----

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**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 March 31, 2007**

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

**Securities      Exchange Act of 1934**

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

**DYNEX      CAPITAL, INC.**

**(Exact      name of registrant as specified in its charter)**

| **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 March 31, 2007 (unaudited) and December                31,                2006                                               | 1      |
|                    |                                 |                                                                                                                                                                                 |   |
|                    |                                 | Condensed                Consolidated Statements of Operations and Comprehensive Income for                the                three months ended March 31, 2007 and 2006 (unaudited) | 2      |
|                    |                                 |                                                                                                                                                                                 |   |
|                    |                                 | Condensed                Consolidated Statements of Cash Flows for the three months ended                March 31,                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                                                                                             | 26     |
|                    |                                 |                                                                                                                                                                                 |   |
|                    | Item                4.               | Controls                and Procedures                                                                                                                                               | 28     |
|                    |                                 |                                                                                                                                                                                 |   |
| PART                II. | OTHER                INFORMATION     |                                                                                                                                                                                 |
|                    |                                 |                                                                                                                                                                                 |   |
|                    | Item                1.               | Legal                Proceedings                                                                                                                                                     | 28     |
|                    |                                 |                                                                                                                                                                                 |   |
|                    | Item                1A.              | Risk                Factors                                                                                                                                                          | 30     |
|                    |                                 |                                                                                                                                                                                 |   |
|                    | Item                2.               | Unregistered                Sales of Equity Securities and Use of Proceeds                                                                                                           | 30     |
|                    |                                 |                                                                                                                                                                                 |   |
|                    | Item                3.               | Defaults                Upon Senior Securities                                                                                                                                       | 30     |
|                    |                                 |                                                                                                                                                                                 |   |
|                    | Item                4.               | Submission                of Matters to a Vote of Security Holders                                                                                                                   | 30     |
|                    |                                 |                                                                                                                                                                                 |   |
|                    | Item                5.               | Other                Information                                                                                                                                                     | 30     |
|                    |                                 |                                                                                                                                                                                 |   |
|                    | Item                6.               | Exhibits                                                                                                                                                                             | 30     |
|                    |                                 |                                                                                                                                                                                 |   |
| SIGNATURE               | 31                                   |

----

**PART      I. FINANCIAL INFORMATION**

**Item      1. **
**Financial      Statements**

**DYNEX      CAPITAL, INC.**

**CONDENSED      **
**CONSOLIDATED      **

**BALANCE      SHEETS (UNAUDITED)**

*(amounts      in thousands except share data)*

|                                                                                                    |   | March                31, |     | December                31, |   |
|---------------------------------------------------------------------------------------------------------|--------|--------------------------|----------|-----------------------------|--------|
|                                                                                                    |   | 2007                     |     | 2006                        |   |
|                                                                                                    |   |                     |     |                        |   |
| ASSETS                                                                                                  |   |                     |     |                        |   |
| Cash                and cash equivalents                                                                |   | $                        | 57,843   |                        | $      | 56,880 |   |
| Other                assets                                                                             |   |                     | 4,705    |                        |   | 6,111 |   |
|                                                                                                    |   |                     | 62,548   |                        |   | 62,991 |   |
| Investments:                                                                                            |   |                     |     |                        |   |   |   |
| Securitized                finance receivables:                                                         |   |                     |     |                        |   |   |   |
| Commercial                mortgage loans, net                                                           |   |                     | 224,173  |                        |   | 228,466 |   |
| Single-family                mortgage loans, net                                                        |   |                     | 106,654  |                        |   | 117,838 |   |
|                                                                                                    |   |                     | 330,827  |                        |   | 346,304 |   |
| Investment                in joint venture                                                              |   |                     | 38,847   |                        |   | 37,388 |   |
| Securities                                                                                              |   |                     | 16,452   |                        |   | 13,143 |   |
| Other                investments                                                                        |   |                     | 2,671    |                        |   | 2,802 |   |
| Other                loans                                                                              |   |                     | 3,645    |                        |   | 3,929 |   |
|                                                                                                    |   |                     | 392,442  |                        |   | 403,566 |   |
|                                                                                                    |   |                     |     |                        |   |   |   |
|                                                                                                    |   | $                        | 454,990  |                        | $      | 466,557 |   |
|                                                                                                    |   |                     |     |                        |   |   |   |
| LIABILITIES                AND SHAREHOLDERS' EQUITY                                                     |   |                     |     |                        |   |   |   |
| LIABILITIES                                                                                             |   |                     |     |                        |   |   |   |
| Securitization                financing                                                                 |   | $                        | 206,615  |                        | $      | 211,564 |   |
| Repurchase                agreements secured by securitization financing                                |   |                     | 86,926   |                        |   | 95,978 |   |
| Obligation                under payment agreement                                                       |   |                     | 16,847   |                        |   | 16,299 |   |
| Other                liabilities                                                                        |   |                     | 6,132    |                        |   | 6,178 |   |
|                                                                                                    |   |                     | 316,520  |                        |   | 330,019 |   |
|                                                                                                    |   |                     |     |                        |   |   |   |
| Commitments                and Contingencies (Note 11)                                                  |   |                     |     |                        |   |   |   |
|                                                                                                    |   |                     |     |                        |   |   |   |
| 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 outstanding, respectively                        |   |                     | 121      |                        |   | 121 |   |
| Additional                paid-in capital                                                               |   |                     | 366,674  |                        |   | 366,637 |   |
| Accumulated                other comprehensive income                                                   |   |                     | 1,618    |                        |   | 663 |   |
| Accumulated                deficit                                                                      |   |                     | (271,692 | )                           |   | (272,632 | ) |
|                                                                                                    |   |                     | 138,470  |                        |   | 136,538 |   |
|                                                                                                    |   |                     |     |                        |   |   |   |
|                                                                                                    |   | $                        | 454,990  |                        | $      | 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 data)*

|                                                                                                |   | Three                Months Ended |   |
|-----------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                                |   | March                31,          |   |
|                                                                                                |   | 2007                              |   | 2006 |   |
|                                                                                                |   |                              |   |   |   |
| Interest                income:                                                                     |   |                              |   |   |   |
| Securitized                finance receivables                                                      |   | $                                 | 7,025  |   | $ | 13,886 |   |
| Securities                                                                                          |   |                              | 324    |   |   | 546 |   |
| Other                investments                                                                    |   |                              | 739    |   |   | 227 |   |
| Other                loans                                                                          |   |                              | 127    |   |   | 107 |   |
|                                                                                                |   |                              | 8,215  |   |   | 14,766 |   |
|                                                                                                |   |                              |   |   |   |   |   |
| Interest                and related expenses:                                                       |   |                              |   |   |   |   |   |
| Non-recourse                securitization financing                                                |   |                              | 4,096  |   |   | 10,988 |   |
| Repurchase                agreements                                                                |   |                              | 1,258  |   |   | 1,515 |   |
| Obligation                under payment agreement                                                   |   |                              | 367    |   |   | - |   |
| Other                                                                                               |   |                              | 34     |   |   | (25 | ) |
|                                                                                                |   |                              | 5,755  |   |   | 12,478 |   |
|                                                                                                |   |                              |   |   |   |   |   |
| Net                interest income                                                                  |   |                              | 2,460  |   |   | 2,288 |   |
| Recapture                of loan losses                                                             |   |                              | 523    |   |   | 119 |   |
|                                                                                                |   |                              |   |   |   |   |   |
| Net                interest income after recapture of loan losses                                   |   |                              | 2,983  |   |   | 2,407 |   |
|                                                                                                |   |                              |   |   |   |   |   |
| Equity                in earnings of joint venture                                                  |   |                              | 630    |   |   | - |   |
| Other                (expense) income                                                               |   |                              | (545   | ) |   | 133 |   |
| General                and administrative expenses                                                  |   |                              | (1,126 | ) |   | (1,327 | ) |
|                                                                                                |   |                              |   |   |   |   |   |
| Net                income                                                                           |   |                              | 1,942  |   |   | 1,213 |   |
| Preferred                stock charge                                                               |   |                              | (1,003 | ) |   | (1,036 | ) |
|                                                                                                |   |                              |   |   |   |   |   |
| Net                income to common shareholders                                                    |   | $                                 | 939    |   | $ | 177 |   |
|                                                                                                |   |                              |   |   |   |   |   |
| Change                in net unrealized gain on :                                                   |   |                              |   |   |   |   |   |
| Investments                classified as available-for-sale                                         |   |                              | 126    |   |   | 364 |   |
| Investment                in joint venture                                                          |   |                              | 829    |   |   | - |   |
| Comprehensive                income                                                                 |   | $                                 | 2,897  |   | $ | 1,577 |   |
|                                                                                                |   |                              |   |   |   |   |   |
| Net                income per common share:                                                         |   |                              |   |   |   |   |   |
| Basic                and diluted                                                                    |   | $                                 | 0.08   |   | $ | 0.01 |   |
|                                                                                                |   |                              |   |   |   |   |   |
|                                                                                                |   |                              |   |   |   |   |   |
| *See                notes to unaudited condensed consolidated financial                statements.* |   |                              |   |   |   |   |   |

----

**DYNEX      CAPITAL, INC.**

**CONDENSED      CONSOLIDATED STATEMENTS**

**OF      CASH FLOWS**
**      (UNAUDITED)**

*(amounts      in thousands)*

|                                                                                                |   | Three                Months Ended |    |
|-----------------------------------------------------------------------------------------------------|--------|-----------------------------------|---------|
|                                                                                                |   | March                31,          |    |
|                                                                                                |   | 2007                              |    | 2006 |   |
| Operating                activities:                                                                |   |                              |    |   |   |
| Net                income                                                                           |   | $                                 | 1,942   |   | $ | 1,213 |   |
| Adjustments                to reconcile net income to cash                                          |   |                              |    |   |   |   |   |
| provided                by operating activities:                                                    |   |                              |    |   |   |   |   |
| Equity                in earnings of joint venture                                                  |   |                              | (630    | ) |   | - |   |
| Recapture                of loan losses                                                             |   |                              | (523    | ) |   | (119 | ) |
| (Loss)                gain on sale of investments                                                   |   |                              | 6       |   |   | (24 | ) |
| Amortization                and depreciation                                                        |   |                              | (335    | ) |   | 365 |   |
| Net                change in other assets and other liabilities                                     |   |                              | 1,407   |   |   | 75 |   |
| Net                cash and cash equivalents provided by operating activities                       |   |                              | 1,867   |   |   | 1,510 |   |
|                                                                                                |   |                              |    |   |   |   |   |
|                                                                                                |   |                              |    |   |   |   |   |
| Investing                activities:                                                                |   |                              |    |   |   |   |   |
| Principal                payments received on investments                                           |   |                              | 15,578  |   |   | 27,435 |   |
| Purchase                of securities and other investments                                         |   |                              | (5,591  | ) |   | (16,168 | ) |
| Payments                received on securities, other investments and loans                         |   |                              | 2,811   |   |   | 5,883 |   |
| Proceeds                from sales of securities and other investments                              |   |                              | 83      |   |   | 104 |   |
| Other                                                                                               |   |                              | 937     |   |   | 69 |   |
| Net                cash and cash equivalents provided by investing activities                       |   |                              | 13,818  |   |   | 17,323 |   |
|                                                                                                |   |                              |    |   |   |   |   |
| Financing                activities:                                                                |   |                              |    |   |   |   |   |
| Principal                payments on securitization financing                                       |   |                              | (4,657  | ) |   | (13,009 | ) |
| Net                repayments on repurchase agreements                                              |   |                              | (9,100  | ) |   | (12,190 | ) |
| Issuance                (retirement) of common stock                                                |   |                              | 37      |   |   | (137 | ) |
| Retirement                of preferred stock                                                        |   |                              | -       |   |   | (14,072 | ) |
| Dividends                paid                                                                       |   |                              | (1,002  | ) |   | (1,370 | ) |
| Net                cash and cash equivalents used for financing activities                          |   |                              | (14,722 | ) |   | (40,778 | ) |
| Net                increase (decrease) in cash and cash equivalents                                 |   |                              | 963     |   |   | (21,945 | ) |
| Cash                and cash equivalents at beginning of period                                     |   |                              | 56,880  |   |   | 45,235 |   |
| Cash                and cash equivalents at end of period                                           |   | $                                 | 57,843  |   | $ | 23,290 |   |
|                                                                                                |   |                              |    |   |   |   |   |
|                                                                                                |   |                              |    |   |   |   |   |
| *See                notes to unaudited condensed consolidated financial                statements.* |   |                              |    |   |   |   |   |

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

**DYNEX      CAPITAL, INC.**

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

**NOTE      1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

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*      "*
*,*

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

|                                                                                                                                  |   | Three                Months Ended March 31, |   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|--------|
|                                                                                                                                  |   | 2007                                        |   | 2006 |   |
|                                                                                                                                  |   |   Income                          |   | Weighted-Average                Number of Shares |   |   Income |   | Weighted-AverageNumber                ofShares |   |
|                                                                                                                                  |   |                                        |   |   |   |   |   |   |   |
| Net                income                                                                                                             |   | $                                           | 1,942  |   |   |   |   | $ | 1,213 |   |   |   |   |
| Preferred                stock charge                                                                                                 |   |                                        | (1,003 | ) |   |   |   |   | (1,036 | ) |   |   |   |
| Net                income to common shareholders                                                                                      |   | $                                           | 939    |   |   | 12,133,151 |   | $ | 177 |   |   | 12,161,682 |   |
| Effect                of dividends and additional shares of preferred stock                                                           |   |                                        | -      |   |   | - |   |   | - |   |   | - |   |
| Diluted                                                                                                                               |   | $                                           | 939    |   |   | 12,133,151 |   | $ | 177 |   |   | 12,161,682 |   |
|                                                                                                                                  |   |                                        |   |   |   |   |   |   |   |   |   |   |   |
| Net                income per share:                                                                                                  |
| Basic                and diluted                                                                                                      |   |                                        |   |   | $ | 0.08 |   |   |   |   | $ | 0.01 |   |
|                                                                                                                                  |   |                                        |   |   |   |   |   |   |   |   |   |   |   |
| Reconciliation                of shares included in calculation of earnings per share due to dilutive                effect:          |   |                                        |
| Incremental                shares of options                                                                                          |   |                                        | -      |   |   | 426 |   |   | - |   |   | - |   |
|                                                                                                                                  |   | $                                           | 939    |   |   | 12,133,577 |   | $ | - |   |   | - |   |
|                                                                                                                                  |   |                                        |   |   |   |   |   |   |   |   |   |   |   |
| Reconciliation                of shares not included in calculation of earnings per share due to                anti-dilutive effect: |   |                                        |
| Dividends                and assumed conversion of Series D preferred stock                                                           |   | $                                           | 1,003  |   |   | 4,221,539 |   | $ | 1,036 |   |   | 4,362,259 |   |
| Expense                and incremental shares of stock appreciation rights and                options                                 |   |                                        | -      |   |   | 52,468 |   |   | - |   |   | 93,589 |   |
|                                                                                                                                  |   | $                                           | 1,003  |   |   | 4,274,007 |   | $ | 1,036 |   |   | 4,455,848 |   |
|                                                                                                                                  |   |                                        |   |   |   |   |   |   |   |   |   |   |   |

----

**NOTE      3 — SECURITIZED FINANCE RECEIVABLES**

|                                                                       |   | March                31, 2007 |    | December                31, 2006 |   |
|----------------------------------------------------------------------------|--------|-------------------------------|---------|----------------------------------|--------|
| Collateral:                                                                |   |                          |    |                             |   |
| Commercial                mortgage loans , unpaid principal                |   | $                             | 220,215 |                             | $      | 225,463 |   |
| Single-family                mortgage loans , unpaid principal             |   |                          | 105,054 |                             |   | 116,060 |   |
|                                                                       |   |                          | 325,269 |                             |   | 341,523 |   |
| Funds                held by trustees, including funds held for defeasance |   |                          | 7,297   |                             |   | 7,351 |   |
| Accrued                interest receivable                                 |   |                          | 2,302   |                             |   | 2,380 |   |
| Unamortized                discounts and premiums, net                     |   |                          | (503    | )                                |   | (455 | ) |
| Loans,                at amortized cost                                    |   |                          | 334,365 |                             |   | 350,799 |   |
| Allowance                for loan losses                                   |   |                          | (3,538  | )                                |   | (4,495 | ) |
|                                                                       |   | $                             | 330,827 |                             | $      | 346,304 |   |

**NOTE      4 — ALLOWANCE FOR LOAN LOSSES**

|                                            |   | Three                Months Ended March 31, |   |
|-------------------------------------------------|--------|---------------------------------------------|--------|
|                                            |   | 2007                                        |   | 2006 |   |
| Allowance                at beginning of period |   | $                                           | 4,495  |   | $ | 19,035 |   |
| Recapture                of loan losses         |   |                                        | (523   | ) |   | (119 | ) |
| Charge-offs,                net of recoveries   |   |                                        | (434   | ) |   | (3 | ) |
| Allowance                at end of period       |   | $                                           | 3,538  |   | $ | 18,913 |   |

**NOTE      5 — INVESTMENT IN JOINT VENTURE**

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**NOTE      6 — SECURITIES**

|                                                 |   | March                  31, 2007 |   | December                  31, 2006       |   |
|------------------------------------------------------|--------|---------------------------------|--------|------------------------------------------|--------|
|                                                 |   | FairValue                       |   | Effective                  Interest Rate |   | FairValue |   | Effective                  Interest Rate |   |
| Securities,                  available-for-sale:     |   |                            |   |                                     |   |   |   |   |   |   |   |   |   |
| Adjustable-rate                  mortgage securities |   | $                               | 3,765  |                                     |   | 5.44 | % | $ | - |   |   | - | % |
| Fixed-rate                  mortgage securities      |   |                            | 10,877 |                                     |   | 7.18 | % |   | 11,362 |   |   | 7.22 | % |
| Equity                  securities                   |   |                            | 1,152  |                                     |   |   |   |   | 1,151 |   |   |   |   |
|                                                 |   |                            | 15,794 |                                     |   |   |   |   |   |   |   |   |   |
| Gross                  unrealized gains              |   |                            | 668    |                                     |   |   |   |   | 636 |   |   |   |   |
| Gross                  unrealized losses             |   |                            | (10    | )                                        |   |   |   |   | (6 | ) |   |   |   |
|                                                 |   | $                               | 16,452 |                                     |   |   |   | $ | 13,143 |   |   |   |   |

**NOTE      7 — OTHER INVESTMENTS**

|                                                         |   | March                31, 2007 |   | December                31, 2006 |   |
|--------------------------------------------------------------|--------|-------------------------------|--------|----------------------------------|--------|
| Delinquent                property tax receivable securities |   | $                             | 2,164  |                             | $      | 2,227 |   |
| Real                estate owned                             |   |                          | 507    |                             |   | 575 |   |
|                                                         |   | $                             | 2,671  |                             | $      | 2,802 |   |

**NOTE      8 - OTHER LOANS**

|                                                                   |   | March                31, 2007 |   | December                31, 2006 |   |
|------------------------------------------------------------------------|--------|-------------------------------|--------|----------------------------------|--------|
| Single-family                mortgage loans                            |   | $                             | 3,034  |                             | $      | 3,345 |   |
| Multifamily                and commercial mortgage loan participations |   |                          | 955    |                             |   | 962 |   |
|                                                                   |   |                          | 3,989  |                             |   | 4,307 |   |
| Unamortized                discounts                                   |   |                          | (344   | )                                |   | (378 | ) |
|                                                                   |   | $                             | 3,645  |                             | $      | 3,929 |   |

**NOTE      9 -SECURITIZATION FINANCING**

----

|                                           |   | **March                31, 2007**    |           | **December                31, 2006**       |   |
|------------------------------------------------|--------|--------------------------------------|----------------|--------------------------------------------|--------|
|                                           |   | **Bonds                Outstanding** |           | **Range                of Interest Rates** |   | **Bonds                Outstanding** |   | **Range                of Interest Rates** |   |
| Fixed-rate                classes              |   | $                                    | 201,820        |                                       |   | 6.6%                - 8.8 | % | $ | 206,478 |   |   | 6.6%                - 8.8 | % |
| Accrued                interest payable        |   |                                 | 1,396          |                                       |   |   |   |   | 1,428 |   |   |   |   |
| Deferred                costs                  |   |                                 | (2,742         | )                                          |   |   |   |   | (2,848 | ) |   |   |   |
| Unamortized                net bond premium    |   |                                 | 6,141          |                                       |   |   |   |   | 6,506 |   |   |   |   |
|                                           |   | $                                    | 206,615        |                                       |   |   |   | $ | 211,564 |   |   |   |   |
|                                           |   |                                 |           |                                       |   |   |   |   |   |   |   |   |   |
| Range                of stated maturities      |   |                                 | 2024-2027      |                                       |   |   |   |   | 2024-2027 |   |   |   |   |
| Estimated                weighted average life |   |                                 | 4.1 years |                                       |   |   |   |   | 4.3                years |   |   |   |   |
| Number                of series                |   |                                 | 2              |                                       |   |   |   |   | 2 |   |   |   |   |

**NOTE      10 - REPURCHASE AGREEMENTS **

**NOTE      11 — PREFERRED STOCK**

**NOTE      12 — COMMITMENTS AND CONTINGENCIES**

----

----

**NOTE      13 — STOCK BASED COMPENSATION**

|                                       |   | **SARs                Granted**    |
|--------------------------------------------|--------|------------------------------------|
|                                       |   | **January                3, 2005** | **January                12, 2006** | **January                3, 2007** |
| Expected                volatility         |   | 13.9%-16.9%                        | 14.4%-19.1% | 17.4%-27.2% |
| Weighted-average                volatility |   | 14.8%                              | 17.0% | 21.5% |
| Expected                dividends          |   | 0%                                 | 0% | 0% |
| Expected                term (in months)   |   | 33                                 | 42 | 54 |
| Risk-free                rate              |   | 4.54%                              | 4.56% | 4.58% |

**NOTE      14 — 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)* |   | March                  31, 2007 |    | December                  31, 2006 |   |
|-----------------------------------------------------------------|--------|---------------------------------|---------|------------------------------------|--------|
| Investments:                                                    |   |                            |    |                               |   |
| Securitized                  finance receivables                |   | $                               | 330,827 |                               | $      | 346,304 |   |
| Investment                  in joint venture                    |   |                            | 38,847  |                               |   | 37,388 |   |
| Securities                                                      |   |                            | 16,452  |                               |   | 13,143 |   |
| Other                  investments                              |   |                            | 2,671   |                               |   | 2,802 |   |
| Other                  loans                                    |   |                            | 3,645   |                               |   | 3,929 |   |
|                                                            |   |                            |    |                               |   |   |   |
| Securitization                  financing                       |   |                            | 206,615 |                               |   | 211,564 |   |
| Repurchase                  agreements                          |   |                            | 86,926  |                               |   | 95,978 |   |
| Obligation                  under payment agreement             |   |                            | 16,847  |                               |   | 16,299 |   |
|                                                            |   |                            |    |                               |   |   |   |
| Shareholders’                  equity                     |   |                            | 138,470 |                               |   | 136,538 |   |
| Common                  book value per share                    |   | $                               | 7.93    |                               | $      | 7.78 |   |

----

*Securitized      finance receivables.*

*Investment      in joint venture.*

*Securities*

*Other      investments*

*Other      loans*

*Securitization      financing. *

*Repurchase      Agreements*

*Obligation      under payment agreement*

*Shareholders’      equity*

*Supplemental      Discussion of Investments*

----

|                                                         |   | **March                31, 2007**       |    |
|--------------------------------------------------------------|--------|-----------------------------------------|---------|
|  *(amounts                in thousands)*                |   | **Amortized                cost basis** |    | **Financing** |   | **Net                basis** |   | **Fair                value of net basis** |   |
| Securitized                finance receivables:** **(1) |   |                                    |    |   |   |   |   |   |   |
| Single                family mortgage loans                  |   | $                                       | 107,022 |   | $ | 86,926 |   | $ | 20,096 |   | $ | 20,621 |   |
| Commercial                mortgage loans                     |   |                                    | 227,343 |   |   | 206,615 |   |   | 20,728 |   |   | 21,125 |   |
| Allowance                for loan losses                     |   |                                    | (3,538  | ) |   | - |   |   | (3,538 | ) |   | - |   |
|                                                         |   |                                    | 330,827 |   |   | 293,541 |   |   | 37,286 |   |   | 41,746 |   |
| Securities:                (2)                               |   |                                    |    |   |   |   |   |   |   |   |   |   |   |
| Investment                grade single-family                |   |                                    | 14,165  |   |   | - |   |   | 14,165 |   |   | 14,439 |   |
| Non-investment                grade single-family            |   |                                    | 356     |   |   | - |   |   | 356 |   |   | 548 |   |
| Equity                and other                              |   |                                    | 1,274   |   |   | - |   |   | 1,274 |   |   | 1,464 |   |
|                                                         |   |                                    | 15,795  |   |   | - |   |   | 15,795 |   |   | 16,451 |   |
|                                                         |   |                                    |    |   |   |   |   |   |   |   |   |   |   |
| Investment                in joint venture(3)                |   |                                    | 38,847  |   |   | - |   |   | 38,847 |   |   | 38,080 |   |
| Obligation                under payment agreement(1)         |   |                                    | -       |   |   | 16,847 |   |   | (16,847 | ) |   | (17,157 | ) |
| Other                loans and investments(2)                |   |                                    | 6,176   |   |   | - |   |   | 6,176 |   |   | 7,050 |   |
| Net                unrealized gain                           |   |                                    | 797     |   |   | - |   |   | 797 |   |   | - |   |
|                                                         |   |                                    |    |   |   |   |   |   |   |   |   |   |   |
| Total                                                        |   | $                                       | 392,442 |   | $ | 310,388 |   | $ | 82,054 |   | $ | 86,170 |   |
|                                                         |   |                                    |    |   |   |   |   |   |   |   |   |   |   |

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

|   | (2) | Fair                values of securities are based on dealer quotes, if available. Where                dealer quotes are not available, fair values are calculated as the                net                present value of expected future cash flows, discounted at 16%. Expected                cash flows for both securitized finance receivables and securities                were                based on the forward LIBOR curve as of March 31, 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. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3) | Fair                value for investment in joint venture represents Dynex’s share of the                joint assets valued using methodologies and assumptions consistent                with                Note 1 and 2 above. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                        | **Fair                Value Assumptions**             |                         |
|---------------------------------------------|-------------------------------------------------------|------------------------------|
| **Loan                type**                | **Weighted-average                prepayment speeds** |  **Losses**             | **Weighted-average****discount                rate****(5)** | **Projected                cash flow termination date** | *(amounts                in thousands)***2007                Cash Flows****(1)** |
|                                        |                                                  |                         |   |   |   |
| Single-family                mortgage loans | 30%                CPR                                | 0.2%                annually | 16% | Anticipated                final maturity 2024 | $831 |
|                                        |                                                  |                         |   |   |   |
| Commercial                mortgage loans(2) | (3)                                                   | 0.8%                annually | 16% | (4) | $572 |

*(1)*

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

*(2)*

*Includes      loans pledged to two different securitization trusts. *

*(3)*

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

*(4)*

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

*(5)*

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

| *(amounts                in thousands)*                         |   | **March                31, 2007** |   |
|-----------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                            |   |                              |   |
| Cash                and cash equivalents                        |   | $                                 | 57,843 |   |
| Investments:                                                    |   |                              |   |   |
| AAA                rated and agency MBS fixed income securities |   |                              | 23,181 |   |
| AA                and A rated fixed income securities           |   |                              | 1,892  |   |
| Unrated                and non-investment grade                 |   |                              | 8,521  |   |
| Securitization                over-collateralization            |   |                              | 9,613  |   |
| Investment                in joint venture                      |   |                              | 38,847 |   |
|                                                            |   | $                                 | 82,054 |   |
|                                                            |   |                              |   |   |

----

**Supplemental      Discussion of Common Equity Book Value**

|                                                                                               |   | **March                31, 2007** |    |
|----------------------------------------------------------------------------------------------------|--------|-----------------------------------|---------|
| ***(amounts                in thousands)***                                                        |   | **Book                Value**     |    | **Adjusted                Common Equity Book Value** |   |
|                                                                                               |   |                              |    |   |   |
| Total                investment assets (per table above)                                           |   | $                                 | 82,054  |   | $ | 86,170 |   |
| Cash                and cash equivalents                                                           |   |                              | 57,843  |   |   | 57,843 |   |
| Other                assets and liabilities, net                                                   |   |                              | (1,427  | ) |   | (1,427 | ) |
|                                                                                               |   |                              | 138,470 |   |   | 142,586 |   |
| Less:                Preferred stock redemption value                                              |   |                              | (42,215 | ) |   | (42,215 | ) |
| Common                equity book value and adjusted book value                                    |   | $                                 | 96,255  |   | $ | 100,371 |   |
|                                                                                               |   |                              |    |   |   |   |   |
| Common                equity book value per share and adjusted book value per                share |   | $                                 | 7.93    |   | $ | 8.27 |   |

----

**RESULTS      OF OPERATIONS**

|                                                                 |   | **Three                Months Ended** |   |
|----------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                 |   | **March                31,**          |   |
| *(amounts                in thousands except per share information)* |   | **2007**                              |   | **2006** |   |
|                                                                 |   |                                  |   |   |   |
| Net                interest income                                   |   | $                                     | 2,460  |   | $ | 2,288 |   |
| Recapture                of loan losses                              |   |                                  | 523    |   |   | 119 |   |
| Net                interest income after recapture of loan losses    |   |                                  | 2,983  |   |   | 2,407 |   |
| Equity                in earnings of joint venture                   |   |                                  | 630    |   |   | - |   |
| Other                (expense) income                                |   |                                  | (545   | ) |   | 133 |   |
| General                and administrative expenses                   |   |                                  | (1,126 | ) |   | (1,327 | ) |
| Net                income                                            |   |                                  | 1,942  |   |   | 1,213 |   |
| Preferred                stock charge                                |   |                                  | (1,003 | ) |   | (1,036 | ) |
| Net                income to common shareholders                     |   |                                  | 939    |   |   | 177 |   |
|                                                                 |   |                                  |   |   |   |   |   |
| Net                income per common share:                          |   |                                  |   |   |   |   |   |
| Basic                and diluted                                     |   | $                                     | 0.08   |   | $ | 0.01 |   |

*Three      Months Ended March 31, 2007 Compared to Three Months Ended March 31,      2006*

The      Company recognized $0.6 million of equity in earnings of a joint venture, which      it formed with in the third quarter of 2006. The joint venture’s earnings are      primarily derived from interest income earned on commercial mortgage backed      securities and cash equivalents.

----

**Average      Balances and Effective Interest Rates**

|                                                                                                            |       | **Three                Months Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                                                      | ** ** | **2007**                                        | ** ** | **2006** | ** ** |
| ** **                                                                                                      | ** ** | **Average****Balance**                          | ** ** | **Effective****Rate** | ** ** | **Average****Balance** | ** ** | **Effective****Rate** |   |
|                                                                                                            |       |                                            |       |   |   |   |   |   |   |
| Interest-earning                assets:(1)                                                                      |       |                                            |       |   |   |   |   |   |   |
| Securitized                finance receivables(2)                                                               |       | $                                               | 342,239    |   |   | 8.20 | % | $ | 723,881 |   |   | 7.67 | % |
| Securities                                                                                                      |       |                                            | 13,143     |   |   | 9.87 | % |   | 35,617 |   |   | 6.09 | % |
| Other                loans                                                                                      |       |                                            | 3,733      |   |   | 13.58 | % |   | 5,184 |   |   | 8.23 | % |
| Total                interest-earning assets                                                                    |       | $                                               | 359,115    |   |   | 8.32 | % | $ | 764,682 |   |   | 7.59 | % |
|                                                                                                            |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing                liabilities:                                                                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Non-recourse                securitization financing(3)                                                         |       | $                                               | 208,434    |   |   | 7.65 | % | $ | 507,482 |   |   | 8.48 | % |
| Repurchase                agreements                                                                            |       |                                            | 92,705     |   |   | 5.43 | % |   | 128,395 |   |   | 4.72 | % |
| Total                interest-bearing liabilities                                                               |       | $                                               | 301,139    |   |   | 6.97 | % | $ | 635,877 |   |   | 7.72 | % |
|                                                                                                            |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Net                interest spread (3)                                                                          |       |                                            |       |   |   | 1.35 | % |   |   |   |   | (0.13 | )% |
| Net                yield on average interest-earning assets(3)(4)                                               |       |                                            |       |   |   | 2.48 | % |   |   |   |   | 1.18 | % |
| Cash                and cash equivalents                                                                        |       | $                                               | 56,595     |   |   | 5.22 | % | $ | 20,156 |   |   | 4.50 | % |
| Net                yield on average interest-earning assets, including                cash and cash equivalents |       |                                            |       |   |   | 2.85 | % |   |   |   |   | 1.26 | % |
|                                                                                                            |       |                                            |       |   |   |   |   |   |   |   |   |   |   |

| *(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 March 31, 2007 and 2006,                respectively.* |
|-------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| *(3)  * | *Effective                rates are calculated excluding non-interest related collateralized                bond                expenses. If included, the effective rate on interest-bearing liabilities                would be 7.49% and 7.85% for the three months ended March 31, 2007                and                2006, respectively.* |
|-------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

----

|                                           |   | Three                Months Ended March 31, 2007 vs. 2006 |   |
|------------------------------------------------|--------|-----------------------------------------------------------|--------|
| *(amounts                in thousands)*        |   | Rate                                                      |   | Volume |   | Total |   |
|                                           |   |                                                      |   |   |   |   |   |
| Securitized                finance receivables |   | $                                                         | 910    |   | $ | (7,767 | ) | $ | (6,857 | ) |
| Securities                                     |   |                                                      | 231    |   |   | (449 | ) |   | (218 | ) |
| Other                loans                     |   |                                                      | 56     |   |   | (36 | ) |   | 20 |   |
|                                           |   |                                                      |   |   |   |   |   |   |   |   |
| Total                interest income           |   |                                                      | 1,197  |   |   | (8,252 | ) |   | (7,055 | ) |
|                                           |   |                                                      |   |   |   |   |   |   |   |   |
| Securitization                financing        |   |                                                      | (967   | ) |   | (5,809 | ) |   | (6,766 | ) |
| Repurchase                agreements           |   |                                                      | 203    |   |   | (460 | ) |   | (257 | ) |
|                                           |   |                                                      |   |   |   |   |   |   |   |   |
| Total                interest expense          |   |                                                      | (764   | ) |   | (6,269 | ) |   | (7,033 | ) |
|                                           |   |                                                      |   |   |   |   |   |   |   |   |
| Net                interest income             |   | $                                                         | 1,961  |   | $ | (1,983 | ) | $ | (22 | ) |

*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 dividends on equity securities, securitization financing      costs, other interest expense and provision for credit losses.*

*Credit      Exposures*

----

**Credit      Reserves and Actual Credit Losses**

|                           |   |  **Outstanding****Loan                Principal****Balance** | ** ** |  **Credit                Exposure,****Net                Of****Credit                Reserves** | ** ** |  **Actual****Credit****Losses** | ** ** | **Credit                Exposure, Net Of Credit Reserves To Outstanding Loan                Balance** |   |
|--------------------------------|--------|-------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------------------------------------------------------------------------|--------|
| 2006,                Quarter 1 |   | $                                                                 | 724.4      |                                                                                                 | $          | 32.0                                 |       | $                                                                                                     | 0.5    |   |   | 4.42 | % |
| 2006,                Quarter 2 |   |                                                              | 693.8      |                                                                                                 |       | 33.1                                 |       |                                                                                                  | 6.6    |   |   | 4.77 | % |
| 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 | % |

**Single-Family      Loan Delinquency Statistics**

|  **December                31,** |  **30                to 59 days delinquent** | **60                to 89 days****delinquent** |  **90                days and over delinquent****(1)** |  **Total** |
|---------------------------------------|---------------------------------------------------|------------------------------------------------|-------------------------------------------------------------|-----------------|
| 2006,                Quarter 1        | 4.50%                                             | 0.85%                                          | 2.90%                                                       | 8.25%           |
| 2006,                Quarter 2        | 4.51%                                             | 1.09%                                          | 2.68%                                                       | 8.28%           |
| 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%           |

----

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

|  **December                31,** |  **30                to 59 days delinquent** | **60                to 89 days****delinquent** |  **90                days and over delinquent****(1)** |  **Total** |
|---------------------------------------|---------------------------------------------------|------------------------------------------------|-------------------------------------------------------------|-----------------|
| 2006,                Quarter 1        | 1.25%                                             | -%                                             | 6.38%                                                       | 7.63%           |
| 2006,                Quarter 2        | 1.09%                                             | -%                                             | 5.15%                                                       | 6.24%           |
| 2006,                Quarter 3        | -%                                                | -%                                             | 1.33%                                                       | 1.33%           |
| 2006,                Quarter 4        | -%                                                | -%                                             | 1.36%                                                       | 1.36%           |
| 2007,                Quarter 1        | -%                                                | -%                                             | -%                                                          | -%              |

* *

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

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

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

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

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

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

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

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

----

**Item      3. Quantitative and Qualitative Disclosures about Market      Risk**

----

|                                                                 |   | **Projected                Change in Net Interest Margin Cash Flow From Base                Case** |   |                                                   |
|----------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------|
| **Basis                Point Increase (Decrease) in Interest Rates** |   | **Excluding                Cash and Cash Equivalents**                                             |   | **Including                Cash and Cash Equivalents** |   | **Projected                Change in Value, Expressed as a Percentage of Shareholders’                Equity** |
|                                                                 |   |                                                                                               |   |                                                   |   |   |
| +200                                                                 |   | (3.7)%                                                                                             |   | 14.2%                                                  |   | (0.2)% |
| +100                                                                 |   | (0.7)%                                                                                             |   | 7.7%                                                   |   | (0.0)% |
| Base                                                                 |   | -                                                                                                  |   | -                                                      |   | - |
| -100                                                                 |   | 0.9%                                                                                               |   | (7.6)%                                                 |   | 0.0% |
| -200                                                                 |   | 4.8%                                                                                               |   | (13.5)%                                                |   | 0.3% |

----

**Item      4. Controls and Procedures**

**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 (filed herewith). |
|   |                                                                                                                                                                |
| 32.1   | Certification                of Principal Executive Officer and Principal Financial Officer pursuant                to                Section 906 (filed herewith). |

----

**SIGNATURE**

|                              | **DYNEX                CAPITAL, INC.**                                                      |
|-----------------------------------|---------------------------------------------------------------------------------------------|
|                              |                                                                                        |
|                              |                                                                                        |
|                              |                                                                                        |
| Date:                May 15, 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 Principal Financial Officer pursuant                to                Section 302 (filed herewith). |
|                           |                                                                                                                                                                |
| 32.1                           | Certification                of Principal Executive Officer and Principal Financial Officer pursuant                to                Section 906 (filed herewith). |

----