Form: 10-K/A

Annual report pursuant to Section 13 and 15(d)

April 15, 1999

Documents

10-K/A: Annual report pursuant to Section 13 and 15(d)

Published on April 15, 1999



The following items were the subject
of a Form 12b-25 and are included
herein: Item 8. Financial statements
and supplementary data; Exhibit 23.1
and Exhibit 23.2.




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A


(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

Commission file number 1-9819

DYNEX CAPITAL, INC.
(Exact name of registrant as specified in its charter)


Virginia 52-1549373
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
10900 Nuckols Road, 3rd Floor, Glen Allen, Virginia 23060
(Address of principal executive offices) Zip Code)

Registrant's telephone number, including area code: (804) 217-5800


Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered
Common Stock, $.01 par value New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:




Title of each class Name of each exchange on which registered


Series A 9.75% Cumulative Convertible Preferred Stock, Nasdaq National Market
$.01 par value
Series B 9.55% Cumulative Convertible Preferred Stock, $.01 Nasdaq National Market
par value
Series C 9.73% Cumulative Convertible Preferred Stock, $.01 Nasdaq National Market
par value


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 XX No___

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|

As of February 28, 1998, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $146,723,220 (46,030,814
shares at a closing price on The New York Stock Exchange of $3.1875). Common
stock outstanding as of February 28, 1998 was 46,030,814 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Definitive Proxy Statement to be filed pursuant to Regulation
14A within 120 days from December 31, 1998, are incorporated by reference into
Part III.


DYNEX CAPITAL, INC.
1998 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS




PAGE


PART II

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................................... 3

PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K.......................................................... 3

SIGNATURES ................................................................................. 4




Part II

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of the Company and the related notes,
together with the Independent Auditors' Report thereon are set forth on pages
F-1 through F-30 of this Form 10-K/A.


Part IV


Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Documents filed as part of this report:

1. and 2. Financial Statements and Financial Statement Schedule

The information required by this section of Item 14 is set forth in the
Consolidated Financial Statements and Independent Auditors' Report beginning at
page F-1 of this Form 10-K/A. The index to the Financial Statements and Schedule
is set forth at page F-2 of this Form 10-K/A.

3. Exhibits

Exhibit
Number Exhibit

23.1 Consent of Deloitte & Touche LLP (filed herewith)

23.2 Consent of KPMG LLP (filed herewith)

(b) Reports on Form 8-K

Current Report on Form 8-K as filed with the Commission on April 2, 1999,
including the 1998 financial statements.


SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) 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.
(Registrant)



April 15, 1999 /s/ Thomas H. Potts
Thomas H. Potts
President
(Principal Executive Officer)


April 15, 1999 /s/ Lynn K. Geurin
Lynn K. Geurin
Executive Vice President and
Chief Financial Officer
(Principal Accounting and Financial Officer)

Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.




Signature Capacity Date



/s/ Thomas H. Potts Director April 15, 1999
Thomas H. Potts


/s/ J. Sidney Davenport, IV Director April 15, 1999
J. Sidney Davenport, IV


/s/ Richard C. Leone Director April 15, 1999
Richard C. Leone


/s/ Barry Shein Director April 15, 1999
Barry Shein


/s/ Donald B. Vaden Director April 15, 1999
Donald B. Vaden







DYNEX CAPITAL, INC.


CONSOLIDATED FINANCIAL STATEMENTS AND

INDEPENDENT AUDITORS' REPORT

For Inclusion in Form 10-K/A

Annual Report Filed with

Securities and Exchange Commission

December 31, 1998






DYNEX CAPITAL, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE







Financial Statements: Page


Independent Auditors' Report for the Year Ended
December 31, 1998 F-3
Independent Auditors' Report for the Years Ended
December 31, 1997 and 1996 F-4
Consolidated Balance Sheets -- December 31, 1998 and 1997 F-5
Consolidated Statements of Operations -- Years ended
December 31, 1998, 1997 and 1996 F-6
Consolidated Statements of Shareholders' Equity -- Years ended
December 31, 1998, 1997 and 1996 F-7
Consolidated Statements of Cash Flows -- Years ended
December 31, 1998, 1997 and 1996 F-8
Notes to Consolidated Financial Statements --
December 31, 1998, 1997 and 1996 F-9
Schedule IV - Mortgage Loans on Real Estate F-28










INDEPENDENT AUDITORS' REPORT




The Board of Directors
Dynex Capital, Inc.


We have audited the accompanying consolidated balance sheet of Dynex
Capital, Inc. and subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended. Our audit also included the financial statement schedule
listed in the Index at Item 14. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such 1998 consolidated financial statements present fairly,
in all material respects, the financial position of Dynex Capital, Inc. and
subsidiaries as of December 31, 1998, and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles. Also, in our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements,
taken as a whole, presents fairly in all material respects the information set
forth therein.




DELOITTE & TOUCHE LLP


Richmond, Virginia
March 26, 1999


INDEPENDENT AUDITORS' REPORT




The Board of Directors
Dynex Capital, Inc.



We have audited the accompanying consolidated balance sheet of Dynex
Capital, Inc. and subsidiaries as of December 31, 1997 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the two year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Dynex
Capital, Inc. and subsidiaries as of December 31, 1997, and the results of their
operations and their cash flows for each of the years in the two year period
ended December 31, 1997 in conformity with generally accepted accounting
principles.


KPMG LLP


Richmond, Virginia
February 4, 1998, except as to the 1997
and 1996 information contained in note 16,
which is as of April 14, 1999





CONSOLIDATED BALANCE SHEETS
DYNEX CAPITAL, INC.

December 31, 1998 and 1997
(amounts in thousands except share data)




ASSETS 1998 1997
----------------- -----------------


Investments:
Collateral for collateralized bonds $ 4,293,528 $ 4,375,561
Securities 217,612 515,501
Other investments 56,743 85,989
Loans held for securitization 388,782 233,958
----------------- -----------------
4,956,665 5,211,009

Investments in and advances to Dynex Holding, Inc. 169,384 119,356
Cash 30,103 18,502
Accrued interest receivable 4,162 5,572
Other assets 18,488 12,919
================= =================
$ 5,178,802 $ 5,367,358
================= =================

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES

Non-recourse debt $ 3,665,316 $ 3,632,079
Recourse debt:
Secured by collateralized bonds retained 298,695 494,493
Secured by investments 588,735 499,935
Unsecured 145,303 139,108
----------------- -----------------
4,698,049 4,765,615

Accrued interest payable 8,403 7,214
Accrued expenses and other liabilities 16,318 14,127
Dividends payable 3,228 19,493
----------------- -----------------
4,725,998 4,806,449
----------------- -----------------

SHAREHOLDERS' EQUITY

Preferred stock, par value $.01 per share,
50,000,000 shares authorized:
9.75% Cumulative Convertible Series A,
1,309,061 and 1,397,511 issued and outstanding, respectively 29,900 31,920
9.55% Cumulative Convertible Series B,
1,912,434 and 1,957,490 issued and outstanding, respectively 44,767 45,822
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,
46,027,426 and 45,146,242 issued and outstanding, respectively 460 451
Additional paid-in capital 352,382 342,570
Accumulated other comprehensive (loss) income (3,097) 79,441
(Accumulated deficit) retained earnings (24,348) 7,965
----------------- -----------------
452,804 560,909
----------------- -----------------
$ 5,178,802 $ 5,367,358
================= =================




See notes to consolidated financial statements.


CONSOLIDATED STATEMENTS OF OPERATIONS
DYNEX CAPITAL, INC.

Years ended December 31, 1998, 1997 and 1996
(amounts in thousands except share data)





1998 1997 1996
------------------- ------------------ ------------------


Interest income:
Collateral for collateralized bonds $ 303,994 $ 208,946 $ 148,675
Securities 40,411 79,714 128,147
Other investments 5,679 4,909 4,702
Loans held for securitization 44,450 34,099 29,387
Net advances to Dynex Holding, Inc. 10,979 5,891 -
------------------- ------------------ -------------------
405,513 333,559 310,911
------------------- ------------------ -------------------

Interest and related expense:
Non-recourse debt 231,242 152,678 102,925
Recourse debt 99,119 90,777 127,981
Other 2,193 1,717 2,539
Net advances from Dynex Holding, Inc. - - 665
------------------- ------------------ -------------------
332,554 245,172 234,110
------------------- ------------------ -------------------

Net interest margin before provision for losses 72,959 88,387 76,801
Provision for losses (6,421) (4,933) (3,051)
------------------- ------------------ -------------------
Net interest margin 66,538 83,454 73,750

Impairment on AutoBond related assets (17,632) - -
Equity in net earnings (loss) of Dynex Holding, Inc. 2,456 (1,109) (4,309)
Gain on sale of single family operations - - 21,512
(Loss) gain on sale of investments and trading activities (2,714) 11,584 (385)
Other income 2,852 1,716 606
------------------- ------------------ -------------------
Net revenue 51,500 95,645 91,174

General and administrative expenses (8,973) (9,531) (8,365)
Net administrative fees and expenses to Dynex Holding, Inc. (22,379) (12,116) (9,761)
------------------- ------------------ -------------------
Income before extraordinary item 20,148 73,998 73,048

Extraordinary item - loss on extinguishment of debt (571) - -
------------------- ------------------ -------------------
Net income after extraordinary item 19,577 73,998 73,048
Dividends on preferred stock (13,019) (14,820) (10,009)
=================== ================== ===================
Net income available to common shareholders $ 6,558 $ 59,178 $ 63,039
=================== ================== ===================

Per common share before extraordinary item:
Basic $ 0.16 $ 1.38 $ 1.54
=================== ================== ===================
Diluted $ 0.16 $ 1.37 $ 1.49
=================== ================== ===================

Per common share after extraordinary item:
Basic $ 0.14 $ 1.38 $ 1.54
=================== ================== ===================
Diluted $ 0.14 $ 1.37 $ 1.49
=================== ================== ===================


See notes to consolidated financial statements.




CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
DYNEX CAPITAL, INC.

Years ended December 31, 1998, 1997 and 1996
(amounts in thousands except share data)



Accumulated Retained
Additional Other Earnings
Preferred Common Paid-in Comprehensive (Accumulated
Stock Stock Capital (Loss) Income Deficit) Total
----------------------------------------------------------------------------------------


Balance at January 1, 1996 $ 86,885 $ 202 $ 281,508 $ (4,759) $ (9,013) $ 354,823

Comprehensive income:
Net income - 1996 - - - - 73,048 73,048
Change in net unrealized loss on
investments classified as
available-for-sale during the - - - 69,161 - 69,161
period
----------------------------------------------------------------------------------------
Total comprehensive income - - - 69,161 73,048 142,209

Issuance of common stock - 5 10,129 - - 10,134
Series C preferred stock issued,
net of issuance costs 52,740 - - - - 52,740
Dividends on common stock at
$1.1325 per share - - - - (46,280) (46,280)
Dividends on preferred stock - - - - (10,009) (10,009)
----------------------------------------------------------------------------------------
Balance at December 31, 1996 139,625 207 291,637 64,402 7,746 503,617

Comprehensive income:
Net income - 1997 - - - - 73,998 73,998
Change in net unrealized gain on
investments classified as
available-for-sale during the - - - 15,039 - 15,039
period
----------------------------------------------------------------------------------------
Total comprehensive income - - - 15,039 73,998 89,037

Issuance of common stock - 25 42,009 - - 42,034
Conversion of preferred stock (9,143) 6 9,137 - - -
Two-for-one common stock split - 213 (213) - - -
Dividends on common stock at
$1.355 per share - - - - (58,959) (58,959)
Dividends on preferred stock - - - - (14,820) (14,820)
----------------------------------------------------------------------------------------
Balance at December 31, 1997 130,482 451 342,570 79,441 7,965 560,909

Comprehensive income:
Net income - 1998 - - - - 19,577 19,577
Change in net unrealized gain on
investments classified as
available-for-sale during the - - - (82,538) - (82,538)
period
----------------------------------------------------------------------------------------
Total comprehensive income - - - (82,538) 19,577 (62,961)

Issuance of common stock - 7 7,652 - - 7,659
Conversion of preferred stock (3,075) 3 3,072 - - -
Retirement of common stock - (1) (912) - - (913)
Dividends on common stock at $0.85
per share - - - - (38,871) (38,871)
Dividends on preferred stock - - - - (13,019) (13,019)
========================================================================================
Balance at December 31, 1998 $ 127,407 $ 460 $ 352,382 $ (3,097) $ (24,348) $ 452,804
========================================================================================


See notes to consolidated financial statements.




CONSOLIDATED STATEMENTS OF CASH FLOWS
DYNEX CAPITAL, INC.

Years ended December 31, 1998, 1997 and 1996
(amounts in thousands except share data)



1998 1997 1996
----------------- ---------------- -----------------


Operating activities:
Net income $ 19,577 $ 73,998 $ 73,048
Adjustments to reconcile net income to cash provided by
operating activities:
Provision for losses 6,421 4,933 3,051
Impairment charge on AutoBond related assets 17,632
Net loss (gain) from sale of investments and trading
activities 2,714 (11,584) 385
Gain on sale of single family operations - - (21,512)
Equity in net (earnings) loss of Dynex Holding, Inc. (2,456) 1,109 4,309
Amortization and depreciation 43,938 26,389 22,131
Net (increase) decrease in accrued interest, other
assets and other liabilities (4,471) 10,835 (5,698)
----------------- ---------------- -----------------
Net cash provided by operating activities 83,355 105,680 75,714
----------------- ---------------- -----------------

Investing activities:
Collateral for collateralized bonds:
Fundings of investments subsequently securitized (1,857,617) (2,302,831) (1,571,955)
Principal payments on collateral 2,112,473 940,613 464,478
Decrease (increase) in accrued interest receivable 1,057 (10,316) (10,775)
Net decrease in funds held by trustee 889 544 419
Net (increase) decrease in loans held for securitization (155,497) 29,767 (50,456)
Purchase of other investments (65,836) (50,525) (2,251)
Payments received on other investments 16,977 18,547 12,655
Purchase of securities (572,225) (848,663) (111,596)
Payments received on securities 122,693 62,184 304,551
Proceeds from sales of securities 424,338 847,339 505,708
Investment in and advances to Dynex Holding, Inc. (47,572) (82,086) (39,616)
Proceeds from sale of single family operations 19,000 9,500 20,413
Capital expenditures (402) (2,094) (1,445)
----------------- ---------------- -----------------
Net cash used for investing activities (1,722) (1,388,021) (479,870)
----------------- ---------------- -----------------

Financing activities:
Collateralized bonds:
Proceeds from issuance of bonds 1,817,179 2,400,191 1,770,965
Principal payments on bonds (2,066,344) (919,885) (448,238)
(Decrease) increase in accrued interest payable (262) 2,945 91
Proceeds from issuance of senior notes - 98,223 -
Repayment of senior notes (11,750) (3,000) (3,000)
Proceeds from (repayment of) recourse debt borrowings, net 252,554 (256,660) (939,599)
Net proceeds from issuance of stock 7,659 42,034 62,874
Retirement of common stock (913) - -
Dividends paid (68,155) (70,520) (51,721)
----------------- ---------------- -----------------
Net cash (used for) provided by financing activities (70,032) 1,293,328 391,372
----------------- ---------------- -----------------

Net increase (decrease) in cash 11,601 10,987 (12,784)
Cash at beginning of period 18,502 7,515 20,299
----------------- ---------------- -----------------

Cash at end of period $ 30,103 $ 18,502 $ 7,515
================= ================ =================



See notes to consolidated financial statements.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.

December 31, 1998, 1997 and 1996
(amounts in thousands except share data)


NOTE 1 - BASIS 0F PRESENTATION

Basis of Presentation
The consolidated financial statements include the accounts of Dynex
Capital, Inc. and its qualified REIT subsidiaries (together, "Dynex REIT"). The
loan production operations are primarily conducted through Dynex Holding, Inc.
("DHI"), a taxable affiliate of Dynex REIT. Dynex REIT owns all the preferred
stock which represents a 99% economic ownership interest in DHI. Prior to 1998,
Dynex REIT had consolidated DHI for financial reporting purposes. In 1998, Dynex
REIT changed its method of accounting for its investment in DHI to a method
similar to the equity method. This method was used because management believes
that Dynex REIT has the ability to exercise significant influence over the
financial and operating policies of DHI through its ownership of the preferred
stock and other agreements. Dynex REIT has revised the 1997 and 1996
accompanying financial statements to give retroactive effect to the change in
accounting method during 1998. The accounting change had no impact on net
income. Under the equity method, Dynex REIT's original investment in DHI is
recorded at cost and adjusted by Dynex REIT's share of earnings or losses and
decreased by dividends received. The common stock of DHI represents a 1%
economic ownership of DHI and is owned by certain officers of Dynex REIT.
References to the "Company" mean Dynex Capital, Inc., its consolidated
subsidiaries, and 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.

Reclassifications
Certain reclassifications have been made to the financial statements for
the periods ended December 31, 1997 and 1996 to conform to the December 31, 1998
presentation.

Stock Split
On May 5, 1997, Dynex REIT completed a two-for-one common stock split. All
references to the per share amounts in the accompanying consolidated financial
statements and related notes have been restated to reflect the stock split.


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Federal Income Taxes
Dynex REIT has elected to be taxed as a real estate investment trust
("REIT") under the Internal Revenue Code. As a result, Dynex REIT generally will
not be subject to federal income taxation at the corporate level to the extent
that it distributes at least 95 percent of its taxable income to its
shareholders and complies with certain other requirements. No provision has been
made for income taxes for Dynex Capital, Inc. and its qualified REIT
subsidiaries in the accompanying consolidated financial statements, as Dynex
REIT believes it has met the prescribed requirements.

Investments
Pursuant to the requirements of Statement of Financial Accounting Standards
No. 115 ("FAS No. 115"), "Accounting for Certain Investments in Debt and Equity
Securities," Dynex REIT is required to classify certain of its investments as
either trading, available-for-sale or held-to-maturity. Dynex REIT has
classified collateral for collateralized bonds and securities as
available-for-sale. These investments are therefore reported at fair value, with
unrealized gains and losses excluded from earnings and reported as accumulated
other comprehensive income. The basis of any securities sold is computed using
the specific identification method. Collateral for collateralized bonds can be
sold only subject to the lien of the respective collateralized bond indenture,
unless the related bonds have been redeemed.

Collateral for Collateralized Bonds. Collateral for collateralized bonds
consists of securities which have been pledged to secure collateralized bonds.
These securities are primarily backed by single family, multifamily and
commercial properties and installment loans on manufactured housing.
Substantially all of the collateral for collateralized bonds is pledged to
secure non-recourse debt in the form of collateralized bonds issued by
limited-purpose finance subsidiaries and is not available for the satisfaction
of general claims of Dynex REIT. As the collateralized bonds are non-recourse to
Dynex REIT, Dynex REIT's exposure to loss on the assets pledged as 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.

Securities. Securities consist of fixed-rate funding notes secured by
fixed-rate automobile installment contracts ("funding notes"), adjustable-rate
mortgage ("ARM") securities, fixed-rate mortgage securities, mortgage derivative
securities and mortgage residual interests.

Other Investments. Other investments consist primarily of corporate bonds,
an installment note receivable received in connection with the sale of the
Company's single family mortgage operations in May 1996 (see Note 9), property
tax receivables and manufactured housing inventory lines of credit. Only the
corporate bonds are considered securities pursuant to FAS No. 115, and therefore
are reported at fair value as they are classified as available for sale. All
other investments are carried at their amortized cost basis.

Loans Held for Securitization
Loans held for securitization primarily include mortgage loans secured by
multifamily and commercial properties and installment loans secured by
manufactured homes. These assets will generally be securitized as collateral for
collateralized bonds and are carried at amortized cost. Premiums paid or
discounts obtained on these loans are deferred as an adjustment to the carrying
value of the loans. Deferred hedging gains or losses, if any, are netted against
the outstanding asset balances.

Construction loans on multifamily properties are also included in loans
held for securitization. Such loans are carried at the balance funded to date.
Interest earned on these loans is capitalized and included as a component of the
amount funded until construction is completed and the property is stabilized.

Price Premiums and Discounts
Price premiums and discounts on investments and obligations are amortized
into interest income or expense, respectively, over the life of the related
investment or obligation using a method that approximates the effective yield
method.

Deferred Issuance Costs
Costs incurred in connection with the issuance of collateralized bonds and
unsecured notes are deferred and amortized over the estimated lives of their
respective debt obligations using a method that approximates the effective yield
method.

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 trade
date, these instruments are designated as either hedging positions or trading
positions.

For Interest Rate Agreements designated as hedge instruments, Dynex REIT
evaluates the effectiveness of these hedges periodically against the financial
instrument being hedged under various interest rate scenarios. The revenues and
costs associated with interest rate swap agreements are recorded as adjustments
to interest income or expense on the asset or liability being hedged. For
interest rate cap agreements, the amortization of the cost of the agreements is
recorded as a reduction in the net interest income on the related investment.
The unamortized cost is included in the carrying amount of the related
investment. Revenues or cost associated with futures and option contracts are
recognized in income or expense in a manner consistent with the accounting for
the asset or liability being hedged. Amounts payable to or receivable from
counterparties are included in the financial statement line of the item being
hedged. Interest Rate Agreements that are hedge instruments and hedge an
available for sale investment which is carried at its fair value are also
carried at fair value, with the unrealized gains and losses reported as
accumulated other comprehensive 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 as a yield adjustment.

Dynex REIT may also enter into forward delivery contracts and interest rate
futures and options contracts for hedging interest rate risk associated with
commitments made to fund loans. Gains and losses on such contracts are either
(i) deferred as an adjustment to the carrying value of the related loans until
the loan has been funded and securitized in a collateralized bond structure,
after which the gains or losses will be amortized into income over the remaining
life of the loan using a method that approximates the effective yield method, or
(ii) deferred until such time as the related loans are funded and sold.

If the underlying asset, liability or commitment is sold or matures, 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.

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.

Cash
Approximately $24,437 and $12,489 of cash at December 31, 1998 and 1997,
respectively, is held as collateral for outstanding letters of credit; is held
in trust to cover losses not otherwise covered by insurance; or is restricted
for the payment of premiums on various insurance policies related to certain
securities.

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,
using the treasury stock method, but only if these items are dilutive. As a
result of the two-for-one split of the Dynex REIT's common stock in May 1997,
the preferred stock is convertible into two shares of common stock for each
share of preferred stock.

Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from those estimates. The primary estimates
inherent in the accompanying consolidated financial statements are discussed
below.

Fair Value. 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 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. The discount rates used are
based on management's estimates of market rates. 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. The fair value of all on- and off-balance
sheet financial instruments is presented in Note 8.

Allowance for Losses. As discussed in Note 5, Dynex REIT has credit risk on
certain investments. An allowance for losses has been estimated and established
for such credit risk based on management's judgment. The allowance for losses is
evaluated and adjusted periodically by management based on the actual and
projected timing and amount of probable credit losses, as well as industry loss
experience. Provisions made to increase the allowance related to credit risk are
presented as provision for losses in the accompanying consolidated statements of
operations. Dynex REIT's actual credit losses may differ from those estimates
used to establish the allowance.

Derivative and Residual Securities. Income on certain derivative and
residual securities is accrued using the effective yield method based upon
estimates of future cash flows to be received over the estimated remaining lives
of the related securities. Reductions in carrying value are made when the total
projected cash flow is less than the Company's basis, based on either the
dealers' prepayment assumptions or, if it would accelerate such adjustments,
management's expectations of interest rates and future prepayment rates.

Recent Accounting Pronouncements

In January 1998, the Company adopted the Statement of Financial Accounting
Standard No.130, "Reporting Comprehensive Income" ("FAS No. 130"). FAS No.130
requires companies to classify items of other comprehensive income separately,
either in a separate statement of comprehensive income, in the statement of
shareholders' equity, or in the statement of operations.

Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," establishes standards and
disclosure requirements for the way companies report information about operating
segments, including related product information, both in annual and interim
reports issued to shareholders. This standard is effective for financial
statements issued for periods beginning after December 15, 1997, including
interim periods. Management has determined that for the purpose of this
disclosure Dynex REIT has only one segment.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS No. 133"). FAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. FAS
No. 133 is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. The impact of adopting FAS No. 133 has not yet been determined.

In October 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise" ("FAS No. 134"). FAS No. 134 requires that after
the securitization of mortgage loans held for sale that meets all of the
criteria of FAS No. 125 and is accounted for as a sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed securities or
other retained interests based on its ability and intent to sell or hold those
investments. FAS No. 134 is effective for fiscal quarters beginning after
December 15, 1998. FAS No. 134 did not have a material impact on the financial
statements as Dynex REIT typically accounts for securitization of assets as
secured financing transactions.


NOTE 3 - COLLATERAL FOR COLLATERALIZED BONDS, SECURITIES AND OTHER INVESTMENTS

The following table summarizes Dynex REIT's amortized cost basis and fair
value of investments, as of December 31, 1998 and 1997, classified as
available-for-sale and the related average effective interest rates:



- ----------------------------------------- ----------------------------------- -------------------------------
1998 1997
Effective Effective
Fair Value Interest Rate Fair Value Interest Rate
- ----------------------------------------- --------------- ------------------- --------------- ---------------


Collateral for collateralized bonds:
Amortized cost $ 4,288,520 7.5% $ 4,317,945 7.5%
Allowance for losses (16,593) (24,811)
- ----------------------------------------- --------------- ------------------- --------------- ---------------
Amortized cost, net 4,271,927 4,293,134
Gross unrealized gains 67,236 94,825
Gross unrealized losses (45,635) (12,398)
- ----------------------------------------- --------------- ------------------- --------------- ---------------
$ 4,293,528 $ 4,375,561
- ----------------------------------------- --------------- ------------------- --------------- ---------------

Securities:
Funding notes $ 122,009 8.0% $ - -
Adjustable-rate mortgage securities 58,935 6.2% 403,117 5.4%
Fixed-rate mortgage securities 28,851 8.3% 21,463 9.1%
Derivative and residual securities 33,480 2.9% 97,848 16.2%
- ----------------------------------------- --------------- ------------------- --------------- ---------------
243,275 522,428
Allowance for losses (2,746) (3,941)
- ----------------------------------------- --------------- ------------------- --------------- ---------------
Amortized cost, net 240,529 518,487
Gross unrealized gains 1,479 18,144
Gross unrealized losses (24,396) (21,130)
- ----------------------------------------- --------------- ------------------- --------------- ---------------
$ 217,612 $ 515,501
- ----------------------------------------- --------------- ------------------- --------------- ---------------

Other investments (1):
Amortized cost $ 28,153 7.5% $ -
Gross unrealized gains 87 -
Gross unrealized losses (1,868) -
- ----------------------------------------- --------------- ------------------- --------------- ---------------
$ 26,372 $ -
- ----------------------------------------- --------------- ------------------- --------------- ---------------


(1) Excludes $30,371 and $85,989 of other investments at amortized cost at December 31, 1998 and 1997,
respectively, which are not classified as debt securities according to Statement of Financial Accounting
Standard No. 115 "Accounting for Certain Investments in Debt and Equity Securities" and as such are not
included in this table.



Collateral for collateralized bonds. Collateral for collateralized bonds
consists 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 in excess of the related
collateralized bonds issued, as the collateralized bonds issued by the
limited-purpose finance subsidiaries are non-recourse to Dynex REIT.

During 1998, Dynex REIT securitized $2.2 billion of collateral, through the
issuance of two series of collateralized bonds. The collateral securitized
primarily included single-family mortgage loans, manufactured housing loans,
commercial real estate and multifamily mortgage loans. One of the
securitizations was accounted for as part financing and part sale of the
underlying collateral pursuant to Statement of Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" ("FAS No. 125"). Under FAS No. 125, if an entity retains a call
provision on the bonds in excess of a "clean-up" call, usually defined as 10% of
the initial principal amount of the bond, the entity is precluded from
accounting for the securitization of the collateral and the issuance of the
bonds as a sale. The call provision is considered individually for each bond
issued. On all but one class of bonds issued in this securitization, Dynex REIT
retained call rights which are substantially in excess of a clean-up call. For
the one class of bonds with an original principal amount totaling $55,007, Dynex
REIT retained only a clean-up call provision of 10%. Dynex REIT therefore
treated the issuance of this class as a sale and recognized a gain of $7,500 in
connection with the sale of that class of bonds. The issuance of the remaining
classes of bonds was considered a financing transaction.

The components of collateral for collateralized bonds at December 31, 1998
and 1997 are as follows:



-------------------------------------------- --------------------- ----------------
1998 1997
-------------------------------------------- --------------------- ----------------


Collateral, net of allowance $ 4,161,000 $ 4,199,777
Funds held by trustees 1,104 2,092
Accrued interest receivable 27,834 28,891
Unamortized premiums and discounts, net 81,989 62,374
Unrealized gain, net 21,601 82,427
-------------------------------------------- --------------------- ----------------
$ 4,293,528 $ 4,375,561
-------------------------------------------- --------------------- ----------------


Securities. Funding notes consist of fixed-rate funding notes secured by
fixed-rate automobile installment contracts. ARM securities 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.

Other investments. Other investments primarily include an installment note
receivable in connection with the sale of the Company's single family mortgage
operations in May 1996 (see Note 9), corporate bond obligations purchased by
Dynex REIT and property tax receivables.

Sale of investments. Proceeds from sales of securities totaled $424,338,
$847,339, and $505,708 in 1998, 1997 and 1996, respectively. Gross gains of
$8,481, $2,743, and $4,489 and gross losses of $8,532, $2,163, and $6,887 were
realized on those sales in 1998, 1997 and 1996, respectively. Gross realized
losses in 1996 included writedowns for permanent impairment of certain mortgage
derivative securities of $1,460.

In 1998, Dynex REIT recorded an impairment charge of $17.6 million relating
to the funding notes, the senior unsecured convertible note acquired from
AutoBond in June 1998 and certain equity securities of AutoBond held by the
Company at December 31, 1998.


NOTE 4 - LOANS HELD FOR SECURITIZATION

The following table summarizes Dynex REIT's loans held for securitization
at December 31, 1998 and 1997, respectively.




---------------------------------------------------------------------------------------------------
1998 1997
---------------------------------------------------------------------------------------------------


Secured by multifamily and commercial properties $ 160,101 $ 125,338
Secured by manufactured homes 197,076 56,497
Secured by single family residential properties 1,243 33,951
----------------- ----------------
358,420 215,786
Deferred hedging positions 52,355 27,677
Net discount (21,014) (8,046)
Allowance for losses (979) (1,459)
---------------------------------------------------------------------------------------------------
Total loans held for securitization $ 388,782 $ 233,958
---------------------------------------------------------------------------------------------------


The Company originates fixed-rate loans secured by first mortgages or deeds
of trust on multifamily properties, commercial properties and manufactured
homes, when the underlying land is also pledged. The Company also originates
fixed-rate and adjustable-rate installment loans on manufactured homes which are
secured by either a UCC filing or a motor vehicle title. While the Company
originates these assets throughout the United States, as of December 31, 1998
approximately 60% of the multifamily and commercial loans held for
securitization are located in Louisiana, Minnesota and Maryland and
approximately 50% of the manufactured housing loans held for securitization are
located in Texas, North Carolina, Michigan and South Carolina.

Net discount on loans held for securitization includes premiums paid and
discounts obtained on loans held for securitization. The deferred hedging
position includes the gains and losses generated from corresponding hedging
transactions, primarily used to hedge the pipeline of commitments to fund
multifamily and commercial loans, which totaled $751.9 million at December 31,
1998. Deferred hedging positions are deferred as an adjustment to the carrying
value of the loans until the loans are funded and either securitized or sold.

The Company funded loans with an aggregate principal balance of $1,150,271,
$565,058, and $744,001 during 1998, 1997 and 1996, respectively. Included in
these amounts are $228,613 and $49,191 of multifamily construction loans and tax
exempt bonds closed during the years ended December 31, 1998 and 1997,
respectively. Only the amount drawn on the construction loans of $46,146 is
included in the balance of the loans held for securitization at December 31,
1998. Additionally, Dynex REIT purchased loans on a bulk basis, principally
single family ARM loans, totaling $562,045, $1,271,479, and $731,460 in 1998,
1997 and 1996, respectively.


NOTE 5 - ALLOWANCE FOR LOSSES

The following table summarizes the activity for the allowance for losses on
investments for the years ended December 31, 1998, 1997 and 1996:




- ---------------------------------------------- --------------- --------------- ---------------
1998 1997 1996
- ---------------------------------------------- --------------- --------------- ---------------

Allowance at beginning of year $ 30,270 $ 39,781 $ 11,498
Provision for losses 6,421 4,933 3,051
Provision recorded due to sale of single
family operations (See Note 9) - - 30,084
Credit losses, net of recoveries (16,321) (14,444) (4,852)
- ---------------------------------------------- --------------- --------------- ---------------
Allowance at end of year $ 20,370 $ 30,270 $ 39,781
- ---------------------------------------------- --------------- --------------- ---------------


Collateral for collateralized bonds. Dynex REIT has limited exposure to
credit risk retained on loans that it has securitized through the issuance of
collateralized bonds. The aggregate loss exposure is generally limited to the
amount of collateral in excess of the related investment-grade collateralized
bonds issued (commonly referred to as "overcollateralization"), excluding price
premiums and discounts and hedge gains and losses. The allowance for losses on
the overcollateralization totaled $16,593 and $24,811 at December 31, 1998 and
1997 respectively, and is included in collateral for collateralized bonds in the
accompanying consolidated balance sheets. Overcollateralization (net of
discounts, reserves and third party guarantees) at December 31, 1998 and 1997
totaled $152,248 and $79,837, respectively.

Securities. On certain securities collateralized by mortgage loans
purchased by Dynex REIT for which mortgage pool insurance is used as the primary
source of credit enhancement, Dynex REIT has limited exposure to certain credit
risks such as fraud in the origination and special hazards not covered by such
insurance. An allowance was established based on the estimate of losses at the
time of securitization. The allowance for losses for securities is $2,746 and
$3,941 at December 31, 1998 and 1997, respectively, and is included in
securities in the accompanying consolidated balance sheets.

Other investments. Dynex REIT has established reserves for potential losses
for property tax receivables totaling $53 and $59 at December 31, 1998 and 1997,
respectively.

Loans held for securitization. Dynex REIT has exposure to credit losses on
loans held for securitization until those loans are securitized. Upon
securitization, Dynex REIT's exposure is generally limited to the
overcollateralization as discussed above. Dynex REIT has established reserves
for potential losses for the loans held for securitization totaling $978 and
$1,459 at December 31, 1998 and 1997, respectively.


NOTE 6 - NON-RECOURSE DEBT

Dynex REIT, through limited-purpose finance subsidiaries, has issued
non-recourse debt in the form of collateralized bonds. Each series of
collateralized bonds may consist of various classes of bonds, either at fixed or
variable rates of interest. Payments received on the collateral for
collateralized bonds and any reinvestment income thereon are used to make
payments on the collateralized bonds (see Note 3). The obligations under the
collateralized bonds are payable solely from the collateral for collateralized
bonds and are otherwise non-recourse to Dynex REIT. The maturity of each class
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. As a
result, the actual maturity of any class of a collateralized bonds series is
likely to occur earlier than its stated maturity.

During 1998, Dynex REIT redeemed six series of previously issued
collateralized bonds, which resulted in $571 of additional costs related to such
redemptions. Total retained bonds at December 31, 1998 were $375,108.

The components of collateralized bonds along with certain other information
at December 31, 1998 and 1997 are summarized as follows:




- ------------------------------ ------------------------------------ --- ----------------------------------
1998 1997
- ------------------------------ ------------------------------------ --- ----------------------------------
Bonds Outstanding Range of Bonds Range of
Interest Rates Outstanding Interest Rates
- ------------------------------ ------------------- ---------------- --- ----------------- ----------------


Variable-rate classes $ 3,028,108 5.1% - 7.0% $ 3,192,049 5.9% - 7.4%
Fixed-rate classes 630,074 6.3% - 11.5% 433,028 6.5% - 11.5%
Accrued interest payable 5,687 5,949
Deferred bond issuance costs (6,880) (4,875)
Unamortized net premium 8,327 5,928
- ------------------------------ ------------------- ---------------- --- ----------------- ----------------
$ 3,665,316 $ 3,632,079
- ------------------------------ ------------------- ---------------- --- ----------------- ----------------

Range of stated maturities 2009-2032 1998-2031

Number of series 33 33
- ------------------------------ ------------------- ---------------- --- ----------------- ----------------


The variable rate classes are based on one-month London InterBank Offered
Rate (LIBOR). The average effective rate of interest expense for non-recourse
debt was 6.4%, 6.7%, and 6.6% for the years ended December 31, 1998, 1997 and
1996, respectively.


NOTE 7 - RECOURSE DEBT

Dynex REIT utilizes repurchase agreements, notes payable and warehouse
credit facilities (together, "recourse debt") to finance certain of its
investments. The following table summarizes Dynex REIT's recourse debt
outstanding and the weighted-average annual rates at December 31, 1998 and 1997:



- ------------------------------------- ----------------------------------------- -- -----------------------------------------
1998 1997
- ------------------------------------- ----------------------------------------- -- -----------------------------------------
Weighted-Average Weighted-Average
Annual Rate Market Value Annual Rate Market
Amount of Collateral Amount Value of
Outstanding Outstanding Collateral
- ------------------------------------- -------------- ------------ ------------- -- ------------- ------------- -------------


Recourse debt secured by:
Collateralized bonds $ 298,695 6.01% $ 348,494 $ 494,493 6.18% $ 523,907
Securities 170,519 6.56% 219,003 394,551 6.23% 418,611
Other investments 165,070 6.22% 185,749 50,525 7.33% 119,416
Loans held for securitization 250,589 7.19% 334,855 51,423 6.95% 64,043
Other assets 2,557 7.46% 4,520 3,436 7.25% 3,619
-------------- ------------- ------------- -------------
887,430 1,092,621 994,428 1,129,596
Unsecured debt:
7.875% senior notes 98,718 7.88% - 98,380 7.88% -
Series B 10.03% senior notes 26,116 10.03% - 34,795 10.03% -
Series A 9.56% senior notes 2,969 9.56% - 5,933 9.56% -
Bank credit facility 17,500 8.03% - - - -
- ------------------------------------- -------------- ------------ ------------- -- ------------- ------------- -------------
$ 1,032,733 $ 1,092,621 $ 1,133,536 $ 1,129,596
- ------------------------------------- -------------- ------------ ------------- -- ------------- ------------- -------------


Secured Debt. At December 31, 1998 and 1997, recourse debt consisted of
$528,283 and $889,044, respectively, of repurchase agreements secured by
investments, and $357,111 and $101,971, respectively, outstanding under
warehouse credit facilities which are secured by loans held for securitization,
securities and other investments. At December 31, 1998, substantially all
recourse debt in the form of repurchase agreements had maturities within thirty
days and bear interest at rates indexed to LIBOR. If the counterparty to the
repurchase agreement fails to return the collateral, the ultimate realization of
the security by Dynex REIT may be delayed or limited. The excess market value of
the assets securing Dynex REIT's repurchase obligations at December 31, 1998 did
not exceed 10% of shareholders' equity for any of the individual counterparties
with whom Dynex REIT had contracted these agreements.

At December 31, 1998, Dynex REIT had four committed credit facilities
aggregating $925,000 to finance the funding of loans and securities, three of
which expire in 1999 and one that expires in 2000. The interest rates on
$750,000 of these facilities range from one-month LIBOR plus 0.75% to one-month
LIBOR plus 2.5%. The interest rate on $175,000 of these facilities is the
federal funds rate plus 1.5%. The contractual rates paid on these facilities may
be reduced by credits for compensating cash balances. In addition to the
$925,000 of committed facilities, Dynex REIT also has $700,000 available on an
uncommitted basis. Dynex REIT expects that these credit facilities will be
renewed, if necessary, at their respective expiration dates, although there can
be no assurance of such renewal.

In 1997, Dynex REIT entered into capital leases for financing its furniture
and computer equipment. Interest expense on these capital leases was $274 and
$52 for the years ended December 31, 1998 and 1997, respectively. The aggregate
payments due under the capital leases for five years after December 31, 1998 are
$904, $975, $541, $439, and none, respectively.

Unsecured Debt. Dynex REIT's $100,000 unsecured 7.875% senior notes are due
2002. Interest is payable semi-annually in arrears. Dynex REIT's Series A 9.56%
senior notes are payable in annual installments through 1999. Dynex REIT's
Series B 10.03% senior notes are payable in annual installments through 2001.
The aggregate principal payments due under the unsecured notes for the five
years after December 31, 1998 are $11,750, $8,750, $8,750, $100,000, and none,
respectively.


NOTE 8 - FAIR VALUE AND ADDITIONAL INFORMATION ABOUT FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standard No. 107, "Disclosures about Fair
Value of Financial Instruments" ("FAS No. 107") requires the disclosure of the
estimated fair value of on-and off-balance-sheet financial instruments. The
following table presents the amortized cost and estimated fair values of Dynex
REIT's financial instruments as of December 31, 1998 and 1997:



- ---------------------------------------- ---------------------------------------- ----------------------------------------
1998 1997
---------------------------------------- ----------------------------------------
Notional Amortized Fair Notional Amortized Fair
Recorded financial instruments: Amount Cost Value Amount Cost Value
- ---------------------------------------- ------------ ------------- ------------- ------------ ------------- -------------


Assets:
Collateral for collateralized bonds $ - $4,267,268 $4,293,159 $ - $4,285,079 $4,375,626
Securities - 235,555 217,217 - 512,207 513,971
Other investments - 58,524 55,621 - 85,989 96,229
Loans held for securitization - 356,895 354,102 - 212,490 227,968
Interest rate cap agreements 1,599,000 9,634 764 1,599,000 14,335 1,465
Liabilities:
Non-recourse debt - 3,665,316 3,665,316 - 3,632,079 3,632,079
Recourse debt:
Secured by collateralized bonds
retained - 298,695 298,695 - 494,493 494,493
Secured by investments - 588,735 588,735 - 499,935 499,935
Unsecured - 145,303 105,205 - 139,108 147,477

Off-balance sheet financial
instruments:
- ---------------------------------------- ------------ ------------- ------------- ------------ ------------- -------------

Financial futures contracts - - - 538,500 5,179 (4,904)
Options on futures contracts 700,000 4,589 2,441 50,000 (195) 90
Interest rate swap agreements 1,139,863 - (3,699) 1,378,778 - (3,940)
Forward delivery contracts - - - 74,200 (8,270) (8,270)
Commitments to fund loans 823,030 27,908 849,713 697,840 11,750 758,542
- ---------------------------------------- ------------ ------------- ------------- ------------ ------------- -------------


The fair value of collateral for collateralized bonds, securities, other
investments, loans held for securitization and interest rate cap agreements is
based on actual market price quotes, or by determining the present value of the
projected future cash flows using appropriate discount rates, credit losses and
prepayment assumptions. Non-recourse debt and secured recourse debt are
short-term borrowings that reprice frequently. Therefore, the carrying value
approximates the fair value. For unsecured debt maturing in less than one year,
carrying value approximates fair value. For unsecured debt with a maturity of
greater than one year, the fair value was determined by calculating the present
value of the projected cash flows using appropriate discount rates. The fair
value of the off-balance sheet financial instruments excluding the commitments
to fund loans was determined from actual market quotes. The fair value of the
commitments to fund loans was estimated assuming the loans were securitized at
current market rates.

Derivative Financial Instruments Used for Interest Rate Risk Management
Dynex REIT may engage in derivative financial instrument activities for the
purpose of interest rate risk management and yield enhancement. As of December
31, 1998, all of Dynex REIT's outstanding derivative financial positions were
for interest rate risk management. For all derivative financial instruments,
Dynex REIT has credit risk to the extent that the counterparties do not perform
their obligation under the agreements. If one of the counterparties does not
perform, Dynex REIT would not receive the cash to which it would otherwise be
entitled under the conditions of the agreement.

Interest rate cap agreements. Dynex REIT has LIBOR and one-year Constant
Maturity Treasury (CMT) index based interest rate cap agreements to limit its
exposure to the lifetime interest rate caps on certain of its ARM securities and
collateral for collateralized bonds. Under these agreements, the Company will
receive additional cash flow should the related index increase above the
contracted rates. Contract rates on these cap agreements range from 8.0% to
11.5%, with expiration dates ranging from 1999 to 2004.

Financial futures, forwards and options contracts. Dynex REIT may use
financial futures, forward and option contracts to reduce exposure to the effect
of changes in interest rates on funded loans, as well as those loans that Dynex
REIT has committed to fund. As of December 31, 1998, Dynex REIT had entered into
commitments to fund multifamily and commercial loans of $751,943 at fixed
interest rates ranging from 5.90% to 9.45% and manufactured housing loans of
$71,087 primarily at fixed interest rates ranging from 7.99% to 11.75%. The
multifamily and commercial commitments had original terms of not more than 18
months. The manufactured housing commitments generally had original terms of not
more than 90 days. Dynex REIT has deferred net hedging losses of $39,697 at
December 31, 1998 and $15,088 at December 31, 1997 related to these positions.
At December 31, 1998, Dynex REIT had purchased $400,000 notional amount of put
options to hedge these positions and had sold $300,000 notional amount of put
options to offset part of the cost of the purchase of options. The purpose of
these positions was to reduce exposure to the effect of changes in interest rate
on loans that Dynex REIT has committed to fund.

Interest rate swap agreements. Dynex REIT may enter into various interest
rate swap agreements to limit its exposure to changes in financing rates of
collateral for collateralized bonds and certain securities. Dynex REIT has
entered into a series of interest rate swap agreements which limits the increase
in borrowing costs in any six-month period to 1% for $1,020,000 notional amount
of short-term borrowings. Pursuant to the terms of this agreement, Dynex REIT
pays the lesser of current six-month LIBOR, or six-month LIBOR in effect
180-days prior plus 1%, and receives current 6-month LIBOR. These agreements
expire in 2001. Dynex REIT also has an amortizing interest rate swap agreement
with a remaining notional balance of $119,863 related to Prime rate-based ARM
loans financed with LIBOR-based variable-rate collateralized bonds. Under the
terms of the agreement, the Company receives one-month LIBOR plus 2.65% and pays
one-month average Prime rate in effect three months prior. This agreement
expires in 2003.

During 1998, Dynex REIT terminated interest rate swap agreements with a
notional value of $1,240,848. These interest rate swap agreements related
primarily to Dynex REIT's fixed-rate manufactured housing collateral, which was
being financed with variable-rate debt in the form of collateralized bonds,
repurchase agreements or warehouse lines. The Company paid a fixed rate ranging
from 5.40% to 6.15% and received one-month LIBOR. The cost of terminating these
agreements was $10,071, which was deferred and is being recognized as a yield
adjustment over the remaining life of the underlying loans.

During 1997 and 1998, Dynex REIT entered into interest rate swap agreements
with a notional balance of $73,000 and $25,134, respectively, related to
tax-exempt bonds for which Dynex REIT facilitates the issuance. As the
facilitator of the issuance of the bonds, Dynex REIT is required to pay interest
due to the bondholders in excess of a fixed rate. The bonds are floating rate
based on the current weekly Bond Market Association ("BMA") index. Dynex REIT,
simultaneous to the issuance of the bonds, may enter into interest rate swap
agreements to pay fixed and receive weekly BMA. During the fourth quarter of
1998, Dynex REIT terminated all of these agreements. The cost of terminating
these agreements was $3,419. The cost was deferred and is being amortized over
the remaining life of the tax-exempt bonds.

Derivative Financial Instruments Used for Other Than Risk Rate Management
Purposes
The Company may enter into financial futures, forwards and options
contracts to enhance the overall yield on its investment portfolio. Such
derivative contracts are accounted for as trading positions, and generally are
for terms of less than three months. The Company realized gross gains of $4,136
and $9,862 from these contracts in 1998 and 1997, respectively, primarily from
premium income received on options contracts written. The Company realized gross
losses of $5,565 and $281 from these contracts in 1998 and 1997, respectively.
There were no open trading positions at December 31, 1998 and 1997.


NOTE 9 - SALE OF SINGLE-FAMILY MORTGAGE OPERATIONS

On May 13, 1996, the Company sold its single family correspondent,
wholesale and servicing operations (collectively, the "single family mortgage
operations") to a subsidiary of Dominion Resources, Inc. for $67,958. The terms
of the purchase included an initial cash payment of $20,458, with the remainder
of the purchase price paid in five annual installments of $9,500 beginning
January 2, 1997, pursuant to a note agreement. The note bears interest at a rate
of 6.50% and is classified as other investments in the consolidated balance
sheet. As a result of the sale, the Company recorded a net gain of $21,512. Such
amount included a provision of $30,084 for possible losses on securitized single
family loans where the Company, which performed the servicing of such loans
prior to the sale, has retained a portion of the credit risk on these loans, of
which $10,593 is remaining as of December 31, 1998


NOTE 10 - EARNINGS PER SHARE

The following table reconciles the numerator and denominator for both the
basic and diluted EPS for the years ended December 31, 1998, 1997 and 1996.



- ----------------------------------- ----------------------------- ------------------------------ ----------------------------
1998 1997 1996
----------------------------- ------------------------------ ----------------------------

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


Income before extraordinary item $ 20,148 $ 73,998 $ 73,048
Extraordinary item - loss on
extinguishment of debt (571) - -
---------- ----------- -----------
Net income after extraordinary 19,577 73,998 73,048
item
Less: Dividends paid to preferred (13,019) (14,820) - (10,009)
stock
---------- ------------ ----------- ------------- ----------- ------------
------------ ------------- ------------
Basic 6,558 45,746,394 59,178 43,031,381 63,039 40,889,581

Effect of dividends and additional shares
of preferred stock:
Series A - - 3,948 2,953,413 3,687 3,105,000
Series B - - 5,500 4,138,945 5,218 4,393,648
Series C - - - - 1,104 771,585
========== =========== =========== ============ =========== ============
Diluted $ 6,558 45,746,394 $ 68,626 50,123,739 $ 73,048 49,159,814
========== =========== =========== ============ =========== ============

Earnings per share before extraordinary
item:
Basic EPS $0.16 $1.38 $1.54
=========== ============ ============
Diluted EPS $0.16 $1.37 $1.49
=========== ============ ============

Earnings per share after extraordinary
item:
Basic EPS $0.14 $1.38 $1.54
=========== ============ ============
Diluted EPS $0.14 $1.37 $1.49
=========== ============ ============

Reconciliation of anti-dilutive
shares:
Dividends and additional shares
of preferred stock:
Series A $ 3,111 2,643,248 $ - - $ - -
Series B 4,535 3,837,128 - - - -
Series C 5,373 3,680,000 5,372 3,679,474 - -
Expense and incremental shares
of stock appreciation rights 929 60,904 2,019 207,395 1,827 165,542
========== =========== =========== ============ =========== ============
$ 13,948 10,221,280 $ 7,391 3,886,869 $ 1,827 165,542
========== =========== =========== ============ =========== ============



During 1998, Dynex REIT recognized an extraordinary loss of $571 on the
redemption of six series of previously issued collateralized bonds. During 1998,
both the basic and diluted earnings per share was reduced by $0.01 due to these
early redemptions.


NOTE 11 - PREFERRED STOCK

The following table presents a summary of Dynex REIT's issued and
outstanding preferred stock:



- --------------------------------------------------------------------------------------------------------------
Liquidation Dividends
Preference Per Share
------------------------------------
Per Share 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------


Series A 9.75% Cumulative Convertible Preferred Stock $24.00 $2.370 $2.710 $2.375
Series B 9.55% Cumulative Convertible Preferred Stock 24.50 2.370 2.710 2.375
Series C 9.73% Cumulative Convertible Preferred Stock 30.00 2.920 2.920 0.600
- --------------------------------------------------------------------------------------------------------------


The Company is authorized to issue up to 50,000,000 shares of preferred
stock. For all series issued, dividends are cumulative from the date of issue
and are payable quarterly in arrears. The dividends are equal, per share, to the
greater of (i) the per quarter base rate of $0.585 for Series A and Series B,
and $0.73 for Series C, or (ii) two times the quarterly dividend declared on the
Company's common stock. Each share of Series A, Series B and Series C is
convertible at any time at the option of the holder into two shares of common
stock. Each series is redeemable by the Company, in whole or in part, (i) for
two shares of common stock, plus accrued and unpaid dividends, provided that for
20 trading days within any period of 30 consecutive trading days, the closing
price of the common stock equals or exceeds one-half of the issue price, or (ii)
for cash at the issue price, plus any accrued and unpaid dividends beginning
after June 30, 1998, October 31, 1998 and September 30, 1999 for Series A, B and
C, respectively.

In the event of liquidation, the holders of all series of preferred stock
will be entitled to receive out of the assets of the Company, prior to any such
distribution to the common shareholders, the issue price per share in cash, plus
any accrued and unpaid dividends.

During 1998, the Company issued 267,012 shares of common stock due to the
conversion of Series A and Series B preferred stock. No shares of Series C
preferred stock were converted during 1998.


NOTE 12 - EMPLOYEE BENEFITS

Stock Incentive Plan Pursuant to the Company's 1992 Stock Incentive Plan,
as amended on April 24, 1997 (the "Employee Incentive Plan"), the Company may
grant to eligible employees stock options, stock appreciation rights ("SARs")
and restricted stock awards. An aggregate of 2,400,000 shares of common stock is
available for distribution pursuant to the Employee Incentive Plan. The Company
may also grant dividend equivalent rights ("DERs") in connection with the grant
of options or SARs. These SARs and related DERs generally become exercisable as
to 20 percent of the granted amounts each year after the date of the grant. The
Company expensed $1,830, and $1,664 for SARs and DERs related to the Employee
Incentive Plan during 1997 and 1996, respectively, and there was no expense
during 1998. There were no stock options outstanding as of December 31, 1998,
1997 and 1996.

Stock Incentive Plan for Outside Directors

In 1995, Dynex REIT adopted a Stock Incentive Plan for its Board of
Directors (the "Board Incentive Plan") with terms similar to the Employee
Incentive Plan. On May 1, 1995, the date of the initial date of grant under the
Board Incentive Plan, each member of the Board of Directors was granted 14,000
SARs. Each Board member has subsequently received a grant of 2,000 SARs on May
1, 1996, 1997 and 1998 and will receive an additional grant of 2,000 SARs on May
1, 1999. The SARs granted on May 1, 1995 were fully vested on May 1, 1998. Each
successive award will become exercisable as to 20% of the granted amounts each
year after the date of grant. The maximum period in which any SAR may be
exercised is 73 months from the date of grant. The maximum number of shares of
common stock encompassed by the SARs granted under the Board Incentive Plan is
200,000. Dynex REIT expensed $189 and $163 for SARs and DERs related to the
Board Incentive Plan during 1997 and 1996, respectively and there was no expense
during 1998.

The following table presents a summary of the SARs activity for both the
Employee Incentive Plan and the Board Incentive Plan.



------------------------------ --------------------------------------------------------------------------------------
Years ended December 31,
--------------------------------------------------------------------------------------

1998 1997 1996
------------------------------ ---------------------------- ------------- --------------- ------------- ----------
Weighted-Average Weighted-Average Weighted-Average
Exercise Exercise Exercise
Number of Price Number of Price Number of Price
Shares Shares Shares
------------------------------ ------------- --------------- ------------- --------------- ------------- ----------


SARs outstanding at
beginning of year 694,890 $10.87 631,818 $8.98 669,020 $8.38
SARs granted 259,101 11.75 208,300 13.75 152,130 10.43
SARs forfeited (21,211) 12.12 - - (23,034) 9.48
SARs exercised (54,000) 7.04 (145,228) 6.82 (32,228) 5.25
SARs terminated at sale of
single- family mortgage - - - - (134,070) 8.43
operations
------------------------------ ------------- ----------- ---- ------------- ---------- ----- ------------- ----------
SARs outstanding at end of 878,780 11.18 694,890 $10.87 631,818 $8.98
year
------------------------------ ------------- ----------- ---- ------------- ---------- ----- ------------- ----------
SARs vested and exercisable 340,481 $10.38 223,638 $9.71 234,094 $8.37
------------------------------ ------------- ----------- ---- ------------- ---------- ----- ------------- ----------


The Company adopted the disclosure-only option under Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("FAS No.
123"). If the fair value accounting provisions of FAS No. 123 had been adopted
as of January 1, 1996 the pro forma effect on the 1998, 1997 and 1996 results
would have been immaterial. The exercise price range for the SARs outstanding at
December 31, 1998 was $6.38 - $14.50 with a weighted-average exercise price of
$11.18 and a weighted-average contractual remaining life of 4 years.

Employee Savings Plan The Company provides an Employee Savings Plan under
Section 401(k) of the Internal Revenue Code. The Employee Savings Plan allows
eligible employees to defer up to 12% of their income on a pretax basis. The
Company matches the employees' contribution, up to 6% of the employees' eligible
compensation. The Company may also make discretionary contributions based on the
profitability of the Company. The total expense related to the Company's
matching and discretionary contributions in 1998, 1997 and 1996 was $497, $424,
and $248, respectively. The Company does not provide post employment or post
retirement benefits to its employees.

401(k) Overflow Plan During 1997, the Company adopted a non-qualifying
overflow plan which covers employees who have contributed to the Employee
Savings Plan the maximum amount allowed under the Internal Revenue Code. The
excess contributions are made to the overflow plan on an after-tax basis.
However, the Company partially reimburses employees for the effect of the
contributions being made on an after-tax basis. The Company matches the
employee's contribution up to 6% of the employee's eligible compensation. The
total expense related to the Company's reimbursements in 1998 and 1997 was $56
and $17, respectively.


NOTE 13 - COMMITMENTS AND CONTINGENCIES

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
mortgage loans, and could incur losses. In the opinion of management, no
material losses are expected to result from any such representations and
warranties.

Dynex REIT facilitates the issuance of tax-exempt multifamily housing
bonds, the proceeds of which are used to fund mortgage loans on multifamily
properties. Dynex REIT enters into standby commitment agreements. Dynex REIT is
required to pay principal and interest to the bondholders in the event there is
a payment shortfall from the construction proceeds. In addition, Dynex REIT is
required to purchase the bonds if such bonds are not able to be remarketed by
the remarketing agent. Dynex REIT provided letters of credit to support its
obligations in amounts equal $144,216 and $25,878 at December 31, 1998 and 1997,
respectively.

On June 10, 1998, Dynex REIT entered into a credit agreement with AutoBond
Acceptance Corporation ("AutoBond") and AutoBond Master Funding Corporation V
("Funding"), whereby Dynex REIT would provide Funding with limited funding over
a one-year period to finance its purchase of automobile installment contracts
from AutoBond up to $20 million per month. This agreement was subsequently
amended to increase the funding amount to $25 million per month and to extend
the term through November 30, 1999. AutoBond is a specialty consumer finance
company that underwrites, acquires, services and securitizes retail installment
contracts originated by automobile dealers to borrowers that are credit
impaired. The common stock of AutoBond trades on the American Stock Exchange
under the symbol "ABD" In addition, DHI received an option to purchase 5.5
million shares of common stock of AutoBond held by the three principal
shareholders of AutoBond, for a price of $6.00 per share. Dynex REIT also
purchased from AutoBond a $3.0 million senior note convertible into 500,000
shares of AutoBond's common stock. As of December 31, 1998, Dynex REIT had
funded $149,189 million in funding notes related to the auto contracts. Based
upon results of a compliance review conducted by third party consultants during
January 1999, the Company ceased funding additional contracts effective February
3, 1999 (see Note 16).

As of December 31, 1998, Dynex REIT is obligated under noncancelable
operating leases with expiration dates through 2004. Rent expense under those
leases was $336, $295, and $204, respectively in 1998, 1997 and 1996. The future
minimum lease payments under these noncancelable leases are as follows:
1999--$566; 2000--$582; 2001--$600; 2002--$618; 2003--$636, and thereafter--$8.


NOTE 14 - SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS INFORMATION



- ------------------------------------------------------ -----------------------------------------------------
Years ended December 31,
- ------------------------------------------------------ -----------------------------------------------------
1998 1997 1996
-------------- --------------- ---------------


Cash paid for interest $ 319,626 $ 232,598 $ 228,027

Supplemental disclosure of non-cash activities:

Securities owned subsequently securitized $ 257,959 $ 311,117 $ 562,757

Other investments owned subsequently securitized $ 37,221 $ - $ -
- ---------------------------------------------------------- -------------- -- --------------- -- ---------------



NOTE 15 - RELATED PARTY TRANSACTIONS

Dynex REIT has a credit arrangement with DHI whereby DHI and any of DHI's
subsidiaries can borrow funds from Dynex REIT to finance its production
operations. Under this arrangement, Dynex REIT can also borrow funds from DHI.
The terms of the agreement allows DHI and its subsidiaries to borrow up to $50
million from Dynex REIT at a rate of Prime plus 1.0%. Dynex REIT can borrow up
to $50 million from DHI at a rate of one-month LIBOR plus 1.0%. This agreement
has a one-year maturity which is extended automatically unless notice is
received from one of the parties to the agreement within 30 days of the
anticipated termination of the agreement. As of December 31, 1998 and 1997, net
borrowings due to DHI under this agreement totaled $8,583 and $14,010,
respectively. Net interest expense under this agreement was $992, $462 and
$1,096 for the years ended December 31, 1998, 1997 and 1996, respectively.

Dynex REIT also has a loan funding agreement with Dynex Financial, Inc.
("DFI"), an operating subsidiary of DHI, whereby Dynex REIT pays DFI on a fee
plus cost basis for the origination of manufactured housing loans on behalf of
Dynex REIT. During 1998, 1997 and 1996, Dynex REIT paid DFI $15,771, $9,722 and
$5,172, respectively under such agreement.

Dynex REIT has a funding agreement with Dynex Commercial, Inc. ("DCI"), an
operating subsidiary of DHI, whereby Dynex REIT pays DCI a fee per loan
originated on behalf of Dynex REIT. Dynex REIT paid DCI $4,753, $1,694 and none,
respectively under this agreement for the years ended December 31, 1998, 1997
and 1996.

Dynex REIT has note agreements with Dynex Residential, Inc. ("DRI"), an
operating subsidiary of DHI, whereby DRI and its subsidiaries can borrow up to
$287,000 from Dynex REIT on a secured basis to finance the acquisition of model
homes from single-family home builders. The interest rate on the note is
adjustable and is based on 30-day LIBOR plus 2.5%-2.875%. The outstanding
balance of the note as of December 31, 1998 and 1997 was $159,377 and $115,905,
respectively. Interest income recorded by Dynex REIT for the years ended
December 31, 1998 1997 and 1996 was $11,971, $6,354 and $431, respectively.

Dynex REIT has entered into subservicing agreements with DCI and DFI to
service single family, consumer and manufactured housing loans. For servicing
the commercial loans, DCI receives an annual servicing fee of 0.02% of the
aggregate unpaid principal balance of the loans plus credit for compensating
balances. For servicing the single family mortgage, consumer and manufactured
housing loans, DFI receives annual fees of $10, $8 and $5 per loan,
respectively, and certain incentive fees. Servicing fees paid by Dynex REIT
under such agreements were $1,061, $321 and $none in 1998, 1997 and 1996,
respectively.


NOTE 16 - INVESTMENT IN AND ADVANCES TO DYNEX HOLDING, INC.

In 1998, Dynex REIT changed its method of accounting for its investment in
DHI from the full consolidation method to a method that approximates the equity
method. The accounting change had no impact on net income. For consistency
purposes, Dynex REIT has revised the 1997 and 1996 financial statements to give
retroactive effective to the change in accounting method.

Investments in and advances to DHI accounted for under a method similar to
the equity method amounted to $169,384 and $119,356 at December 31, 1998 and
1997, respectively. The results of operations and financial position of DHI are
summarized below:




- ------------------------------------------------------ ------------------------------------------------------
Condensed Income Statement Information Years ended December 31,
- ------------------------------------------------------ ------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------- ---------------- ----------------- ----------------


Total revenues $ 30,126 $ 17,338 $ 13,365
Total expenses 27,645 18,458 17,718
Net income (loss) 2,481 1,120 (4,353)




- ---------------------------------------------- -------------------------------------------
Condensed Balance Sheet Information December 31,
- ---------------------------------------------- -------------------------------------------
1998 1997
- ------------------------------------------------------------------ -----------------


Total assets $ 196,324 $ 144,606
Total liabilities 177,050 126,720
Total equity 19,274 17,886
- ------------------------------------------------------------------ -----------------



NOTE 17 - SUBSEQUENT EVENTS

In anticipation of exercising the stock option (discussed previously in
Note 13), the Company notified AutoBond in late December that the Company would
be performing due diligence and compliance procedures beginning January, 1999.
The Company hired outside consultants, experienced in subprime auto lending, to
assist in designing and performing the various tests and procedures. These tests
and procedures included, among others, the testing of compliance with AutoBond's
underwriting criteria using a statistically significant sample of loans. In late
January, the Company received the results from the underwriting compliance tests
which showed that a significant number of loans contained material deviations
from AutoBond's underwriting criteria. Also during the due diligence process,
AutoBond failed to provide the Company and its consultants with a significant
amount of requested information. Based on these findings and results, the
Company notified AutoBond of these breaches to the agreements, and discontinued
funding.

As a consequence of the breaches by AutoBond, on February 9, 1999, the
Company filed suit against AutoBond in the Federal district court of the Eastern
District of Virginia seeking declaratory relief with respect to its rights and
obligations under the Agreements. The Company subsequently amended its compliant
and is seeking unspecified damages from AutoBond.

The outside consultants also performed various tests and procedures to
determine AutoBond's compliance with its servicing procedures and guidelines. In
early February, Dynex received the results from the servicing compliance tests,
which highlighted certain irregularities. Based upon such report, Dynex analyzed
the loan data information that it has received monthly from AutoBond. Based upon
such analysis, Dynex determined that the delinquency ratio reported and
certified by AutoBond was understated, and that the delinquency ratio was such
that a "Triggering Event" had occurred as specified in the Agreements. Such
Triggering Event allowed Dynex to immediately terminate AutoBond as servicer. On
February 22, 1999, Dynex notified AutoBond that it was terminating its servicing
arrangement due to the Triggering Event, and named a third-party as successor
servicer. As of this date, AutoBond has not cooperated in the transfer of
servicing.

On February 8, 1999, AutoBond, along with three principal shareholders of
AutoBond, ("Plaintiffs") commenced an action in the District Court of Travis
County, Texas (250th Judicial District) against the Company. The Plaintiffs
allege that the Company breached the terms of the Agreements. The Plaintiffs
also allege that the Company conspired to misrepresent and mischaracterize
AutoBond's credit underwriting criteria and its compliance with such criteria
with the intention of interfering and causing actual damage to AutoBond's
business, prospective business and contracts. In addition to actual, punitive
and exemplary damages, the Plaintiffs also seek injunctive relief compelling the
Company to fund immediately all advances due AutoBond under the credit
agreement. The Company believes AutoBond's claims are without merit and intends
to defend against them vigorously.




DYNEX CAPITAL, INC.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE

December 31, 1998
(amounts in thousands except number of loans)



- ----------------------------------------------------------------------------------------------------------------------------
Principal
Amount of
Carrying Loans
Final Periodic Face Amount of Subject to
Interest Maturity Payment Prior Amount of Mortgage Delinquent
Description Rate Date Terms Liens Mortgages Loans Principal or
Interest
- ----------------------------------------------------------------------------------------------------------------------------


First mortgage loans:
Single family residential
417 mortgages, original 5.75% - Varies - $ $ $ 34,142 $ 468
loan amounts ranging from 10.25% - -
$28 to $219

Commercial
Office Building
St. Paul, Minnesota 6.96% October Interest - 41,500 14,962 -
(1) 1, 2008 and
principal
monthly

New Orleans,Louisiana 9.70% April 1, Interest - 8,200 8,200 -
2001 monthly


New Orleans,Louisiana 9.70% April 1, Interest - 7,400 7,400 -
2001 monthly


New Orleans, Louisiana 9.70% April 1, Interest - 15,000 15,000 -
2001 monthly


Multifamily Residential
Baron Rouge, Louisiana 7.75% March, 1 Interest - 8,075 8,0225 -
2016 and
principal
monthly


Baron Rouge,Louisiana 7.75% March, 1 Interest - 8,075 8,022 -
2016 and
principal
monthly

Nashville, Tennessee 8.05% August, 1 Interest - 8,000 7,911 -
2015 and
principal
monthly

15 mortgages, original loan 7.15%- Varies - - - 17,160 -
amounts ranging from $58 to 10.00%
$3,900
- ----------------------------------------------------------------------------------------------------------------------------


DYNEX CAPITAL, INC.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE (CONTINUED)

December 31, 1998
(amounts in thousands except number of loans)

- --------------------------------------------------------------------------------------------------------------------------
Principal
Amount of
Carrying Loans
Final Periodic Face Amount of Subject to
Interest Maturity Payment Prior Amount of Mortgage Delinquent
Description Rate Date Terms Liens Mortgages Loans Principal or
Interest
- --------------------------------------------------------------------------------------------------------------------------

Second Mortgage Loans
Commercial
St. Paul, Minnesota 9.00% November Interest - 10,157 10,157 -
1, 2020 and
principal
monthly

4 mortgages, original loan 9.00% Varies Balloon - - 10,017 -
amounts ranging from $1,300 payments
to $3,500 at
maturity
- -------------------------------------------------------------------------------------------------------------------------
140,993
Net premium/discount (6,454)
Allowance for loan losses (171)
- -------------------------------------------------------------------------------------------------------------------------
Total mortgage loans on real $ 134,368
estate
- -------------------------------------------------------------------------------------------------------------------------


(1) The Company owns a participation in this loan. The remaining
amount of the loan, $26.4 million is securitized in a commercial
securitization completed by the Company in December 1998.



The loans in the table above are conventional mortgage loans secured by
either single family and/or commercial properties with initial maturities
ranging from 3 to 30 years. Of the carrying amount, $135 million or 96% are
fixed-rate and $6 million or 4% are adjustable-rate loans. The Company believes
that its mortgage pool insurance and allowance of $171 are adequate to cover any
exposure on delinquent mortgage loans. A summary of activity of the single
family and commercial mortgage loans for the years ended December 31, 1998, 1997
and 1996 is as follows:



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


Balance at December 31, 1995 $ 247,633
Mortgage loans funded 1,411,161
Collection of principal (58,397)
Mortgage loans sold or securitized (1,361,969)
- --------------------------------------------------------------------

Balance at December 31, 1996 238,428
Mortgage loans funded 1,526,229
Collection of principal (61,188)
Mortgage loans sold or securitized (1,544,844)
- --------------------------------------------------------------------

Balance at December 31, 1997 158,625
Mortgage loans funded or purchased 1,164,512
Collection of principal (118,583)
Mortgage loans securitized (1,070,186)
- --------------------------------------------------------------------
Balance at December 31, 1998 134,368
- --------------------------------------------------------------------



DYNEX CAPITAL, INC.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE (CONTINUED)

December 31, 1998
(amounts in thousands except number of loans)

The geographic distribution of the Company's single family and commercial
loans held for securitization at December 31, 1998 is as follows:




------------------------- --------------------------- ---------------------
Number of Loans Principal
State Amount
------------------------- --------------------------- ---------------------


Arizona 2 149
Alabama 1 85
California 5 6,967
Colorado 2 2,079
Florida 14 3,607
Georgia 27 2,071
Idaho 4 289
Kentucky 8 4,181
Louisiana 5 46,645
Maryland 2 155
Michigan 2 3,191
Minnesota 2 25,120
Mississippi 3 210
New Mexico 1 1,541
North Carolina 143 14,124
Ohio 1 57
Oregon 21 1,838
South Carolina 60 5,430
Tennessee 46 10,939
Texas 2 4,745
Virginia 34 2,603
Washington 29 3,057
West Virginia 26 1,910
---------------------------- ---------------------------- ------------------
Total 140,993
Net premium/discount (6,454)
Allowance for loan losses (171)
---------------------------- ---------------------------- ------------------
134,368
---------------------------- ---------------------------- ------------------





EXHIBIT INDEX





Sequentially
Exhibit Numbered Page


23.1 Consent of Deloitte & Touche LLP I

23.2 Consent of KPMG LLP II