Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

May 15, 2001

10-Q: Quarterly report pursuant to Section 13 or 15(d)

Published on May 15, 2001


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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

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

For the quarter ended March 31, 2001

|_| 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
(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 ninety days.
|_| Yes |X|No

On April 30, 2001, the registrant had 11,444,206 shares of common stock of $.01
value outstanding, 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

Consolidated Balance Sheets at March 31, 2001
(unaudited) and December 31, 2000 1

Consolidated Statements of Operations for the
three months ended March 31, 2001 and 2000
(unaudited) 2

Consolidated Statement of Shareholders' Equity
for the three months ended March 31, 2001
(unaudited) 3

Consolidated Statements of Cash Flows for
the three months ended March 31, 2001 and 2000
(unaudited) 4

Notes to Unaudited Consolidated Financial
Statements 5

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13

Item 3. Quantitative and Qualitative Disclosures about
Market Risk 24


PART II. OTHER INFORMATION

Item 1. Legal Proceedings 26

Item 2. Changes in Securities and Use of Proceeds 26

Item 3. Defaults Upon Senior Securities 26

Item 4. Submission of Matters to a Vote of Security Holders 26

Item 5. Other Information 26

Item 6. Exhibits and Reports on Form 8-K 26


SIGNATURES 27

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

DYNEX CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands except share data)



(Unaudited)
March 31, December 31,
ASSETS 2001 2000
------------------- ------------------

Investments:
Collateral for collateralized bonds $ 2,894,775 $ 3,042,158
Securities 9,357 9,364
Other investments 32,280 42,284
Loans held for sale 3,422 19,102
------------------- ------------------
2,939,834 3,112,908

Cash, including restricted 23,285 26,773
Accrued interest receivable 66 323
Other assets 25,154 19,592
------------------- ------------------
$ 2,988,339 $ 3,159,596
=================== ==================

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES
Non-recourse debt $ 2,713,869 $ 2,856,728
Recourse debt 97,164 134,168
------------------- ------------------
2,811,033 2,990,896

Accrued interest payable 1,110 3,775
Accrued expenses and other liabilities 2,325 7,794
------------------- ------------------
2,814,468 3,002,465
------------------- ------------------

SHAREHOLDERS' EQUITY
Preferred stock, par value $.01 per share, 50,000,000 shares authorized:
9.75% Cumulative Convertible Series A,
1,309,061 issued and outstanding 29,900 29,900
9.55% Cumulative Convertible Series B,
1,912,434 issued and outstanding 44,767 44,767
9.73% Cumulative Convertible Series C,
1,840,000 issued and outstanding 52,740 52,740
Common stock, par value $.01 per share,
100,000,000 shares authorized,
11,446,206 and 11,446,206 issued and outstanding, respectively 114 114
Additional paid-in capital 351,999 351,999
Accumulated other comprehensive loss (119,496) (124,589)
Accumulated deficit (186,153) (197,800)
------------------- ------------------
173,871 157,131
------------------- ------------------
$ 2,988,339 $ 3,159,596
=================== ==================

See notes to unaudited consolidated financial statements.
DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS, UNAUDITED
(amounts in thousands except share data)



Three Months Ended
March 31,
----------------------------------------------------
2001 2000
----------------------- ------------------------


Interest income:
Collateral for collateralized bonds $ 61,113 $ 70,230
Securities 309 1,976
Other investments 1,927 1,512
Loans held for sale or securitization 153 5,374
----------------------- ------------------------
63,502 79,092
----------------------- ------------------------

Interest and related expense:
Non-recourse debt 50,125 56,827
Recourse debt 2,588 8,886
Other 363 1,788
Net advances from Dynex Holding, Inc. - 291
----------------------- ------------------------
53,076 67,792
----------------------- ------------------------

Net interest margin before provision for losses 10,426 11,300
Provision for losses (6,589) (5,321)
----------------------- ------------------------

Net interest margin 3,837 5,979

Net gain (loss) on sales, write-downs, impairment charges and 7,087 (13,433)
litigation
Equity in net loss of Dynex Holding, Inc. - (719)
Other income 295 122
----------------------- ------------------------
11,219 (8,051)

General and administrative expenses (1,843) (2,403)
Net administrative fees and expenses to Dynex Holding, Inc. - (250)
----------------------- ------------------------
Income (loss) before extraordinary item 9,376 (10,704)

Extraordinary item - net gain on extinguishment of debt 2,271 -
----------------------- ------------------------

Net income (loss) after extraordinary item 11,647 (10,704)
Dividends on preferred stock (3,228) (3,228)
----------------------- ------------------------

Net income (loss) to common shareholders $ 8,419 $ (13,932)
======================= ========================
======================= ========================

Net income (loss) per common share before extraordinary item:
Basic $ 0.54 $ (1.22)
======================= ========================
======================= ========================
Diluted $ 0.54 $ (1.22)
======================= ========================
======================= ========================

Net income (loss) per common share after extraordinary item:
Basic $ 0.74 $ (1.22)
======================= ========================
======================= ========================
Diluted $ 0.74 $ (1.22)
======================= ========================
======================= ========================


See notes to unaudited consolidated financial statements.
DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY, UNAUDITED
For the three months ended March 31, 2001
(amounts in thousands)




Accumulated
Additional Other
Preferred Common Paid-in Comprehensive Accumulated
Stock Stock Capital Loss Deficit Total
------------ ------------------------- --------------- --------------- ------------


Balance at December 31, 2000 $ 127,407 $ 114 $ 351,999 $ (124,589) $ (197,800) $ 157,131
------------

Comprehensive income:
Net income - three months ended - - - - 11,647 11,647
March 31, 2001
Change in net unrealized loss on
investments classified as
available-for-sale during the period - - - 5,093 - 5,093
------------ ------------------------- --------------- --------------- ------------
Total comprehensive income 16,740
------------

Balance at March 31, 2001 $ 127,407 $ 114 $ 351,999 $ (119,496) $ (186,153) $ 173,871
============ ========================= =============== =============== ============


See notes to unaudited consolidated financial statements.
DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, UNAUDITED
(amounts in thousands)



Three Months Ended
March 31,
--------------------------------------
2001 2000
------------------ ------------------

Operating activities:
Net income (loss) $ 11,647 $ (10,704)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Provision for losses 6,589 5,321
Net (gain) loss on sales, write-downs, impairment charges and (7,087) 13,433
litigation
Equity in net loss of Dynex Holding, Inc. - 719
Extraordinary item - net gain on extinguishment of debt (2,271) -
Payment received from litigation settlement, net of legal fees 7,111 -
Amortization and depreciation 3,942 4,334
Net change in accrued interest, other assets and other liabilities (14,808) (6,634)
----------------- -----------------
Net cash provided by operating activities 5,123 6,469
----------------- -----------------

Investing activities:
Collateral for collateralized bonds:
Principal payments on collateral 142,581 120,868
Decrease (increase) in accrued interest receivable 257 (399)
Net decrease in funds held by trustee 104 201
Net decrease in loans held for sale or securitization 15,707 6,691
Purchase of other investments - (553)
Payments received on other investments 554 1,758
Proceeds from sales of other investments 233 -
Decrease (increase) in restricted cash 20,301 (2,226)
Payments received on securities 276 13,135
Proceeds from sales of securities - 2,468
Investment in and net advances to Dynex Holding, Inc. - (4,017)
Proceeds from sale of loan operations 9,500 9,500
Capital expenditures (88) -
----------------- -----------------
Net cash provided by investing activities 189,425 147,426
----------------- -----------------

Financing activities:
Collateralized bonds:
Proceeds from issuance of bonds - 78,997
Principal payments on bonds (143,653) (120,034)
Increase in accrued interest payable 437 963
Repayment of senior notes (29,484) (4,980)
Repayment of recourse debt borrowings, net (5,035) (111,916)
----------------- -----------------
Net cash used for financing activities (177,735) (156,970)
----------------- -----------------

Net increase (decrease) in cash 16,813 (3,075)
Unrestricted cash, beginning of period 3,485 18,505
----------------- -----------------
Unrestricted cash, end of period $20,298 $ 15,430
================= =================

Cash paid for interest $ 57,237 $ 66,763
================= =================
================= =================


See notes to unaudited consolidated financial statements.
DYNEX CAPITAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
(amounts in thousands except share data)


NOTE 1--BASIS OF PRESENTATION

The accompanying consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. The consolidated financial statements include the
accounts of Dynex Capital, Inc. and its qualified REIT subsidiaries (together,
"Dynex REIT"). Certain of the Company's operations were previously conducted
through Dynex Holding, Inc. ("DHI"), a taxable affiliate of Dynex REIT. During
2000, Dynex REIT owned all of the outstanding non-voting preferred stock of DHI
representing a 99% economic ownership interest in DHI. The common stock of DHI
represented a 1% economic ownership of DHI and was owned by certain officers of
Dynex REIT. For the three months ended March 31, 2000, DHI was accounted for
under an accounting method similar to the equity method. In November 2000,
certain subsidiaries of DHI were sold to Dynex REIT, and on December 31, 2000,
DHI was liquidated in a taxable transaction into Dynex REIT. As a result of the
liquidation, effectively all of the assets and liabilities of DHI have been
transferred to Dynex REIT as of December 31, 2000. References to the "Company"
mean Dynex Capital, Inc., its consolidated subsidiaries, and, to the extent they
existed, DHI and its consolidated subsidiaries. All significant intercompany
balances and transactions with Dynex REIT's consolidated subsidiaries have been
eliminated in consolidation of Dynex REIT.

In the opinion of management, all material adjustments, consisting of normal
recurring adjustments, considered necessary for a fair presentation of the
consolidated financial statements have been included. The Consolidated Balance
Sheet at March 31, 2001, the Consolidated Statements of Operations for the three
months ended March 31, 2001 and 2000, the Consolidated Statement of
Shareholders' Equity for the three months ended March 31, 2001, the Consolidated
Statements of Cash Flows for the three months ended March 31, 2001 and 2000 and
related notes to consolidated financial statements are unaudited. Operating
results for the three months ended March 31, 2001 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2001. For
further information, refer to the audited consolidated financial statements and
footnotes included in the Company's Form 10-K for the year ended December 31,
2000.

Certain reclassifications have been made to the financial statements for 2000 to
conform to presentation for 2001.

Risks and Uncertainties
Since early 1999, the Company has focused its efforts on conserving its capital
base and repaying its outstanding recourse borrowings. The Company's ability to
execute its fundamental business plan and strategies has been negatively
impacted since the fourth quarter of 1998, when the fixed income markets were
significantly disrupted by the collapse of certain foreign economies.
Specifically, as a result of this disruption, investors in fixed income
securities generally demanded higher yields in order to purchase securities
issued by specialty finance companies and ratings agencies began imposing higher
credit enhancement levels and other requirements on securitizations sponsored by
specialty finance companies like Dynex. The net result of these changes in the
market reduced the Company's ability to compete against larger finance
companies, investment banks and depository institutions, which generally have
not been penalized by investors or ratings agencies when issuing fixed income
securities. In addition, access to interim lenders that provided short-term
funding to support the accumulation of loans for securitization was reduced and
terms of existing facilities were tightened. These lenders began to pressure the
Company to sell or securitize assets to repay amounts outstanding under the
various facilities. As a result of the difficult market environment for
specialty finance companies, during 1999 the Company sold both its manufactured
housing lending/servicing operations and model home purchase/leaseback business.
Additionally, the Company began to phase-out its commercial lending operations;
this phase-out was completed by the end of 2000, including the sale of the
commercial loan servicing portfolio for loans that had been securitized.

On a long-term basis, the Company believes that competitive pressures, including
competing against larger companies which generally have significantly lower
costs of capital and access to both short-term and long-term financing sources,
will generally keep specialty finance companies like Dynex from earning an
adequate risk-adjusted return on its invested capital. The Company's business
operations are essentially limited to the management of its investment portfolio
and the active collection of its portfolio of delinquent property tax
receivables. The Company currently has no loan origination operations, and for
the foreseeable future does not intend to purchase loans or securities in the
secondary market. However, the Company will likely acquire delinquent property
tax receivables in the future.

The Board of the Company initiated a process in the fall of 1999 to evaluate
various courses of action to improve shareholder value given the depressed
prices of the Company's preferred and common stocks. As a result of this
evaluation, the Company entered into a merger agreement in November 2000; such
agreement was subsequently terminated in January 2001 by the Company due to
breaches by the other party. See Note 10 below. On April 2, 2001, the Company
announced it was continuing to explore various courses of action to improve
shareholder value and to provide greater liquidity for the Company's preferred
and common stocks. Such alternatives included, among others: (i) the outright
sale of the Company to a third party; (ii) the sale to a third party of either
"permitted subordinated indebtedness" or "qualified capital stock"; and (iii)
one or more distributions to shareholders as permitted by the indenture to the
Company's July 2002 Senior Notes.

On April 30, 2001, the Company announced a tender offer to purchase up to
$26,000 of its outstanding Series A, Series B and Series C Preferred Stock. The
tender offer provides for the purchase of up to 500,000 shares of Series A
Preferred Stock for a cash purchase price of $12.24 per share, up to 730,250
shares of its Series B Preferred Stock for a cash purchase price of $12.50 per
share, and up to 702,700 shares of Series C Preferred Stock for a cash purchase
price of $15.30 per share. The Company is not presently in negotiations with any
third party regarding the sale of the Company or any investment in the Company.
The Company expects that the tender offer will improve shareholder value and
liquidity.

Cash - Restricted
At March 31, 2001 and December 31, 2000, cash in the aggregate amount of
approximately $2,987 and $23,288, respectively, was held in escrow as collateral
for letters of credit or to cover losses on securities not otherwise covered by
insurance.


NOTE 2--NET INCOME PER COMMON SHARE

Net income per common share is presented on both a basic net income per common
share and diluted net income per common share basis. Diluted net income per
common share assumes the conversion of the convertible preferred stock into
common stock, using the if-converted method, and stock appreciation rights to
the extent that there are rights outstanding, using the treasury stock method,
but only if these items are dilutive. As a result of the two-for-one split in
May 1997 and the one-for-four reverse split in July 2000 of Dynex REIT's common
stock, the preferred stock is convertible into one share of common stock for two
shares of preferred stock
The following table reconciles the numerator and denominator for both the basic
and diluted net income per common share for the three months ended March 31,
2001 and 2000.



- ----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31,

---------------------------------------------------------------------
2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------


Weighted-Average Weighted-Average
Number of Number of
Income Shares Income Shares
--------------- ---------------- ------------- ----------------

Income (loss) before extraordinary item $ 9,376 $ (10,704)
Extraordinary item - net gain on extinguishment of debt 2,271 -
--------------- -------------
Net income (loss) after extraordinary item 11,647 (10,704)
Less: Dividends on preferred stock (3,228) (3,228)
--------------- ------------- ------------- ---------------
Basic and diluted net income (loss) to common
shareholders $ 8,419 11,446,206
$ (13,932) 11,444,15
=============== ============== ============== ================

Net income (loss) per common share before extraordinary item:
Basic $ 0.54 $ (1.22)
============= =============
Diluted $ 0.54 $ (1.22)
============= =============

Net income (loss) per common share after extraordinary item:
Basic $ 0.74 $ (1.22)
============= =============
Diluted $ 0.74 $ (1.22)
============= =============

Reconciliation of anti-dilutive shares:
Dividends and additional shares of preferred stock:
Series A $ 766 654,531 $ 766 654,531
Series B 1,119 956,217 1,119 956,217
Series C 1,343 920,000 1,343 920,000
Expense and incremental shares of stock appreciation
rights - - - 24,539
------------- ------------- --------------
--------------
$ 3,228 2,530,748 $ 3,228 2,555,287
============== ============= ============= ==============

- ----------------------------------------------------------------------------------------------------------------------------------

NOTE 3 -- COLLATERAL FOR COLLATERALIZED BONDS AND SECURITIES

The following table summarizes Dynex REIT's amortized cost basis and fair value
of investments classified as available-for-sale, as of March 31, 2001 and
December 31, 2000, and the related average effective interest rates:



- ------------------------------------------------------------------------------------------------------------------------
March 31, 2001 December 31, 2000
- ------------------------------------------------------------------------------------------------------------------------
Effective Effective
Interest Interest
Fair Value Rate Fair Value Rate
- ------------------------------------------------------------------------------------------------------------------------

Collateral for collateralized bonds:
Amortized cost $ 3,035,785 8.0% $ 3,189,414 7.8%
Allowance for losses (23,789) (25,314)
- ------------------------------------------------------------------------------------------------------------------------
Amortized cost, net 3,011,966 3,164,100
Gross unrealized gains 36,337 37,803
Gross unrealized losses (153,558) (159,745)
- ------------------------------------------------------------------------------------------------------------------------
$ 2,894,775 $ 3,042,158
- ------------------------------------------------------------------------------------------------------------------------

Securities:
Adjustable-rate mortgage securities 4,887 9.4% 5,008 10.9%
Fixed-rate mortgage securities 1,456 11.0% 1,505 9.3%
Derivative and residual securities 5,344 9.9% 5,553 7.9%
- ------------------------------------------------------------------------------------------------------------------------
11,687 12,066
Allowance for losses (55) (55)
-----------------------------------------------------------------------------------------------------------------------
Amortized cost, net 11,632 12,011
Gross unrealized gains 568 411
Gross unrealized losses (2,843) (3,058)
- ------------------------------------------------------------------------------------------------------------------------
$ 9,357 $ 9,364
- ------------------------------------------------------------------------------------------------------------------------


Collateral for collateralized bonds. Collateral for collateralized bonds
consists primarily of securities backed by adjustable-rate and fixed-rate
mortgage loans secured by first liens on single family housing, fixed-rate loans
on multifamily and commercial properties and manufactured housing installment
loans secured by either a UCC filing or a motor vehicle title. All collateral
for collateralized bonds is pledged to secure repayment of the related
collateralized bonds. All principal and interest (less servicing-related fees)
on the collateral is remitted to a trustee and is available for payment on the
collateralized bonds. Dynex REIT's exposure to loss on collateral for
collateralized bonds is generally limited to the amount of collateral pledged to
the collateralized bonds in excess of the amount of the collateralized bonds
issued, as the collateralized bonds issued by the limited-purpose finance
subsidiaries are non-recourse to Dynex REIT.

Dynex REIT did not securitize any collateral through the issuance of
collateralized bonds during the first quarter of 2001.

Securities. Adjustable-rate mortgage securities ("ARM") consist of mortgage
certificates secured by ARM loans. Fixed-rate mortgage securities consist of
mortgage certificates secured by mortgage loans that have a fixed rate of
interest for at least one year from the balance sheet date. Derivative
securities are classes of collateralized bonds, mortgage pass-through
certificates or mortgage certificates that pay to the holder substantially all
interest (i.e., an interest-only security), or substantially all principal
(i.e., a principal-only security). Residual interests represent the right to
receive the excess of (i) the cash flow from the collateral pledged to secure
related mortgage-backed securities, together with any reinvestment income
thereon, over (ii) the amount required for principal and interest payments on
the mortgage-backed securities or repurchase arrangements, together with any
related administrative expenses.

Sale of Securities. Proceeds from sales of securities totaled $ 2,468 for the
three months ended March 31, 2000. There were no security sales during the three
months ended March 31, 2001. See Note 8, Net Gain(Loss) on Sales, Write-downs,
Impairment Charges and Litigation for further discussion.


NOTE 4 - USE OF ESTIMATES

Dynex REIT uses estimates in establishing fair value for its financial
instruments. Estimates of fair value for financial instruments may be based on
market prices provided by certain dealers. Estimates of fair value for certain
other financial instruments including collateral for collateralized bonds, are
determined by calculating the present value of the projected cash flows of the
instruments using appropriate discount rates, prepayment rates and credit loss
assumptions. Discount rates used are those which management believes would be
used by willing buyers of these financial instruments at prevailing market
rates. The discount rate used in the determination of fair value of the
collateral for collateralized bonds at both March 31, 2001 and December 31, 2000
was 16%. Variations in market discount rates, prepayments rates and credit loss
assumptions may materially impact the resulting fair values of the Company's
financial instruments. Estimates of fair value for other financial instruments
are based primarily on management's judgment. Since the fair value of Dynex
REIT's financial instruments is based on estimates, actual gains and losses
recognized may differ from those estimates recorded in the consolidated
financial statements.


NOTE 5 -- RECOURSE DEBT

Dynex REIT utilizes repurchase agreements, notes payable and secured credit
facilities (together, "recourse debt") to finance certain of its investments.
The following table summarizes Dynex REIT's recourse debt outstanding at March
31, 2001 and December 31, 2000:



- ---------------------------------------------------------------------------------------------------------------
March 31, 2001 December 31, 2000
-------------------------- -------------------------


Repurchase agreements $ 29,340 $ 35,015
Credit facility - 2,000
Capital lease obligations 370 430
-------------------------- -------------------------
29,710 37,445

7.875% July 2002 Senior Notes 67,766 97,250
Net unamortized issuance costs (312) (527)
-------------------------- -------------------------
$ 97,164 $ 134,168
- ---------------------------------------------------------------------------------------------------------------


At March 31, 2001 and December 31, 2000, recourse debt consisted of $29,340 and
$35,015, respectively, of repurchase agreements secured by investments and
retained collateralized bonds, none and $2,000, respectively, outstanding under
a revolving credit facility secured by other investments, and $370 and $430,
respectively, of amounts outstanding under a capital lease. The secured
revolving credit facility was extinguished in January 2001. At March 31, 2001,
all recourse debt in the form of repurchase agreements was with Lehman Brothers,
Inc., had overnight or "one-day" maturity, and bears interest at rates indexed
to LIBOR. If Lehman Brothers, Inc. fails to return the collateral, the ultimate
realization of the security by Dynex REIT may be delayed or limited.

As of December 31, 2000, Dynex REIT had $97,250 outstanding of its Senior
Unsecured Notes issued in July 1997 and due July 15, 2002 (the "July 2002
Notes"). On March 30, 2001, the Company entered into an amendment to the related
indenture governing the July 2002 Notes whereby the Company pledged to the
Trustee of the July 2002 Notes substantially all of the Company's unencumbered
assets in its investment portfolio and the stock of its subsidiaries. In
consideration of this pledge, the indenture was further amended to provide for
the release of the Company from certain covenant restrictions in the indenture,
and specifically provided for the Company's ability to make distributions on its
capital stock in an amount not to exceed the sum of (i) $26,000, (ii) the cash
proceeds of any "permitted subordinated indebtedness", (iii) the cash proceeds
of the issuance of any "qualified capital stock", and (iv) any distributions
required in order for the Company to maintain its REIT status. In addition, the
Company entered into a Purchase Agreement with holders of 50.1% of the July 2002
Notes which require the Company to purchase, and such holders to sell, their
respective July 2002 Notes at various discounts prior to maturity based on a
computation of the Company's available cash. On March 30, 2001 the Company
retired $29,484 of July 2002 Notes for $26,536 in cash under the Purchase
Agreement. The discounts provided for under the Purchase Agreement are as
follows: by April 15, 2001, 10%; by July 15, 2001, 8%; by October 15, 2001, 6%;
by January 15, 2002, 4%; by March 1, 2002, 2%; thereafter until maturity, 0%.

At December 31, 2000, Dynex REIT had a secured non-revolving credit facility
under which $66,765 of letters of credit to support tax-exempt bonds had been
issued. These letters of credit were released during the first quarter of 2001,
as a result of the purchase, sale or transfer of the underlying tax-exempt
bonds, and the facility was extinguished.


NOTE 6-- ADOPTION OF FINANCIAL ACCOUNTING STANDARDS

Statement of Financial Accounting Standards ("FAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities", is effective for all fiscal
years beginning after June 15, 2000. FAS No. 133, as amended, establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
Under FAS No. 133, certain contracts that were not formerly considered
derivatives may now meet the definition of a derivative. The Company adopted FAS
No. 133 effective January 1, 2001. The adoption of FAS No. 133 did not have a
significant impact on the financial position, results of operations, or cash
flows of the Company.

In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities" ("FAS No.
140"). FAS No. 140 replaces the Statement of Financial Accounting Standards No.
125 "Accounting for the Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" ("FAS No. 125"). FAS No. 140 revises the
standards for accounting for securitization and other transfers of financial
assets and collateral and requires certain disclosure, but it carries over most
of FAS No. 125 provisions without reconsideration. FAS No. 140 is effective for
transfers and servicing of financial assets and extinguishment of liabilities
occurring after March 31, 2001. FAS No. 140 is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000.
Disclosures about securitization and collateral accepted need not be reported
for periods ending on or before December 15, 2000, for which financial
statements are presented for comparative purposes. FAS No. 140 is to be applied
prospectively with certain exceptions. Other than those exceptions, earlier or
retroactive application of its accounting provision is not permitted. The
Company does not believe the adoption of FAS No. 140 will have a material impact
on its financial statements.


NOTE 7--DERIVATIVE FINANCIAL INSTRUMENTS

Dynex REIT may enter into interest rate swap agreements, interest rate cap
agreements, interest rate floor agreements, financial forwards, financial
futures and options on financial futures ("Interest Rate Agreements") to manage
its sensitivity to changes in interest rates. These Interest Rate Agreements are
intended to provide income and cash flow to offset potential reduced net
interest income and cash flow under certain interest rate environments. At the
inception of the hedge, these instruments are designated as either hedge
positions or trade positions using criteria established in FAS No. 133.

For Interest Rate Agreements designated as hedge instruments, Dynex REIT
evaluates the effectiveness of these hedges against the financial instrument
being hedged under various interest rate scenarios. The effective portion of the
gain or loss on an Interest Rate Protection Agreement designated as a hedge is
reported in accumulated other comprehensive income, and the ineffective portion
of such hedge is reported in income.

As a part of Dynex REIT's interest rate risk management process, Dynex REIT may
be required periodically to terminate hedge instruments. Any realized gain or
loss resulting from the termination of a hedge is amortized into income or
expense of the corresponding hedged instrument over the remaining period of the
original hedge or hedged instrument.

If the underlying asset, liability or commitment is sold or matures, the hedge
is deemed partially or wholly ineffective, or the criteria that was executed at
the time the hedge instrument was entered into no longer exists, the Interest
Rate Agreement is no longer accounted for as a hedge. Under these circumstances,
the accumulated change in the market value of the hedge is recognized in current
income to the extent that the effects of interest rate or price changes of the
hedged item have not offset the hedge results or otherwise previously been
recognized in income.

For Interest Rate Agreements entered into for trading purposes, realized and
unrealized changes in fair value of these instruments are recognized in the
consolidated statements of operations as trading activities in the period in
which the changes occur or when such trade instruments are settled. Amounts
payable to or receivable from counterparties, if any, are included on the
consolidated balance sheets in accrued expenses and other liabilities. During
the three months ended March 31, 2001, the Company entered into three separate
short positions aggregating $1,300,000 on the June 2001, September 2001, and
December 2001 90-day Eurodollar Futures Contracts. The Company entered into
these positions to in effect lock-in its borrowing costs on a forward basis
relative to its floating-rate liabilities. These instruments fail to meet the
hedge criteria of FAS No. 133, and therefore are accounted for on a trading
basis. Changes in market value for these contracts will be recognized in current
period earnings. During the three months ended March 31, 2001, the Company
recognized $246 in income related to these contracts.


NOTE 8 - NET GAIN (LOSS) ON SALES, WRITE-DOWNS, IMPAIRMENT CHARGES
AND LITIGATION

The following table sets forth the composition of net gain (loss) on sales,
write-downs and impairment charges for the three months ended March 31, 2001 and
2000.

- --------------------------------------------------------------------------------
Three months ended March 31,
--------------------------------------------
2001 2000
------------------- --------------------

Phase-out of commercial
production operations 31 (940)
Sales of investments - (12,463)
AutoBond litigation and
AutoBond securities 7,111 -
Other (55) (30)
- --------------------------------------------------------------------------------
$ 7,087 $ (13,433)
- --------------------------------------------------------------------------------

During the three months ending March 31, 2001 the Company resolved litigation
related to AutoBond Acceptance Corporation to the mutual satisfaction of the
parties involved. The Company received $7,111 net of legal fees incurred related
to the litigation. During the three months ended March 31, 2000, the Company
incurred losses of $12,160 related to the writedown of securities sold in April
2000, and $303 related to the sale of securities during the quarter. Also during
the three months ended March 31, 2000, the Company incurred net losses of $940
related to phasing out its commercial production, including losses related to
the sale of commercial loans.


NOTE 9 -- COMMITMENTS

The Company makes various representations and warranties relating to the sale or
securitization of loans. To the extent the Company were to breach any of these
representations or warranties, and such breach could not be cured within the
allowable time period, the Company would be required to repurchase such loans,
and could incur losses. In the opinion of management, no material losses are
expected to result from any such representations and warranties.

The Company has made various representations and warranties relating to the sale
of various production operations. To the extent the Company were to breach any
of these representations or warranties, and such breach could not be cured
within the allowable time period, the Company would be required to cover any
losses and expenses up to certain limits. In the opinion of management, no
material losses are expected to result from any such representations and
warranties.


NOTE 10 -- LITIGATION

On November 7, 2000, the Company entered into an Agreement and Plan of Merger
with California Investment Fund, LLC ("CIF"), for the purchase of all of the
equity securities of the Company for $90,000 (the "Merger Agreement"). The
Merger Agreement obligated CIF to, among other things, deliver to the Company
evidence of commitments for the financing of the acquisition based upon a
predetermined timeline. CIF failed to deliver such evidence of the financing
commitments pursuant to the terms of the Merger Agreement. Pursuant to a letter
dated December 22, 2000, the Company agreed to forebear its right to terminate
the Merger Agreement and extended the timeline. In return, CIF agreed to deliver
written binding financing commitments and evidence of the consent of the holders
of the July 2002 Notes to the merger transaction on or before January 25, 2001.
On January 25, 2001, CIF failed to meet the requirements as set forth in the
Merger Agreement and the letter of December 22, 2000, and the Company terminated
the Merger Agreement effective January 26, 2001 and requested that the escrow
agent release to the Company the $1,000 and 572,178 shares of common stock of
the Company which CIF placed in escrow under the Merger Agreement (the "Escrow
Amount"). On January 29, 2001, the Company filed for Declaratory Judgment in
Federal District Court in the Eastern District of Virginia, Alexandria Division
(the "Court"). CIF has filed a counterclaim and demand for jury trial and asked
for damages of $45,000. On April 19, 2001, based on a motion brought by the
Company, the Court dismissed CIF's claim for $45,000 of damages. The Company
believes that the Agreement is clear that the maximum damages that CIF may
recover from the Company is $2,000. The Company intends to defend itself
vigorously against the counterclaim by CIF, and will seek the release of the
Escrow Amount. The Company does not expect that the resolution of this matter
will have a material effect on its financial statements.

In February 2001, the Company resolved a matter related to AutoBond Acceptance
Corporation to the mutual satisfaction of the parties involved. In connection
with the resolution of this matter, the Company received $7,111, net of related
legal fees.

The Company is also subject to other lawsuits or claims which arise in the
ordinary course of its business, some of which seek damages in amounts which
could be material to the financial statements. Although no assurance can be
given with respect to the ultimate outcome of any such litigation or claim, the
Company believes the resolution of such lawsuits or claims will not have a
material effect on the Company's consolidated balance sheet, but could
materially affect consolidated results of operations in a given year.


NOTE 11 -- RELATED PARTY TRANSACTIONS

During 2000, Dynex REIT had a credit arrangement with DHI whereby DHI and any of
DHI's subsidiaries could borrow funds from Dynex REIT to finance its operations.
Under this arrangement, Dynex REIT could also borrow funds from DHI. The terms
of the agreement allowed DHI and its subsidiaries to borrow up to $50 million
from Dynex REIT at a rate of Prime plus 1.0%. Dynex REIT could borrow up to $50
million from DHI at a rate of one-month LIBOR plus 1.0%. Effective with the
liquidation of DHI at December 31, 2000, this credit agreement was terminated.
Net interest expense under this agreement was $379 for the three months ended
March 31, 2000.

During a portion of 2000, Dynex REIT had a funding agreement with Dynex
Commercial, Inc. ("DCI"), an operating subsidiary of DHI, whereby Dynex REIT
paid DCI a fee for loans transferred to Dynex REIT. Dynex REIT paid DCI $118
under this agreement for the three months ended March 31, 2000.

Dynex REIT has entered into subservicing agreements with Dynex Commercial
Services, Inc. ("DCSI"), and GLS Capital Services, Inc ("GLS") to service
commercial, single family, consumer, manufactured housing loans and property tax
receivables. DCSI and GLS were subsidiaries of DHI in 2000, and are now
subsidiaries of Dynex REIT. For servicing the commercial loans, DSCI receives an
annual servicing fee of 0.02% of the aggregate unpaid principal balance of the
loans. For servicing the property tax receivables, GLS receives an annual
servicing fee of 0.72% of the aggregate unpaid principal balance of the property
tax receivables. Servicing fees paid by Dynex REIT under such agreements were
$82 during the three months ended March 31, 2000.

The Company has made a loan to Thomas H. Potts, president of the Company, as
evidenced by a demand promissory note in the aggregate principal amount of $935
(the "Potts Note"). Mr. Potts directly owns 399,502 shares of common stock of
the Company, all of which have been pledged as collateral to secure the Potts
Note. Interest is charged on the Potts Note at the applicable short-term monthly
applicable federal rate (commonly known as the AFR Rate) as published by the
Internal Revenue Service. As of March 31, 2001, the outstanding balance of the
Potts Note was $671.

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Dynex Capital, Inc. (the "Company") is a financial services company
which invests in a portfolio of securities and investments backed principally by
single family mortgage loans, commercial mortgage loans and manufactured housing
installment loans. Such loans have been funded generally by the Company's loan
production operations or purchased in bulk in the market. Loans funded through
the Company's production operations have generally been pooled and pledged as
collateral using a collateralized bond security structure, which provides
long-term financing for the loans while limiting credit, interest rate and
liquidity risk.

FINANCIAL CONDITION
(amounts in thousands except per share data)

- --------------------------------------------------------------------------------
March 31, 2001 December 31, 2000
- --------------------------------------------------------------------------------
Investments:
Collateral for collateralized bonds $ 2,894,775 $ 3,042,158
Securities 9,357 9,364
Other investments 32,280 42,284
Loans held for sale 3,422 19,102

Non-recourse debt - collateralized bonds 2,713,869 2,856,728
Recourse debt 97,164 134,168

Shareholders' equity 173,871 157,131

- --------------------------------------------------------------------------------

Collateral for collateralized bonds
Collateral for collateralized bonds consists primarily of securities
backed by adjustable-rate and fixed-rate mortgage loans secured by first liens
on single family housing, fixed-rate loans secured by first liens on multifamily
and commercial properties, manufactured housing installment loans secured by
either a UCC filing or a motor vehicle title and property tax receivables. As of
March 31, 2001, the Company had 23 series of collateralized bonds outstanding.
The collateral for collateralized bonds decreased to $2.89 billion at March 31,
2001 compared to $3.04 billion at December 31, 2000. This decrease of $0.15
billion is primarily the result of $143.6 million in paydowns on the collateral.

Securities
Securities consist primarily of adjustable-rate and fixed-rate
mortgage-backed securities. Securities also include derivative and residual
securities. Securities declined slightly during the three months ended March 31,
2001, from paydowns, which was partially offset by the improvement in the market
value of the underlying securities during the quarter.

Other investments
Other investments at March 31, 2001 consists primarily of property tax
receivables. Other investments decreased from $42.3 million at December 31, 2000
to $32.3 million at March 31, 2001. This decrease is primarily the result of the
receipt of the final $9.5 million annual principal payment on the note
receivable from the 1996 sale of the Company's single family mortgage
operations.

Loans held for sale
Loans held for sale, which consists principally of commercial mortgage
and mezzanine loans, decreased from $19.1 million at December 31, 2000 to $3.4
million at March 31, 2001 as the result of the sale of loans during the quarter.
These loans are carried at the lower of cost or market.

Non-recourse debt
Collateralized bonds issued by Dynex REIT are recourse only to the
assets pledged as collateral, and are otherwise non-recourse to Dynex REIT.
Collateralized bonds decreased from $2.9 billion at December 31, 2000 to $2.7
billion at March 31, 2001. This decrease was primarily a result of principal
payments received on the associated collateral pledged which were used to pay
down the collateralized bonds in accordance with the respective indentures.

Recourse debt
Recourse debt decreased to $97.2 million at March 31, 2001 from $134.2
million at December 31, 2000. This decrease was due to a $29.5 million principal
repayment made on the July 2002 notes, $5.7 million of repayments made on
repurchase agreements, and $2.0 million final payment on a secured credit
facility.

Shareholders' equity
Shareholders' equity increased to $173.9 million at March 31, 2001 from
$157.1 million at December 31, 2000. This increase was a combined result of a
$5.1 million decrease in the net unrealized loss on investments
available-for-sale from $124.6 million at December 31, 2000 to $119.5 million at
March 31, 2001 and net income of $11.6 million during the three months ended
March 31, 2001.

RESULTS OF OPERATIONS



- --------------------------------------------------------------------------------------------------
Three Months Ended
March 31,
-----------------------------------
(amounts in thousands except per share information) 2001 2000
- --------------------------------------------------------------------------------------------------


Net interest margin $ 3,837 $ 5,979
Net gain (loss) on sales, write-downs, impairment charges and 7,087 (13,433)
litigation
General and administrative expenses 1,843 2,403
Extraordinary item - gain on extinguishment of debt 2,271 -
Net income (loss) before preferred stock dividends 11,647 (10,704)

Basic net income (loss) per common before extraordinary gain $ 0.54 $ (1.22)
Diluted net income (loss) per common before extraordinary gain $ 0.54 $ (1.22)
Basic net income (loss) per common share after extraordinary $ 0.74 $ (1.22)
gain
Diluted net income (loss) per common share after $ 0.74 $ (1.22)
extraordinary gain

Dividends declared per share:
Common $ - $ -
Preferred - -
- --------------------------------------------------------------------------------------------------


Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000.
The increase in net income and net income per common share during the three
months ended March 31, 2001 as compared to the same period in 2000 is primarily
the result of several non-recurring items, including the favorable settlement of
litigation, and an extraordinary gain related to the early extinguishment of
$29.5 million of the Company's July 2002 Notes versus losses in 2000 from the
sale of certain securities. These items were partially offset by a decline in
net interest margin from 2000 to 2001.

Net interest margin for the three months ended March 31, 2001 decreased
to $3.8 million from $6.0 million for the same period for 2000. This decrease
was primarily the result of the decline in average interest-earning assets from
$4.1 billion for the three months ended March 31, 2000 to $3.1 billion for the
three months ended March 31, 2001. In addition, provision for losses increased
to $6.6 million during the three months ended March 31, 2001 compared to $5.3
million during the three months ended March 31, 2000. This increase in provision
for losses was a result of increasing the reserve for probable losses on various
manufactured housing loan pools pledged as collateral for collateralized bonds
where the Company has retained credit risk.

Net gain (loss) on sales, write-downs, impairment charges and
litigation improved $20.5 million, from a loss of $13.4 million during the three
months ended March 31, 2000, to a gain of $7.1 million during the three months
ended March 31, 2001. During 2001, the Company favorably resolved litigation for
$7.1 million net of legal expenses. During 2000, the Company incurred $12.2
million of losses related to the writedown of $23.7 million of securities which
were sold during April 2000 and $0.3 million related to the sale of securities
during the quarter. In addition, the Company incurred net losses of $0.9 million
primarily related to the phasing out of its commercial lending operations

The following table summarizes the average balances of interest-earning
assets and their average effective yields, along with the average
interest-bearing liabilities and the related average effective interest rates,
for each of the periods presented.

Average Balances and Effective Interest Rates



- ------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31,
-----------------------------------------------------------
2001 2000
- ------------------------------------------------------------------------------------------------------------------
Average Effective Average Effective
Balance Rate Balance Rate
----------------- ----------- ---------------- ------------


Interest-earning assets: (1)
Collateral for collateralized bonds (2) (3) $ 3,067,884 7.97% $ 3,637,089 7.72%
Securities 11,878 9.82% 135,391 5.84%
Other investments 32,159 19.51% 50,143 12.77%
Loans held for sale or securitization 4,635 8.09% 262,109 8.20%
----------------- ----------- ---------------- ------------
Total interest-earning assets $ 3,116,556 8.09% $ 4,084,732 7.75%
================= =========== ================ ============

Interest-bearing liabilities:
Non-recourse debt (3) $ 2,781,292 7.13% $ 3,255,742 6.91%
Recourse debt - collateralized bonds retained 31,265 6.76% 131,525 6.48%
----------------- ----------- ---------------- ------------
2,812,557 7.12% 3,387,267 6.89%

Repurchase agreements and credit facilities 2,105 6.49% 264,656 6.51%
Other recourse debt - unsecured - - 106,636 8.84%
Other recourse debt - secured 96,933 8.27% - -
----------------- ----------- ---------------- ------------
Total interest-bearing liabilities $ 2,911,595 7.16% $ 3,758,559 6.93%
================= =========== ================ ============
Net interest spread on all investments (3) 0.93% 0.82%
=========== ============
Net yield on average interest-earning assets (3) 1.40% 1.38%
=========== ============

- ----------------------------------------------------------------------------------------------------------------


(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 $437 and $1,143 for the
three months ended March 31, 2001 and 2000, respectively.
(3) Effective rates for non-recourse debt are calculated excluding non-interest
related collateralized bond expenses. If included, the effective rate on
interest bearing liabilities for the first quarter of 2001 and 2000 would
be 6.98% and 6.99%, respectively.



The net interest spread increased 0.11%, to 0.93% for the three months
ended March 31, 2001 from 0.82% for the same period in 2000. Generally, the
Company's net interest spread increased as a result in increasing yields on the
Company's single-family adjustable rate ("ARM") loan portfolio included in
collateral for collateralized bonds, the sale during 2000 of lower-yielding
residual ARM trusts (which were financed in the first quarter of 2000 at a
negative interest spread), and the improved yield in other investments, most
notably from the delinquent property tax receivable portfolio. The effective
rate on the Company's non-recourse debt does not necessarily reflect the recent
reduction in short-term interest rates by the Federal Reserve. In addition,
there has been no corresponding decline during the first quarter of 2001 in the
effective yield on the collateral for collateralized bonds due to the `reset'
lag (the loans generally adjust or `reset' every six or twelve months) on the
$1.05 billion in single-family ARM loans that comprise a portion of the
collateral for collateralized bonds. The delinquent property tax receivable
portfolio yield improved as a result of the shift in the portfolio to higher
yielding tax receivables.

Over the past 15 months as the Company continued to reduce its operations
and sold various assets, total interest-earning assets and interest-bearing
liabilities have measurably declined and the mix of the investment portfolio has
changed. For the three months ended March 31, 2001 compared to the three months
ended March 31, 2000, average interest-earning assets declined $967 million, or
approximately 24%. A large portion of such reduction relates to paydowns on the
Company's adjustable-rate single-family mortgage loans and and the sale of
fixed-rate commercial mortgage loans that were held for sale. The Company's
portfolio now consists of approximately $1.0 billion of adjustable rate assets
and $1.9 billion of fixed-rate assets. The Company currently finances
approximately $180 million of the fixed-rate assets with non-recourse LIBOR
based floating-rate liabilities, and to the extent that short-term rates
continue to decline, the Company's net interest spread should continue to
benefit. Once rates stabilize, however, the remaining single-family ARM loans
should continue to reset downwards in rate which will have the impact of
reducing net interest spread.

Interest Income and Interest-Earning Assets
At March 31, 2001, $1.89 billion of the investment portfolio consists
of loans which pay a fixed-rate of interest. Also at March 31, 2001,
approximately $1.05 billion of the investment portfolio is comprised of loans or
securities that have coupon rates which adjust over time (subject to certain
periodic and lifetime limitations) in conjunction with changes in short-term
interest rates. Approximately 64% of the ARM loans underlying the ARM securities
and collateral for collateralized bonds are indexed to and reset based upon the
level of six-month LIBOR; approximately 26% of the ARM loans are indexed to and
reset based upon the level of the one-year Constant Maturity Treasury (CMT)
index. The following table presents a breakdown, by principal balance, of the
Company's collateral for collateralized bonds and ARM and fixed mortgage
securities by type of underlying loan. This table excludes derivative and
residual securities, other investments and loans held for sale.

Investment Portfolio Composition (1)
($ in millions)



- ----------------------------------------------------------------------------------------------------------------------------
Other Indices
LIBOR Based ARM CMT Based ARM Based ARM Loans Fixed-Rate Loans
Loans Loans Total
- ----------------------------------------------------------------------------------------------------------------------------

1999, Quarter 2 $ 1,239.2 $ 525.4 $ 146.9 $ 1,872.9 $ 3,784.4
1999, Quarter 3 1,112.7 461.4 135.9 2,095.4 3,805.4
1999, Quarter 4 1,048.5 430.8 121.1 2,061.5 3,661.9
2000, Quarter 1 976.7 362.6 117.4 2,029.4 3,486.1
2000, Quarter 2 902.5 375.8 110.8 1,998.2 3,387.3
2000, Quarter 3 830.1 348.9 103.2 1,960.8 3,243.0
2000, Quarter 4 758.6 309.9 97.4 1,926.3 3,092.2
2001, Quarter 1 688.4 271.6 91.3 1,892.8 2,944.1
- ----------------------------------------------------------------------------------------------------------------------------


(1) Includes only the principal amount of collateral for collateralized bonds,
ARM securities and fixed-rate mortgage securities.



The average asset yield is reduced for the amortization of premiums,
net of discounts on the investment portfolio. As indicated in the table below,
premiums on the collateral for collateralized bonds, ARM securities, fixed-rate
mortgage securities at March 31, 2001 were $28.0 million, or approximately 0.94%
of the aggregate balance of collateral for collateralized bonds, ARM securities
and fixed-rate securities. Of this $28.0 million, $29.7 million relates to the
premium on multifamily and commercial mortgage loans with a principal balance of
$814.2 million at March 31, 2001, and that have average remaining prepayment
lockouts or yield maintenance for at least [**another nine] years. Amortization
expense as a percentage of principal paydowns has decreased from 1.64% for the
three months ended March 31, 2000 to 1.43% for the same period in 2001. The
principal prepayment rate for the Company (indicated in the table below as "CPR
Annualized Rate") was approximately 23% for the three months ended March 31,
2001. CPR or "constant prepayment rate" is a measure of the annual prepayment
rate on a pool of loans.

Premium Basis and Amortization
($ in millions)



- -------------------------------------------------------------------------------------------------------------------------
Amortization
CPR Expense as a % of
Amortization Annualized Principal Principal Paydowns
Net Premium Expense Rate Paydowns
- -------------------------------------------------------------------------------------------------------------------------


1999, Quarter 2 $ 60.7 $ 4.8 30% $ 338.4 1.42%
1999, Quarter 3 45.4 3.4 28% 239.6 1.40%
1999, Quarter 4 38.3 2.2 20% 165.0 1.41%
2000, Quarter 1 36.2 2.0 18% 122.6 1.64%
2000, Quarter 2 34.1 2.1 18% 131.6 1.56%
2000, Quarter 3 32.0 2.1 18% 134.1 1.59%
2000, Quarter 4 30.1 1.9 20% 134.7 1.41%
2001, Quarter 1 28.0 2.0 23% 142.6 1.43%
- -------------------------------------------------------------------------------------------------------------------------


Credit Exposures
The Company securitizes its loan production into collateralized bonds
or pass-through securitization structures. With either structure, the Company
may use overcollateralization, subordination, third-party guarantees, reserve
funds, bond insurance, mortgage pool insurance or any combination of the
foregoing as a form of credit enhancement. With all forms of credit enhancement,
the Company may retain a limited portion of the direct credit risk after
securitization.

The following table summarizes the aggregate principal amount of collateral
for collateralized bonds and ARM and fixed-rate mortgage pass-through securities
outstanding; the direct credit exposure retained by the Company (represented by
the amount of overcollateralization pledged and subordinated securities owned by
the Company and rated below BBB by one of the nationally recognized rating
agencies), net of the credit reserves maintained by the Company for such
exposure; and the actual credit losses incurred for each year. Credit reserves
maintained by the Company and included in the table below includes third-party
reimbursement guarantees of $30.3 million. The table excludes any risks related
to representations and warranties made on loans funded by the Company and
securitized in mortgage pass-through securities generally funded prior to 1995.
This table also excludes any credit exposure on loans held for sale or
securitization, funding notes and securities, and other investments.

The Company is currently engaged in a dispute with the counterparty to
the $30.3 million in reimbursement guarantees. Such guarantees are payable when
cumulative loss trigger levels are reached on certain of the Company's
single-family mortgage loan securitizations. Currently, these trigger levels
have been reached on four of the Company's securities, and the Company has made
claims under the reimbursement guarantees in amounts approximating $1.2 million.
The counterparty has denied payment on these claims, citing various deficiencies
in loan underwriting which would render these loans and corresponding claims
ineligible under the reimbursement agreements. The Company disputes this
classification and is pursuing this matter through court-ordered arbitration.

Credit Reserves and Actual Credit Losses
($ in millions)



- ----------------------------------------------------------------------------------------------------------------------
Outstanding Credit Exposure, Actual Credit Exposure, Net of
Loan Principal Net Credit Credit Reserves to
Balance of Credit Reserves Losses Outstanding Loan Balance
- ----------------------------------------------------------------------------------------------------------------------

1999, Quarter 2 $ 3,965.6 $ 155.5 $ 4.6 3.92%
1999, Quarter 3 3,949.2 194.5 5.3 4.93%
1999, Quarter 4 3,770.3 183.2 5.5 4.86%
2000, Quarter 1 3,679.6 136.0 4.8 3.70%
2000, Quarter 2 3,677.3 165.2 5.4 4.49%
2000, Quarter 3 3,503.1 142.4 6.8 4.06%
2000, Quarter 4 3,245.3 119.1 9.6 3.67%
2001, Quarter 1 3,137.0 111.7 8.1 3.56%
- ----------------------------------------------------------------------------------------------------------------------


The following table summarizes single family mortgage loan,
manufactured housing loan and commercial mortgage loan delinquencies as a
percentage of the outstanding collateral balance for those securities in which
Dynex REIT has retained a portion of the direct credit risk. The delinquencies
as a percentage of the outstanding collateral balance has increased to 1.75% at
March 31, 2001 from 1.72% at March 31, 2000. The Company monitors and evaluates
its exposure to credit losses and has established reserves based upon
anticipated losses, general economic conditions and trends in the investment
portfolio. As of March 31, 2001, management believes the credit reserves are
sufficient to cover anticipated losses which may occur as a result of current
delinquencies presented in the table below.

Delinquency Statistics (1)



- ----------------------------------------------------------------------------------------------------------------------
90 days and over delinquent
60 to 90 days delinquent (2) Total
- ----------------------------------------------------------------------------------------------------------------------


1999, Quarter 2 0.30% 1.82% 2.12%
1999, Quarter 3 0.23% 1.72% 1.95%
1999, Quarter 4 0.27% 1.37% 1.64%
2000, Quarter 1 0.26% 1.46% 1.72%
2000, Quarter 2 0.34% 1.52% 1.86%
2000, Quarter 3 0.35% 1.61% 1.96%
2000, Quarter 4 0.37% 1.59% 1.96%
2001, Quarter 1 0.20% 1.55% 1.75%
- -------------------------------------------------------------------------------------------------------------------------


(1) Excludes funding notes, other investments and loans held for sale or securitization.
(2) Includes foreclosures, repossessions and REO.



Recent Accounting Pronouncements
Statement of Financial Accounting Standards ("FAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities", is effective for all fiscal
years beginning after June 15, 2000. FAS No. 133, as amended, establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
The Company adopted FAS No. 133 effective January 1, 2001. The adoption of FAS
No. 133 did not have a significant impact on the financial position, results of
operations, or cash flows of the Company.

In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities" ("FAS No.
140"). FAS No. 140 replaces the Statement of Financial Accounting Standards No.
125 "Accounting for the Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" ("FAS No. 125"). FAS No. 140 revises the
standards for accounting for securitization and other transfers of financial
assets and collateral and requires certain disclosure, but it carries over most
of FAS No. 125 provisions without reconsideration. FAS No. 140 is effective for
transfers and servicing of financial assets and extinguishment of liabilities
occurring after March 31, 2001. FAS No. 140 is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000.
Disclosures about securitization and collateral accepted need not be reported
for periods ending on or before December 15, 2000, for which financial
statements are presented for comparative purposes. FAS No. 140 is to be applied
prospectively with certain exceptions. Other than those exceptions, earlier or
retroactive application of its accounting provision is not permitted. The
Company does not believe the adoption of FAS No. 140 will have a material impact
on its financial statements.


LIQUIDITY AND CAPITAL RESOURCES

The Company has historically financed its operations from a variety of
sources. These sources have included cash flow generated from the investment
portfolio, including net interest income and principal payments and prepayments,
common stock offerings through the dividend reinvestment plan, short-term
warehouse lines of credit with commercial and investment banks, repurchase
agreements and the capital markets via the asset-backed securities market (which
provides long-term non-recourse funding of the investment portfolio via the
issuance of collateralized bonds). Historically, cash flow generated from the
investment portfolio has satisfied its working capital needs, and the Company
has had sufficient access to capital to fund its loan production operations, on
both a short-term (prior to securitization) and long-term (after securitization)
basis. However, market conditions since October 1998 have substantially reduced
the Company's access to capital. The Company has been unable to access
short-term warehouse lines of credit, and has been unable to efficiently access
the asset-backed securities market to meet its long-term funding needs. Largely
as a result of its inability to access additional capital, the Company sold its
manufactured housing and model home purchase/leaseback operations in 1999, and
ceased issuing new commitments in its commercial lending operations. Since 1999,
the Company has been focused on substantially reducing both its short-term debt
and capital requirements, generally through the sale of assets.

Non-recourse Debt
Dynex REIT, through limited-purpose finance subsidiaries, has issued
non-recourse debt in the form of collateralized bonds to fund the majority of
its investment portfolio. The obligations under the collateralized bonds are
payable solely from the collateral for collateralized bonds and are otherwise
non-recourse to Dynex REIT. Collateral for collateralized bonds are not subject
to margin calls. The maturity of each class of collateralized bonds is directly
affected by the rate of principal prepayments on the related collateral. Each
series is also subject to redemption according to specific terms of the
respective indentures, generally when the remaining balance of the bonds equals
35% or less of the original principal balance of the bonds. At March 31, 2001,
Dynex REIT had $2.7 billion of collateralized bonds outstanding.

Recourse Debt
At December 31, 2000, the Company had a secured non-revolving credit
facility under which $66.8 million of letters of credit to support tax-exempt
bonds were outstanding. These letters of credit were secured, in part, by $22.3
million in cash held in escrow. These letters of credit were released during the
first quarter of 2001 as a result of the purchase, sale or transfer of the
underlying tax-exempt bonds, and the facility was extinguished.

The Company also uses repurchase agreements to finance a portion of its
investments. Repurchase agreements allow the Company to sell investments for
cash together with a simultaneous agreement to repurchase the same investments
on a specified date for a price which is equal to the original sales price plus
an interest component. At March 31, 2001, the Company had repurchase agreements
outstanding of $29.3 million, all with Lehman Brothers, Inc. (Lehman). These
repurchase agreements remain on an "overnight" or one-day basis, and were
secured by securities with an unpaid principal balance of approximately $102
million, and an estimated fair value of approximately $85 million. The majority
of these securities are rated investment grade.

Increases in short-term interest rates, long-term interest rates or
market risk could negatively impact the valuation of securities and may limit
the Company's borrowing ability or cause Lehman to initiate margin calls for
securities financed using repurchase agreements. Additionally, certain
investments are classes of securities rated AA, A or BBB that are subordinated
to other classes from the same series of securities, and which further may be
secured by less liquid collateral such as delinquent property tax receivables.
These classes of securities may have less liquidity than classes of securities
that are not subordinated, and the value of such classes is more dependent on
the credit rating of the related insurer or the credit performance of the
underlying loans or receivables. In instances of a downgrade of an insurer or
the deterioration of the credit quality of the underlying collateral, the
Company may be required to sell certain investments in order to maintain
liquidity. If required, these sales could be made at prices lower than the
carrying value of the assets, which could result in losses.

As of March 31, 2001, the Company has $67.8 million outstanding of its
senior notes issued in July 1997 and due July 15, 2002 (the "July 2002 Notes").
On March 30, 2001, the Company entered into an amendment to the related
indenture governing the July 2002 Notes whereby the Company pledged to the
Trustee of the July 2002 Notes substantially all of the Company's unencumbered
assets and the stock of its subsidiaries. In consideration of this pledge, the
indenture was further amended to provide for the release of the Company from
certain covenant restrictions in the indenture, and specifically provided for
the Company's ability to make distributions on its capital stock in an amount
not to exceed the sum of (a) $26 million, (b) the cash proceeds of any
"permitted subordinated indebtedness", (c) the cash proceeds of the issuance of
any "qualified capital stock", and (d) any distributions required in order for
the Company to maintain its REIT status. In addition, the Company entered into a
Purchase Agreement with holders of 50.1% of the July 2002 Notes which require
the Company to purchase, and such holders to sell, their respective July 2002
Notes at various discounts based on a computation of the Company's available
cash. On March 30, 2001, the Company retired a net $29.5 million of the July
2002 Notes for $26.5 million in cash under the Purchase Agreement. The discounts
provided for under the Purchase Agreement are as follows: by April 15, 2001,
10%; by July 15, 2001, 8%; by October 15, 2001, 6%; by January 15, 2002, 4%; by
March 1, 2002, 2%; thereafter until maturity, 0%.

Based upon (i) its expected investment portfolio cash flows, (ii)
anticipated proceeds from the sale or refinancing of assets, and (iii)
anticipated proceeds from new credit lines, the Company anticipates that it will
meet all of its current recourse debt obligations in accordance with their
respective contractual terms.

Table 1
Net Balance Sheet (1)
($ in thousands)



March 31, 2001
-----------------
-----------------


ASSETS
Investments:
Collateral for collateralized bonds $ 2,894,775
Less: Collateralized bonds issued (2,801,457)
-----------------
-----------------
Net investment in collateralized bonds 93,318
Collateralized bonds retained 87,305
Securities 9,357
Other investments 32,280
Loans held for sale 3,422
-----------------
225,682

Investment in and advances to Dynex Holding, Inc. -
Cash, including restricted 23,285
Accrued interest receivable 352
Other assets 25,154
-----------------
-----------------
$ 274,471
=================
=================

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Repurchase agreements $ 29,340
Notes payable 67,825
Accrued interest payable 1,110
Other liabilities 2,325
-----------------
100,600
-----------------
-----------------

Shareholders' Equity:
Preferred stock, par value $.01 per share, 50,000,000 shares authorized:
9.75% Cumulative Convertible Series A 29,900
1,309,061 issued and outstanding
9.55% Cumulative Convertible Series B 44,767
1,912,434 issued and outstanding
9.73% Cumulative Convertible Series C
1,840,000 issued and outstanding 52,740
Common stock, par value $.01 per share,
100,000,000 shares authorized,
11,444,188 and 11,444,099 issued and outstanding, respectively 114
Additional paid-in capital 351,999
Accumulated other comprehensive loss (119,496)
Accumulated deficit (186,153)
-----------------
-----------------
173,871
-----------------
-----------------
$ 274,471
=================


(1) This presents the balance sheet where the collateralized bonds are "netted"
against the collateral for collateralized bonds. This presentation better
illustrates the Company's net investment in the collateralized bonds and
the collateralized bonds retained in its investment portfolio.




FORWARD-LOOKING STATEMENTS

Certain written statements in this Form 10-Q made by the Company, that are
not historical fact constitute "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such forward-looking statements may
involve factors that could cause the actual results of the Company to differ
materially from historical results or from any results expressed or implied by
such forward-looking statements. The Company cautions the public not to place
undue reliance on forward-looking statements, which may be based on assumptions
and anticipated events that do not materialize. The Company does not undertake,
and the Securities Litigation Reform Act specifically relieves the Company from,
any obligation to update any forward-looking statements.

Factors that may cause actual results to differ from historical results or
from any results expressed or implied by forward-looking statements include the
following:

Economic Conditions. The Company is affected by general economic
conditions. The risk of defaults and credit losses could increase during an
economic slowdown or recession. This could have an adverse effect on the
Company's financial performance and the performance on the Company's securitized
loan pools.

Capital Resources. The Company relies on a repurchase facility with an
investment banking firm to help provide the Company's short-term funding needs.
The Company's access to alternative or additional sources of financing has been
significantly reduced.

Capital Markets. The Company relies on the capital markets for the sale
upon securitization of its collateralized bonds or other types of securities.
While the Company has historically been able to sell such collateralized bonds
and securities into the capital markets, the Company's access to capital markets
has been substantially reduced, which may impair the Company's ability to
re-securitize its existing securitizations in the future.

Interest Rate Fluctuations. The Company's income depends on its ability to
earn greater interest on its investments than the interest cost to finance these
investments. Interest rates in the markets served by the Company generally rise
or fall with interest rates as a whole. A majority of the loans currently
pledged as collateral for collateralized bonds by the Company are fixed-rate.
The Company currently finances these fixed-rate assets through non-recourse
debt, approximately $180 million of which is variable rate. In addition, a
significant amount of the investments held by the Company are variable rate
collateral for collateralized bonds. These investments are financed through
non-recourse long-term collateralized bonds and, to a lesser extent, recourse
short-term repurchase agreements. The net interest spread for these investments
could decrease during a period of rapidly rising short-term interest rates,
since the investments generally have periodic interest rate caps and the related
borrowing have no such interest rate caps.

Defaults. Defaults by borrowers on loans retained by the Company may have
an adverse impact on the Company's financial performance, if actual credit
losses differ materially from estimates made by the Company at the time of
securitization. The allowance for losses is calculated on the basis of
historical experience and management's best estimates. Actual default rates or
loss severities may differ from the Company's estimate as a result of economic
conditions. Actual defaults on ARM loans may increase during a rising interest
rate environment. The Company believes that its reserves are adequate for such
risks on loans that were delinquent as of March 31, 2001.

Prepayments. Prepayments by borrowers on loans securitized by the Company
may have an adverse impact on the Company's financial performance. Prepayments
are expected to increase during a declining interest rate or flat yield curve
environment. The Company's exposure to rapid prepayments is primarily (i) the
faster amortization of premium on the investments and, to the extent applicable,
amortization of bond discount, and (ii) the more rapid decline in its portfolio
of earning assets.

Competition. The financial services industry is a highly competitive
market. Increased competition in the market has adversely affected the Company,
and may continue to do so.

Regulatory Changes. The Company's businesses as of March 31, 2001 are not
subject to any material federal or state regulation or licensing requirements.
However, changes in existing laws and regulations or in the interpretation
thereof, or the introduction of new laws and regulations, could adversely affect
the Company and the performance of the Company's securitized loan pools or its
ability to collect on its delinquent property tax receivables..

Risks and Uncertainties. See Note 2 to the Company's financial statements.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk generally represents the risk of loss that may result from
the potential change in the value of a financial instrument due to fluctuations
in interest and foreign exchange rates and in equity and commodity prices.
Market risk is inherent to both derivative and non-derivative financial
instruments, and accordingly, the scope of the Company's market risk management
extends beyond derivatives to include all market risk sensitive financial
instruments. As a financial services company, net interest income comprises the
primary component of the Company's earnings. As a result, the Company is subject
to risk resulting from interest rate fluctuations to the extent that there is a
gap between the amount of the Company's interest-earning assets and the amount
of interest-bearing liabilities that are prepaid, mature or reprice within
specified periods. The Company's strategy has been to mitigate interest rate
risk through the creation of a diversified investment portfolio of high quality
assets that, in the aggregate, preserves the Company's capital base while
generating stable income in a variety of interest rate and prepayment
environments.

The Company monitors the aggregate cash flow, projected net yield and
market value of its investment portfolio under various interest rate and
prepayment assumptions. While certain investments may perform poorly in an
increasing or decreasing interest rate environment, other investments may
perform well, and others may not be impacted at all.

The Company measures the sensitivity of its net interest income,
excluding various accounting adjustments including provision for losses, and
premium and discount amortization, to changes in interest rates. Changes in
interest rates are defined as instantaneous, parallel, and sustained interest
rate movements in 100 basis point increments. The Company estimates its interest
income for the next twelve months assuming no changes in interest rates from
those at period end. Once the base case has been estimated, cash flows are
projected for each of the defined interest rate scenarios. Those scenario
results are then compared against the base case to determine the estimated
change to net interest income, excluding various accounting adjustments as set
forth above.

The following table summarizes the Company's net interest margin
sensitivity analysis as of March 31, 2001. This analysis represents management's
estimate of the percentage change in net interest margin given a parallel shift
in interest rates. The "Base" case represents the interest rate environment as
it existed as of March 31, 2001. The analysis is heavily dependent upon the
assumptions used in the model. The effect of changes in future interest rates,
the shape of the yield curve or the mix of assets and liabilities may cause
actual results to differ from the modeled results. In addition, certain
financial instruments provide a degree of "optionality." The model considers the
effects of these embedded options when projecting cash flows and earnings. The
most significant option affecting the Company's portfolio is the borrowers'
option to prepay the loans. The model applies prepayment rate assumptions
representing management's estimate of prepayment activity on a projected basis
for each collateral pool in the investment portfolio. While the Company's model
considers these factors, the extent to which borrowers utilize the ability to
exercise their option may cause actual results to significantly differ from the
analysis. Furthermore, its projected results assume no additions or subtractions
to the Company's portfolio, and no change to the Company's liability structure.
Historically, there have been significant changes in the Company's assets and
liabilities, and there are likely to be such changes in the future.

Basis Point % Change in Net
Increase (Decrease) in Interest Margin
Interest Rates from Base Case
-------------------------- -----------------------

+200 (13.9)%
+100 ( 7.0)%
Base
-100 7.0%
-200 13.7%

The Company's investment policy sets forth guidelines for assuming
interest rate risk. The investment policy stipulates that given a 200 basis
point increase or decrease in interest rates over a twelve month period, the
estimated net interest margin may not change by more than 25% of current net
interest margin during the subsequent one year period. The Company is in
compliance with such investment policy.

Approximately $1.05 billion of the Company's investment portfolio as of
March 31, 2001 is comprised of loans or securities that have coupon rates which
adjust over time (subject to certain periodic and lifetime limitations) in
conjunction with changes in short-term interest rates. Approximately 64% and 26%
of the ARM loans underlying the Company's ARM securities and collateral for
collateralized bonds are indexed to and reset based upon the level of six-month
LIBOR and one-year CMT, respectively.

Generally, during a period of rising short-term interest rates, the
Company's net interest spread earned on its investment portfolio will decrease.
The decrease of the net interest spread results from (i) the lag in resets of
the ARM loans underlying the ARM securities and collateral for collateralized
bonds relative to the rate resets on the associated borrowings and (ii) rate
resets on the ARM loans which are generally limited to 1% every six months or 2%
every twelve months and subject to lifetime caps, while the associated
borrowings have no such limitation. As short-term interest rates stabilize and
the ARM loans reset, the net interest margin may be restored to its former level
as the yields on the ARM loans adjust to market conditions. Conversely, net
interest margin may increase following a fall in short-term interest rates. This
increase may be temporary as the yields on the ARM loans adjust to the new
market conditions after a lag period. In each case, however, the Company expects
that the increase or decrease in the net interest spread due to changes in the
short-term interest rates to be temporary. The net interest spread may also be
increased or decreased by the proceeds or costs of interest rate swap, cap or
floor agreements, to the extent that the Company has entered into such
agreements.

The remaining portion of the Company's investments portfolio as of
March 31, 2001, approximately $1.89 billion, is comprised of loans or securities
that have coupon rates that are fixed. The Company has substantially limited its
interest rate risk on such investments through (i) the issuance of fixed-rate
collateralized bonds and notes payable which approximated $1.5 billion as of
March 31, 2001, and (ii) equity, which was $173.9 million as of the same date.
Overall, the Company's interest rate risk is related both to the rate of change
in short term interest rates, and to the level of short term interest rates.


PART II. OTHER INFORMATION

Item 1. Legal Proceedings

On November 7, 2000, the Company entered into an Agreement and Plan of Merger
with California Investment Fund, LLC ("CIF"), for the purchase of all of the
equity securities of the Company for $90,000 (the "Merger Agreement"). The
Merger Agreement obligated CIF to, among other things, deliver to the Company
evidence of commitments for the financing of the acquisition based upon a
predetermined timeline. CIF failed to deliver such evidence of the financing
commitments pursuant to the terms of the Merger Agreement. Pursuant to a letter
dated December 22, 2000, the Company agreed to forebear its right to terminate
the Merger Agreement and extended the timeline. In return, CIF agreed to deliver
written binding financing commitments and evidence of the consent of the holders
of the July 2002 Notes to the merger transaction on or before January 25, 2001.
On January 25, 2001, CIF failed to meet the requirements as set forth in the
Merger Agreement and the letter of December 22, 2000, and the Company terminated
the Merger Agreement effective January 26, 2001 and requested that the escrow
agent release to the Company the $1,000 and 572,178 shares of common stock of
the Company which CIF placed in escrow under the Merger Agreement (the "Escrow
Amount"). On January 29, 2001, the Company filed for Declaratory Judgment in
Federal District Court in the Eastern District of Virginia, Alexandria Division
(the "Court"). CIF has filed a counterclaim and demand for jury trial and asked
for damages of $45,000. On April 19, 2001, on a motion brought by the Company,
the Court dismissed CIF's claim for $45,000 of damages. The Company believes
that the Agreement is clear that the maximum damages that CIF may recover from
the Company is $2,000. The Company intends to defend itself vigorously against
the counterclaim by CIF, and will seek the release of the Escrow Amount. The
Company does not expect that the resolution of this matter will have a material
effect on its financial statements.

The Company is also subject to other lawsuits or claims which arise in the
ordinary course of its business, some of which seek damages in amounts which
could be material to the financial statements. Although no assurance can be
given with respect to the ultimate outcome of any such litigation or claim, the
Company believes the resolution of such lawsuits or claims will not have a
material effect on the Company's consolidated balance sheet, but could
materially affect consolidated results of operations in a given year.

Item 2. Changes in Securities and Use of Proceeds

Not applicable

Item 3. Defaults Upon Senior Securities

Not applicable

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

Not applicable

Item 5. Other Information

None

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

None

(b) Reports on Form 8-K

Current Report on Form 8-K as filed with the Commission on
January 29, 2001, regarding termination of the Merger
Agreement dated November 7, 2000 between California Investment
Fund, LLC, DCI Acquisition Corporation and Dynex Capital, Inc.



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

DYNEX CAPITAL, INC.



By: /s/ Thomas H. Potts
----------------------------------
Thomas H. Potts, President
(authorized officer of registrant)



/s/ Stephen J. Benedetti
---------------------------------
Stephen J. Benedetti,
Vice President, Treasurer
(principal accounting officer)

Dated: May 15, 2001