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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-Q

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

                      For the quarter ended March 31, 2001

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

                          Commission file number 1-9819



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





         Virginia                                                52-1549373

         (State or other jurisdiction of                      (I.R.S. Employer
          incorporation or organization)                     Identification No.)

         4551 Cox Road, Suite 300, Glen Allen, Virginia             23060
          (Address of principal executive offices)                (Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past ninety days.
 |_| Yes    |X|No

On April 30, 2001, the registrant had 11,444,206  shares of common stock of $.01
value outstanding, which is the registrant's only class of common stock.

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                               DYNEX CAPITAL, INC.
                                    FORM 10-Q

                                      INDEX

                                                                          Page

PART I.  FINANCIAL INFORMATION

         Item 1.  Financial Statements

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

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

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

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

                  Notes to Unaudited Consolidated Financial
                  Statements                                                5

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

         Item 3.  Quantitative and Qualitative Disclosures about
                  Market Risk                                              24


PART II. OTHER INFORMATION

         Item 1.  Legal Proceedings                                        26

         Item 2.  Changes in Securities and Use of Proceeds                26

         Item 3.  Defaults Upon Senior Securities                          26

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

         Item 5.  Other Information                                        26

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


         SIGNATURES                                                        27


PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements

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


                                                                               (Unaudited)
                                                                                March 31,            December 31,
  ASSETS                                                                          2001                   2000
                                                                            -------------------    ------------------
                                                                                                     
  Investments:
    Collateral for collateralized bonds                                      $      2,894,775       $     3,042,158
    Securities                                                                          9,357                 9,364
    Other investments                                                                  32,280                42,284
    Loans held for sale                                                                 3,422                19,102
                                                                            -------------------    ------------------
                                                                                    2,939,834             3,112,908

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

  LIABILITIES AND SHAREHOLDERS' EQUITY

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

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

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

See notes to unaudited consolidated financial statements.

DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS, UNAUDITED
(amounts in thousands except share data)



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

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

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

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

Net interest margin                                                                      3,837                       5,979

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

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

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

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

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

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

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


See notes to unaudited consolidated financial statements.

DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY, UNAUDITED
For the three months ended March 31, 2001
(amounts in thousands)




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

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

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

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


See notes to unaudited consolidated financial statements.

DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, UNAUDITED
(amounts in thousands)



                                                                                          Three Months Ended
                                                                                               March 31,
                                                                                --------------------------------------
                                                                                        2001                   2000
                                                                                ------------------  ------------------
                                                                                                          
 Operating activities:
   Net income (loss)                                                          $           11,647     $        (10,704)
   Adjustments to reconcile net income (loss) to net cash provided by
     operating activities:
       Provision for losses                                                                6,589                5,321
       Net (gain) loss on sales, write-downs, impairment charges and                     (7,087)               13,433
         litigation
       Equity in net loss of Dynex Holding, Inc.                                               -                  719
       Extraordinary item  - net gain on extinguishment of debt                          (2,271)                    -
       Payment received from litigation settlement, net of legal fees                      7,111                    -
       Amortization and depreciation                                                       3,942                4,334
       Net change in accrued interest, other assets and other liabilities               (14,808)               (6,634)
                                                                                -----------------    -----------------
          Net cash provided by operating activities                                        5,123                6,469
                                                                                -----------------    -----------------

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

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

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

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


See notes to unaudited consolidated financial statements.

DYNEX CAPITAL, INC.
NOTES TO UNAUDITED  CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
(amounts in thousands except share data)


NOTE 1--BASIS OF PRESENTATION

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

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

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

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

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

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

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

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


NOTE 2--NET INCOME PER COMMON SHARE

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

The following table  reconciles the numerator and denominator for both the basic
and diluted  net income per common  share for the three  months  ended March 31,
2001 and 2000.



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

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

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

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

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

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

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

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


NOTE 3 -- COLLATERAL FOR COLLATERALIZED BONDS AND SECURITIES

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



------------------------------------------------------------------------------------------------------------------------
                                                    March 31, 2001                           December 31, 2000
------------------------------------------------------------------------------------------------------------------------
                                                                Effective                                   Effective
                                                                 Interest                                    Interest
                                             Fair Value            Rate                Fair Value              Rate
------------------------------------------------------------------------------------------------------------------------
                                                                                                    
Collateral for collateralized bonds:
   Amortized cost                          $   3,035,785           8.0%             $     3,189,414             7.8%
   Allowance for losses                          (23,789)                                   (25,314)
------------------------------------------------------------------------------------------------------------------------
     Amortized cost, net                       3,011,966                                  3,164,100
  Gross unrealized gains                          36,337                                     37,803
  Gross unrealized losses                      (153,558)                                   (159,745)
------------------------------------------------------------------------------------------------------------------------
                                           $   2,894,775                            $     3,042,158
------------------------------------------------------------------------------------------------------------------------

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


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

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

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

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


NOTE 4 - USE OF ESTIMATES

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


NOTE 5 -- RECOURSE DEBT

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



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

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

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


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

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

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


NOTE 6-- ADOPTION OF FINANCIAL ACCOUNTING STANDARDS

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

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


NOTE 7--DERIVATIVE FINANCIAL INSTRUMENTS

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

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

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

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

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


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

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

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

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

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


NOTE 9 -- COMMITMENTS

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

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


NOTE 10 -- LITIGATION

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

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

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


NOTE 11 -- RELATED PARTY TRANSACTIONS

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

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

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

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

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

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

                               FINANCIAL CONDITION
                  (amounts in thousands except per share data)

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

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

Shareholders' equity                              173,871           157,131

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

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

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

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

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

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

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

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

                              RESULTS OF OPERATIONS



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

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

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

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


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

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

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

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

                  Average Balances and Effective Interest Rates



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

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

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

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

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


(1)  Average balances  exclude  adjustments made in accordance with Statement of
     Financial Accounting Standards No. 115, "Accounting for Certain Investments
     in Debt and Equity Securities" to record  available-for-sale  securities at
     fair value.
(2)  Average  balances exclude funds held by trustees of $437 and $1,143 for the
     three months ended March 31, 2001 and 2000, respectively.
(3)  Effective rates for non-recourse debt are calculated excluding non-interest
     related  collateralized bond expenses.  If included,  the effective rate on
     interest  bearing  liabilities for the first quarter of 2001 and 2000 would
     be 6.98% and 6.99%, respectively.



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

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

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

                      Investment Portfolio Composition (1)
                                 ($ in millions)



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


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



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

                         Premium Basis and Amortization
                                 ($ in millions)



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

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


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

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

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

                    Credit Reserves and Actual Credit Losses
                                 ($ in millions)



----------------------------------------------------------------------------------------------------------------------
                            Outstanding        Credit Exposure,       Actual      Credit Exposure, Net of
                           Loan Principal             Net             Credit         Credit Reserves to
                              Balance         of Credit Reserves      Losses     Outstanding Loan Balance
----------------------------------------------------------------------------------------------------------------------
                                                                               
1999, Quarter 2           $   3,965.6          $        155.5         $  4.6              3.92%
1999, Quarter 3               3,949.2                   194.5            5.3              4.93%
1999, Quarter 4               3,770.3                   183.2            5.5              4.86%
2000, Quarter 1               3,679.6                   136.0            4.8              3.70%
2000, Quarter 2               3,677.3                   165.2            5.4              4.49%
2000, Quarter 3               3,503.1                   142.4            6.8              4.06%
2000, Quarter 4               3,245.3                   119.1            9.6              3.67%
2001, Quarter 1               3,137.0                   111.7            8.1              3.56%
----------------------------------------------------------------------------------------------------------------------


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

                           Delinquency Statistics (1)



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

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


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



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

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


                         LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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

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

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

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

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



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

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

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

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

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


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




                           FORWARD-LOOKING STATEMENTS

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

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

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

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

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

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

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

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

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

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

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

     Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

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

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

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

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

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

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


PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

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

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

Item 2.  Changes in Securities and Use of Proceeds

         Not applicable

Item 3.  Defaults Upon Senior Securities

         Not applicable

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

         Not applicable

Item 5.  Other Information

         None

Item 6.  Exhibits and Reports on Form 8-K

         (a)      Exhibits

                  None

         (b)      Reports on Form 8-K

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



                                   SIGNATURES

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

                                          DYNEX CAPITAL, INC.



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



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

Dated:  May 15, 2001