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**UNITED          STATES**

**SECURITIES        AND EXCHANGE COMMISSION**

**Washington,        DC 20549**

**FORM        10-Q**

**þ**
**Quarterly        Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of        1934**

**For        the quarterly period June 30, 2006**

**o**
**Transition        Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of        1934**

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

**DYNEX        CAPITAL, INC.**

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

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

**Indicate        by check mark whether the registrant (1) has filed all reports required to        be        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during        the        preceding 12 months (or for such shorter period that the registrant was required        to file such reports), and (2) has been subject to such filing requirements        for        the past 90 days.**

**Yes þ No o**

**Indicate        by check mark whether the registrant is a large accelerated filer, an        accelerated filer, or a non-accelerated filer. See definition of “accelerated        filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check        one):**

**Large        accelerated filer o Accelerated        filer o  Non-accelerated        filer þ**

**Indicate        by check mark whether the registrant is a shell company (as defined in Rule        12b-2 of the Act).**

**Yes o No þ**

**On        June 30, 2006, the registrant had 12,130,831shares outstanding of common        stock,        $.01 par value, which is the registrant’s only class of common        stock.**

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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, 2006 (unaudited) and December                31,                2005                                                                      | 1      |
|                    |                                 |                                                                                                                                                                                                       |   |
|                    |                                 | Condensed                Consolidated Statements of Operations and Comprehensive Income for                the                three and six months ended June 30, 2006 and 2005                (unaudited) | 2      |
|                    |                                 |                                                                                                                                                                                                       |   |
|                    |                                 | Condensed                Consolidated Statements of Cash Flows for the six months ended June                30,                2006 and 2005 (unaudited)                                                   | 3      |
|                    |                                 |                                                                                                                                                                                                       |   |
|                    |                                 | Notes                to Condensed Consolidated Financial Statements                (unaudited)                                                                                                             | 4      |
|                    |                                 |                                                                                                                                                                                                       |   |
|                    | Item                2.               | Management’s                Discussion and Analysis of Financial Condition and Results of                Operations                                                                                  | 12     |
|                    |                                 |                                                                                                                                                                                                       |   |
|                    | Item                3.               | Quantitative                and Qualitative Disclosures about Market Risk                                                                                                                                  | 26     |
|                    |                                 |                                                                                                                                                                                                       |   |
|                    | Item                4.               | Controls                and Procedures                                                                                                                                                                     | 27     |
|                    |                                 |                                                                                                                                                                                                       |   |
| PART                II. | OTHER                INFORMATION     |                                                                                                                                                                                                       |
|                    |                                 |                                                                                                                                                                                                       |   |
|                    | Item                1.               | Legal                Proceedings                                                                                                                                                                      | 28     |
|                    |                                 |                                                                                                                                                                                                       |   |
|                    | Item                1A.              | Risk                Factors                                                                                                                                                                                | 28     |
|                    |                                 |                                                                                                                                                                                                       |   |
|                    | Item                2.               | Unregistered                Sales of Equity Securities and Use of Proceeds                                                                                                                                 | 29     |
|                    |                                 |                                                                                                                                                                                                       |   |
|                    | Item                3.               | Defaults                Upon Senior Securities                                                                                                                                                             | 29     |
|                    |                                 |                                                                                                                                                                                                       |   |
|                    | Item                4.               | Submission                of Matters to a Vote of Security Holders                                                                                                                                         | 29     |
|                    |                                 |                                                                                                                                                                                                       |   |
|                    | Item                5.               | Other                Information                                                                                                                                                                           | 30     |
|                    |                                 |                                                                                                                                                                                                       |   |
|                    | Item                6.               | Exhibits                                                                                                                                                                                                   | 30     |
|                    |                                 |                                                                                                                                                                                                       |   |
| Signature               | 31                                   |

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**PART      I. FINANCIAL INFORMATION**

**Item      1. Finan****c****ial      Statements**

**DYNEX      CAPITAL, INC.**

**CONDENS****E****D      CONSOLIDATED**

**BALA****N****CE      SHEETS****      (UNAUDITED)**

|                                                                                                    |   | June                30, |     | December                31, |   |
|---------------------------------------------------------------------------------------------------------|--------|-------------------------|----------|-----------------------------|--------|
|                                                                                                    |   | 2006                    |     | 2005                        |   |
|                                                                                                    |   |                    |     |                        |   |
| ASSETS                                                                                                  |   |                    |     |                        |   |
| Cash                and cash equivalents                                                                |   | $                       | 47,692   |                        | $      | 45,235 |   |
| Other                assets                                                                             |   |                    | 4,273    |                        |   | 4,332 |   |
|                                                                                                    |   |                    | 51,965   |                        |   | 49,567 |   |
| Investments:                                                                                            |   |                    |     |                        |   |   |   |
| Securitized                finance receivables, net                                                     |   |                    | 668,143  |                        |   | 722,152 |   |
| Securities                                                                                              |   |                    | 16,186   |                        |   | 24,908 |   |
| Other                investments                                                                        |   |                    | 3,524    |                        |   | 4,067 |   |
| Other                loans                                                                              |   |                    | 4,674    |                        |   | 5,282 |   |
|                                                                                                    |   |                    | 692,527  |                        |   | 756,409 |   |
|                                                                                                    |   |                    |     |                        |   |   |   |
|                                                                                                    |   | $                       | 744,492  |                        | $      | 805,976 |   |
|                                                                                                    |   |                    |     |                        |   |   |   |
| LIABILITIES                AND SHAREHOLDERS' EQUITY                                                     |   |                    |     |                        |   |   |   |
| LIABILITIES                                                                                             |   |                    |     |                        |   |   |   |
| Securitization                financing:                                                                |   |                    |     |                        |   |   |   |
| Non-recourse                securitization financing                                                    |   | $                       | 487,429  |                        | $      | 516,578 |   |
| Repurchase                agreements secured by securitization financing                                |   |                    | 113,488  |                        |   | 133,104 |   |
| Repurchase                agreements secured by securities                                              |   |                    | 84       |                        |   | 211 |   |
| Other                liabilities                                                                        |   |                    | 7,108    |                        |   | 6,749 |   |
|                                                                                                    |   |                    | 608,109  |                        |   | 656,642 |   |
|                                                                                                    |   |                    |     |                        |   |   |   |
| Commitments                and Contingencies (Note 11)                                                  |   |                    |     |                        |   |   |   |
|                                                                                                    |   |                    |     |                        |   |   |   |
| SHAREHOLDERS'                EQUITY                                                                     |   |                    |     |                        |   |   |   |
| Preferred                stock, par value $0.01 per share, 50,000,000 shares                authorized, |   |                    |     |                        |   |   |   |
| 9.5%                Cumulative Convertible Series D,                                                    |   |                    |     |                        |   |   |   |
| 4,221,539                and 5,628,737 shares issued and outstanding, respectively,                     |   |                    |     |                        |   |   |   |
| ($43,218                and $57,624 aggregate liquidation                                               |   |                    |     |                        |   |   |   |
| preference,                respectively)                                                                |   |                    | 41,749   |                        |   | 55,666 |   |
| Common                stock, par value $0.01 per share, 100,000,000 shares                authorized,   |   |                    |     |                        |   |   |   |
| 12,130,831                and 12,163,391 shares issued and outstanding, respectively                    |   |                    | 121      |                        |   | 122 |   |
| Additional                paid-in capital                                                               |   |                    | 366,633  |                        |   | 366,903 |   |
| Accumulated                other comprehensive income                                                   |   |                    | 588      |                        |   | 140 |   |
| Accumulated                deficit                                                                      |   |                    | (272,708 | )                           |   | (273,497 | ) |
|                                                                                                    |   |                    | 136,383  |                        |   | 149,334 |   |
|                                                                                                    |   |                    |     |                        |   |   |   |
|                                                                                                    |   | $                       | 744,492  |                        | $      | 805,976 |   |
|                                                                                                    |   |                    |     |                        |   |   |   |
| *See                notes to unaudited condensed consolidated financial                statements.*     |   |                    |     |                        |   |   |   |

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**DYNEX      CAPITAL, INC.**

**COND****E****N****S****E****D**** ****C****O****NSOLIDATED      STATEMENTS**

**OF      OPERATIONS AND COMPREHENSIVE INCOM****E**** ****(UNAUDITED)**

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

|                                                                                                |   | Three                Months Ended |   | Six                Months Ended |   |
|-----------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                                                                |   | June                30,           |   | June                30,         |   |
|                                                                                                |   | 2006                              |   | 2005                            |   | 2006 |   | 2005 |   |
|                                                                                                |   |                              |   |                            |   |   |   |   |   |
| Interest                income:                                                                     |   |                              |   |                            |   |   |   |   |   |
| Securitized                finance receivables                                                      |   | $                                 | 13,139 |                            | $      | 16,927 |   | $ | 27,025 |   | $ | 38,924 |   |
| Securities                                                                                          |   |                              | 426    |                            |   | 938 |   |   | 973 |   |   | 2,064 |   |
| Other                investments                                                                    |   |                              | 463    |                            |   | 209 |   |   | 690 |   |   | 467 |   |
| Other                loans                                                                          |   |                              | 164    |                            |   | 459 |   |   | 270 |   |   | 1,131 |   |
|                                                                                                |   |                              | 14,192 |                            |   | 18,533 |   |   | 28,958 |   |   | 42,586 |   |
|                                                                                                |   |                              |   |                            |   |   |   |   |   |   |   |   |   |
| Interest                and related expenses:                                                       |   |                              |   |                            |   |   |   |   |   |   |   |   |   |
| Non-recourse                securitization financing                                                |   |                              | 10,201 |                            |   | 15,410 |   |   | 21,189 |   |   | 33,515 |   |
| Repurchase                agreements                                                                |   |                              | 1,519  |                            |   | 436 |   |   | 3,034 |   |   | 1,886 |   |
| Other                                                                                               |   |                              | (71    | )                               |   | (45 | ) |   | (96 | ) |   | (4 | ) |
|                                                                                                |   |                              | 11,649 |                            |   | 15,801 |   |   | 24,127 |   |   | 35,397 |   |
|                                                                                                |   |                              |   |                            |   |   |   |   |   |   |   |   |   |
| Net                interest income                                                                  |   |                              | 2,543  |                            |   | 2,732 |   |   | 4,831 |   |   | 7,189 |   |
| (Provision                for) recapture of loan losses                                             |   |                              | -      |                            |   | (664 | ) |   | 119 |   |   | (2,925 | ) |
|                                                                                                |   |                              |   |                            |   |   |   |   |   |   |   |   |   |
| Net                interest income after provision for loan losses                                  |   |                              | 2,543  |                            |   | 2,068 |   |   | 4,950 |   |   | 4,264 |   |
|                                                                                                |   |                              |   |                            |   |   |   |   |   |   |   |   |   |
| Impairment                charges                                                                   |   |                              | -      |                            |   | (1,586 | ) |   | - |   |   | (1,673 | ) |
| Gain                on sale of investments, net                                                     |   |                              | 116    |                            |   | 9,552 |   |   | 140 |   |   | 9,850 |   |
| Other                income                                                                         |   |                              | 121    |                            |   | 958 |   |   | 230 |   |   | 978 |   |
| General                and administrative expenses                                                  |   |                              | (1,165 | )                               |   | (1,398 | ) |   | (2,492 | ) |   | (2,890 | ) |
|                                                                                                |   |                              |   |                            |   |   |   |   |   |   |   |   |   |
| Net                income                                                                           |   |                              | 1,615  |                            |   | 9,594 |   |   | 2,828 |   |   | 10,529 |   |
| Preferred                stock charge                                                               |   |                              | (1,003 | )                               |   | (1,337 | ) |   | (2,039 | ) |   | (2,674 | ) |
|                                                                                                |   |                              |   |                            |   |   |   |   |   |   |   |   |   |
| Net                income to common shareholders                                                    |   | $                                 | 612    |                            | $      | 8,257 |   | $ | 789 |   | $ | 7,855 |   |
|                                                                                                |   |                              |   |                            |   |   |   |   |   |   |   |   |   |
| Change                in net unrealized gain/(loss) on :                                            |   |                              |   |                            |   |   |   |   |   |   |   |   |   |
| Investments                classified as available-for-sale                                         |   |                              | 84     |                            |   | (465 | ) |   | 448 |   |   | (4,348 | ) |
| Hedge                instruments                                                                    |   |                              | -      |                            |   | 201 |   |   | - |   |   | 584 |   |
|                                                                                                |   |                              |   |                            |   |   |   |   |   |   |   |   |   |
| Comprehensive                income                                                                 |   | $                                 | 1,699  |                            | $      | 9,330 |   | $ | 3,276 |   | $ | 6,765 |   |
|                                                                                                |   |                              |   |                            |   |   |   |   |   |   |   |   |   |
| Net                income per common share:                                                         |   |                              |   |                            |   |   |   |   |   |   |   |   |   |
| Basic                                                                                               |   | $                                 | 0.05   |                            | $      | 0.68 |   | $ | 0.06 |   | $ | 0.65 |   |
| Diluted                                                                                             |   | $                                 | 0.05   |                            | $      | 0.54 |   | $ | 0.06 |   | $ | 0.59 |   |
|                                                                                                |   |                              |   |                            |   |   |   |   |   |   |   |   |   |
| *See                notes to unaudited condensed consolidated financial                statements.* |   |                              |   |                            |   |   |   |   |   |

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**DYNEX      CAPITAL, INC.**

**C****O****NDENS****E****D      CON****S****OLIDATED      STATEMENTS**

**OF      CAS****H****FLOWS**** **
**(UNAUDITED)**

*(amounts      in thousands)*

|                                                                          |   | Six                Months Ended |    |
|-------------------------------------------------------------------------------|--------|---------------------------------|---------|
|                                                                          |   | June                30,         |    |
|                                                                          |   | 2006                            |    | 2005 |   |
| Operating                activities:                                          |   |                            |    |   |   |
| Net                income                                                     |   | $                               | 2,828   |   | $ | 10,529 |   |
| Adjustments                to reconcile net income to cash                    |   |                            |    |   |   |   |   |
| provided                by operating activities:                              |   |                            |    |   |   |   |   |
| (Recapture                of) provision for loan loss                         |   |                            | (119    | ) |   | 2,925 |   |
| Impairment                charges                                             |   |                            | -       |   |   | 1,673 |   |
| Gain                on sale of investments                                    |   |                            | (141    | ) |   | (9,850 | ) |
| Amortization                and depreciation                                  |   |                            | 346     |   |   | 1,106 |   |
| Compensation                expense for stock options                         |   |                            | 104     |   |   | - |   |
| Net                change in other assets and other liabilities               |   |                            | 752     |   |   | 298 |   |
| Net                cash and cash equivalents provided by operating activities |   |                            | 3,770   |   |   | 6,681 |   |
|                                                                          |   |                            |    |   |   |   |   |
|                                                                          |   |                            |    |   |   |   |   |
| Investing                activities:                                          |   |                            |    |   |   |   |   |
| Principal                payments received on investments                     |   |                            | 51,479  |   |   | 66,740 |   |
| Purchase                of securities and other investments                   |   |                            | (16,642 | ) |   | (34,770 | ) |
| Payments                received on securities, other investments and loans   |   |                            | 26,238  |   |   | 29,580 |   |
| Proceeds                from sales of securities and other investments        |   |                            | 1,136   |   |   | 18,374 |   |
| Other                                                                         |   |                            | (561    | ) |   | 179 |   |
| Net                cash and cash equivalents provided by investing activities |   |                            | 61,650  |   |   | 80,103 |   |
|                                                                          |   |                            |    |   |   |   |   |
| Financing                activities:                                          |   |                            |    |   |   |   |   |
| Principal                payments on non-recourse securitization financing    |   |                            | (26,555 | ) |   | (59,656 | ) |
| Net                (repayment of) borrowings under repurchase agreement       |   |                            | (19,743 | ) |   | 142,466 |   |
| Redemption                of securitization financing bonds                   |   |                            | -       |   |   | (195,653 | ) |
| Retirement                of common stock                                     |   |                            | (220    | ) |   | - |   |
| Retirement                of preferred stock                                  |   |                            | (14,072 | ) |   | - |   |
| Dividends                paid                                                 |   |                            | (2,373  | ) |   | (2,674 | ) |
| Net                cash and cash equivalents used for financing activities    |   |                            | (62,963 | ) |   | (115,517 | ) |
| Net                increase (decrease) in cash and cash equivalents           |   |                            | 2,457   |   |   | (28,733 | ) |
| Cash                and cash equivalents at beginning of period               |   |                            | 45,235  |   |   | 52,522 |   |
| Cash                and cash equivalents at end of period                     |   | $                               | 47,692  |   | $ | 23,789 |   |

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**DYNEX      CAPITAL, INC.**

**NOTES      T****O****CONDENSED CONSOLIDATED FINANCIAL STATEMENTS****      (UNAUDITED)**

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

**NOTE      1 - BASIS OF PRESENTATION**

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

|                                                                                                                                                      |   | Three                  Months Ended June 30, |   | Six                  Months Ended June 30,       |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|--------|--------------------------------------------------|--------|
|                                                                                                                                                      |   | 2006                                         |   | 2005                                             |   | 2006 |   | 2005 |   |
|                                                                                                                                                      |   | Income                                       |   | Weighted-AverageNumberOf                  Shares |   | Income |   | Weighted-AverageNumberOf                  Shares |   | Income |   | Weighted-AverageNumberOf                  Shares |   | Income |   | Weighted-AverageNumberOf                  Shares |   |
| Net                  income                                                                                                                               |   | $                                            | 1,615  |                                             |   |   |   | $ | 9,594 |   |   |   |   | $ | 2,828 |   |   |   |   | $ | 10,529 |   |   |   |   |
| Preferred                  stock charge                                                                                                                   |   |                                         | (1,003 | )                                                |   |   |   |   | (1,337 | ) |   |   |   |   | (2,039 | ) |   |   |   |   | (2,674 | ) |   |   |   |
| Net                  income to common shareholders                                                                                                        |   | $                                            | 612    |                                             |   | 12,138,469 |   | $ | 8,257 |   |   | 12,163,061 |   | $ | 789 |   |   | 12,150,011 |   | $ | 7,855 |   |   | 12,162,728 |   |
|                                                                                                                                                      |   |                                         |   |                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                  income per share:                                                                                                                    |   |                                         |   |                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                                                                     |   |                                         |   |                                             | $      | 0.05 |   |   |   |   | $ | 0.68 |   |   |   |   | $ | 0.06 |   |   |   |   | $ | 0.65 |   |
| Diluted                                                                                                                                                   |   |                                         |   |                                             | $      | 0.05 |   |   |   |   | $ | 0.54 |   |   |   |   | $ | 0.06 |   |   |   |   | $ | 0.59 |   |
|                                                                                                                                                      |   |                                         |   |                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reconciliation                  of shares included in calculation of earnings per share due to                  dilutive                  effect          |   |                                         |   |                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Series                  D preferred stock                                                                                                                 |   | $                                            | -      |                                             |   | - |   | $ | (1,337 | ) |   | 5,628,737 |   | $ | - |   |   | - |   | $ | (2,674 | ) |   | 5,628,737 |   |
| Expense                  and incremental shares of stock appreciation rights                                                                              |   |                                         | -      |                                             |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 129 |   |
|                                                                                                                                                      |   | $                                            | -      |                                             |   | - |   | $ | (1,337 | ) |   | 5,628,737 |   | $ | - |   |   | - |   | $ | (2,674 | ) |   | 5,628,866 |   |
|                                                                                                                                                      |   |                                         |   |                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 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 |   | $ | - |   |   | - |   | $ | (2,039 | )   |   | 4,291,510 |   | $ | - |   |   | - |   |
| Expense                  and incremental shares of stock appreciation rights                                                                              |   |                                         | -      |                                             |   | (89,162 | ) |   | - |   |   | - |   |   | - |   |   | (89,757 | ) |   | - |   |   | - |   |
|                                                                                                                                                      |   | $                                            | (1,003 | )                                           |   | 4,132,377 |   | $ | - |   |   | - |   | $ | (2,039 | )   |   | 4,201,753 |   | $ | - |   |   | - |   |
|                                                                                                                                                      |   |                                         |   |                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

----

**NOTE      3 - SECURITIZED FINANCE RECEIVABLES**

|                                                                       |   | June                30, 2006 |    | December                31, 2005 |   |
|----------------------------------------------------------------------------|--------|------------------------------|---------|----------------------------------|--------|
| Collateral:                                                                |   |                         |    |                             |   |
| Commercial                                                                 |   | $                            | 535,528 |                             | $      | 570,199 |   |
| Single-family                                                              |   |                         | 136,954 |                             |   | 161,058 |   |
|                                                                       |   |                         | 672,482 |                             |   | 731,257 |   |
| Funds                held by trustees, including funds held for defeasance |   |                         | 7,456   |                             |   | 6,648 |   |
| Accrued                interest receivable                                 |   |                         | 4,883   |                             |   | 5,114 |   |
| Unamortized                discounts and premiums, net                     |   |                         | (1,809  | )                                |   | (1,832 | ) |
| Loans,                at amortized cost                                    |   |                         | 683,012 |                             |   | 741,187 |   |
| Allowance                for loan losses                                   |   |                         | (14,869 | )                                |   | (19,035 | ) |
|                                                                       |   | $                            | 668,143 |                             | $      | 722,152 |   |

**NOTE      4 - ALLOWANCE FOR LOAN LOSSES**

|                                                         |   | Three                Months Ended June 30, |   | Six                Months Ended June 30, |   |
|--------------------------------------------------------------|--------|--------------------------------------------|--------|------------------------------------------|--------|
|                                                         |   | 2006                                       |   | 2005                                     |   | 2006 |   | 2005 |   |
| Allowance                at beginning of period              |   | $                                          | 18,913 |                                     | $      | 27,681 |   | $ | 19,035 |   | $ | 28,014 |   |
| Provision                for (recapture of) loan losses |   |                                       | -      |                                     |   | 664 |   |   | (119 | ) |   | 2,925 |   |
| Charge-offs,                net of recoveries                |   |                                       | (4,044 | )                                        |   | (499 | ) |   | (4,047 | ) |   | (3,093 | ) |
| Portfolio                sold                                |   |                                       | -      |                                     |   | (11,310 | ) |   | - |   |   | (11,310 | ) |
| Allowance                at end of period                    |   | $                                          | 14,869 |                                     | $      | 16,536 |   | $ | 14,869 |   | $ | 16,536 |   |

----

**NOTE      5 - OTHER INVESTMENTS**

|                                                         |   | June                30, 2006 |   | December                31, 2005 |   |
|--------------------------------------------------------------|--------|------------------------------|--------|----------------------------------|--------|
| Delinquent                property tax receivable securities |   | $                            | 2,804  |                             | $      | 3,220 |   |
| Real                estate owned                             |   |                         | 720    |                             |   | 847 |   |
|                                                         |   | $                            | 3,524  |                             | $      | 4,067 |   |

**NOTE      6 - SECURITIES**

|                                           |   | June                30, 2006 |   | December                31, 2005       |   |
|------------------------------------------------|--------|------------------------------|--------|----------------------------------------|--------|
|                                           |   | FairValue                    |   | Effective                Interest Rate |   | FairValue |   | Effective                Interest Rate |   |
| Securities,                available-for-sale: |   |                         |   |                                   |   |   |   |   |   |
| Fixed-rate                mortgage securities  |   | $                            | 13,307 |                                   |   | 7.29 | % | $ | 22,900 |   |   | 6.14 | % |
| Equity                securities               |   |                         | 2,602  |                                   |   |   |   |   | 1,602 |   |   |   |   |
| Other                securities                |   |                         | -      |                                   |   |   |   |   | 320 |   |   |   |   |
|                                           |   |                         | 15,909 |                                   |   |   |   |   | 24,822 |   |   |   |   |
| Gross                unrealized gains          |   |                         | 446    |                                   |   |   |   |   | 332 |   |   |   |   |
| Gross                unrealized losses         |   |                         | (169   | )                                      |   |   |   |   | (246 | ) |   |   |   |
|                                           |   | $                            | 16,186 |                                   |   |   |   | $ | 24,908 |   |   |   |   |

**NOTE      7 - OTHER LOANS**

|                                                                   |   | June                30, 2006 |   | December                31, 2005 |   |
|------------------------------------------------------------------------|--------|------------------------------|--------|----------------------------------|--------|
| Single-family                mortgage loans                            |   | $                            | 4,210  |                             | $      | 4,825 |   |
| Multifamily                and commercial mortgage loan participations |   |                         | 979    |                             |   | 995 |   |
|                                                                   |   |                         | 5,189  |                             |   | 5,820 |   |
| Unamortized                discounts                                   |   |                         | (515   | )                                |   | (538 | ) |
|                                                                   |   | $                            | 4,674  |                             | $      | 5,282 |   |

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

----

|                                        |   | June                30, 2006     |      | December                31, 2005       |   |
|---------------------------------------------|--------|----------------------------------|-----------|----------------------------------------|--------|
|                                        |   | Bonds                Outstanding |      | Range                of Interest Rates |   | Bonds                Outstanding |   | Range                of Interest Rates |   |
| Fixed-rate                classes           |   | $                                | 483,368   |                                   |   | 6.6%                - 8.8 | % | $ | 509,923 |   |   | 6.6%                - 8.8 | % |
| Accrued                interest payable     |   |                             | 3,257     |                                   |   |   |   |   | 3,438 |   |   |   |   |
| Deferred                costs               |   |                             | (14,547   | )                                      |   |   |   |   | (16,912 | ) |   |   |   |
| Unamortized                net bond premium |   |                             | 15,351    |                                   |   |   |   |   | 20,129 |   |   |   |   |
|                                        |   | $                                | 487,429   |                                   |   |   |   | $ | 516,578 |   |   |   |   |
|                                        |   |                             |      |                                   |   |   |   |   |   |   |   |   |   |
| Range                of stated maturities   |   |                             | 2009-2028 |                                   |   |   |   |   | 2009-2028 |   |   |   |   |
| Number                of series             |   |                             | 3         |                                   |   |   |   |   | 3 |   |   |   |   |

**NOTE      9 - REPURCHASE AGREEMENTS **

**NOTE      10 - PREFERRED STOCK**

----

**NOTE      11 - COMMITMENTS AND CONTINGENCIES**

**NOTE      12 - **
**STOCK      BASED COMPENSATION**

----

|                                                              |   | Three                Months EndedJune                30, 2005 |   | Six                Months Ended June                30, 2005 |   |
|-------------------------------------------------------------------|--------|---------------------------------------------------------------|--------|--------------------------------------------------------------|--------|
| Net                income to common shareholders                  |   | $                                                             | 8,257  |                                                         | $      | 7,855 |   |
| Fair                value method stock based compensation expense |   |                                                          | (84    | )                                                            |   | (100 | ) |
| Pro                forma net income to common shareholders        |   | $                                                             | 8,173  |                                                         | $      | 7,755 |   |
|                                                              |   |                                                          |        |                                                         |   |  |   |
| Net                income per common share:                       |   |                                                          |        |                                                         |   |  |   |
| Basic                - as reported                                |   | $                                                             | 0.68   |                                                         | $      | 0.65 |   |
| Basic                - pro forma                                  |   | $                                                             | 0.67   |                                                         | $      | 0.64 |   |
| Diluted                - as reported                              |   | $                                                             | 0.54   |                                                         | $      | 0.59 |   |
| Diluted                - pro forma                                |   | $                                                             | 0.53   |                                                         | $      | 0.59 |   |
|                                                              |   |                                                          |        |                                                         |   |  |   |

|                                                     |   | Three                  Months Ended |    | Six                  Months Ended                |   |
|----------------------------------------------------------|--------|-------------------------------------|---------|--------------------------------------------------|--------|
|                                                     |   | June                  30, 2006      |    | June                  30, 2006                   |   |
|                                                     |   | Number                  of Shares   |    | Weighted-Average                  Exercise Price |   | Number                  of Shares |   | Weighted-AverageExercise                  Price |   |
| SARs                  outstanding at beginning of period |   |                                | 203,297 |                                             |   | 7.36 |   |   | 126,297 |   |   | 7.81 |   |
| SARs                  granted                            |   |                                | -       |                                             |   | - |   |   | 77,000 |   |   | 6.61 |   |
| SARs                  forfeited or redeemed              |   |                                | -       |                                             |   | - |   |   | - |   |   | - |   |
| SARs                  exercised                          |   |                                | -       |                                             |   | - |   |   | - |   |   | - |   |
| SARs                  outstanding at end of period       |   |                                | 203,297 |                                             |   | 7.36 |   |   | 203,297 |   |   | 7.36 |   |
| SARs                  vested and exercisable             |   |                                | 31,574  |                                             |   | 7.81 |   |   | 31,574 |   |   | 7.81 |   |

----

|                                                        |   | Three                  Months Ended |   | Six                  Months Ended                |   |
|-------------------------------------------------------------|--------|-------------------------------------|--------|--------------------------------------------------|--------|
|                                                        |   | June                  30, 2006      |   | June                  30, 2006                   |   |
|                                                        |   | Number                  of Shares   |   | Weighted-Average                  Exercise Price |   | Number                  of Shares |   | Weighted-Average                  Exercise                  Price |   |
| Options                  outstanding at beginning of period |   |                                | 40,000 |                                             |   | 8.46 |   |   | 40,000 |   |   | 8.46 |   |
| Options                  granted                            |   |                                | 35,000 |                                             |   | 7.43 |   |   | 35,000 |   |   | 7.43 |   |
| Options                  forfeited or redeemed              |   |                                | -      |                                             |   | - |   |   | - |   |   | - |   |
| Options                  exercised                          |   |                                | -      |                                             |   | - |   |   | - |   |   | - |   |
| Options                  outstanding at end of period       |   |                                | 75,000 |                                             |   | 7.98 |   |   | 75,000 |   |   | 7.98 |   |
| Options                  vested and exercisable             |   |                                | 75,000 |                                             |   | 7.98 |   |   | 75,000 |   |   | 7.98 |   |

**NOTE      1**
**3      - RECENT ACCOUNTING PRONOUNCEMENTS**

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

----

**Item      2.** **Mana****g****e****m****e****nt’s      Discussio****n****and Analy****s****is      of Fina****n****cial      Condition and Results of Operations**

**CRITICAL      ACCOUNTING POLICIES**

*Consolidation      of Subsidiaries.*

----

*Impairments.*

*Allowance      for Loan Losses.*

----

**FINANCIAL      CONDITION**

| *(amounts                in thousands except per share data)*                                 |   | June                30, 2006 |    | December                31, 2005 |   |
|-----------------------------------------------------------------------------------------------|--------|------------------------------|---------|----------------------------------|--------|
| Investments:                                                                                  |   |                         |    |                             |   |
| Securitized                finance receivables, net                                           |   | $                            | 668,143 |                             | $      | 722,152 |   |
| Securities                                                                                    |   |                         | 16,186  |                             |   | 24,908 |   |
| Other                loans                                                                    |   |                         | 4,674   |                             |   | 5,282 |   |
| Other                investments                                                              |   |                         | 3,524   |                             |   | 4,067 |   |
|                                                                                          |   |                         |    |                             |   |   |   |
| Non-recourse                securitization financing                                          |   |                         | 487,429 |                             |   | 516,578 |   |
| Repurchase                agreements secured                by securitization financing bonds |   |                         | 113,488 |                             |   | 133,104 |   |
| Repurchase                agreements secured                by securities                     |   |                         | 84      |                             |   | 211 |   |
|                                                                                          |   |                         |    |                             |   |   |   |
| Shareholders’                equity                                                     |   |                         | 136,383 |                             |   | 149,334 |   |
| Common                book value per share                                                    |   |                         | 7.76    |                             |   | 7.65 |   |

*Securitized      finance receivables.*

*Securities.*

*Other      investments*

*Other      loans*

*Non-recourse      s*
*ecuritization      financing. *

*Repurchase      Agreements. *

*Shareholders’      equity*

----

**Supplemental      Discussion of Investments**

| *(amounts                in thousands)*           |   | June                30, 2006        |    |
|---------------------------------------------------|--------|-------------------------------------|---------|
|                                              |   | Amortized                cost basis |    | Financing |   | Net                basis |   | Fair                value of net basis                (1) |   |
| Securitized                finance receivables:   |   |                                |    |   |   |   |   |   |   |
| Single                family mortgage loans       |   | $                                   | 139,456 |   | $ | 113,488 |   | $ | 25,968 |   | $ | 26,597 |   |
| Commercial                mortgage loans          |   |                                | 543,556 |   |   | 487,429 |   |   | 56,127 |   |   | 39,944 |   |
| Allowance                for loan losses          |   |                                | (14,869 | ) |   | - |   |   | (14,869 | ) |   | - |   |
|                                              |   |                                | 668,143 |   |   | 600,917 |   |   | 67,226 |   |   | 66,541 |   |
| Securities:                                       |   |                                |         |   |   |  |   |   |  |   |   |  |   |
| Investment                grade single-family     |   |                                | 12,750  |   |   | 84 |   |   | 12,666 |   |   | 12,751 |   |
| Non-investment                grade single-family |   |                                | 641     |   |   | - |   |   | 641 |   |   | 641 |   |
| Equity                and other                   |   |                                | 2,795   |   |   | - |   |   | 2,795 |   |   | 2,795 |   |
|                                              |   |                                | 16,186  |   |   | 84 |   |   | 16,102 |   |   | 16,187 |   |
|                                              |   |                                |         |   |   |  |   |   |  |   |   |  |   |
| Other                loans and investments        |   |                                | 8,198   |   |   | - |   |   | 8,198 |   |   | 9,356 |   |
|                                              |   |                                |         |   |   |  |   |   |  |   |   |  |   |
| Total                                             |   | $                                   | 692,527 |   | $ | 601,001 |   | $ | 91,526 |   | $ | 92,084 |   |
|                                              |   |                                |         |   |   |  |   |   |  |   |   |  |   |

| *(1)*  | *Fair                  values are based on dealer quotes or bids from independent third                  parties,                  and where dealer quotes are not available fair values are calculated                  as                  the net present value of expected future cash flows, discounted                  at 16%.                  Fair value also includes capital invested in redeemed securitization                  financing bonds. Expected future cash flows were based on the forward                  LIBOR curve as of June 30, 2006, and incorporate the resetting                  of the                  interest rates on the adjustable rate assets to a level consistent                  with                  projected prevailing rates. Expected cash flows were also based                  on                  estimated prepayment speeds and credit losses on the underlying                  loans set                  forth in the table below. Increases or decreases in interest rates                  and                  index levels from those used would impact the calculation of fair                  value,                  as would differences in actual prepayment speeds and credit losses                  versus                  the assumptions set forth                  above.* |
|-------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| * (amounts                in thousands)*               | Fair                Value Assumptions             |               |
|-------------------------------------------------------------|---------------------------------------------------|--------------------|
| Loan                type                                    | Weighted-average                prepayment speeds | Annual Losses | Weighted-AverageDiscount                Rate | Projected                cash flow termination date | Cash                flows received in 2006                (1) |
|                                                        |                                              |               |   |   |   |
| Single-family                mortgage loans                 | 30%                CPR                            | 0.2%               | 16% | Anticipated                final maturity 2024 | $                1,667 |
|                                                        |                                              |               |   |   |   |
| Commercial                mortgage loans                (2) | (3)                                               | 0.8%               | 16% | (4) | $                3,209 |
|                                                        |                                              |               |   |   |   |

| *(1)*  | *Represents                the excess of the cash flows received on the collateral pledged over                the                cash flow requirements of the securitization financing* *bond security.* |
|-------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| *(2)*  | *Includes                loans pledged to three different securitization                trusts.* |
|-------------|--------------------------------------------------------------------------------------------------|

| *(3)*  | *Assumed                CPR speeds generally are governed by underlying pool characteristics,                prepayment lock-out provisions, and yield maintenance provisions.                Loans                currently delinquent in excess of 30 days are assumed liquidated                in month                six.* |
|-------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| *(4)* | *Cash                flow termination dates are modeled based on the repayment dates of                the                loans or optional redemption dates of the underlying securitization                financing bonds.* |
|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| *(amounts                in thousands)*                         |   | June                30, 2006 |   | December                31, 2005 |   |
|-----------------------------------------------------------------|--------|------------------------------|--------|----------------------------------|--------|
|                                                            |   |                         |   |                             |   |
| Cash                and cash equivalents                        |   | $                            | 47,692 |                             | $      | 45,235 |   |
| Investments:                                                    |   |                         |   |                             |   |   |   |
| AAA                rated and agency MBS fixed income securities |   |                         | 23,550 |                             |   | 36,223 |   |
| AA                and A rated fixed income securities           |   |                         | 4,996  |                             |   | 6,480 |   |
| Unrated                and non-investment grade                 |   |                         | 11,834 |                             |   | 11,781 |   |
| Securitization                over-collateralization            |   |                         | 51,146 |                             |   | 52,032 |   |
|                                                            |   | $                            | 91,526 |                             | $      | 106,516 |   |
|                                                            |   |                         |   |                             |   |   |   |

----

**RESULTS      OF OPERATIONS**

| *(amounts                in thousands except per share information)* |   | Three                Months EndedJune                30, |   | Six                Months EndedJune                30, |   |
|----------------------------------------------------------------------|--------|----------------------------------------------------------|--------|--------------------------------------------------------|--------|
|                                                                 |   | 2006                                                     |   | 2005                                                   |   | 2006 |   | 2005 |   |
|                                                                 |   |                                                     |   |                                                   |   |   |   |   |   |
| Net                interest income                                   |   | $                                                        | 2,543  |                                                   | $      | 2,732 |   | $ | 4,831 |   | $ | 7,189 |   |
| (Provision                for) recapture of loan losses              |   |                                                     | -      |                                                   |   | (664 | ) |   | 119 |   |   | (2,925 | ) |
| Net                interest income after provision for losses        |   |                                                     | 2,543  |                                                   |   | 2,068 |   |   | 4,950 |   |   | 4,264 |   |
| Impairment                charges                                    |   |                                                     | -      |                                                   |   | (1,586 | ) |   | - |   |   | (1,673 | ) |
| Gain                on sale of investments, net                      |   |                                                     | 116    |                                                   |   | 9,552 |   |   | 140 |   |   | 9,850 |   |
| General                and administrative expenses                   |   |                                                     | (1,165 | )                                                      |   | (1,398 | ) |   | (2,492 | ) |   | (2,890 | ) |
| Net                income                                            |   |                                                     | 1,615  |                                                   |   | 9,594 |   |   | 2,828 |   |   | 10,529 |   |
| Preferred                stock charge                                |   |                                                     | (1,003 | )                                                      |   | (1,337 | ) |   | (2,039 | ) |   | (2,674 | ) |
| Net                income to common shareholders                     |   |                                                     | 612    |                                                   |   | 8,257 |   |   | 789 |   |   | 7,855 |   |
|                                                                 |   |                                                     |   |                                                   |   |   |   |   |   |   |   |   |   |
| Net                income per common share:                          |   |                                                     |   |                                                   |   |   |   |   |   |   |   |   |   |
| Basic                                                                |   | $                                                        | 0.05   |                                                   | $      | 0.68 |   | $ | 0.06 |   | $ | 0.65 |   |
| Diluted                                                              |   | $                                                        | 0.05   |                                                   | $      | 0.54 |   | $ | 0.06 |   | $ | 0.59 |   |
|                                                                 |   |                                                     |   |                                                   |   |   |   |   |   |   |   |   |   |

----

**Average      Balances and Effective Interest Rates**

|                                                                              |   | Three                Months Ended June 30, |    | Six                Months Ended June 30, |   |
|-----------------------------------------------------------------------------------|--------|--------------------------------------------|---------|------------------------------------------|--------|
|                                                                              |   | 2006                                       |    | 2005                                     |   | 2006 |   | 2005 |   |
| *(amounts                in thousands)*                                           |   | AverageBalance                             |    | EffectiveRate                            |   | AverageBalance |   | EffectiveRate |   | AverageBalance |   | EffectiveRate |   | AverageBalance |   | EffectiveRate |   |
| Interest-earning                assets(1):                                        |   |                                       |    |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securitized                finance receivables(2)                (3)              |   |                  $                    | 684,483 |                                     |   | 7.61 | % |                  $ | 945,090 |   |   | 7.16 | % |                  $ | 700,873 |   |   | 7.65 | % |                  $ | 1,085,971 |   |   | 7.17 | % |
| Cash                                                                              |   |                                       | 38,353  |                                     |   | 4.83 | % |   | 35,841 |   |   | 2.56 | % |   | 27,703 |   |   | 4.98 | % |   | 44,489 |   |   | 2.38 | % |
| Securities                                                                        |   |                                       | 16,365  |                                     |   | 9.68 | % |   | 71,854 |   |   | 5.02 | % |   | 25,938 |   |   | 7.23 | % |   | 72,614 |   |   | 5.33 | % |
| Other                loans                                                        |   |                                       | 4,909   |                                     |   | 13.33 | % |   | 6,486 |   |   | 12.90 | % |   | 5,046 |   |   | 10.71 | % |   | 6,789 |   |   | 13.75 | % |
| Other                investments                                                  |   |                                       | -       |                                     |   | - | % |   | 4,756 |   |   | 19.35 | % |   | - |   |   | - | % |   | 6,075 |   |   | 19.83 | % |
| Total                interest-earning assets                                      |   |                  $                    | 744,110 |                                     |   | 7.55 | % |                  $ | 1,064,027 |   |   | 6.95 | % |                  $ | 759,560 |   |   | 7.56 | % |                  $ | 1,215,938 |   |   | 6.98 | % |
|                                                                              |   |                                       |    |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing                liabilities:                                      |   |                                       |    |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-recourse                securitization financing(3)                           |   |                  $                    | 491,666 |                                     |   | 8.13 | % | $ | 731,625 |   |   | 7.73 | % |                  $ | 499,530 |   |   | 8.31 | % |                  $ | 939,569 |   |   | 6.97 | % |
| Repurchase                agreements secured by securitization financing          |   |                                       | 118,025 |                                     |   | 5.11 | % |   | 123,581 |   |   | 3.12 | % |   | 123,085 |   |   | 4.92 | % |   | 61,790 |   |   | 3.20 | % |
| Repurchase                agreements                                              |   |                                       | 123     |                                     |   | 5.24 | % |   | 57,177 |   |   | 3.02 | % |   | 158 |   |   | 4.96 | % |   | 63,197 |   |   | 2.80 | % |
| Total                interest-bearing liabilities                                 |   |                  $                    | 609,813 |                                     |   | 7.54 | % |                  $ | 912,383 |   |   | 6.81 | % |                  $ | 622,773 |   |   | 7.64 | % |                  $ | 1,064,556 |   |   | 6.50 | % |
| Net                interest spread on all investments(3)                          |   |                                       |    |                                     |   | 0.01 | % |   |   |   |   | 0.14 | % |   |   |   |   | (0.08 | )% |   |   |   |   | 0.48 | % |
| Net                yield on average interest-earning assets(3)                (4) |   |                                       |    |                                     |   | 1.38 | % |   |   |   |   | 1.10 | % |   |   |   |   | 1.30 | % |   |   |   |   | 1.29 | % |

| *(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 of $7,473 and $251 for                  the three                  months ended June 30, 2006 and 2005, respectively, and $7,045 and                  $242 for                  the six months ended June 30, 2006 and 2005,                  respectively.* |
|-------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| *(3)*  | *Effective                  rates are calculated excluding non-interest related securitization                  financing expenses. If included, the effective rate on interest-bearing                  liabilities would be 7.64% and 6.93% for the three months ended                  June 30,                  2006 and 2005, respectively, and 7.75% and 6.65% for the six months                  ended                  June 30, 2006 and 2005,                  respectively.* |
|-------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| *(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, 2006 vs. 2005 |                  |
|------------------------------------------------|--------|----------------------------------------------------------|-----------------------|
| *(amounts                in thousands)*        |   | Rate                                                     |                  | Volume |   | Total |   |
|                                           |   |                                                     |                  |   |   |   |   |
| Securitized                finance receivables |   | $                                                        | 1,                043 |   | $ | (4,913 | ) | $ | (3,870 | ) |
| Cash                and cash equivalents       |   |                                                     | 162                   |   |   | 72 |   |   | 234 |   |
| Securities                                     |   |                                                     | 508                   |   |   | (1,014 | ) |   | (506 | ) |
| Other                loans                     |   |                                                     | 7                     |   |   | (52 | ) |   | (45 | ) |
| Other                investments               |   |                                                     | (115                  | ) |   | (115 | ) |   | (230 | ) |
|                                           |   |                                                     |                       |   |   |  |   |   |  |   |
| Total                interest income           |   |                                                     | 1,605                 |   |   | (6,022 | ) |   | (4,417 | ) |
|                                           |   |                                                     |                       |   |   |  |   |   |  |   |
| Securitization                financing        |   |                                                     | 965                   |   |   | (4,582 | ) |   | (3,617 | ) |
| Repurchase                agreements           |   |                                                     | 222                   |   |   | (656 | ) |   | (434 | ) |
|                                           |   |                                                     |                       |   |   |  |   |   |  |   |
| Total                interest expense          |   |                                                     | 1,187                 |   |   | (5,238 | ) |   | (4,051 | ) |
|                                           |   |                                                     |                       |   |   |  |   |   |  |   |
| Net                interest income             |   | $                                                        | 418                   |   | $ | (784 | ) | $ | 366 |   |

----

|                                           |   | Six                Months Ended June 30, 2006 vs. 2005 |   |
|------------------------------------------------|--------|--------------------------------------------------------|--------|
| *(amounts                in thousands)*        |   | Rate                                                   |   | Volume |   | Total |   |
|                                           |   |                                                   |   |   |   |   |   |
| Securitized                finance receivables |   | $                                                      | 2,555  |   | $ | (14,628 | ) | $ | (12,073 | ) |
| Cash                and cash equivalents       |   |                                                   | 26     |   |   | 135 |   |   | 161 |   |
| Securities                                     |   |                                                   | 601    |   |   | (1,599 | ) |   | (998 | ) |
| Other                loans                     |   |                                                   | (91    | ) |   | (106 | ) |   | (197 | ) |
| Other                investments               |   |                                                   | (301   | ) |   | (301 | ) |   | (602 | ) |
|                                           |   |                                                   |        |   |   |  |   |   |  |   |
| Total                interest income           |   |                                                   | 2,790  |   |   | (16,499 | ) |   | (13,709 | ) |
|                                           |   |                                                   |        |   |   |  |   |   |  |   |
| Securitization                financing        |   |                                                   | 4,084  |   |   | (14,028 | ) |   | (9,944 | ) |
| Repurchase                agreements           |   |                                                   | 375    |   |   | (1,261 | ) |   | (886 | ) |
|                                           |   |                                                   |        |   |   |  |   |   |  |   |
| Total                interest expense          |   |                                                   | 4,459  |   |   | (15,289 | ) |   | (10,830 | ) |
|                                           |   |                                                   |        |   |   |  |   |   |  |   |
| Net                interest income             |   | $                                                      | (1,669 | ) | $ | (1,210 | ) | $ | (2,879 | ) |

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

*Credit      Exposures*

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**Credit      Reserves and Actual Credit Losses**

| *(amounts                in millions)* |   | Outstanding                Loan Principal Balance | ** ** | Credit                Exposure, NetOf                Credit Reserves | ** ** | ActualCredit                Losses |   | Credit                Exposure, Net to Outstanding Loan Balance |   |
|----------------------------------------|--------|---------------------------------------------------|------------|----------------------------------------------------------------------|------------|------------------------------------|--------|-----------------------------------------------------------------|--------|
| 2005,                Quarter 2         |   | $                                                 | 828.9      |                                                                 | $          | 29.0                               |   | $                                                               | 0.5    |   |   | 3.50 | % |
| 2005,                Quarter 3         |   |                                              | 786.5      |                                                                 |       | 29.3                               |   |                                                            | 0.3    |   |   | 3.73 | % |
| 2005,                Quarter 4         |   |                                              | 753.2      |                                                                 |       | 31.0                               |   |                                                            | 0.0    |   |   | 4.12 | % |
| 2006,                Quarter 1         |   |                                              | 724.4      |                                                                 |       | 32.0                               |   |                                                            | 0.5    |   |   | 4.42 | % |
| 2006,                Quarter 2         |   |                                              | 693.8      |                                                                 |       | 33.1                               |   |                                                            | 7.1    |   |   | 4.77 | % |

**Single-Family      Loan Delinquency Statistics**

|                           | 30                to 59 days delinquent | 60                to 89 days delinquent | 90                days and over delinquent                (1) | Total |
|--------------------------------|-----------------------------------------|-----------------------------------------|---------------------------------------------------------------|-------|
| 2005,                Quarter 2 | 4.09%                                   | 0.69%                                   | 2.46%                                                         | 7.24% |
| 2005,                Quarter 3 | 3.33%                                   | 1.43%                                   | 2.24%                                                         | 7.00% |
| 2005,                Quarter 4 | 4.23%                                   | 0.61%                                   | 2.57%                                                         | 7.41% |
| 2006,                Quarter 1 | 4.50%                                   | 0.85%                                   | 2.90%                                                         | 8.25% |
| 2006,                Quarter 2 | 4.51%                                   | 1.09%                                   | 2.68%                                                         | 8.28% |

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**Commercial      Loan Delinquency Statistics**

|                           | 30                to 59 days delinquent | 60                to 89 days delinquent | 90                days and over delinquent(1) | Total |
|--------------------------------|-----------------------------------------|-----------------------------------------|-----------------------------------------------|-------|
| 2005,                Quarter 2 | 0.84%                                   | 0.71%                                   | 5.78%                                         | 7.33% |
| 2005,                Quarter 3 | -%                                      | 1.50%                                   | 6.54%                                         | 8.04% |
| 2005,                Quarter 4 | -%                                      | 0.25%                                   | 6.65%                                         | 6.90% |
| 2006,                Quarter 1 | 1.25%                                   | -%                                      | 6.38%                                         | 7.63% |
| 2006,                Quarter 2 | 1.09%                                   | -%                                      | 5.15%                                         | 6.24% |

***(1)***

*Includes      foreclosures, repossessions and real estate owned.*

**RECENT      ACCOUNTING PRONOUNCEMENTS**

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

----

**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.*

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

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| ·   | 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****.****Quantitati****v****e      and****Q****ualitative      Disclosures ab****o****ut      Market Risk**

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|                                                                 | ** ** | Projected                    Change in Net Interest Margin Cash Flow From Base Case |   | ** **                                             |
|----------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|--------|--------------------------------------------------------|
| Basis                    Point Increase (Decrease) in Interest Rates |       | Excluding                    Cash and Cash Equivalents                              |   | Including                    Cash and Cash Equivalents |   | Projected                    Change in Value, Expressed as a Percentage of Shareholders’                    Equity |
|                                                                 |       |                                                                                |   |                                                   |   |   |
| +200                                                                 |       | (9.2)%                                                                              |   | 2.1%                                                   |   | (0.9)% |
| +100                                                                 |       | (3.5)%                                                                              |   | 1.9%                                                   |   | (0.3)% |
| Base                                                                 |       | -                                                                                   |   | -                                                      |   | - |
| -100                                                                 |       | 0.9%                                                                                |   | (4.0)%                                                 |   | 0.1% |
| -200                                                                 |       | 1.5%                                                                                |   | (8.1)%                                                 |   | 0.1% |

**Item      4.**
**Controls      and Procedures**

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**PART      II. OTHER INFORMATION**

**Item      1. Le****g****al****P****r****o****c****eedings**

**Item      1A. Risk Factors**

----

**Item      2.** **Unregistered      Sales of****E****q****uity      Securities and Use of Proceeds**

| Period                       | Total                Number of Shares Purchased | Average                Price Paid per Share | Total                Number of Shares Purchased as Part of Publicly Announced Plan or                Program | Maximum                Number of Shares That May Yet Be Purchased under the Plan or                Program |
|------------------------------|-------------------------------------------------|---------------------------------------------|--------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------|
| Beginning                    | Ending                                          |                                        |                                                                                                         |                                                                                                       |   |
| April                1, 2006 | April                30, 2006                   | 2,500                                       | $                6.73                                                                                        | 2,500                                                                                                      | 977,200 |
| May                1, 2006   | May                31, 2006                     | 1,200                                       | $                6.84                                                                                        | 1,200                                                                                                      | 976,000 |
| June                1, 2006  | June                30, 2006                    | 8,560                                       | $                6.82                                                                                        | 8,560                                                                                                      | 967,440 |
|                         |                                            |                                        |                                                                                                         |                                                                                                       |   |
|                         |                                            | 32,560                                      | $                6.75                                                                                        | 32,560                                                                                                     | 967,440 |

**Item      3.** **De****f****aults      Upon Seni****o****r      S****e****curities**

**Item      4.** **S****u****bmission      of Matters to a Vote of Security Holders**

| Director                              |   |   | For        | Withheld |
|---------------------------------------|--------|--------|------------|----------|
| Common                Share Votes     |
| Thomas                B. Akin         |   |   | 11,773,158 | 101,944  |
| Daniel                K. Osborne      |   |   | 11,772,447 | 102,655  |
| Eric                P. Von der Porten |   |   | 11,771,217 | 103,885  |
|                                  |   |   |       |     |
| Preferred                Share Votes  |
| Leon                A. Felman         |   |   | 3,921,539  | 1,900    |
| Barry                Igdaloff         |   |   | 3,921,539  | 1,900    |
|                                  |   |   |       |     |

----

**Item      5. Other      Information**

**Item      6.** **Ex****h****i****bits**

| 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. |

----

**SIG****N****ATURE**

|                                 | **DYNEX                CAPITAL, INC.**                                       |
|--------------------------------------|------------------------------------------------------------------------------|
|                                 |                                                                         |
|                                 |                                                                         |
|                                 |                                                                         |
| Date:                August 14, 2006 | /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. |

----