----

**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**Washington,      DC  20549**

**FORM      10-Q**

**Quarterly      Report Pursuant to Section 13      or 15(d) of the**

**Securities      Exchange Act of      1934**

**For      the quarterly period ended September 30, 2007**

**OR**

**Transition      Report Pursuant to Section      13 or 15(d) of the**

**Securities      Exchange Act of      1934**

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

**DYNEX      CAPITAL, INC.**

| **Virginia**                                                                                                     | **52-1549373**                     |
|------------------------------------------------------------------------------------------------------------------|------------------------------------|
| (State                or other jurisdiction of                                                                   | (I.R.S.                Employer    |
| incorporation                or organization)                                                                    | Identification                No.) |
|                                                                                                             |                               |
| **4551                Cox Road, Suite 300, Glen Allen, Virginia**                                                | **23060-6740**                     |
| (Address                of principal executive offices)                                                          | (Zip                Code)          |
|                                                                                                             |                               |
| **(804)                217-5800**(Registrant’s                telephone number, including area code)  |

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**DYNEX      CAPITAL, INC.**

**FORM      10-Q**

**INDEX**

|                    |                                 |                                                                                                                                                                                                                | Page   |
|-------------------------|--------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| PART                I.  | FINANCIAL                INFORMATION |                                                                                                                                                                                                                |
|                    |                                 |                                                                                                                                                                                                                |   |
|                    | Item                1.               | Financial                Statements                                                                                                                                                                                 |   |
|                    |                                 |                                                                                                                                                                                                                |   |
|                    |                                 | Condensed                Consolidated Balance Sheets at September                30, 2007 (unaudited) and December 31, 2006                                                                                         | 1      |
|                    |                                 |                                                                                                                                                                                                                |   |
|                    |                                 | Condensed                Consolidated Statements of Operations                and Comprehensive Income (Loss) for the three and nine months ended                September 30, 2007 and 2006  (unaudited) | 2      |
|                    |                                 |                                                                                                                                                                                                                |   |
|                    |                                 | Condensed                Consolidated Statements of Cash                Flows for the nine months ended September 30, 2007 and                2006  (unaudited)                                           | 3      |
|                    |                                 |                                                                                                                                                                                                                |   |
|                    |                                 | Notes                to Condensed Consolidated                Financial Statements (unaudited)                                                                                                                      | 4      |
|                    |                                 |                                                                                                                                                                                                                |   |
|                    | Item                2.               | Management’s                Discussion and Analysis of Financial                Condition and Results of Operations                                                                                           | 12     |
|                    |                                 |                                                                                                                                                                                                                |   |
|                    | Item                3.               | Quantitative                and Qualitative                Disclosures about Market Risk                                                                                                                            | 30     |
|                    |                                 |                                                                                                                                                                                                                |   |
|                    | Item                4.               | Controls                and Procedures                                                                                                                                                                              | 32     |
|                    |                                 |                                                                                                                                                                                                                |   |
| PART                II. | OTHER                INFORMATION     |                                                                                                                                                                                                                |
|                    |                                 |                                                                                                                                                                                                                |   |
|                    | Item                1.               | Legal                Proceedings                                                                                                                                                                                    | 32     |
|                    |                                 |                                                                                                                                                                                                                |   |
|                    | Item                1A.              | Risk                Factors                                                                                                                                                                                         | 34     |
|                    |                                 |                                                                                                                                                                                                                |   |
|                    | Item                2.               | Unregistered                Sales of                Equity Securities and Use of Proceeds                                                                                                                           | 34     |
|                    |                                 |                                                                                                                                                                                                                |   |
|                    | Item                3.               | Defaults                Upon Senior                Securities                                                                                                                                                       | 34     |
|                    |                                 |                                                                                                                                                                                                                |   |
|                    | Item                4.               | Submission                of Matters to a Vote of Security                Holders                                                                                                                                   | 34     |
|                    |                                 |                                                                                                                                                                                                                |   |
|                    | Item                5.               | Other                Information                                                                                                                                                                                    | 34     |
|                    |                                 |                                                                                                                                                                                                                |   |
|                    | Item                6.               | Exhibits                                                                                                                                                                                                            | 34     |
|                    |                                 |                                                                                                                                                                                                                |   |
| Signature               | 35                                   |

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**PART      I.  FINANCIAL INFORMATION**

**Item      1.  Financial      Statements**

**DYNEX      CAPITAL, INC.**

**CONDENSED      CONSOLIDATED**

**BALANCE      SHEETS**

*(amounts      in thousands except share data)*

|                                                                                                    |   | September                30, |     |   | December                31, |   |
|---------------------------------------------------------------------------------------------------------|--------|------------------------------|----------|--------|-----------------------------|--------|
|                                                                                                    |   | 2007                         |     |   | 2006                        |   |
|                                                                                                    |   | (Unaudited)                  |     |   |                        |   |
| ASSETS                                                                                                  |   |                         |     |   |                        |   |
| Cash                and cash equivalents                                                                |   | $                            | 35,447   |   |                        | $      | 56,880 |   |
| Other                assets                                                                             |   |                         | 4,004    |   |                        |   | 6,111 |   |
|                                                                                                    |   |                         | 39,451   |   |                        |   | 62,991 |   |
| Investments:                                                                                            |   |                         |     |   |                        |   |   |   |
| Securitized                mortgage loans, net                                                          |   |                         | 295,686  |   |                        |   | 346,304 |   |
| Investment                in joint venture                                                              |   |                         | 21,357   |   |                        |   | 37,388 |   |
| Securities                                                                                              |   |                         | 21,546   |   |                        |   | 13,143 |   |
| Other                loans and investments                                                              |   |                         | 6,348    |   |                        |   | 6,731 |   |
|                                                                                                    |   |                         | 344,937  |   |                        |   | 403,566 |   |
|                                                                                                    |   |                         |     |   |                        |   |   |   |
|                                                                                                    |   | $                            | 384,388  |   |                        | $      | 466,557 |   |
|                                                                                                    |   |                         |     |   |                        |   |   |   |
| LIABILITIES                AND SHAREHOLDERS' EQUITY                                                     |   |                         |     |   |                        |   |   |   |
| LIABILITIES                                                                                             |   |                         |     |   |                        |   |   |   |
| Securitization                financing                                                                 |   | $                            | 183,070  |   |                        | $      | 211,564 |   |
| Repurchase                agreements                                                                    |   |                         | 36,197   |   |                        |   | 95,978 |   |
| Obligation                under payment agreement                                                       |   |                         | 16,813   |   |                        |   | 16,299 |   |
| Other                liabilities                                                                        |   |                         | 6,957    |   |                        |   | 6,178 |   |
|                                                                                                    |   |                         | 243,037  |   |                        |   | 330,019 |   |
|                                                                                                    |   |                         |     |   |                        |   |   |   |
| Commitments                and Contingencies (Note 10)                                                  |   |                         |     |   |                        |   |   |   |
|                                                                                                    |   |                         |     |   |                        |   |   |   |
| SHAREHOLDERS'                EQUITY                                                                     |   |                         |     |   |                        |   |   |   |
| Preferred                stock, par value $0.01 per share, 50,000,000 shares                authorized, |   |                         |     |   |                        |   |   |   |
| 9.5%                Cumulative Convertible Series D, 4,221,539 shares issued                            |   |                         |     |   |                        |   |   |   |
| and                outstanding, ($43,218 aggregate liquidation preference)                              |   |                         | 41,749   |   |                        |   | 41,749 |   |
| Common                stock, par value $0.01 per share, 100,000,000 shares                authorized,   |   |                         |     |   |                        |   |   |   |
| 12,136,262                and 12,131,262 shares issued and outstanding, respectively                    |   |                         | 121      |   |                        |   | 121 |   |
| Additional                paid-in capital                                                               |   |                         | 366,716  |   |                        |   | 366,637 |   |
| Accumulated                other comprehensive income                                                   |   |                         | 1,075    |   |                        |   | 663 |   |
| Accumulated                deficit                                                                      |   |                         | (268,310 | )      |                        |   | (272,632 | ) |
|                                                                                                    |   |                         | 141,351  |   |                        |   | 136,538 |   |
|                                                                                                    |   |                         |     |   |                        |   |   |   |
|                                                                                                    |   | $                            | 384,388  |   |                        | $      | 466,557 |   |
|                                                                                                    |   |                         |     |   |                        |   |   |   |
| *See                notes to unaudited condensed consolidated financial                statements.*     |   |                         |     |   |                        |   |   |   |

----

**DYNEX      CAPITAL, INC.**

**CONDENSED      CONSOLIDATED STATEMENTS**

**OF      OPERATIONS AND COMPREHENSIVE INCOME (LOSS)(UNAUDITED)**

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

|                                                                                                |   | Three                Months Ended |   |   | Nine                Months Ended |   |
|-----------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|--------|----------------------------------|--------|
|                                                                                                |   | September                30,      |   |   | September                30,     |   |
|                                                                                                |   | 2007                              |   |   | 2006                             |   |   | 2007 |   |   | 2006 |   |
|                                                                                                |   |                              |   |   |                             |   |   |   |   |   |   |   |
|                                                                                                |   |                              |   |   |                             |   |   |   |   |   |   |   |
| Interest                income:                                                                     |   |                              |   |   |                             |   |   |   |   |   |   |   |
| Securitized                mortgage loans                                                           |   | $                                 | 6,445  |   |                             | $      | 11,863 |   |   | $ | 20,318 |   |   | $ | 38,888 |   |
| Securities                                                                                          |   |                              | 289    |   |                             |   | 330 |   |   |   | 897 |   |   |   | 1,303 |   |
| Cash                and cash equivalents                                                            |   |                              | 637    |   |                             |   | 613 |   |   |   | 2,163 |   |   |   | 1,303 |   |
| Other                loans and investments                                                          |   |                              | 102    |   |                             |   | 194 |   |   |   | 333 |   |   |   | 464 |   |
|                                                                                                |   |                              | 7,473  |   |                             |   | 13,000 |   |   |   | 23,711 |   |   |   | 41,958 |   |
|                                                                                                |   |                              |   |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Interest                and related expenses:                                                       |   |                              |   |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Securitization                financing                                                             |   |                              | 3,685  |   |                             |   | 8,236 |   |   |   | 11,317 |   |   |   | 29,425 |   |
| Repurchase                agreements                                                                |   |                              | 937    |   |                             |   | 1,533 |   |   |   | 3,357 |   |   |   | 4,567 |   |
| Obligation                under payment agreement                                                   |   |                              | 386    |   |                             |   | 121 |   |   |   | 1,139 |   |   |   | 121 |   |
| Other                                                                                               |   |                              | 8      |   |                             |   | (59 | ) |   |   | 17 |   |   |   | (155 | ) |
|                                                                                                |   |                              | 5,016  |   |                             |   | 9,831 |   |   |   | 15,830 |   |   |   | 33,958 |   |
|                                                                                                |   |                              |   |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Net                interest income                                                                  |   |                              | 2,457  |   |                             |   | 3,169 |   |   |   | 7,881 |   |   |   | 8,000 |   |
| Recapture                of (provision for) loan losses                                             |   |                              | 127    |   |                             |   | (67 | ) |   |   | 1,352 |   |   |   | 52 |   |
|                                                                                                |   |                              |   |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Net                interest income after provision for loan losses                                  |   |                              | 2,584  |   |                             |   | 3,102 |   |   |   | 9,233 |   |   |   | 8,052 |   |
|                                                                                                |   |                              |   |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Equity                in income (loss) of joint venture                                             |   |                              | 576    |   |                             |   | (1,661 | ) |   |   | 1,878 |   |   |   | (1,661 | ) |
| Loss                on capitalization of joint venture                                              |   |                              | -      |   |                             |   | (1,194 | ) |   |   | - |   |   |   | (1,194 | ) |
| Gain                on sale of investments, net                                                     |   |                              | 21     |   |                             |   | 85 |   |   |   | 21 |   |   |   | 226 |   |
| Other                income (expense)                                                               |   |                              | 305    |   |                             |   | 433 |   |   |   | (713 | ) |   |   | 662 |   |
| General                and administrative expenses                                                  |   |                              | (800   | )      |                             |   | (980 | ) |   |   | (3,089 | ) |   |   | (3,473 | ) |
|                                                                                                |   |                              |   |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Net                income (loss)                                                                    |   |                              | 2,686  |   |                             |   | (215 | ) |   |   | 7,330 |   |   |   | 2,612 |   |
| Preferred                stock dividends                                                            |   |                              | (1,003 | )      |                             |   | (1,003 | ) |   |   | (3,008 | ) |   |   | (3,041 | ) |
|                                                                                                |   |                              |   |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Net                income (loss) to common shareholders                                             |   | $                                 | 1,683  |   |                             | $      | (1,218 | ) |   | $ | 4,322 |   |   | $ | (429 | ) |
|                                                                                                |   |                              |   |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Change                in net unrealized gain (loss) on :                                            |   |                              |   |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Investments                classified as available-for-sale                                         |   |                              | 576    |   |                             |   | (166 | ) |   |   | 100 |   |   |   | 282 |   |
| Investment                in joint venture                                                          |   |                              | (295   | )      |                             |   | 18 |   |   |   | 311 |   |   |   | 18 |   |
|                                                                                                |   |                              |   |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive                income (loss)                                                          |   | $                                 | 2,967  |   |                             | $      | (363 | ) |   | $ | 7,741 |   |   | $ | 2,912 |   |
|                                                                                                |   |                              |   |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Net                income (loss) per common share:                                                  |   |                              |   |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Basic                and diluted                                                                    |   | $                                 | 0.14   |   |                             | $      | (0.10 | ) |   | $ | 0.36 |   |   | $ | (0.04 | ) |
|                                                                                                |   |                              |   |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| *See                notes to unaudited condensed consolidated financial                statements.* |   |                              |   |   |                             |   |   |   |   |

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

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

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

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

|                                                                                                |   | Nine                Months Ended |    |
|-----------------------------------------------------------------------------------------------------|--------|----------------------------------|---------|
|                                                                                                |   | September                30,     |    |
|                                                                                                |   | 2007                             |    |   | 2006 |   |
| Operating                activities:                                                                |   |                             |    |   |   |   |
| Net                income                                                                           |   | $                                | 7,330   |   |   | $ | 2,612 |   |
| Adjustments                to reconcile net income to cash provided by                              |   |                             |    |   |   |   |   |   |
| operating                activities:                                                                |   |                             |    |   |   |   |   |   |
| Equity                in earnings (loss) of joint venture                                           |   |                             | (1,878  | ) |   |   | 1,661 |   |
| Distribution                of joint venture earnings                                               |   |                             | 1,125   |   |   |   | - |   |
| Loss                on capitalization of joint venture                                              |   |                             | -       |   |   |   | 1,194 |   |
| Recapture                of provision for loan loss                                                 |   |                             | (1,352  | ) |   |   | (52 | ) |
| Gain                on sale of investments                                                          |   |                             | (21     | ) |   |   | (226 | ) |
| Amortization                and depreciation                                                        |   |                             | (1,518  | ) |   |   | 246 |   |
| Stock                based compensation expense                                                     |   |                             | 79      |   |   |   | 104 |   |
| Net                change in other assets and other liabilities                                     |   |                             | 2,883   |   |   |   | (576 | ) |
| Net                cash and cash equivalents provided by operating activities                       |   |                             | 6,648   |   |   |   | 4,963 |   |
|                                                                                                |   |                             |    |   |   |   |   |   |
| Investing                activities:                                                                |   |                             |    |   |   |   |   |   |
| Principal                payments received on securitized mortgage loans                            |   |                             | 51,517  |   |   |   | 77,776 |   |
| Purchase                of securities and other investments                                         |   |                             | (16,398 | ) |   |   | (17,221 | ) |
| Payments                received on securities and other loans and investments                      |   |                             | 8,230   |   |   |   | 27,816 |   |
| Proceeds                from sales of securities and other investments                              |   |                             | 452     |   |   |   | 2,129 |   |
| Return                of capital from joint venture                                                 |   |                             | 17,095  |   |   |   | - |   |
| Other                                                                                               |   |                             | 931     |   |   |   | 886 |   |
| Net                cash and cash equivalents provided by investing activities                       |   |                             | 61,827  |   |   |   | 91,386 |   |
|                                                                                                |   |                             |    |   |   |   |   |   |
| Financing                activities:                                                                |   |                             |    |   |   |   |   |   |
| Principal                payments on securitization financing                                       |   |                             | (27,119 | ) |   |   | (41,573 | ) |
| Net                repayments on repurchase agreement                                               |   |                             | (59,781 | ) |   |   | (30,062 | ) |
| Repurchase                of common stock                                                           |   |                             | -       |   |   |   | (216 | ) |
| Redemption                of preferred stock                                                        |   |                             | -       |   |   |   | (14,072 | ) |
| Dividends                paid                                                                       |   |                             | (3,008  | ) |   |   | (3,376 | ) |
| Net                cash and cash equivalents used for financing activities                          |   |                             | (89,908 | ) |   |   | (89,299 | ) |
| Net                (decrease) increase in cash and cash equivalents                                 |   |                             | (21,433 | ) |   |   | 7,050 |   |
| Cash                and cash equivalents at beginning of period                                     |   |                             | 56,880  |   |   |   | 45,235 |   |
| Cash                and cash equivalents at end of period                                           |   | $                                | 35,447  |   |   | $ | 52,285 |   |
|                                                                                                |   |                             |    |   |   |   |   |   |
|                                                                                                |   |                             |    |   |   |   |   |   |
| *See                notes to unaudited condensed consolidated financial                statements.* |   |                             |    |   |   |   |   |   |

----

**DYNEX      CAPITAL, INC.**

**NOTES      TO CONDENSED      CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

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

**NOTE      1 – BASIS OF PRESENTATION**

----

**NOTE      2 – NET INCOME PER COMMON SHARE**

----

|                                                                                                                                 |   | **Three                Months Ended September 30,** |    |   | **Nine                months Ended September 30,**             |   |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|---------|--------|----------------------------------------------------------------|--------|
|                                                                                                                                 |   | **2007**                                            |    |   | **2006**                                                       |   |   | **2007** |   |   | **2006** |   |
|                                                                                                                                 |   | **Income**                                          |    |   | **Weighted-****Average****Number****of                Shares** |   |   | **Income** |   |   | **Weighted-****Average****Number****of                Shares** |   |   | **Income** |   |   | **Weighted-****Average****Number****of                Shares** |   |   | **Income** |   |   | **Weighted-****Average****Number****of                Shares** |   |
| Net                income  (loss)                                                                                          |   | $                                                   | 2,686   |   |                                                           |   |   |   | $ | (215 | ) |   |   |   |   | $ | 7,330 |   |   |   |   |   | $ | 2,612 |   |   |   |   |
| Preferred                stock dividends                                                                                             |   |                                                | (1,003  | )      |                                                           |   |   |   |   | (1,003 | ) |   |   |   |   |   | (3,008 | ) |   |   |   |   |   | (3,041 | ) |   |   |   |
| Net                income (loss) to common shareholders                                                                              |   | $                                                   | 1,683   |   |                                                           |   | 12,136,262 |   |   | $ | (1,218 | ) |   |   | 12,130,836 |   |   | $ | 4,322 |   |   |   | 12,135,236 |   |   | $ | (429 | ) |   |   | 12,143,549 |   |
|                                                                                                                                 |   |                                                |    |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                income (loss) per share:                                                                                          |   |                                                |    |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   Basic                                                                                                                    |   |                                                |    |   |                                                           | $      | 0.14 |   |   |   |   |   |   | $ | (0.10 | ) |   |   |   |   |   | $ | 0.36 |   |   |   |   |   |   | $ | (0.04 | ) |
|   Diluted                                                                                                                  |   |                                                |    |   |                                                           | $      | 0.14 |   |   |   |   |   |   | $ | (0.10 | ) |   |   |   |   |   | $ | 0.36 |   |   |   |   |   |   | $ | (0.04 | ) |
|                                                                                                                                 |   |                                                |    |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reconciliation                of shares included in calculation of earnings per share due to dilutive                effect          |   |                                                |    |   |                                                           |
| Expense                and incremental shares of stock options                                                                       |   | $                                                   | – |   |                                                           |   | 2,369 |   |   | $ | – |   |   |   | – |   |   | $ | – |   |   |   | 2,079 |   |   | $ | – |   |   |   | – |   |
|                                                                                                                                 |   | $                                                   | – |   |                                                           |   | 12,138,631 |   |   | $ | – |   |   |   | – |   |   | $ | – |   |   |   | 12,137,315 |   |   | $ | – |   |   |   | – |   |
|                                                                                                                                 |   |                                                |    |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reconciliation                of shares not included in calculation of earnings per share due to                anti-dilutive effect |   |                                                |    |   |                                                           |
| Series                D preferred stock                                                                                              |   | $                                                   | 1,003   |   |                                                           |   | 4,221,539 |   |   | $ | 1,003 |   |   |   | 4,221,539 |   |   | $ | 3,008 |   |   |   | 4,221,539 |   |   | $ | 3,041 |   |   |   | 4,267,930 |   |
| Expense                and incremental shares of stock options                                                                       |   |                                                | – |   |                                                           |   | 5,495 |   |   |   | – |   |   |   | 16,360 |   |   |   | – |   |   |   | 6,076 |   |   |   | – |   |   |   | 18,151 |   |
|                                                                                                                                 |   | $                                                   | 1,003   |   |                                                           |   | 4,227,034 |   |   | $ | 1,003 |   |   |   | 4,237,899 |   |   | $ | 3,008 |   |   |   | 4,227,615 |   |   | $ | 3,041 |   |   |   | 4,286,081 |   |
|                                                                                                                                 |   |                                                |    |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

**NOTE      3 – SECURITIZED MORTGAGE LOANS, NET**

|                                                                           |   | **September                30,****2007** |    |   | **December                31, 2006** |   |
|--------------------------------------------------------------------------------|--------|------------------------------------------|---------|--------|--------------------------------------|--------|
| Collateral:                                                                    |   |                                     |    |   |                                 |   |
| Commercial                mortgage loans                                       |   | $                                        | 197,991 |   |                                 | $      | 225,463 |   |
| Single-family                mortgage loans                                    |   |                                     | 91,303  |   |                                 |   | 116,060 |   |
|                                                                           |   |                                     | 289,294 |   |                                 |   | 341,523 |   |
| Funds                held by trustees, including funds held for defeased loans |   |                                     | 7,283   |   |                                 |   | 7,351 |   |
| Accrued                interest receivable                                     |   |                                     | 2,047   |   |                                 |   | 2,380 |   |
| Unamortized                discounts and premiums, net                         |   |                                     | (290    | )      |                                 |   | (455 | ) |
| Loans,                at amortized cost                                        |   |                                     | 298,334 |   |                                 |   | 350,799 |   |
| Allowance                for loan losses                                       |   |                                     | (2,648  | )      |                                 |   | (4,495 | ) |
|                                                                           |   | $                                        | 295,686 |   |                                 | $      | 346,304 |   |

----

**NOTE      4 – ALLOWANCE FOR LOAN LOSSES**

|                                                    |   | **Three                Months Ended****September                30,** |    |   | **Nine                months Ended****September                30,** |   |
|---------------------------------------------------------|--------|-----------------------------------------------------------------------|---------|--------|----------------------------------------------------------------------|--------|
|                                                    |   | **2007**                                                              |    |   | **2006**                                                             |   |   | **2007** |   |   | **2006** |   |
| Allowance                at beginning of period         |   | $                                                                     | 2,805   |   |                                                                 | $      | 14,869 |   |   | $ | 4,495 |   |   | $ | 19,035 |   |
| (Recapture                of) provision for loan losses |   |                                                                  | (127    | )      |                                                                 |   | 67 |   |   |   | (1,352 | ) |   |   | (52 | ) |
| Charge-offs,                net of recoveries           |   |                                                                  | (30     | )      |                                                                 |   | (94 | ) |   |   | (495 | ) |   |   | (4,141 | ) |
| Portfolio                sold/transferred               |   |                                                                  | – |   |                                                                 |   | (10,353 | ) |   |   | – |   |   |   | (10,353 | ) |
| Allowance                at end of period               |   | $                                                                     | 2,648   |   |                                                                 | $      | 4,489 |   |   | $ | 2,648 |   |   | $ | 4,489 |   |

**NOTE      5 — INVESTMENT IN JOINT VENTURE**

**NOTE      6 – SECURITIES**

|                                               |   | **September                30, 2007** |   |   | **December                31, 2006**       |   |
|----------------------------------------------------|--------|---------------------------------------|--------|--------|--------------------------------------------|--------|
|                                               |   | **Fair****Value**                     |   |   | **Effective                Interest Rate** |   |   | **Fair****Value** |   |   | **Effective                Interest Rate** |   |
| Securities,                available-for-sale:     |   |                                  |   |   |                                       |   |   |   |   |   |   |   |
| Adjustable-rate                mortgage securities |   | $                                     | 735    |   |                                       |   | 5.63 | % |   | $ | – |   |   |   | – | % |
| Fixed-rate                mortgage securities      |   |                                  | 8,882  |   |                                       |   | 7.10 | % |   |   | 11,362 |   |   |   | 7.22 | % |
| Equity                securities                   |   |                                  | 6,385  |   |                                       |   |   |   |   |   | 1,151 |   |   |   |   |   |
| Corporate                debt securities           |   |                                  | 4,721  |   |                                       |   | 11.75 | % |   |   | – |   |   |   |   |   |
|                                               |   |                                  | 20,723 |   |                                       |   |   |   |   |   | 12,513 |   |   |   |   |   |
| Gross                unrealized gains              |   |                                  | 970    |   |                                       |   |   |   |   |   | 636 |   |   |   |   |   |
| Gross                unrealized losses             |   |                                  | (147   | )      |                                       |   |   |   |   |   | (6 | ) |   |   |   |   |
|                                               |   | $                                     | 21,546 |   |                                       |   |   |   |   | $ | 13,143 |   |   |   |   |   |

----

**NOTE      7 – OTHER LOANS AND INVESTMENTS**

|                                                                     |   | **September                  30, 2007** |   |   | **December                  31, 2006** |   |
|--------------------------------------------------------------------------|--------|-----------------------------------------|--------|--------|----------------------------------------|--------|
| Single-family                  mortgage loans                            |   | $                                       | 2,703  |   |                                   | $      | 3,345 |   |
| Multifamily                  and commercial mortgage loan participations |   |                                    | 936    |   |                                   |   | 962 |   |
| Unamortized                  discounts on mortgage loans                 |   |                                    | (311   | )      |                                   |   | (378 | ) |
| Mortgage                  loans, net                                     |   |                                    | 3,328  |   |                                   |   | 3,929 |   |
|                                                                     |   |                                    |   |   |                                   |   |   |   |
| Delinquent                  property tax receivable securities           |   |                                    | 2,388  |   |                                   |   | 2,802 |   |
| Notes                  receivable and other investments                  |   |                                    | 632    |   |                                   |   | – |   |
| Other                  loans and investments                             |   | $                                       | 6,348  |   |                                   | $      | 6,731 |   |

**NOTE      8 –SECURITIZATION FINANCING**

----

|                                           |   | **September                30, 2007** |      |   | **December                31, 2006**       |   |
|------------------------------------------------|--------|---------------------------------------|-----------|--------|--------------------------------------------|--------|
|                                           |   | **Bonds                Outstanding**  |      |   | **Range                of Interest Rates** |   |   | **Bonds                Outstanding** |   |   | **Range                of Interest Rates** |   |
| Fixed-rate                classes              |   | $                                     | 179,358   |   |                                       |   | 6.6%-8.8 | % |   | $ | 206,478 |   |   |   | 6.6%-8.8 | % |
| Accrued                interest payable        |   |                                  | 1,240     |   |                                       |   |   |   |   |   | 1,428 |   |   |   |   |   |
| Deferred                costs                  |   |                                  | (2,132    | )      |                                       |   |   |   |   |   | (2,848 | ) |   |   |   |   |
| Unamortized                bond premium, net   |   |                                  | 4,604     |   |                                       |   |   |   |   |   | 6,506 |   |   |   |   |   |
|                                           |   | $                                     | 183,070   |   |                                       |   |   |   |   | $ | 211,564 |   |   |   |   |   |
|                                           |   |                                  |      |   |                                       |   |   |   |   |   |   |   |   |   |   |   |
| Range                of stated maturities      |   |                                  | 2024-2027 |   |                                       |   |   |   |   |   | 2024-2027 |   |   |   |   |   |
| Estimated                weighted average life |   | 3.6                years              |      |   |                                       |   |   |   | 4.3                years |   |   |   |   |   |
| Number                of series                |   |                                  | 2         |   |                                       |   |   |   |   |   | 2 |   |   |   |   |   |

**NOTE      9 – REPURCHASE AGREEMENTS**

**NOTE      10 – COMMITMENTS AND CONTINGENCIES**

----

----

**NOTE      11 – STOCK BASED COMPENSATION**

|                                                   |   | Three                Months Ended |    |   | Nine                Months Ended               |   |
|--------------------------------------------------------|--------|-----------------------------------|---------|--------|------------------------------------------------|--------|
|                                                   |   | September                30, 2007 |    |   | September                30, 2007              |   |
|                                                   |   | Number                of Shares   |    |   | Weighted-Average                Exercise Price |   |   | Number                of Shares |   |   | Weighted-AverageExercisePrice |   |
| SARs                outstanding at beginning of period |   |                              | 280,222 |   |                                           | $      | 7.27 |   |   |   | 203,297 |   |   | $ | 7.36 |   |
| SARs                granted                            |   |                              | – |   |                                           |   | – |   |   |   | 82,500 |   |   |   | 7.06 |   |
| SARs                forfeited or redeemed              |   |                              | (2,076  | )      |                                           |   | 7.52 |   |   |   | (7,651 | ) |   |   | 7.25 |   |
| SARs                exercised                          |   |                              | – |   |                                           |   | – |   |   |   | – |   |   |   | – |   |
| SARs                outstanding at end of period       |   |                              | 278,146 |   |                                           | $      | 7.27 |   |   |   | 278,146 |   |   | $ | 7.27 |   |
| SARs                vested and exercisable             |   |                              | 78,249  |   |                                           | $      | 7.53 |   |   |   | 78,249 |   |   | $ | 7.53 |   |

|                                                      |   | Three                Months Ended |    |   | Nine                Months Ended               |   |
|-----------------------------------------------------------|--------|-----------------------------------|---------|--------|------------------------------------------------|--------|
|                                                      |   | September                30, 2007 |    |   | September                30, 2007              |   |
|                                                      |   | Number                of Shares   |    |   | Weighted-Average                Exercise Price |   |   | Number                of Shares |   |   | Weighted-AverageExercisePrice |   |
| Options                outstanding at beginning of period |   |                              | 95,000  |   |                                           | $      | 8.23 |   |   |   | 75,000 |   |   | $ | 7.98 |   |
| Options                granted                            |   |                              | – |   |                                           |   | – |   |   |   | 25,000 |   |   |   | 9.02 |   |
| Options                forfeited or redeemed              |   |                              | – |   |                                           |   | – |   |   |   | – |   |   |   | – |   |
| Options                exercised                          |   |                              | – |   |                                           |   | – |   |   |   | (5,000 | ) |   |   | 8.46 |   |
| Options                outstanding at end of period       |   |                              | 95,000  |   |                                           | $      | 8.23 |   |   |   | 95,000 |   |   | $ | 8.23 |   |
| Options                vested and exercisable             |   |                              | 95,000  |   |                                           | $      | 8.23 |   |   |   | 95,000 |   |   | $ | 8.23 |   |

----

|                                       |   | SARs                Fair Value    |         |
|--------------------------------------------|--------|-----------------------------------|--------------|
|                                       |   | September                30, 2007 |         |
| Expected                volatility         |   |                              | 15.56%-22.08 | % |
| Weighted-average                volatility |   |                              | 17.32        | % |
| Expected                dividends          |   |                              | 0            | % |
| Expected                term (in months)   |   |                              | 50           |   |
| Risk-free                rate              |   |                              | 4.30         | % |

**NOTE      12 – RECENT ACCOUNTING PRONOUNCEMENTS**

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

----

**CRITICAL      ACCOUNTING POLICIES**

*Consolidation      of Subsidiaries.*

*Securitization*
*.*

----

*Impairments.*

*Allowance      for Loan Losses.*

**FINANCIAL      CONDITION**

| ***(**amounts                in thousands except per share data)* |   | **September                30, 2007** |    |   | **December                31, 2006** |   |
|-------------------------------------------------------------------|--------|---------------------------------------|---------|--------|--------------------------------------|--------|
| Investments:                                                      |   |                                  |    |   |                                 |   |
| Securitized                mortgage loans,net                     |   | $                                     | 295,686 |   |                                 | $      | 346,304 |   |
| Investment                in joint venture                        |   |                                  | 21,357  |   |                                 |   | 37,388 |   |
| Securities                                                        |   |                                  | 21,546  |   |                                 |   | 13,143 |   |
| Other                loans and investments                        |   |                                  | 6,348   |   |                                 |   | 6,731 |   |
|                                                              |   |                                  |    |   |                                 |   |   |   |
| Securitization                financing                           |   |                                  | 183,070 |   |                                 |   | 211,564 |   |
| Repurchase                agreements                              |   |                                  | 36,197  |   |                                 |   | 95,978 |   |
| Obligation                under payment agreement                 |   |                                  | 16,813  |   |                                 |   | 16,299 |   |
|                                                              |   |                                  |    |   |                                 |   |   |   |
| Shareholders’                equity                         |   |                                  | 141,351 |   |                                 |   | 136,538 |   |
| Common                book value per share                        |   |                                  | 8.17    |   |                                 |   | 7.78 |   |

----

*Securitized      mortgage loans.*

*Investment      in joint venture.*

*Securities.*

*Other      loans and investments*

*S*
*ecuritization      financing.  *

*Repurchase      Agreements. *

*Obligation      under payment agreement*

*Shareholders’      equity*

----

*Supplemental      Discussion of Investments*

|                                                    |   | **September                30, 2007**   |    |
|---------------------------------------------------------|--------|-----------------------------------------|---------|
| *(amounts                in thousands)*                 |   | **Amortized                cost basis** |    |   | **Financing** |   |   | **Net                basis** |   |   | **Fair                value of net basis** |   |
| Securitized                mortgage loans:** **(1) |   |                                    |    |   |   |   |   |   |   |   |   |   |
| Single                family mortgage loans (2)         |   | $                                       | 93,153  |   |   | $ | 36,197 |   |   | $ | 56,956 |   |   | $ | 55,800 |   |
| Commercial                mortgage loans                |   |                                    | 205,181 |   |   |   | 183,070 |   |   |   | 22,111 |   |   |   | 20,451 |   |
| Allowance                for loan losses                |   |                                    | (2,648  | ) |   |   | – |   |   |   | (2,648 | ) |   |   | – |   |
|                                                    |   |                                    | 295,686 |   |   |   | 219,267 |   |   |   | 76,419 |   |   |   | 76,251 |   |
| Securities:                (3)                          |   |                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment                grade single-family           |   |                                    | 9,323   |   |   |   | – |   |   |   | 9,323 |   |   |   | 9,435 |   |
| Non-investment                grade single-family       |   |                                    | 295     |   |   |   | – |   |   |   | 295 |   |   |   | 391 |   |
| Equity                and other                         |   |                                    | 11,105  |   |   |   | – |   |   |   | 11,105 |   |   |   | 11,720 |   |
|                                                    |   |                                    | 20,723  |   |   |   | – |   |   |   | 20,723 |   |   |   | 21,546 |   |
|                                                    |   |                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment                in joint venture(4)           |   |                                    | 21,357  |   |   |   | – |   |   |   | 21,357 |   |   |   | 20,847 |   |
| Obligation                under payment agreement(1)    |   |                                    | – |   |   |   | 16,813 |   |   |   | (16,813 | ) |   |   | (16,284 | ) |
| Other                loans and investments(3)           |   |                                    | 6,400   |   |   |   | – |   |   |   | 6,400 |   |   |   | 7,000 |   |
| Net                unrealized gain                      |   |                                    | 771     |   |   |   | – |   |   |   | 771 |   |   |   | – |   |
|                                                    |   |                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                                   |   | $                                       | 344,937 |   |   | $ | 236,080 |   |   | $ | 108,857 |   |   | $ | 109,360 |   |
|                                                    |   |                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |

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

|   | (2) | Financing                for single-family mortgage loans consists of repurchase                agreements. |
|--------|-----|-------------------------------------------------------------------------------------------------------------|

|   | (3) | Fair                values of securities are based on market quotes and dealer quotes,                if                available.  Where dealer quotes are not available, fair values                are calculated as the net present value of expected future cash flows,                discounted at 16%.  Expected cash flows for both securitized                mortgage loans and securities were based on the forward LIBOR curve                as of                September 30, 2007, 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. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (4) | Fair                value for investment in joint venture represents Dynex’s share of the                joint assets valued using methodologies and assumptions consistent                with                Note 1 and 3 above. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                        | **Fair                Value Assumptions**             |                         |   |                                                    |          |
|---------------------------------------------|-------------------------------------------------------|------------------------------|--------|---------------------------------------------------------|---------------|
| **Loan                type**                | **Weighted-average                prepayment speeds** | **Losses**                   |   | **Weighted-average****discount                rate(1)** |          |   | **Weighted                average maturity (months)** |   |   | *(amounts                in thousands)***2007                Cash**** Flow                (2)(6)** |   |
|                                        |                                                  |                         |   |                                                    |          |   |   |   |   |   |   |
| Single-family                mortgage loans | 25%                CPR                                | 0.2%                annually |   |                                                    | 16            | % |   |   | 193 |   |   | $ | 2,090 |   |
|                                        |                                                  |                         |   |                                                    |          |   |   |   |   |   |   |   |   |   |
| Commercial                mortgage loans(3) | (4)                                                   | 0.8%                annually |   | ** **                                              | **(7)**  |  |   | ** ** | **(5)**  |  |   | $ | 1,840 |   |

| (1) | Represents                management’s estimate of the market discount rate that would be used in a                transaction between a willing buyer and a willing                seller. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Represents                the excess of the cash flows received on the collateral pledged over                the                cash flow required to service the related securitization                financing. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | Includes                loans pledged to two different securitization                trusts. |
|-----|----------------------------------------------------------------------------------------------|

| (4) | Assumed                CPR speeds generally are governed by underlying pool characteristics,                prepayment lock-out provisions, and yield maintenance                provisions.  Loans currently delinquent in excess of 30 days are                assumed liquidated in six months at a loss amount that is calculated                for                each loan based on its specific                facts. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (5) | Cash                flow termination dates are modeled based on the repayment dates of                the                loans or optional redemption dates of the underlying securitization                financing bonds.  The assumed weighted average maturity for the                two deals is 130 months and 80 months,                respectively. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (6) | Single-family                mortgage loans cash flows represent surplus cash received on the                over-collateralization and excludes cash inflows from the Company’s                ownership of the senior class bonds and the cash outflows on the                repurchase agreement financing. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (7) | Cash                flows for the two securitization trusts were discounted at 16% and                22%                based on the anticipated redemption dates of the trusts of June 2008                and                March 2011, respectively. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| *(amounts                in thousands)*                         |   | **September                30, 2007** |    |
|-----------------------------------------------------------------|--------|---------------------------------------|---------|
|                                                            |   |                                  |    |
| Investments:                                                    |   |                                  |    |
| AAA                rated and agency MBS fixed income securities |   | $                                     | 56,351  |   |
| AA                and A rated fixed income securities           |   |                                  | 644     |   |
| Unrated                and non-investment grade                 |   |                                  | 6,989   |   |
| Securitization                over-collateralization            |   |                                  | 11,796  |   |
| Common                and preferred equity securities           |   |                                  | 6,950   |   |
| Corporate                debt securities                        |   |                                  | 4,770   |   |
| Investment                in joint venture                      |   |                                  | 21,357  |   |
|                                                            |   | $                                     | 108,857 |   |
|                                                            |   |                                  |    |   |

----

**Supplemental      Discussion of Common Equity Book Value**

|                                                                                               |   | **September                30, 2007** |    |
|----------------------------------------------------------------------------------------------------|--------|---------------------------------------|---------|
| *(amounts                in thousands, except per share information)*                              |   | **Book                Value**         |    |   | **Adjusted                Common Equity Book Value** |   |
|                                                                                               |   |                                  |    |   |   |   |
| Total                investment assets (per table above)                                           |   | $                                     | 108,857 |   |   | $ | 109,360 |   |
| Cash                and cash equivalents                                                           |   |                                  | 35,447  |   |   |   | 35,447 |   |
| Other                assets and liabilities, net                                                   |   |                                  | (2,953  | ) |   |   | (2,953 | ) |
|                                                                                               |   |                                  | 141,351 |   |   |   | 141,854 |   |
| Less:  Preferred                stock redemption value                                   |   |                                  | (42,215 | ) |   |   | (42,215 | ) |
| Common                equity book value and adjusted book value                                    |   | $                                     | 99,136  |   |   | $ | 99,639 |   |
|                                                                                               |   |                                  |    |   |   |   |   |   |
| Common                equity book value per share and adjusted book value per                share |   | $                                     | 8.17    |   |   | $ | 8.21 |   |

----

**RESULTS      OF OPERATIONS**

| ***(amounts                in thousands except per share information)***                         |   | **Three                Months Ended****September                30,** |    |   | **Nine                months Ended****September                30,** |   |
|--------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------|---------|--------|----------------------------------------------------------------------|--------|
|                                                                                             |   | **2007**                                                              |    |   | **2006**                                                             |   |   | **2007** |   |   | **2006** |   |
|                                                                                             |   |                                                                  |    |   |                                                                 |   |   |   |   |   |   |   |
| Net                interest income                                                               |   | $                                                                     | 2,457   |   |                                                                 | $      | 3,169 |   |   | $ | 7,881 |   |   | $ | 8,000 |   |
| Recapture                of (provision for) loan losses                                          |   |                                                                  | 127     |   |                                                                 |   | (67 | ) |   |   | 1,352 |   |   |   | 52 |   |
| Net                interest income after recapture of (provision for) loan                losses |   |                                                                  | 2,584   |   |                                                                 |   | 3,102 |   |   |   | 9,233 |   |   |   | 8,052 |   |
| Equity                in earnings (loss) of joint venture                                        |   |                                                                  | 576     |   |                                                                 |   | (1,661 | ) |   |   | 1,878 |   |   |   | (1,661 | ) |
| Loss                on capitalization of joint venture                                           |   |                                                                  | – |   |                                                                 |   | (1,194 | ) |   |   | – |   |   |   | (1,194 | ) |
| Other                income (expense)                                                            |   |                                                                  | 305     |   |                                                                 |   | 433 |   |   |   | (713 | ) |   |   | 662 |   |
| General                and administrative expenses                                               |   |                                                                  | (800    | )      |                                                                 |   | (980 | ) |   |   | (3,089 | ) |   |   | (3,473 | ) |
| Net                income (loss)                                                                 |   |                                                                  | 2,686   |   |                                                                 |   | (215 | ) |   |   | 7,330 |   |   |   | 2,612 |   |
| Preferred                stock charge                                                            |   |                                                                  | (1,003  | )      |                                                                 |   | (1,003 | ) |   |   | (3,008 | ) |   |   | (3,041 | ) |
| Net                income (loss) to common shareholders                                          |   |                                                                  | 1,683   |   |                                                                 |   | (1,218 | ) |   |   | 4,322 |   |   |   | (429 | ) |
|                                                                                             |   |                                                                  |    |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |
| Net                income (loss) per common share:                                               |   |                                                                  |    |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |
| Basic  and                diluted                                                      |   | $                                                                     | 0.14    |   |                                                                 | $      | (0.10 | ) |   | $ | 0.36 |   |   | $ | (0.04 | ) |
|                                                                                             |   |                                                                  |    |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |

*Three      Months Ended September 30, 2007 Compared to Three Months Ended September 30,      2006*

|   | · | a                $0.4 million decrease from the third quarter of 2006 to the third                quarter                of 2007 in net amortization of discounts on securitized mortgage                loans and                premiums on securitization financing bonds, which was a result of                higher                than anticipated commercial mortgage loan prepayments during the                third                quarter of 2006; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                $0.3 million decrease related to the interest expense associated                with the                obligation under payment agreement that was recognized late in the                third                quarter of 2006; and, |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                $0.2 million increase, which partially offset the other decreases,                as a                result of the derecognition of a pool of securitized commercial mortgage                loans in the third quarter of 2006 that contributed $0.2 million                of net                interest expense for the third quarter of                2006. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

*Nine      months Ended September 30, 2007 Compared to Nine months Ended September 30,      2006*

----

**Average      Balances and Effective Interest Rates**

|                                                                                                           |   | **Three                Months Ended September 30,** |    |
|----------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|---------|
|                                                                                                           |   | **2007**                                            |    |   | **2006** |   |
| *(amounts                in thousands)*                                                                        |   | **Average****Balance**                              |    |   | **Effective****Rate** |   |   | **Average****Balance** |   |   | **Effective****Rate** |   |
| Interest-earning                assets(1):                                                                     |   |                                                |    |   |   |   |   |   |   |   |   |   |
| Securitized                mortgage loans(2)                (3)                                                |   | $                                                   | 308,045 |   |   |   | 8.36 | % |   | $ | 570,818 |   |   |   | 8.31 | % |
| Securities                                                                                                     |   |                                                | 12,623  |   |   |   | 9.38 | % |   |   | 12,884 |   |   |   | 8.87 | % |
| Other                loans and investments                                                                     |   |                                                | 3,419   |   |   |   | 11.87 | % |   |   | 4,602 |   |   |   | 16.88 | % |
| Total                interest-earning assets                                                                   |   | $                                                   | 324,087 |   |   |   | 8.44 | % |   | $ | 588,304 |   |   |   | 8.39 | % |
|                                                                                                           |   |                                                |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing                liabilities:                                                                   |   |                                                |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securitization                financing(3)                                                                     |   | $                                                   | 189,816 |   |   |   | 7.58 | % |   | $ | 392,947 |   |   |   | 8.15 | % |
| Repurchase                agreements                                                                           |   |                                                | 66,495  |   |   |   | 5.51 | % |   |   | 109,809 |   |   |   | 5.46 | % |
| Total                interest-bearing liabilities                                                              |   | $                                                   | 256,311 |   |   |   | 7.05 | % |   | $ | 502,756 |   |   |   | 7.56 | % |
|                                                                                                           |   |                                                |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                interest spread (3)                                                                         |   |                                                |    |   |   |   | 1.39 | % |   |   |   |   |   |   | 0.82 | % |
|                                                                                                           |   |                                                |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                yield on average interest-earning investments (3)                (4)                        |   |                                                |    |   |   |   | 2.86 | % |   |   |   |   |   |   | 1.92 | % |
|                                                                                                           |   |                                                |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash                and cash equivalents                                                                       |   | $                                                   | 52,427  |   |   |   | 4.86 | % |   | $ | 48,921 |   |   |   | 5.01 | % |
| Net                yield on average interest-earning assets,including                cash and cash equivalents |   |                                                |    |   |   |   | 3.14 | % |   |   |   |   |   |   | 2.16 | % |
|                                                                                                           |   |                                                |    |   |   |   |   |   |   |   |   |   |   |   |   |   |

| *(1)* | Average                balances exclude adjustments made in accordance with Statement of                Financial Accounting Standards 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 and bond issuance costs for                the                three months ended September 30, 2007 and 2006,                respectively. |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| *(3)* | Effective                rates are calculated excluding non-interest related securitization                financing expenses. |
|-------|--------------------------------------------------------------------------------------------------------------------------------|

| *(4)* | Net                yield on average interest-earning assets reflects net interest income                excluding non-interest related securitization financing expenses                divided                by average interest earning assets for the period,                annualized. |
|-------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                                                                                           |   | **Nine                months Ended September 30,** |    |
|----------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------|---------|
|                                                                                                           |   | **2007**                                           |    |   | **2006** |   |
| *(amounts                in thousands)*                                                                        |   | **Average****Balance**                             |    |   | **Effective****Rate** |   |   | **Average****Balance** |   |   | **Effective****Rate** |   |
| Interest-earning                assets(1):                                                                     |   |                                               |    |   |   |   |   |   |   |   |   |   |
| Securitized                mortgage loans(2)                (3)                                                |   | $                                                  | 325,489 |   |   |   | 8.31 | % |   | $ | 661,548 |   |   |   | 7.83 | % |
| Securities                                                                                                     |   |                                               | 13,036  |   |   |   | 9.17 | % |   |   | 21,514 |   |   |   | 7.59 | % |
| Other                loans and investments                                                                     |   |                                               | 3,557   |   |   |   | 12.46 | % |   |   | 4,903 |   |   |   | 12.63 | % |
| Total                interest-earning assets                                                                   |   | $                                                  | 342,082 |   |   |   | 8.39 | % |   | $ | 687,965 |   |   |   | 7.86 | % |
|                                                                                                           |   |                                               |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing                liabilities:                                                                   |   |                                               |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securitization                financing(3)                                                                     |   | $                                                  | 200,172 |   |   |   | 7.27 | % |   | $ | 463,612 |   |   |   | 8.27 | % |
| Repurchase                agreements                                                                           |   |                                               | 81,185  |   |   |   | 5.45 | % |   |   | 118,427 |   |   |   | 5.09 | % |
| Total                interest-bearing liabilities                                                              |   | $                                                  | 281,357 |   |   |   | 6.75 | % |   | $ | 582,039 |   |   |   | 7.62 | % |
|                                                                                                           |   |                                               |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                interest spread (3)                                                                         |   |                                               |    |   |   |   | 1.64 | % |   |   |   |   |   |   | 0.23 | % |
|                                                                                                           |   |                                               |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                yield on average interest-earning investments (3)                (4)                        |   |                                               |    |   |   |   | 2.84 | % |   |   |   |   |   |   | 1.41 | % |
|                                                                                                           |   |                                               |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash                and cash equivalents                                                                       |   | $                                                  | 56,205  |   |   |   | 5.13 | % |   | $ | 36,647 |   |   |   | 4.74 | % |
| Net                yield on average interest-earning assets,including                cash and cash equivalents |   |                                               |    |   |   |   | 3.16 | % |   |   |   |   |   |   | 1.58 | % |
|                                                                                                           |   |                                               |    |   |   |   |   |   |   |   |   |   |   |   |   |   |

| *(1)* | Average                balances exclude adjustments made in accordance with Statement of                Financial Accounting Standards 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 and bond issuance costs for                the                nine months ended September 30, 2007 and 2006,                respectively. |
|-------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| *(3)* | Effective                rates are calculated excluding non-interest related securitization                financing expenses. |
|-------|--------------------------------------------------------------------------------------------------------------------------------|

| *(4)* | Net                yield on average interest-earning assets reflects net interest income                excluding non-interest related securitization financing expenses                divided                by average interest earning assets for the period,                annualized. |
|-------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                       |   | **Three                Months Ended September 30, 2007 vs. 2006** |   |
|--------------------------------------------|--------|-------------------------------------------------------------------|--------|
| *(amounts                in thousands)*    |   | **Rate**                                                          |   |   | **Volume** |   |   | **Total** |   |
|                                       |   |                                                              |   |   |   |   |   |   |   |
| Securitized                mortgage loans  |   | $                                                                 | 76     |   |   | $ | (5,491 | ) |   | $ | (5,415 | ) |
| Securities                                 |   |                                                              | 16     |   |   |   | (6 | ) |   |   | 10 |   |
| Other                loans and investments |   |                                                              | (49    | ) |   |   | (43 | ) |   |   | (92 | ) |
|                                       |   |                                                              |   |   |   |   |   |   |   |   |   |   |
| Total                interest income       |   |                                                              | 43     |   |   |   | (5,540 | ) |   |   | (5,497 | ) |
|                                       |   |                                                              |   |   |   |   |   |   |   |   |   |   |
| Securitization                financing    |   |                                                              | (524   | ) |   |   | (3,886 | ) |   |   | (4,410 | ) |
| Repurchase                agreements       |   |                                                              | 15     |   |   |   | (611 | ) |   |   | (596 | ) |
|                                       |   |                                                              |   |   |   |   |   |   |   |   |   |   |
| Total                interest expense      |   |                                                              | (509   | ) |   |   | (4,4976 | ) |   |   | (5,006 | ) |
|                                       |   |                                                              |   |   |   |   |   |   |   |   |   |   |
| Net                interest income         |   | $                                                                 | 552    |   |   | $ | (1,043 | ) |   | $ | (491 | ) |
|                                       |   |                                                              |   |   |   |   |   |   |   |   |   |   |

|                                      |   | **Nine                months Ended September 30, 2007 vs. 2006** |   |
|-------------------------------------------|--------|------------------------------------------------------------------|--------|
| *(amounts                in thousands)*   |   | **Rate**                                                         |   |   | **Volume** |   |   | **Total** |   |
|                                      |   |                                                             |   |   |   |   |   |   |   |
| Securitized                mortgage loans |   | $                                                                | 2,262  |   |   | $ | (20,822 | ) |   | $ | (18,560 | ) |
| Securities                                |   |                                                             | 222    |   |   |   | (548 | ) |   |   | (326 | ) |
| Other                loans                |   |                                                             | (6     | ) |   |   | (126 | ) |   |   | (132 | ) |
|                                      |   |                                                             |   |   |   |   |   |   |   |   |   |   |
| Total                interest income      |   |                                                             | 2,478  |   |   |   | (21,496 | ) |   |   | (19,018 | ) |
|                                      |   |                                                             |   |   |   |   |   |   |   |   |   |   |
| Securitization                financing   |   |                                                             | (3,123 | ) |   |   | (14,718 | ) |   |   | (17,841 | ) |
| Repurchase                agreements      |   |                                                             | 316    |   |   |   | (1,526 | ) |   |   | (1,210 | ) |
|                                      |   |                                                             |   |   |   |   |   |   |   |   |   |   |
| Total                interest expense     |   |                                                             | (2,807 | ) |   |   | (16,244 | ) |   |   | (19,051 | ) |
|                                      |   |                                                             |   |   |   |   |   |   |   |   |   |   |
| Net                interest income        |   | $                                                                | 5,285  |   |   | $ | (5,252 | ) |   | $ | 33 |   |
|                                      |   |                                                             |   |   |   |   |   |   |   |   |   |   |

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

*Credit      Exposures*

----

**Credit      Reserves and Actual Credit Losses**

| *(amounts                in millions)* |   | **Outstanding                Loan Principal Balance** |   |   | **Credit                Exposure, Net****of                Credit Reserves** |   |   | **Actual****Credit                Losses** |   |   | **Credit                Exposure, Net to Outstanding Loan Balance** |   |
|----------------------------------------|--------|-------------------------------------------------------|--------|--------|------------------------------------------------------------------------------|--------|--------|--------------------------------------------|--------|--------|---------------------------------------------------------------------|--------|
| 2006,                Quarter 3         |   | $                                                     | 378.2  |   |                                                                         | $      | 21.5   |                                       |   | $      | 0.1                                                                 |   |   |   | 5.68 | % |
| 2006,                Quarter 4         |   |                                                  | 361.3  |   |                                                                         |   | 22.4   |                                       |   |   | 0.0                                                                 |   |   |   | 6.20 | % |
| 2007,                Quarter 1         |   |                                                  | 344.6  |   |                                                                         |   | 22.3   |                                       |   |   | 0.4                                                                 |   |   |   | 6.47 | % |
| 2007,                Quarter 2         |   |                                                  | 331.6  |   |                                                                         |   | 23.0   |                                       |   |   | 0.0                                                                 |   |   |   | 6.94 | % |
| 2007,                Quarter 3         |   |                                                  | 306.9  |   |                                                                         |   | 24.3   |                                       |   |   | 0.1                                                                 |   |   |   | 7.92 | % |

----

**Single-Family      Loan Delinquency Statistics**

|                           |   | **30                to 59 days**** delinquent** |   |   | **60                to 89 days****delinquent** |   |   | **90                days and over delinquent                (1)** |   |   | **Total** |   |
|--------------------------------|--------|------------------------------------------------------|--------|--------|------------------------------------------------|--------|--------|-------------------------------------------------------------------|--------|--------|-----------|--------|
| 2006,                Quarter 3 |   |                                                 | 4.56   | %      |                                           |   | 1.28   | %                                                                 |   |   | 2.83      | %      |   |   | 8.67 | % |
| 2006,                Quarter 4 |   |                                                 | 4.90   | %      |                                           |   | 1.89   | %                                                                 |   |   | 3.05      | %      |   |   | 9.84 | % |
| 2007,                Quarter 1 |   |                                                 | 4.60   | %      |                                           |   | 0.08   | %                                                                 |   |   | 3.64      | %      |   |   | 9.04 | % |
| 2007,                Quarter 2 |   |                                                 | 3.83   | %      |                                           |   | 0.80   | %                                                                 |   |   | 2.89      | %      |   |   | 7.52 | % |
| 2007,                Quarter 3 |   |                                                 | 2.34   | %      |                                           |   | 0.54   | %                                                                 |   |   | 3.01      | %      |   |   | 5.89 | % |

**Commercial      Loan Delinquency Statistics (1)**

|                           |   | **30                to 59 days delinquent** |    |   | **60                to 89 days delinquent** |   |    | **90                days and over delinquent**(1) |   |   | **Total** |   |
|--------------------------------|--------|---------------------------------------------|---------|--------|---------------------------------------------|--------|---------|---------------------------------------------------|--------|--------|-----------|--------|
| 2006,                Quarter 3 |   |                                        | – | %      |                                        |   | – | %                                                 |   |   | 1.33      | %      |   |   | 1.33 | % |
| 2006,                Quarter 4 |   |                                        | – | %      |                                        |   | – | %                                                 |   |   | 1.36      | %      |   |   | 1.36 | % |
| 2007,                Quarter 1 |   |                                        | – | %      |                                        |   | – | %                                                 |   |   | –   | %      |   |   | – | % |
| 2007,                Quarter 2 |   |                                        | – | %      |                                        |   | – | %                                                 |   |   | –   | %      |   |   | – | % |
| 2007,                Quarter 3 |   |                                        | – | %      |                                        |   | – | %                                                 |   |   | –   | %      |   |   | – | % |

| ***(1)*** | *Includes                foreclosures and real estate                owned.* |
|-----------|------------------------------------------------------------------------------|

**RECENT      ACCOUNTING PRONOUNCEMENTS**

----

**LIQUIDITY      AND CAPITAL RESOURCES**

----

**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.*

| · | 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 or if the repurchase agreement                financier chooses to reduce its position in financing afforded our                company. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

| · | Changes                our ownership or changes in our business could result in a limitation                on  the amount of our NOL that we may use  to offset                our annual income distribution requirements under the REIT                regulations. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | 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      3.  Quantitative and      Qualitative Disclosures about Market Risk**

----

|                                                                                   |   |   | **Projected                Change in Net Interest Margin Cash Flow From Base                Case** |   |
|----------------------------------------------------------------------------------------|--------|--------|----------------------------------------------------------------------------------------------------|--------|
|                                                                                   |   |   | **Excluding                Cash and Cash Equivalents**                                             |   |   | **Including                Cash and Cash Equivalents** |   |
| **Basis                Point Increase (Decrease) in****Interest                Rates** |   |   | **Cash                Flow**                                                                       |   |   | **Percent** |   |   | **Cash                Flow** |   |   | **Percent** |   |
|                                                                                   |   |   |                                                                                               |   |   |   |   |   |   |   |   |   |   |
|                                                                                   | +200   |   |                                                                                               | $      | 709.5 |   |   |   | 4.8 | % |   | $ | 2,226.7 |   |   |   | 12.2 | % |
|                                                                                   | +100   |   |                                                                                               |   | 412.1 |   |   |   | 2.8 | % |   |   | 1,170.7 |   |   |   | 6.4 | % |
| Base                                                                                   |   |   |                                                                                               |   |   |   |   | – |   |   |   |   |   |   |   | – |   |
|                                                                                   | -100   |   |                                                                                               |   | (274.1 | ) |   |   | (1.9 | )% |   |   | (1,032.7 | ) |   |   | (5.6 | )% |
|                                                                                   | -200   |   |                                                                                               |   | (152.6 | ) |   |   | (1.0 | )% |   |   | (1,669.7 | ) |   |   | (9.1 | )% |

----

**Item      4.  Controls and Procedures**

| (a)   | Evaluation                of disclosure controls and                procedures. |
|-----------------|---------------------------------------------------------------------------------|

| (b)   | Changes                in internal controls. |
|-----------------|----------------------------------------------|

**PART      II.  OTHER INFORMATION**

**Item      1.  Legal      Proceedings**

----

----

**Item      1A. Risk Factors**

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

**Item      3.                      Defaults      Upon Senior Securities**

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

**Item      5.                      Other      Information**

**Item      6.                      Exhibits**

| 31.1 | Certification                of Principal Executive Officer and Principal Financial Officer pursuant                to                Section 302 of the Sarbanes-Oxley Act of 2002.  |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 32.1 | Certification                of Principal Executive Officer and Principal Financial Officer pursuant                to                Section 906 of the Sarbanes-Oxley Act of 2002.  |

----

**SIGNATURE**

|                                              | **DYNEX                CAPITAL, INC.**                                       |
|---------------------------------------------------|------------------------------------------------------------------------------|
|                                              |                                                                         |
|                                              |                                                                         |
|                                              |                                                                         |
| Date:  November                14, 2007 | /s/                Stephen J. Benedetti                                      |
|                                              | Stephen                J. Benedetti                                          |
|                                              | Executive                Vice President and Chief Operating Officer          |
|                                              | (Principal                Executive Officer and Principal Financial Officer) |
|                                              |                                                                         |

----

**EXHIBIT      INDEX**

| **Exhibit                No.** |                                                                                                                                                                                   |
|--------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                           |                                                                                                                                                                                   |
| 31.1                           | Certification                of Principal Executive Officer and Chief Financial Officer pursuant                to                Section 302 of the Sarbanes-Oxley Act of 2002.  |
| 32.1                           | Certification                of Principal Executive Officer and Chief Financial Officer pursuant                to                Section 906 of the Sarbanes-Oxley Act of 2002.  |