |
| Principal                  payments received on investments                                                            |   |     | 144,532  |     |   | 286,212  |   |   | 294,785 |   |
| Purchase                  of securities and other investments                                                          |   |     | (56,246  | )        |   | (71,468  | )      |   | (32,196 | ) |
| Payments                  received on securities, other investments and loans                                          |   |     | 117,264  |     |   | 21,601   |   |   | 17,781 |   |
| Proceeds                  from sales of securities and other investments                                               |   |     | 15,321   |     |   | 32,066   |   |   | 2,937 |   |
| Other                                                                                                                  |   |     | 168      |     |   | 180      |   |   | 245 |   |
| Net                  cash and cash equivalents provided by investing activities                                        |   |     | 221,039  |     |   | 268,591  |   |   | 283,552 |   |
|                                                                                                                   |   |     |     |     |   |     |   |   |   |   |
| Financing                  activities:                                                                                 |   |     |     |     |   |     |   |   |   |   |
| Proceeds                  from issuance of securitization financing                                                    |   |     | -        |     |   | 7,377    |   |   | - |   |
| Principal                  payments on securitization financing                                                        |   |     | (102,510 | )        |   | (286,330 | )      |   | (301,573 | ) |
| Redemption                  of securitization financing                                                                |   |     | (195,653 | )        |   | -        |   |   | - |   |
| Repayment                  of senior notes                                                                             |   |     | -        |     |   | (10,872  | )      |   | (22,030 | ) |
| Proceeds                  from repurchase agreement borrowings, net                                                    |   |     | 62,847   |     |   | 46,584   |   |   | 23,884 |   |
| Retirement                  of preferred stock                                                                         |   |     | -        |     |   | (648     | )      |   | (19,552 | ) |
| Dividends                  paid                                                                                        |   |     | (5,347   | )        |   | (2,599   | )      |   | (1,787 | ) |
| Net                  cash and cash equivalents used for financing activities                                           |   |     | (240,663 | )        |   | (246,488 | )      |   | (321,058 | ) |
| Net                  (decrease) increase in cash and cash equivalents                                                  |   |     | (7,287   | )        |   | 45,136   |   |   | (7,690 | ) |
| Cash                  and cash equivalents at beginning of period                                                      |   |     | 52,522   |     |   | 7,386    |   |   | 15,076 |   |
| Cash                  and cash equivalents at end of period                                                            |   | $        | 45,235   |     | $      | 52,522   |   | $ | 7,386 |   |

*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**

----

*Securitized        Finance Receivables.*

*Other        Investments.*

*Securities.        *

*Other        loans*

*Interest        Income.*

**Premiums,        Discounts and Hedging Basis Adjustments**

----

**Derivative        Financial Instruments**

**Cash        Equivalents**

**Net        Income Per Common Share**

----

*Fair        Value. *

*Allowance        for Loan Losses. *

*Impairments.        *

*Mortgage        Servicing Liability.*

----

*Contingencies.*
*Accounting        for Contingencies*

**Securitization        Transactions**

**Recent        Accounting Pronouncements**

In        December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.        123 (Revised 2004), Share-Based Payment (FAS 123R). This statement supersedes        APB Opinion No. 25 and its related implementation guidance. The statement        establishes standards for the accounting for transactions in which an entity        exchanges its equity instruments for goods and services. This statement focuses        primarily on accounting for transactions in which an entity obtains employee        services in share-based payment transactions. The most significant change        resulting from this statement is the requirement for public companies to        expense        employee share-based payments under fair value as originally introduced in        SFAS        No. 123. This statement is effective for public companies as of the beginning        of        the first annual reporting period that begins after June 15, 2005, or December        15, 2005 for small business issuers. The Company will adopt this statement        effective January 1, 2006. Had the Company applied FAS123R to to awards granted        prior to January 1, 2003 net income to common shareholders and net income        per        common share would have been the pro forma amounts reported in the table        below:.

|                                                                |   | 2005   |   | 2004   |   | 2003   |   |
|---------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
| Net                  (loss) income to common shareholders           |   | $      | 4,238  |   | $      | (5,194 | )      | $ | (14,260 | ) |
| Fair                  value method stock based compensation expense |   |   | (95    | )      |   | -      |   |   | (126 | ) |
| Stock                  based compensation expense under APB 25      |   |   | -      |   |   | -      |   |   | 38 |   |
| Pro                  forma net (loss) income to common shareholders |   | $      | 4,143  |   | $      | (5,194 | )      | $ | (14,348 | ) |
|                                                                |   |   |   |   |   |   |   |   |   |   |
| Net                  (loss) income per common share:                |   |   |   |   |   |   |   |   |   |   |
| Basic                  - as reported                                |   | $      | 0.35   |   | $      | (0.46  | )      | $ | (1.31 | ) |
| Basic                  - pro forma                                  |   | $      | 0.34   |   | $      | (0.46  | )      | $ | (1.32 | ) |
|                                                                |   |   |   |   |   |   |   |   |   |   |

----

*Accounting        for Transfers and Servicing of Financial Assets and Extinguishments of        Liabilities, *

----

**NOTE        3 - SECURITIZED FINANCE RECEIVABLES**

|                                           |   | **2005** |    | **2004** |   |
|------------------------------------------------|--------|----------|---------|----------|--------|
| Loans,                  at amortized cost      |   | $        | 741,187 |     | $      | 1,064,137 |   |
| Allowance                  for loan losses     |   |     | (19,035 | )        |   | (28,014 | ) |
| Loans,                  net                    |   |     | 722,152 |     |   | 1,036,123 |   |
| Debt                  securities at fair value |   |     | -       |     |   | 206,434 |   |
|                                           |   | $        | 722,152 |     | $      | 1,242,557 |   |

|                                                                    |   | **2005** |   | **2004** |   |
|-------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Debt                  securities, available-for-sale, at amortized cost |   | $        | -      |     | $      | 205,370 |   |
| Gross                  unrealized gains                                 |   | $        | -      |     |   | 1,064 |   |
| Estimated                  fair value                                   |   | $        | -      |     | $      | 206,434 |   |

|                                                       |   | **2005**                        |    | **2004**                             |   |
|------------------------------------------------------------|--------|---------------------------------|---------|--------------------------------------|--------|
|                                                       |   | **Loans,                  net** |    | **Debt                  Securities** |   | **Total** |   | **Loans,                  net** |   | **Debt                  Securities** |   | **Total** |   |
| Collateral:                                                |   |                            |    |                                 |   |   |   |   |   |   |   |   |   |
| Commercial                                                 |   | $                               | 570,199 |                                 | $      | - |   | $ | 570,199 |   | $ | 640,090 |   | $ | - |   | $ | 640,090 |   |
| Manufactured                  housing                      |   |                            | -       |                                 |   | - |   |   | - |   |   | 198,246 |   |   | 149,420 |   |   | 347,666 |   |
| Single-family                                              |   |                            | 161,058 |                                 |   | - |   |   | 161,058 |   |   | 225,055 |   |   | 52,753 |   |   | 277,808 |   |
|                                                       |   |                            | 731,257 |                                 |   | - |   |   | 731,257 |   |   | 1,063,391 |   |   | 202,173 |   |   | 1,265,564 |   |
| Allowance                  for loan losses                 |   |                            | (19,035 | )                                    |   | - |   |   | (19,035 | ) |   | (28,014 | ) |   | - |   |   | (28,014 | ) |
| Funds                  held by trustees                    |   |                            | 6,648   |                                 |   | - |   |   | 6,648 |   |   | 130 |   |   | 43 |   |   | 173 |   |
| Accrued                  interest receivable               |   |                            | 5,114   |                                 |   | - |   |   | 5,114 |   |   | 6,548 |   |   | 202 |   |   | 6,750 |   |
| Unamortized                  premiums and (discounts), net |   |                            | (1,832  | )                                    |   | - |   |   | (1,832 | ) |   | (5,932 | ) |   | 2,952 |   |   | (2,980 | ) |
| Unrealized                  gain, net                      |   |                            | -       |                                 |   | - |   |   | - |   |   | - |   |   | 1,064 |   |   | 1,064 |   |
|                                                       |   | $                               | 722,152 |                                 | $      | - |   | $ | 722,152 |   | $ | 1,036,123 |   | $ | 206,434 |   | $ | 1,242,557 |   |

----

**NOTE        4 - ALLOWANCE FOR LOAN LOSSES**

|                                                |   | **2005** |    | **2004** |   | **2003** |   |
|-----------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
| Allowance                    at beginning of year   |   | $        | 28,014  |     | $      | 43,364   |   | $ | 25,472 |   |
| Provision                    for loan losses        |   |     | 5,780   |     |   | 18,463   |   |   | 37,082 |   |
| Credit                    losses, net of recoveries |   |     | (3,450  | )        |   | (17,651  | )      |   | (19,190 | ) |
| Loans                    sold                       |   |     | (11,309 | )        |   | (16,162  | )      |   | - |   |
| Allowance                    at end of year         |   | $        | 19,035  |     | $      | 28,014   |   | $ | 43,364 |   |

| **December                  31,** |   | **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** |   |
|-----------------------------------|--------|------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------|--------|
| 2004                              |   |                                                             | 72,431 |                                                                                                  |   | 17,379                                                                                                 |   |   | 55,052 |   |
| 2005                              |   |                                                             | 54,558 |                                                                                                  |   | 21,609                                                                                                 |   |   | 32,949 |   |

**NOTE        5 - OTHER INVESTMENTS**

|                                                              |   | **2005** |   | **2004** |   |
|-------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Delinquent                  property tax receivables and security |   | $        | 3,220  |     | $      | 6,000 |   |
| Real                  estate owned                                |   |     | 847    |     |   | 1,596 |   |
|                                                              |   | $        | 4,067  |     | $      | 7,596 |   |

----

|                                             |   | **2005**          |   | **2004**                                     |   |
|--------------------------------------------------|--------|-------------------|--------|----------------------------------------------|--------|
|                                             |   | **Fair****Value** |   | **Effective                  Interest Rate** |   | **Fair****Value** |   | **Effective                  Interest Rate** |   |
| Securities,                  available-for-sale: |   |              |   |                                         |   |   |   |   |   |   |   |   |   |
| Fixed-rate                  mortgage securities  |   | $                 | 22,900 |                                         |   | 6.14 | % | $ | 79,081 |   |   | 4.54 | % |
| Other                  securities                |   |              | 320    |                                         |   |   |   |   | 404 |   |   |   |   |
| Equity                  securities               |   |              | 1,602  |                                         |   |   |   |   | 7,438 |   |   |   |   |
|                                             |   |              | 24,822 |                                         |   |   |   |   | 86,928 |   |   |   |   |
| Gross                  unrealized gains          |   |              | 332    |                                         |   |   |   |   | 852 |   |   |   |   |
| Gross                  unrealized losses         |   |              | (246   | )                                            |   |   |   |   | (74 | ) |   |   |   |
| Securities,                  available-for-sale  |   | $                 | 24,908 |                                         |   |   |   | $ | 87,706 |   |   |   |   |

*Investment        activity.*

*Unrealized        gain/loss on securities.*

**NOTE        7 - OTHER LOANS**

|                                                                      |   | **2005** |   | **2004** |   |
|---------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Single-family                  mortgage loans                             |   | $        | 4,825  |     | $      | 3,693 |   |
| Multifamily                  and commercial mortgage loans participations |   |     | 995    |     |   | 2,878 |   |
|                                                                      |   |     | 5,820  |     |   | 6,571 |   |
| Unamortized                  discounts                                    |   |     | (538   | )        |   | (982 | ) |
|                                                                      |   | $        | 5,282  |     | $      | 5,589 |   |

**NOTE        8 - NON-RECOURSE SECURITIZATION FINANCING**

----

|                                             |   | **2005**                               |                       | **2004**                                     |   |
|--------------------------------------------------|--------|----------------------------------------|----------------------------|----------------------------------------------|--------|
|                                             |   | **Bonds                  Outstanding** |                       | **Range                  of Interest Rates** |   | **Bonds                  Outstanding** |   | **Range                  of Interest Rates** |   |
| Variable-rate                  classes           |   | $                                      | -                          |                                         |   |   |   | $ | 405,236 |   |   | 2.6%                  - 3.7 | % |
| Fixed-rate                  classes              |   |                                   | 509,923                    |                                         |   | 6.6%                  - 8.8 | % |   | 760,672 |   |   | 6.3%                  - 11.5 | % |
| Accrued                  interest payable        |   |                                   | 3,438                      |                                         |   |   |   |   | 5,237 |   |   |   |   |
| Deferred                  costs                  |   |                                   | (16,912                    | )                                            |   |   |   |   | (25,658 | ) |   |   |   |
| Unamortized                  net bond premium    |   |                                   | 20,129                     |                                         |   |   |   |   | 31,793 |   |   |   |   |
|                                             |   | $                                      | 516,578                    |                                         |   |   |   | $ | 1,177,280 |   |   |   |   |
|                                             |   |                                   |                       |                                         |   |   |   |   |   |   |   |   |   |
| Range                  of stated maturities      |   |                                   | 2009-2028                  |                                         |   |   |   |   | 2009-2033 |   |   |   |   |
| Estimated                  weighted average life |   |                                   | 3.5                  years |                                         |   |   |   |   | 4.7                  years |   |   |   |   |
| Number                  of series                |   |                                   | 3                          |                                         |   |   |   |   | 17 |   |   |   |   |

**NOTE        9 - REPURCHASE AGREEMENTS **

----

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

|                                                   |   | **2005**              |    | **2004**          |   |
|--------------------------------------------------------|--------|-----------------------|---------|-------------------|--------|
|                                                   |   | **Recorded****Basis** |    | **Fair****Value** |   | **Recorded****Basis** |   | **Fair****Value** |   |
| Assets:                                                |   |                  |    |              |   |   |   |   |   |
| Securitized                  finance receivables       |   |                  |    |              |   |   |   |   |   |
| Loans,                  net                            |   | $                     | 722,152 |              | $      | 761,287 |   | $ | 1,036,123 |   | $ | 1,096,971 |   |
| Debt                  securities                       |   |                  | -       |              |   | - |   |   | 206,434 |   |   | 206,434 |   |
| Securitized                  finance receivables       |   |                  | 722,152 |              |   | 761,287 |   |   | 1,242,557 |   |   | 1,303,405 |   |
| Other                  investments                     |   |                  | 4,067   |              |   | 4,067 |   |   | 7,596 |   |   | 7,596 |   |
| Securities                                             |   |                  | 24,908  |              |   | 24,908 |   |   | 87,706 |   |   | 87,706 |   |
| Other                  loans                           |   |                  | 5,282   |              |   | 6,040 |   |   | 5,589 |   |   | 7,872 |   |
| Liabilities:                                           |   |                  |    |              |   |   |   |   |   |   |   |   |   |
| Non-recourse                  securitization financing |   |                  | 516,578 |              |   | 556,610 |   |   | 1,177,280 |   |   | 1,236,899 |   |
| Repurchase                  agreements                 |   |                  | 133,315 |              |   | 133,315 |   |   | 70,468 |   |   | 70,468 |   |

**NOTE        11 - DERIVATIVE FINANCIAL INSTRUMENTS**

----

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

|                                                                                                                                                                           |   |                                 |    |                                                     |   |                                 |   |                                                     |    |                                 |   |                                                     |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|---------|----------------------------------------------------------|--------|--------------------------------------|--------|----------------------------------------------------------|---------|--------------------------------------|--------|----------------------------------------------------------|--------|
|                                                                                                                                                                           |   | **2005**                             |    | **2004**                                                 |   | **2003**                             |   |
|                                                                                                                                                                           |   | **Income                    (loss)** |    | **Weighted-Average                    Number of Shares** |   | **Income                    (loss)** |   | **Weighted-Average                    Number of Shares** |    | **Income                    (loss)** |   | **Weighted-Average                    Number of Shares** |   |
|                                                                                                                                                                           |   |                                 |    |                                                     |   |                                 |   |                                                     |    |                                 |   |                                                     |   |
| Net                    income (loss)                                                                                                                                           |   | $                                    | 9,585   |                                                     |   |                                 |   | $                                                        | (3,375  | )                                    |   |                                                     |   | $ | (21,107 | ) |   |   |   |
| Preferred                    stock (charge) benefit                                                                                                                            |   |                                 | (5,347  | )                                                        |   |                                 |   |                                                     | (1,819  | )                                    |   |                                                     |   |   | 6,847 |   |   |   |   |
| Net                    income (loss) available to common shareholders                                                                                                          |   | $                                    | 4,238   |                                                     | $      | 12,163,062                           |   | $                                                        | (5,194  | )                                    | $      | 11,272,259                                               |   | $ | (14,260 | ) | $ | 10,873,903 |   |
|                                                                                                                                                                           |   |                                 |    |                                                     |   |                                 |   |                                                     |    |                                 |   |                                                     |   |   |   |   |   |   |   |
| Net                    loss per share:                                                                                                                                         |   |                                 |    |                                                     |   |                                 |   |                                                     |    |                                 |   |                                                     |   |   |   |   |   |   |   |
| Basic                    and diluted EPS                                                                                                                                       |   |                                 |    |                                                     | $      | 0.35                                 |   |                                                     |    |                                 | $      | (0.46                                                    | )      |   |   |   | $ | (1.31 | ) |
|                                                                                                                                                                           |   |                                 |    |                                                     |   |                                 |   |                                                     |    |                                 |   |                                                     |   |   |   |   |   |   |   |
| Dividends                    and potentially anti-dilutive common shares assuming     conversion                    of                    preferred stock: |   |                                 |    |                                                     |   | Shares                               |   |                                                     |    |                                 |   | Shares                                                   |   |   |   |   |   | Shares |   |
|     Series                    A                                                                                                                            |   | $                                    | – |                                                     |   | –                              |   | $                                                        | 337     |                                 | $      | 94,403                                                   |   | $ | 1,252 |   | $ | 287,083 |   |
|     Series                    B                                                                                                                            |   |                                 | – |                                                     |   | –                              |   |                                                     | 537     |                                 |   | 131,621                                                  |   |   | 1,745 |   |   | 399,903 |   |
|     Series                    C                                                                                                                            |   |                                 | – |                                                     |   | –                              |   |                                                     | 666     |                                 |   | 130,990                                                  |   |   | 2,170 |   |   | 398,912 |   |
|     Series                    D                                                                                                                            |   |                                 | 5,347   |                                                     |   | 5,628,737                            |   |                                                     | 3,936   |                                 |   | 3,491,047                                                |   |   | – |   |   | – |   |
| Expense                    and incremental shares of stock appreciation rights                                                                                                 |   |                                 | – |                                                     |   | 64                                   |   |                                                     | – |                                 |   | 21,045                                                   |   |   | – |   |   | 20,164 |   |
|                                                                                                                                                                           |   |                                 |    |                                                     |   |                                 |   |                                                     |    |                                 |   |                                                     |   |   |   |   |   |   |   |
|                                                                                                                                                                           |   | $                                    | 5,347   |                                                     | $      | 5,628,801                            |   | $                                                        | 5,476   |                                 | $      | 3,869,106                                                |   | $ | 5,476 |   | $ | 1,106,062 |   |

**NOTE        13 - PREFERRED AND COMMON STOCK**

|                                                     |   | **Issue                  Price** |   | **Dividends                  Paid Per Share** |        |
|----------------------------------------------------------|--------|----------------------------------|--------|-----------------------------------------------|--------|
| Cumulative                  Convertible Preferred Stock  |   | **Per                  share**   |   | **2005**                                      |   | **2004** |   | **2003** |
| Series                  A 9.75% (“Series A”) |   | $                                | 24.00  |                                          | $      | - |   | $ | - |   | $ | 0.8775 |
| Series                  B 9.55% (“Series B”) |   | $                                | 24.50  |                                          | $      | - |   | $ | - |   | $ | 0.8775 |
| Series                  C 9.73% (“Series C”) |   | $                                | 30.00  |                                          | $      | - |   | $ | - |   | $ | 1.0950 |
| Series                  D 9.50% (“Series D”) |   | $                                | 10.00  |                                          | $      | 0.9500 |   | $ | 0.6993 |   | $ | - |

----

|                               |   | **Preferred                  Shares** |     | **Common**                    |
|------------------------------------|--------|---------------------------------------|----------|-------------------------------|
|                               |   | **Series                  A**         |     | **Series                  B** |   | **Series                  C** |   | **Series                  D** |   | **Total** |   | **Shares** |
| January                  1, 2003   |   |                                  | 992,038  |                          |   | 1,378,707 |   |   | 1,383,532 |   |   | - |   |   | 3,754,277 |   |   | 10,873,903 |
| Tender                  offer      |   |                                  | (498,443 | )                             |   | (690,518 | ) |   | (698,639 | ) |   | - |   |   | (1,887,600 | ) |   | - |
| December                  31, 2003 |   |                                  | 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 |

**NOTE        14 - IMPAIRMENT CHARGES**

|                                                                  |   | 2005   |   | 2004   |   | 2003   |
|-----------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
| Debt                  securities, manufactured housing                |   | $      | -      |   | $      | 9,072  |   | $ | 5,494 |
| Debt                  securities, delinquent property tax receivables |   |   | 1,673  |   |   | 4,891  |   |   | 10,364 |
| Other                                                                 |   |   | 801    |   |   | 793    |   |   | 497 |
| Total                  impairments                                    |   | $      | 2,474  |   | $      | 14,756 |   | $ | 16,355 |

----

**NOTE        15 - EMPLOYEE BENEFITS**

**Stock        Incentive Plan**

|                                                     |   | **Year                    ended December 31,** |    |
|----------------------------------------------------------|--------|------------------------------------------------|---------|
|                                                     |   | **2005**                                       |    | **2004** |   | **2003** |   |
|                                                     |   |  **Number****Of****Shares**               |    | **Weighted-****Average****Exercise****Price** |   |  **Number****Of****Shares** |   | **Weighted-****Average****Exercise****Price** |   |  **Number****Of****Shares** |   | **Weighted-****Average****Exercise****Price** |   |
| SARs                    outstanding at beginning of year |   |                                           | -       |   | $ | - |   |   | 30,000 |   | $ | 2.00 |   |   | 30,000 |   | $ | 2.00 |   |
| SARs                    granted                          |   |                                           | 126,297 |   |   | 7.81 |   |   | - |   |   | - |   |   | - |   |   | - |   |
| SARs                    forfeited or redeemed            |   |                                           | -       |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |
| SARs                    exercised                        |   |                                           | -       |   |   | - |   |   | 30,000 |   |   | 2.00 |   |   | - |   |   | - |   |
| SARs                    outstanding at end of year       |   |                                           | 126,297 |   |   | 7.81 |   |   | - |   |   | - |   |   | 30,000 |   |   | 2.00 |   |
| SARs                    vested and exercisable           |   |                                           | 31,574  |   | $ | 7.81 |   |   | - |   | $ | - |   |   | 30,000 |   | $ | 2.00 |   |

|                                                        |   | **Year                    ended December 31,** |   |
|-------------------------------------------------------------|--------|------------------------------------------------|--------|
|                                                        |   | **2005**                                       |   | **2004** |   | **2003** |   |
|                                                        |   |  **Number****Of****Shares**               |   | **Weighted-****Average****Exercise****Price** |   |  **Number****Of****Shares** |   | **Weighted-****Average****Exercise****Price** |   |  **Number****Of****Shares** |   | **Weighted-****Average****Exercise****Price** |   |
| Options                    outstanding at beginning of year |   |                                           | -      |   | $ | - |   |   | - |   |   | - |   |   | - |   |   | - |   |
| Options                    granted                          |   |                                           | 40,000 |   |   | 8.46 |   |   | - |   |   | - |   |   | - |   |   | - |   |
| Options                    forfeited or redeemed            |   |                                           | -      |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |
| Options                    exercised                        |   |                                           | -      |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |
| Options                    outstanding at end of year       |   |                                           | 40,000 |   |   | 8.46 |   |   | - |   |   | - |   |   | - |   |   | - |   |
| Options                    vested and exercisable           |   |                                           | 40,000 |   | $ | 8.46 |   |   | - |   |   | - |   |   | - |   |   | - |   |

----

**Employee        Savings Plan**

**401(k)        Overflow Plan**

**NOTE        16 - COMMITMENTS AND CONTINGENCIES**

| **Years                  Ending December 31,** |   |   |   |
|------------------------------------------------|--------|--------|--------|
| 2006                                           |   | $      | 146    |   |
| 2007                                           |   |   | 149    |   |
| 2008                                           |   |   | 63     |   |
| 2009                                           |   |   | -      |   |
| 2010                  and thereafter           |   |   | -      |   |
| Total                                          |   | $      | 358    |   |

**NOTE        17 - LITIGATION **

----

**NOTE        18 - SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS        INFORMATION**

|                                                             |   | **Years                  ended December 31,** |   |
|------------------------------------------------------------------|--------|-----------------------------------------------|--------|
|                                                             |   | **2005**                                      |   | **2004** |   | **2003** |   |
| Cash                  paid for interest                          |   | $                                             | 61,824 |   | $ | 96,473 |   | $ | 107,737 |   |
|                                                             |   |                                          |   |   |   |   |   |   |   |   |
| Supplemental                  disclosure of non-cash activities: |   |                                          |   |   |   |   |   |   |   |   |

| 9.75%                  senior unsecured notes due April 2007 issued in connection with                  recapitalization plan           |   |   | - |   |   | 823 |   |   | -      |   |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---|--------|--------|-----|--------|--------|--------|--------|
| 9.50%                  senior unsecured notes due February 2005 issued in connection with                  Preferred Stock tender offer |   |   | - |   |   | -   |   |   | 32,079 |   |

**NOTE        19 - RELATED PARTY TRANSACTIONS**

**NOTE        20 - NON-CONSOLIDATED AFFILIATES**

| **Condensed                  Statement of Operations** |   |
|--------------------------------------------------------|--------|
|                                                   |   | **2005** |   | **2004** |   | **2003** |   |
| Total                  revenues                        |   | $ | 2,538 |   | $ | 2,537 |   | $ | 2,537 |   |
| Total                  expenses                        |   |   | 1,729 |   |   | 1,831 |   |   | 1,948 |   |
| Net                  income                            |   |   | 809 |   |   | 706 |   |   | 589 |   |

| **Condensed                  Balance Sheet** |   |
|----------------------------------------------|--------|
|                                         |   | **2005** |   | **2004** |   |
| Total                  assets                |   | $ | 16,103 |   | $ | 16,587 |   |
| Total                  expenses              |   |   | 12,240 |   |   | 13,533 |   |
| Total                  equity                |   |   | 3,863 |   |   | 3,054 |   |

----

**NOTE        21 - SUMMARY OF FOURTH QUARTER RESULTS (UNAUDITED)**

|                                                            |   | **Fourth                  Quarter, 2005** |   |
|-----------------------------------------------------------------|--------|-------------------------------------------|--------|
| Operating                  results:                             |   |                                      |   |   |
| Net                  interest income                            |   | $                                         | 2,086  |   |
| Provisions                  for losses                          |   |                                      | (1,233 | ) |
| Net                  interest income after provision for losses |   |                                      | 853    |   |
| Impairment                  charges                             |   |                                      | (1,300 | ) |
| Loss                  on sale of investments                    |   |                                      | (193   | ) |
| Net                  income                                     |   |                                      | 955    |   |
| Net                  loss to common shareholders                |   |                                      | (382   | ) |
| Basic                  and diluted loss per common share        |   | $                                         | (0.03  | ) |

----

**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).     |