----

**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 June 30, 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.**

| **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 June 30,                  2007 (unaudited) and December 31, 2006                                                                                                    | 1      |
|                      |                                   |                                                                                                                                                                                                                          |   |
|                      |                                   | Condensed                  Consolidated Statements of Operations                  and Comprehensive Income for the three and six months ended June                  30, 2007                  and 2006  (unaudited) | 2      |
|                      |                                   |                                                                                                                                                                                                                          |   |
|                      |                                   | Condensed                  Consolidated Statements of Cash                  Flows for the six months ended June 30, 2007 and                  2006  (unaudited)                                                     | 3      |
|                      |                                   |                                                                                                                                                                                                                          |   |
|                      |                                   | Notes                  to Condensed Consolidated                  Financial Statements (unaudited)                                                                                                                            | 4      |
|                      |                                   |                                                                                                                                                                                                                          |   |
|                      | Item                  2.               | Management’s                  Discussion and Analysis of Financial                  Condition and Results of Operations                                                                                                 | 12     |
|                      |                                   |                                                                                                                                                                                                                          |   |
|                      | Item                  3.               | Quantitative                  and Qualitative                  Disclosures about Market Risk                                                                                                                                  | 28     |
|                      |                                   |                                                                                                                                                                                                                          |   |
|                      | Item                  4.               | Controls                  and Procedures                                                                                                                                                                                      | 30     |
|                      |                                   |                                                                                                                                                                                                                          |   |
| PART                  II. | OTHER                  INFORMATION     |                                                                                                                                                                                                                          |
|                      |                                   |                                                                                                                                                                                                                          |   |
|                      | Item                  1.               | Legal                  Proceedings                                                                                                                                                                                            | 31     |
|                      |                                   |                                                                                                                                                                                                                          |   |
|                      | Item                  1A.              | Risk                  Factors                                                                                                                                                                                                 | 32     |
|                      |                                   |                                                                                                                                                                                                                          |   |
|                      | Item                  2.               | Unregistered                  Sales of                  Equity Securities and Use of Proceeds                                                                                                                                 | 32     |
|                      |                                   |                                                                                                                                                                                                                          |   |
|                      | Item                  3.               | Defaults                  Upon Senior                  Securities                                                                                                                                                             | 32     |
|                      |                                   |                                                                                                                                                                                                                          |   |
|                      | Item                  4.               | Submission                  of Matters to a Vote of Security                  Holders                                                                                                                                         | 33     |
|                      |                                   |                                                                                                                                                                                                                          |   |
|                      | Item                  5.               | Other                  Information                                                                                                                                                                                            | 33     |
|                      |                                   |                                                                                                                                                                                                                          |   |
|                      | Item                  6.               | Exhibits                                                                                                                                                                                                                      | 33     |
|                      |                                   |                                                                                                                                                                                                                          |   |
| Signature                 | 34                                     |

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**PART        I.  FINANCIAL INFORMATION**

**Item        1.  Financial        Statements**

**DYNEX        CAPITAL, INC.**

**CONDENSED        CONSOLIDATED**

**BALANCE        SHEETS**

*(amounts        in thousands except share data)*

|                                                                                                        |   | June                  30, |     |   | December                  31, |   |
|-------------------------------------------------------------------------------------------------------------|--------|---------------------------|----------|--------|-------------------------------|--------|
|                                                                                                        |   | 2007                      |     |   | 2006                          |   |
|                                                                                                        |   | (Unaudited)               |     |   |                          |   |
| ASSETS                                                                                                      |   |                      |     |   |                          |   |
| Cash                  and cash equivalents                                                                  |   | $                         | 62,556   |   |                          | $      | 56,880 |   |
| Other                  assets                                                                               |   |                      | 4,096    |   |                          |   | 6,111 |   |
|                                                                                                        |   |                      | 66,652   |   |                          |   | 62,991 |   |
| Investments:                                                                                                |   |                      |     |   |                          |   |   |   |
| Securitized                  mortgage loans:                                                                |   |                      |     |   |                          |   |   |   |
| Commercial,                  net                                                                            |   |                      | 220,109  |   |                          |   | 228,466 |   |
| Single-family,                  net                                                                         |   |                      | 99,398   |   |                          |   | 117,838 |   |
|                                                                                                        |   |                      | 319,507  |   |                          |   | 346,304 |   |
| Investment                  in joint venture                                                                |   |                      | 39,296   |   |                          |   | 37,388 |   |
| Securities                                                                                                  |   |                      | 13,446   |   |                          |   | 13,143 |   |
| Other                  investments                                                                          |   |                      | 2,239    |   |                          |   | 2,802 |   |
| Other                  loans                                                                                |   |                      | 3,438    |   |                          |   | 3,929 |   |
|                                                                                                        |   |                      | 377,926  |   |                          |   | 403,566 |   |
|                                                                                                        |   |                      |     |   |                          |   |   |   |
|                                                                                                        |   | $                         | 444,578  |   |                          | $      | 466,557 |   |
|                                                                                                        |   |                      |     |   |                          |   |   |   |
| LIABILITIES                  AND SHAREHOLDERS' EQUITY                                                       |   |                      |     |   |                          |   |   |   |
| LIABILITIES                                                                                                 |   |                      |     |   |                          |   |   |   |
| Securitization                  financing                                                                   |   | $                         | 201,046  |   |                          | $      | 211,564 |   |
| Repurchase                  agreements secured by securitization financing                                  |   |                      | 80,965   |   |                          |   | 95,978 |   |
| Obligation                  under payment agreement                                                         |   |                      | 16,829   |   |                          |   | 16,299 |   |
| Other                  liabilities                                                                          |   |                      | 6,352    |   |                          |   | 6,178 |   |
|                                                                                                        |   |                      | 305,192  |   |                          |   | 330,019 |   |
|                                                                                                        |   |                      |     |   |                          |   |   |   |
| Commitments                  and Contingencies (Note 12)                                                    |   |                      |     |   |                          |   |   |   |
|                                                                                                        |   |                      |     |   |                          |   |   |   |
| SHAREHOLDERS'                  EQUITY                                                                       |   |                      |     |   |                          |   |   |   |
| Preferred                  stock, par value $0.01 per share, 50,000,000 shares                  authorized, |   |                      |     |   |                          |   |   |   |
| 9.5%                  Cumulative Convertible Series D, 4,221,539 shares issued                              |   |                      |     |   |                          |   |   |   |
| and                  outstanding, ($43,218 aggregate liquidation preference)                                |   |                      | 41,749   |   |                          |   | 41,749 |   |
| Common                  stock, par value $0.01 per share, 100,000,000 shares                  authorized,   |   |                      |     |   |                          |   |   |   |
| 12,136,262                  and 12,131,262 shares issued and outstanding, respectively                      |   |                      | 121      |   |                          |   | 121 |   |
| Additional                  paid-in capital                                                                 |   |                      | 366,716  |   |                          |   | 366,637 |   |
| Accumulated                  other comprehensive income                                                     |   |                      | 793      |   |                          |   | 663 |   |
| Accumulated                  deficit                                                                        |   |                      | (269,993 | )      |                          |   | (272,632 | ) |
|                                                                                                        |   |                      | 139,386  |   |                          |   | 136,538 |   |
|                                                                                                        |   |                      |     |   |                          |   |   |   |
|                                                                                                        |   | $                         | 444,578  |   |                          | $      | 466,557 |   |
|                                                                                                        |   |                      |     |   |                          |   |   |   |
| *See                  notes to unaudited condensed consolidated financial                  statements.*     |   |                      |     |   |                          |   |   |   |

----

**DYNEX        CAPITAL, INC.**

**CONDENSED        CONSOLIDATED STATEMENTS**

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

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

|                                                                                                    |   | Three                  Months Ended |   |   | Six                  Months Ended |   |
|---------------------------------------------------------------------------------------------------------|--------|-------------------------------------|--------|--------|-----------------------------------|--------|
|                                                                                                    |   | June                  30,           |   |   | June                  30,         |   |
|                                                                                                    |   | 2007                                |   |   | 2006                              |   |   | 2007 |   |   | 2006 |   |
|                                                                                                    |   |                                |   |   |                              |   |   |   |   |   |   |   |
| Interest                  income:                                                                       |   |                                |   |   |                              |   |   |   |   |   |   |   |
| Securitized                  finance receivables                                                        |   | $                                   | 6,848  |   |                              | $      | 13,139 |   |   | $ | 13,873 |   |   | $ | 27,025 |   |
| Securities                                                                                              |   |                                | 284    |   |                              |   | 426 |   |   |   | 608 |   |   |   | 973 |   |
| Other                  investments                                                                      |   |                                | 787    |   |                              |   | 463 |   |   |   | 1,526 |   |   |   | 690 |   |
| Other                  loans                                                                            |   |                                | 104    |   |                              |   | 164 |   |   |   | 231 |   |   |   | 270 |   |
|                                                                                                    |   |                                | 8,023  |   |                              |   | 14,192 |   |   |   | 16,238 |   |   |   | 28,958 |   |
|                                                                                                    |   |                                |   |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| Interest                  and related expenses:                                                         |   |                                |   |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| Securitization                  financing                                                               |   |                                | 3,537  |   |                              |   | 10,201 |   |   |   | 7,632 |   |   |   | 21,189 |   |
| Repurchase                  agreements                                                                  |   |                                | 1,162  |   |                              |   | 1,519 |   |   |   | 2,420 |   |   |   | 3,034 |   |
| Obligation                  under payment agreement                                                     |   |                                | 386    |   |                              |   | - |   |   |   | 753 |   |   |   | - |   |
| Other                                                                                                   |   |                                | (25    | )      |                              |   | (71 | ) |   |   | 9 |   |   |   | (96 | ) |
|                                                                                                    |   |                                | 5,060  |   |                              |   | 11,649 |   |   |   | 10,814 |   |   |   | 24,127 |   |
|                                                                                                    |   |                                |   |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| Net                  interest income                                                                    |   |                                | 2,963  |   |                              |   | 2,543 |   |   |   | 5,424 |   |   |   | 4,831 |   |
| Recapture                  of provision for loan losses                                                 |   |                                | 702    |   |                              |   | - |   |   |   | 1,225 |   |   |   | 119 |   |
|                                                                                                    |   |                                |   |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| Net                  interest income after provision for loan losses                                    |   |                                | 3,665  |   |                              |   | 2,543 |   |   |   | 6,649 |   |   |   | 4,950 |   |
|                                                                                                    |   |                                |   |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| Equity                  in income of joint venture                                                      |   |                                | 672    |   |                              |   | - |   |   |   | 1,302 |   |   |   | - |   |
| Gain                  on sale of investments, net                                                       |   |                                | 6      |   |                              |   | 116 |   |   |   | - |   |   |   | 140 |   |
| Other                  (expense) income                                                                 |   |                                | (478   | )      |                              |   | 121 |   |   |   | (1,018 | ) |   |   | 230 |   |
| General                  and administrative expenses                                                    |   |                                | (1,163 | )      |                              |   | (1,165 | ) |   |   | (2,290 | ) |   |   | (2,492 | ) |
|                                                                                                    |   |                                |   |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| Net                  income                                                                             |   |                                | 2,702  |   |                              |   | 1,615 |   |   |   | 4,643 |   |   |   | 2,828 |   |
| Preferred                  stock charge                                                                 |   |                                | (1,003 | )      |                              |   | (1,003 | ) |   |   | (2,005 | ) |   |   | (2,039 | ) |
|                                                                                                    |   |                                |   |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| Net                  income to common shareholders                                                      |   | $                                   | 1,699  |   |                              | $      | 612 |   |   | $ | 2,638 |   |   | $ | 789 |   |
|                                                                                                    |   |                                |   |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| Change                  in net unrealized gain (loss) on :                                              |   |                                |   |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| Investments                  classified as available-for-sale                                           |   |                                | (602   | )      |                              |   | 84 |   |   |   | (476 | ) |   |   | 448 |   |
| Investment                  in joint venture                                                            |   |                                | (223   | )      |                              |   | - |   |   |   | 606 |   |   |   | - |   |
|                                                                                                    |   |                                |   |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive                  income                                                                   |   | $                                   | 1,877  |   |                              | $      | 1,699 |   |   | $ | 4,773 |   |   | $ | 3,276 |   |
|                                                                                                    |   |                                |   |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| Net                  income per common share:                                                           |   |                                |   |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| Basic                  and diluted                                                                      |   | $                                   | 0.14   |   |                              | $      | 0.05 |   |   | $ | 0.22 |   |   | $ | 0.06 |   |
|                                                                                                    |   |                                |   |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| *See                  notes to unaudited condensed consolidated financial                  statements.* |   |                                |   |   |                              |   |   |   |   |   |   |   |   |

----

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

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

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

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

|                                                                                                    |   | Six                  Months Ended |    |
|---------------------------------------------------------------------------------------------------------|--------|-----------------------------------|---------|
|                                                                                                    |   | June                  30,         |    |
|                                                                                                    |   | 2007                              |    |   | 2006 |   |
| Operating                  activities:                                                                  |   |                              |    |   |   |   |
| Net                  income                                                                             |   | $                                 | 4,643   |   |   | $ | 2,828 |   |
| Adjustments                  to reconcile net income to cash                                            |   |                              |    |   |   |   |   |   |
| provided                  by operating activities:                                                      |   |                              |    |   |   |   |   |   |
| Equity                  in earnings of joint venture                                                    |   |                              | (1,302  | ) |   |   | - |   |
| Recapture                  of provision for loan loss                                                   |   |                              | (1,225  | ) |   |   | (119 | ) |
| Gain                  on sale of investments                                                            |   |                              | -       |   |   |   | (141 | ) |
| Amortization                  and depreciation                                                          |   |                              | (183    | ) |   |   | 346 |   |
| Stock                  based compensation expense                                                       |   |                              | 79      |   |   |   | 104 |   |
| Net                  change in other assets and other liabilities                                       |   |                              | 2,615   |   |   |   | 752 |   |
| Net                  cash and cash equivalents provided by operating activities                         |   |                              | 4,627   |   |   |   | 3,770 |   |
|                                                                                                    |   |                              |    |   |   |   |   |   |
|                                                                                                    |   |                              |    |   |   |   |   |   |
| Investing                  activities:                                                                  |   |                              |    |   |   |   |   |   |
| Principal                  payments received on securitized mortgage loans                              |   |                              | 27,702  |   |   |   | 51,479 |   |
| Purchase                  of securities                                                                 |   |                              | (5,590  | ) |   |   | (16,642 | ) |
| Payments                  received on securities, other investments and other loans                     |   |                              | 5,836   |   |   |   | 26,238 |   |
| Proceeds                  from sales of securities and other investments                                |   |                              | 129     |   |   |   | 1,136 |   |
| Other                                                                                                   |   |                              | 305     |   |   |   | (561 | ) |
| Net                  cash and cash equivalents provided by investing activities                         |   |                              | 28,382  |   |   |   | 61,650 |   |
|                                                                                                    |   |                              |    |   |   |   |   |   |
| Financing                  activities:                                                                  |   |                              |    |   |   |   |   |   |
| Principal                  payments on securitization financing                                         |   |                              | (9,496  | ) |   |   | (26,555 | ) |
| Net                  repayments on repurchase agreement                                                 |   |                              | (15,832 | ) |   |   | (19,743 | ) |
| Repurchase                  of common stock                                                             |   |                              | -       |   |   |   | (220 | ) |
| Redemption                  of preferred stock                                                          |   |                              | -       |   |   |   | (14,072 | ) |
| Dividends                  paid                                                                         |   |                              | (2,005  | ) |   |   | (2,373 | ) |
| Net                  cash and cash equivalents used for financing activities                            |   |                              | (27,333 | ) |   |   | (62,963 | ) |
| Net                  increase in cash and cash equivalents                                              |   |                              | 5,676   |   |   |   | 2,457 |   |
| Cash                  and cash equivalents at beginning of period                                       |   |                              | 56,880  |   |   |   | 45,235 |   |
| Cash                  and cash equivalents at end of period                                             |   | $                                 | 62,556  |   |   | $ | 47,692 |   |
|                                                                                                    |   |                              |    |   |   |   |   |   |
|                                                                                                    |   |                              |    |   |   |   |   |   |
| *See                  notes to unaudited condensed consolidated financial                  statements.* |   |                              |    |   |   |   |   |   |

----

**DYNEX        CAPITAL, INC.**

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

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

**NOTE        1 – BASIS OF PRESENTATION**

----

----

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

|                                                                                                                                                      |   | **Three                  Months Ended June 30,** |    |   | **Six                  Months Ended June 30,**                   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------|---------|--------|------------------------------------------------------------------|--------|
|                                                                                                                                                      |   | **2007**                                         |    |   | **2006**                                                         |   |   | **2007** |   |   | **2006** |   |
|                                                                                                                                                      |   | **Income**                                       |    |   | **Weighted-****Average****Number****Of                  Shares** |   |   | **Income** |   |   | **Weighted-****Average****Number****Of                  Shares** |   |   | **Income** |   |   | **Weighted-****Average****Number****Of                  Shares** |   |   | **Income** |   |   | **Weighted-****Average****Number****Of                  Shares** |   |
| Net                  income                                                                                                                               |   | $                                                | 2,702   |   |                                                             |   |   |   | $ | 1,615 |   |   |   |   |   | $ | 4,643 |   |   |   |   |   | $ | 2,828 |   |   |   |   |
| Preferred                  stock charge                                                                                                                   |   |                                             | (1,003  | )      |                                                             |   |   |   |   | (1,003 | ) |   |   |   |   |   | (2,005 | ) |   |   |   |   |   | (2,039 | ) |   |   |   |
| Net                  income to common shareholders                                                                                                        |   | $                                                | 1,699   |   |                                                             |   | 12,136,262 |   |   | $ | 612 |   |   |   | 12,138,469 |   |   | $ | 2,638 |   |   |   | 12,134,715 |   |   | $ | 789 |   |   |   | 12,150,011 |   |
|                                                                                                                                                      |   |                                             |    |   |                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                  income per share:                                                                                                                    |   |                                             |    |   |                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   Basic                                                                                                                                         |   |                                             |    |   |                                                             | $      | 0.14 |   |   |   |   |   |   | $ | 0.05 |   |   |   |   |   |   | $ | 0.22 |   |   |   |   |   |   | $ | 0.06 |   |
|   Diluted                                                                                                                                       |   |                                             |    |   |                                                             | $      | 0.14 |   |   |   |   |   |   | $ | 0.05 |   |   |   |   |   |   | $ | 0.22 |   |   |   |   |   |   | $ | 0.06 |   |
|                                                                                                                                                      |   |                                             |    |   |                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reconciliation                  of shares included in                  calculation of earnings per share due                  to dilutive effect          |   |                                             |    |   |                                                             |
| Expense                  and incremental shares of stock options                                                                                          |   | $                                                | – |   |                                                             |   | 3,173 |   |   | $ | – |   |   |   | – |   |   | $ | – |   |   |   | 1,909 |   |   | $ | – |   |   |   | – |   |
|                                                                                                                                                      |   | $                                                | – |   |                                                             |   | 12,139,435 |   |   | $ | – |   |   |   | – |   |   | $ | – |   |   |   | 12,136,627 |   |   | $ | – |   |   |   | – |   |
|                                                                                                                                                      |   |                                             |    |   |                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reconciliation                  of shares not included                  in calculation of earnings per                  share due to anti-dilutive effect |   |                                             |    |   |                                                             |
| Series                  D preferred stock                                                                                                                 |   | $                                                | 1,003   |   |                                                             |   | 4,221,539 |   |   | $ | 1,003 |   |   |   | 4,221,539 |   |   | $ | 2,005 |   |   |   | 4,221,539 |   |   | $ | 2,039 |   |   |   | 4,291,510 |   |
| Expense                  and incremental shares of stock options                                                                                          |   |                                             | – |   |                                                             |   | 1,417 |   |   |   | – |   |   |   | 16,360 |   |   |   | – |   |   |   | 3,061 |   |   |   | – |   |   |   | 18,151 |   |
|                                                                                                                                                      |   | $                                                | 1,003   |   |                                                             |   | 4,222,956 |   |   | $ | 1,003 |   |   |   | 4,237,899 |   |   | $ | 2,005 |   |   |   | 4,224,600 |   |   | $ | 2,039 |   |   |   | 4,309,661 |   |
|                                                                                                                                                      |   |                                             |    |   |                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

**NOTE        3 – SECURITIZED FINANCE RECEIVABLES**

|                                                                             |   | **June                  30,****2007** |    |   | **December                  31, 2006** |   |
|----------------------------------------------------------------------------------|--------|---------------------------------------|---------|--------|----------------------------------------|--------|
| Collateral:                                                                      |   |                                  |    |   |                                   |   |
| Commercial                  mortgage loans                                       |   | $                                     | 209,075 |   |                                   | $      | 225,463 |   |
| Single-family                  mortgage loans                                    |   |                                  | 97,855  |   |                                   |   | 116,060 |   |
|                                                                             |   |                                  | 306,930 |   |                                   |   | 341,523 |   |
| Funds                  held by trustees, including funds held for defeased loans |   |                                  | 13,570  |   |                                   |   | 7,351 |   |
| Accrued                  interest receivable                                     |   |                                  | 2,216   |   |                                   |   | 2,380 |   |
| Unamortized                  discounts and premiums, net                         |   |                                  | (404    | )      |                                   |   | (455 | ) |
| Loans,                  at amortized cost                                        |   |                                  | 332,312 |   |                                   |   | 350,799 |   |
| Allowance                  for loan losses                                       |   |                                  | (2,805  | )      |                                   |   | (4,495 | ) |
|                                                                             |   | $                                     | 319,507 |   |                                   | $      | 346,304 |   |

----

**NOTE        4 – ALLOWANCE FOR LOAN LOSSES**

|                                                    |   | **Three                  Months Ended****June                  30,** |   |   | **Six                  Months Ended****June                  30,** |   |
|---------------------------------------------------------|--------|----------------------------------------------------------------------|--------|--------|--------------------------------------------------------------------|--------|
|                                                    |   | **2007**                                                             |   |   | **2006**                                                           |   |   | **2007** |   |   | **2006** |   |
| Allowance                  at beginning of period       |   | $                                                                    | 3,538  |   |                                                               | $      | 18,913 |   |   | $ | 4,495 |   |   | $ | 19,035 |   |
| Recapture                  of provision for loan losses |   |                                                                 | (702   | )      |                                                               |   | – |   |   |   | (1,225 | ) |   |   | (119 | ) |
| Charge-offs,                  net of recoveries         |   |                                                                 | (31    | )      |                                                               |   | (4,044 | ) |   |   | (465 | ) |   |   | (4,047 | ) |
| Allowance                  at end of period             |   | $                                                                    | 2,805  |   |                                                               | $      | 14,869 |   |   | $ | 2,805 |   |   | $ | 14,869 |   |

**NOTE        5 — INVESTMENT IN JOINT VENTURE**

**NOTE        6 – SECURITIES**

|                                                 |   | **June                  30, 2007** |   |   | **December                  31, 2006**       |   |
|------------------------------------------------------|--------|------------------------------------|--------|--------|----------------------------------------------|--------|
|                                                 |   | **Fair****Value**                  |   |   | **Effective                  Interest Rate** |   |   | **Fair****Value** |   |   | **Effective                  Interest Rate** |   |
| Securities,                  available-for-sale:     |   |                               |   |   |                                         |   |   |   |   |   |   |   |
| Adjustable-rate                  mortgage securities |   | $                                  | 2,048  |   |                                         |   | 5.44 | % |   | $ | – |   |   |   | – | % |
| Fixed-rate                  mortgage securities      |   |                               | 9,839  |   |                                         |   | 7.16 | % |   |   | 11,362 |   |   |   | 7.22 | % |
| Equity                  securities                   |   |                               | 1,151  |   |                                         |   |   |   |   |   | 1,151 |   |   |   |   |   |
|                                                 |   |                               | 13,038 |   |                                         |   |   |   |   |   | 12,513 |   |   |   |   |   |
| Gross                  unrealized gains              |   |                               | 434    |   |                                         |   |   |   |   |   | 636 |   |   |   |   |   |
| Gross                  unrealized losses             |   |                               | (26    | )      |                                         |   |   |   |   |   | (6 | ) |   |   |   |   |
|                                                 |   | $                                  | 13,446 |   |                                         |   |   |   |   | $ | 13,143 |   |   |   |   |   |

----

**NOTE        7 – OTHER INVESTMENTS**

|                                                           |   | **June                  30,****2007** |   |   | **December                  31,****2006** |   |
|----------------------------------------------------------------|--------|---------------------------------------|--------|--------|-------------------------------------------|--------|
| Delinquent                  property tax receivable securities |   | $                                     | 1,712  |   |                                      | $      | 2,227 |   |
| Real                  estate owned                             |   |                                  | 527    |   |                                      |   | 575 |   |
|                                                           |   | $                                     | 2,239  |   |                                      | $      | 2,802 |   |

**NOTE        8 – OTHER LOANS**

|                                                                     |   | **June                  30,****2007** |   |   | **December                  31, 2006** |   |
|--------------------------------------------------------------------------|--------|---------------------------------------|--------|--------|----------------------------------------|--------|
| Single-family                  mortgage loans                            |   | $                                     | 2,819  |   |                                   | $      | 3,345 |   |
| Multifamily                  and commercial mortgage loan participations |   |                                  | 945    |   |                                   |   | 962 |   |
|                                                                     |   |                                  | 3,764  |   |                                   |   | 4,307 |   |
| Unamortized                  discounts                                   |   |                                  | (326   | )      |                                   |   | (378 | ) |
|                                                                     |   | $                                     | 3,438  |   |                                   | $      | 3,929 |   |

**NOTE        9 –SECURITIZATION FINANCING**

----

|                                             |   | **June                  30, 2007**     |      |   | **December                  31, 2006**       |   |
|--------------------------------------------------|--------|----------------------------------------|-----------|--------|----------------------------------------------|--------|
|                                             |   | **Bonds                  Outstanding** |      |   | **Range                  of Interest Rates** |   |   | **Bonds                  Outstanding** |   |   | **Range                  of Interest Rates** |   |
| Fixed-rate                  classes              |   | $                                      | 196,982   |   |                                         |   | 6.6%-8.8 | % |   | $ | 206,478 |   |   |   | 6.6%-8.8 | % |
| Accrued                  interest payable        |   |                                   | 1,362     |   |                                         |   |   |   |   |   | 1,428 |   |   |   |   |   |
| Deferred                  costs                  |   |                                   | (2,226    | )      |                                         |   |   |   |   |   | (2,848 | ) |   |   |   |   |
| Unamortized                  bond premium, net   |   |                                   | 4,928     |   |                                         |   |   |   |   |   | 6,506 |   |   |   |   |   |
|                                             |   | $                                      | 201,046   |   |                                         |   |   |   |   | $ | 211,564 |   |   |   |   |   |
|                                             |   |                                   |      |   |                                         |   |   |   |   |   |   |   |   |   |   |   |
| Range                  of stated maturities      |   |                                   | 2024-2027 |   |                                         |   |   |   |   |   | 2024-2027 |   |   |   |   |   |
| Estimated                  weighted average life |   | 3.9                  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**

|                                         | **Options                  Granted** | **SARs                  Granted**    |
|----------------------------------------------|--------------------------------------|--------------------------------------|
|                                         | **May                  25, 2007**    | **January                  3, 2005** | **January                  12, 2006** | **January                  3, 2007** |
| Expected                  volatility         | 15.7%                                | 16.3%–17.0%                    | 16.3%–20.6% | 19.8%–26.4% |
| Weighted-average                  volatility | 15.7%                                | 16.3%                                | 18.0% | 21.6% |
| Expected                  dividends          | 0%                                   | 0%                                   | 0% | 0% |
| Expected                  term (in months)   | 30                                   | 14                                   | 13 | 11 |
| Risk-free                  rate              | 4.80%                                | 4.92%                                | 4.94% | 4.96% |

**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)*** |   | **June                  30,****2007** |    |   | **December                  31, 2006** |   |
|---------------------------------------------------------------------|--------|---------------------------------------|---------|--------|----------------------------------------|--------|
| Investments:                                                        |   |                                  |    |   |                                   |   |
| Securitized                  mortgage loans                         |   | $                                     | 319,507 |   |                                   | $      | 346,304 |   |
| Investment                  in joint venture                        |   |                                  | 39,296  |   |                                   |   | 37,388 |   |
| Securities                                                          |   |                                  | 13,446  |   |                                   |   | 13,143 |   |
| Other                  investments                                  |   |                                  | 2,239   |   |                                   |   | 2,802 |   |
| Other                  loans                                        |   |                                  | 3,438   |   |                                   |   | 3,929 |   |
|                                                                |   |                                  |    |   |                                   |   |   |   |
| Securitization                  financing                           |   |                                  | 201,046 |   |                                   |   | 211,564 |   |
| Repurchase                  agreements                              |   |                                  | 80,965  |   |                                   |   | 95,978 |   |
| Obligation                  under payment agreement                 |   |                                  | 16,829  |   |                                   |   | 16,299 |   |
|                                                                |   |                                  |    |   |                                   |   |   |   |
| Shareholders’                  equity                         |   |                                  | 139,386 |   |                                   |   | 136,538 |   |
| Common                  book value per share                        |   |                                  | 8.01    |   |                                   |   | 7.78 |   |

*Securitized        finance receivables.*

*Investment        in joint venture.*

*Securities.*

*Other        investments*

*Other        loans*

*S*
*ecuritization        financing.  *

----

*Repurchase        Agreements. *

*Obligation        under payment agreement*

*Shareholders’        equity*

*Supplemental        Discussion of Investments*

----

|                                                           |   | **June                  30, 2007**           |    |
|----------------------------------------------------------------|--------|----------------------------------------------|---------|
| *(amounts                  in thousands)*                      |   | **Amortized****cost                  basis** |    |   | **Financing** |   |   | **Net                  basis** |   |   | **Fair                  value****of                  net basis** |   |
| Securitized                  finance receivables:** **(1) |   |                                         |    |   |   |   |   |   |   |   |   |   |
| Single                  family mortgage loans (2)              |   | $                                            | 99,683  |   |   | $ | 80,965 |   |   | $ | 18,718 |   |   | $ | 19,097 |   |
| Commercial                  mortgage loans                     |   |                                         | 222,629 |   |   |   | 201,046 |   |   |   | 21,583 |   |   |   | 20,553 |   |
| Allowance                  for loan losses                     |   |                                         | (2,805  | ) |   |   | – |   |   |   | (2,805 | ) |   |   | – |   |
|                                                           |   |                                         | 319,507 |   |   |   | 282,011 |   |   |   | 37,496 |   |   |   | 39,650 |   |
| Securities:                  (3)                               |   |                                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment                  grade single-family                |   |                                         | 11,478  |   |   |   | – |   |   |   | 11,478 |   |   |   | 11,608 |   |
| Non-investment                  grade single-family            |   |                                         | 324     |   |   |   | – |   |   |   | 324 |   |   |   | 510 |   |
| Equity                  and other                              |   |                                         | 1,237   |   |   |   | – |   |   |   | 1,237 |   |   |   | 1,328 |   |
|                                                           |   |                                         | 13,039  |   |   |   | – |   |   |   | 13,039 |   |   |   | 13,446 |   |
|                                                           |   |                                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment                  in joint venture(4)                |   |                                         | 39,296  |   |   |   | – |   |   |   | 39,296 |   |   |   | 38,628 |   |
| Obligation                  under payment agreement(1)         |   |                                         | – |   |   |   | 16,829 |   |   |   | (16,829 | ) |   |   | (16,729 | ) |
| Other                  loans and investments(3)                |   |                                         | 5,889   |   |   |   | – |   |   |   | 5,889 |   |   |   | 6,360 |   |
| Net                  unrealized gain                           |   |                                         | 195     |   |   |   | – |   |   |   | 195 |   |   |   | – |   |
|                                                           |   |                                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                                          |   | $                                            | 377,926 |   |   | $ | 298,840 |   |   | $ | 79,086 |   |   | $ | 81,355 |   |
|                                                           |   |                                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |

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

|   | (3) | 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 June 30, 2007, and incorporate the resetting of the interest                  rates                  on the adjustable rate assets to a level consistent with projected                  prevailing rates. Increases or decreases in interest rates and                  index                  levels from those used would impact the calculation of fair value,                  as                  would differences in actual prepayment speeds and credit losses                  versus the                  assumptions set forth above. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

----

|                                          | **Fair                  Value Assumptions**             |                           |
|-----------------------------------------------|---------------------------------------------------------|--------------------------------|
| **Loan                  type**                | **Weighted-average                  prepayment speeds** | **Losses**                     | **Weighted-average****discount                  rate(1)** | **Weighted                  average****maturity                  (months)** | *(amounts                  in thousands)***200****7****Cash Flow****(**2**)** |
|                                          |                                                    |                           |   |   |   |
| Single-family                  mortgage loans | 30%                  CPR                                | 0.2%                  annually | 16% | 195 | $      5,078 |
|                                          |                                                    |                           |   |   |   |
| Commercial                  mortgage loans(3) | (4)                                                     | 0.8%                  annually | 16% | (**5**) | $      1,222 |

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

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

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

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

| (5) | Cash                  flow termination dates are modeled based on the repayment dates                  of the                  loans or optional redemption dates of the underlying securitization                  financing bonds.  The assumed weighted average maturity for MCA1                  and CCA2 is 133 months and 83 months,                  respectively. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ***(amounts                  in thousands)***                     |   | **June                  30, 2007** |   |
|-------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                              |   |                               |   |
| Investments:                                                      |   |                               |   |
| AAA                  rated and agency MBS fixed income securities |   |                               | 19,764 |   |
| AA                  and A rated fixed income securities           |   |                               | 1,246  |   |
| Unrated                  and non-investment grade                 |   |                               | 7,704  |   |
| Securitization                  over-collateralization            |   |                               | 11,076 |   |
| Investment                  in joint venture                      |   |                               | 39,296 |   |
|                                                              |   | $                                  | 79,086 |   |
|                                                              |   |                               |   |   |

**Supplemental        Discussion of Common Equity Book Value**

----

|                                                                                                   |   | **June                  30, 2007** |    |
|--------------------------------------------------------------------------------------------------------|--------|------------------------------------|---------|
| ***(amounts                  in thousands)***                                                          |   | **Book                  Value**    |    |   | **Adjusted                  Common Equity Book Value** |   |
|                                                                                                   |   |                               |    |   |   |   |
| Total                  investment assets (per table above)                                             |   | $                                  | 79,086  |   |   | $ | 81,355 |   |
| Cash                  and cash equivalents                                                             |   |                               | 62,556  |   |   |   | 62,556 |   |
| Other                  assets and liabilities, net                                                     |   |                               | (2,256  | ) |   |   | (2,256 | ) |
|                                                                                                   |   |                               | 139,386 |   |   |   | 141,656 |   |
| Less:  Preferred                  stock redemption value                                     |   |                               | (42,215 | ) |   |   | (42,215 | ) |
| Common                  equity book value and adjusted book value                                      |   | $                                  | 97,171  |   |   | $ | 99,441 |   |
|                                                                                                   |   |                               |    |   |   |   |   |   |
| Common                  equity book value per share and adjusted book value per                  share |   | $                                  | 8.01    |   |   | $ | 8.19 |   |

**RESULTS        OF OPERATIONS**

| ***(amounts                  in thousands except per share information)*** |   | **Three                  Months Ended****June                  30,** |   |   | **Six                  Months Ended****June                  30,** |   |
|----------------------------------------------------------------------------|--------|----------------------------------------------------------------------|--------|--------|--------------------------------------------------------------------|--------|
|                                                                       |   | **2007**                                                             |   |   | **2006**                                                           |   |   | **2007** |   |   | **2006** |   |
|                                                                       |   |                                                                 |   |   |                                                               |   |   |   |   |   |   |   |
| Net                  interest income                                       |   | $                                                                    | 2,963  |   |                                                               | $      | 2,543 |   |   | $ | 5,424 |   |   | $ | 4,831 |   |
| Recapture                  of provision for loan losses                    |   |                                                                 | 702    |   |                                                               |   | – |   |   |   | 1,225 |   |   |   | 119 |   |
| Net                  interest income after provision for loan losses       |   |                                                                 | 3,665  |   |                                                               |   | 2,543 |   |   |   | 6,649 |   |   |   | 4,950 |   |
| Equity                  in earnings of joint venture                       |   |                                                                 | 672    |   |                                                               |   | – |   |   |   | 1,302 |   |   |   | – |   |
| Other                  (expense) income                                    |   |                                                                 | (478   | )      |                                                               |   | 121 |   |   |   | (1,018 | ) |   |   | 230 |   |
| General                  and administrative expenses                       |   |                                                                 | (1,163 | )      |                                                               |   | (1,165 | ) |   |   | (2,290 | ) |   |   | (2,492 | ) |
| Net                  income                                                |   |                                                                 | 2,702  |   |                                                               |   | 1,615 |   |   |   | 4,643 |   |   |   | 2,828 |   |
| Preferred                  stock charge                                    |   |                                                                 | (1,003 | )      |                                                               |   | (1,003 | ) |   |   | (2,005 | ) |   |   | (2,039 | ) |
| Net                  income to common shareholders                         |   |                                                                 | 1,699  |   |                                                               |   | 612 |   |   |   | 2,638 |   |   |   | 789 |   |
|                                                                       |   |                                                                 |   |   |                                                               |   |   |   |   |   |   |   |   |   |   |   |
| Net                  income per common share:                              |   |                                                                 |   |   |                                                               |   |   |   |   |   |   |   |   |   |   |   |
| Basic  and                  diluted                              |   | $                                                                    | 0.14   |   |                                                               | $      | 0.05 |   |   | $ | 0.22 |   |   | $ | 0.06 |   |
|                                                                       |   |                                                                 |   |   |                                                               |   |   |   |   |   |   |   |   |   |   |   |

----

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

*Six        Months Ended June 30, 2007 Compared to Six Months Ended June 30,        2006*

----

**Average        Balances and Effective Interest Rates**

|                                                                                                               |   | **Three                  Months Ended June 30,** |    |
|--------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------|---------|
|                                                                                                               |   | **2007**                                         |    |   | **2006** |   |
| ***(amounts                  in thousands)***                                                                      |   | **Average****Balance**                           |    |   | **Effective****Rate** |   |   | **Average****Balance** |   |   | **Effective****Rate** |   |
| Interest-earning                  assets(1):                                                                       |   |                                             |    |   |   |   |   |   |   |   |   |   |
| Securitized                  finance receivables(2)                  (3)                                           |   | $                                                | 326,560 |   |   |   | 8.38 | % |   | $ | 691,725 |   |   |   | 7.59 | % |
| Securities                                                                                                         |   |                                             | 13,360  |   |   |   | 8.28 | % |   |   | 16,366 |   |   |   | 9.68 | % |
| Other                  loans                                                                                       |   |                                             | 3,516   |   |   |   | 11.86 | % |   |   | 4,909 |   |   |   | 13.33 | % |
| Total                  interest-earning assets                                                                     |   | $                                                | 343,436 |   |   |   | 8.41 | % |   | $ | 713,000 |   |   |   | 7.68 | % |
|                                                                                                               |   |                                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing                  liabilities:                                                                     |   |                                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securitization                  financing(3)                                                                       |   | $                                                | 202,470 |   |   |   | 6.59 | % |   | $ | 491,666 |   |   |   | 8.13 | % |
| Repurchase                  agreements                                                                             |   |                                             | 84,793  |   |   |   | 5.42 | % |   |   | 118,147 |   |   |   | 5.09 | % |
| Total                  interest-bearing liabilities                                                                |   | $                                                | 287,263 |   |   |   | 6.24 | % |   | $ | 609,813 |   |   |   | 7.54 | % |
|                                                                                                               |   |                                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                  interest spread (3)                                                                           |   |                                             |    |   |   |   | 2.17 | % |   |   |   |   |   |   | 0.14 | % |
|                                                                                                               |   |                                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                  yield on average interest-earning investments (3)                  (4)                        |   |                                             |    |   |   |   | 3.19 | % |   |   |   |   |   |   | 1.22 | % |
|                                                                                                               |   |                                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash                  and cash equivalents                                                                         |   | $                                                | 59,640  |   |   |   | 5.28 | % |   | $ | 40,905 |   |   |   | 4.54 | % |
| Net                  yield on average interest-earning assets,including                  cash and cash equivalents |   |                                             |    |   |   |   | 3.50 | % |   |   |   |   |   |   | 1.40 | % |
|                                                                                                               |   |                                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |

| *(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 June 30, 2007 and 2006,                  respectively. |
|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

----

|                                                                                                               |   | **Six                  Months Ended June 30,** |    |
|--------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|---------|
|                                                                                                               |   | **2007**                                       |    |   | **2006** |   |
| ***(amounts                  in thousands)***                                                                      |   | **Average****Balance**                         |    |   | **Effective****Rate** |   |   | **Average****Balance** |   |   | **Effective****Rate** |   |
| Interest-earning                  assets(1):                                                                       |   |                                           |    |   |   |   |   |   |   |   |   |   |
| Securitized                  finance receivables(2)                  (3)                                           |   | $                                              | 334,356 |   |   |   | 8.29 | % |   | $ | 707,712 |   |   |   | 7.63 | % |
| Securities                                                                                                         |   |                                           | 13,252  |   |   |   | 9.07 | % |   |   | 25,938 |   |   |   | 7.23 | % |
| Other                  loans                                                                                       |   |                                           | 3,627   |   |   |   | 12.74 | % |   |   | 5,046 |   |   |   | 10.71 | % |
| Total                  interest-earning assets                                                                     |   | $                                              | 351,235 |   |   |   | 8.37 | % |   | $ | 738,696 |   |   |   | 7.63 | % |
|                                                                                                               |   |                                           |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing                  liabilities:                                                                     |   |                                           |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securitization                  financing(3)                                                                       |   | $                                              | 205,435 |   |   |   | 7.13 | % |   | $ | 499,530 |   |   |   | 8.31 | % |
| Repurchase                  agreements                                                                             |   |                                           | 88,652  |   |   |   | 5.43 | % |   |   | 123,243 |   |   |   | 4.90 | % |
| Total                  interest-bearing liabilities                                                                |   | $                                              | 294,087 |   |   |   | 6.62 | % |   | $ | 622,773 |   |   |   | 7.63 | % |
|                                                                                                               |   |                                           |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                  interest spread (3)                                                                           |   |                                           |    |   |   |   | 1.75 | % |   |   |   |   |   |   | 0.00 | % |
|                                                                                                               |   |                                           |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                  yield on average interest-earning investments (3)                  (4)                        |   |                                           |    |   |   |   | 2.82 | % |   |   |   |   |   |   | 1.20 | % |
|                                                                                                               |   |                                           |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash                  and cash equivalents                                                                         |   | $                                              | 27,703  |   |   |   | 5.25 | % |   | $ | 30,408 |   |   |   | 4.53 | % |
| Net                  yield on average interest-earning assets,including                  cash and cash equivalents |   |                                           |    |   |   |   | 3.17 | % |   |   |   |   |   |   | 1.33 | % |
|                                                                                                               |   |                                           |    |   |   |   |   |   |   |   |   |   |   |   |   |   |

| *(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                  six months ended June 30, 2007 and 2006,                  respectively. |
|-------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

----

|                                             |   | **Three                  Months Ended June 30, 2007 vs. 2006** |   |
|--------------------------------------------------|--------|----------------------------------------------------------------|--------|
| *(amounts                  in thousands)*        |   | **Rate**                                                       |   |   | **Volume** |   |   | **Total** |   |
|                                             |   |                                                           |   |   |   |   |   |   |   |
| Securitized                  finance receivables |   | $                                                              | 1,241  |   |   | $ | (7,529 | ) |   | $ | (6,288 | ) |
| Securities                                       |   |                                                           | (54    | ) |   |   | (65 | ) |   |   | (119 | ) |
| Other                  loans                     |   |                                                           | (16    | ) |   |   | (43 | ) |   |   | (59 | ) |
|                                             |   |                                                           |   |   |   |   |   |   |   |   |   |   |
| Total                  interest income           |   |                                                           | 1,171  |   |   |   | (7,637 | ) |   |   | (6,466 | ) |
|                                             |   |                                                           |   |   |   |   |   |   |   |   |   |   |
| Securitization                  financing        |   |                                                           | (1,620 | ) |   |   | (5,035 | ) |   |   | (6,655 | ) |
| Repurchase                  agreements           |   |                                                           | 94     |   |   |   | (451 | ) |   |   | (357 | ) |
|                                             |   |                                                           |   |   |   |   |   |   |   |   |   |   |
| Total                  interest expense          |   |                                                           | (1,526 | ) |   |   | (5,486 | ) |   |   | (7,012 | ) |
|                                             |   |                                                           |   |   |   |   |   |   |   |   |   |   |
| Net                  interest income             |   | $                                                              | 2,697  |   |   | $ | (2,151 | ) |   | $ | 546 |   |
|                                             |   |                                                           |   |   |   |   |   |   |   |   |   |   |

|                                             |   | **Six                  Months Ended June 30, 2007 vs. 2006** |   |
|--------------------------------------------------|--------|--------------------------------------------------------------|--------|
| *(amounts                  in thousands)*        |   | **Rate**                                                     |   |   | **Volume** |   |   | **Total** |   |
|                                             |   |                                                         |   |   |   |   |   |   |   |
| Securitized                  finance receivables |   | $                                                            | 2,154  |   |   | $ | (15,299 | ) |   | $ | (13,145 | ) |
| Securities                                       |   |                                                         | 198    |   |   |   | (535 | ) |   |   | (337 | ) |
| Other                  loans                     |   |                                                         | 46     |   |   |   | (85 | ) |   |   | (39 | ) |
|                                             |   |                                                         |   |   |   |   |   |   |   |   |   |   |
| Total                  interest income           |   |                                                         | 2,398  |   |   |   | (15,919 | ) |   |   | (13,521 | ) |
|                                             |   |                                                         |   |   |   |   |   |   |   |   |   |   |
| Securitization                  financing        |   |                                                         | (2,611 | ) |   |   | (10,820 | ) |   |   | (13,431 | ) |
| Repurchase                  agreements           |   |                                                         | 300    |   |   |   | (914 | ) |   |   | (614 | ) |
|                                             |   |                                                         |   |   |   |   |   |   |   |   |   |   |
| Total                  interest expense          |   |                                                         | (2,311 | ) |   |   | (11,734 | ) |   |   | (14,045 | ) |
|                                             |   |                                                         |   |   |   |   |   |   |   |   |   |   |
| Net                  interest income             |   | $                                                            | 4,709  |   |   | $ | (4,185 | ) |   | $ | 524 |   |
|                                             |   |                                                         |   |   |   |   |   |   |   |   |   |   |

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

----

*Credit        Exposures*

**Credit        Reserves and Actual Credit Losses**

| *(amounts                  in millions)* |   | **Outstanding                  Loan Principal Balance** |   |   | **Credit                  Exposure, Net****of                  Credit Reserves** |   |   | **Actual****Credit                  Losses** |   |   | **Credit                  Exposure, Net to Outstanding Loan Balance** |   |
|------------------------------------------|--------|---------------------------------------------------------|--------|--------|----------------------------------------------------------------------------------|--------|--------|----------------------------------------------|--------|--------|-----------------------------------------------------------------------|--------|
| 2006,                  Quarter 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 | % |
| 2007,                  Quarter 2         |   |                                                    | 331.6  |   |                                                                             |   | 22.7   |                                         |   |   | 0.0                                                                   |   |   |   | 6.85 | % |

----

**Single-Family        Loan Delinquency Statistics**

|                             | **30                  to 59 days**** delinquent** | **60                  to 89 days****delinquent** | **90                  days and over****delinquent                  (1)** | **Total** |
|----------------------------------|--------------------------------------------------------|--------------------------------------------------|--------------------------------------------------------------------------|-----------|
| 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%     |
| 2007,                  Quarter 2 | 3.83%                                                  | 0.80%                                            | 2.89%                                                                    | 7.52%     |

**Commercial        Loan Delinquency Statistics (1)**

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

| ***(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 (1)** |
|                                                                     |   |                                                                                                       |   |                                                       |   |   |
| +200                                                                     |   | (3.9)%                                                                                                     |   | 14.4%                                                      |   | (0.2)% |
| +100                                                                     |   | (0.7)%                                                                                                     |   | 7.9%                                                       |   | (0.0)% |
| Base                                                                     |   | –                                                                                                    |   | –                                                    |   | – |
| -100                                                                     |   | 0.7%                                                                                                       |   | (7.9)%                                                     |   | 0.0% |
| -200                                                                     |   | 3.8%                                                                                                       |   | (14.4)%                                                    |   | 0.2% |

| (1)   | Reflects                  projected change in value based on change in net interest margin                  cash flow                  excluding cash and cash                  equivalents. |
|-----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**Item        4.                      Controls        and Procedures**

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

----

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

**PART        II.  OTHER INFORMATION**

**Item        1.         Legal        Proceedings**

----

**Item        1A.      Risk        Factors**

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

**Item        3.                      Defaults        Upon Senior Securities**

----

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

| **Director**                            |   |   | **For**    | **Withheld** |
|-----------------------------------------|--------|--------|------------|--------------|
|                                    |
| Common                  Share Votes     |
| Thomas                  B. Akin         |   |   | 11,499,348 | 82,925       |
| Daniel                  K. Osborne      |   |   | 11,353,779 | 228,494      |
| Eric                  P. Von der Porten |   |   | 11,499,713 | 82,560       |
|                                    |   |   |       |         |
| Preferred                  Share Votes  |
| Leon                  A. Felman         |   |   | 4,099,803  | 17,429       |
| Barry                  Igdaloff         |   |   | 4,099,701  | 17,531       |
|                                    |   |   |       |         |

**Item        5.                      Other        Information**

**Item        6.                      Exhibits**

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

----

**SIGNATURE**

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

----

**EXHIBIT        INDEX**

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