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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 June 30, 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 July 31, 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

                                                                 

PART I.   FINANCIAL INFORMATION                                              Page Number

Item 1.   Financial Statements

               Consolidated Balance Sheets at June 30, 2001 (unaudited)
               and December 31, 2000 ............................................    1

               Consolidated Statements of Operations for the three and six months
               ended June 30, 2001 and 2000 (unaudited) .........................    2

               Consolidated Statements of Cash Flows for
               the six months ended June 30, 2001 and 2000 (unaudited) ..........    3

               Notes to Unaudited Consolidated Financial Statements .............    4

Item 2.    Management's Discussion and Analysis of
           Financial Condition and Results of Operations ........................   14

Item 3.    Quantitative and Qualitative Disclosures about Market Risk ...........   26


PART II    OTHER INFORMATION

Item 1.    Legal Proceedings ....................................................   28

Item 2.    Changes in Securities and Use of Proceeds ............................   29

Item 3.    Defaults Upon Senior Securities .......................................  29

Item 4.    Submission of Matters to a Vote of Security Holders ..................   29

Item 5.    Other Information ....................................................   29

Item 6.    Exhibits and Reports on Form 8-K .....................................   29


SIGNATURES ......................................................................   30




PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements
DYNEX CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands except share data)


                                                                               (Unaudited)
                                                                                June 30,             December 31,
                                                                                                   
  ASSETS                                                                          2001                   2000
                                                                            -------------------    ------------------
  Investments:
    Collateral for collateralized bonds                                      $      2,722,844       $     3,042,158
    Securities                                                                          9,193                 9,364
    Other investments                                                                  31,857                42,284
    Loans held for sale                                                                 3,429                19,102
                                                                            -------------------    ------------------
                                                                                    2,767,323             3,112,908

  Cash, including restricted                                                            7,164                26,773
  Accrued interest receivable                                                              67                   323
  Other assets                                                                         18,856                19,592
                                                                            -------------------    ------------------
         Total Assets                                                        $      2,793,410       $     3,159,596
                                                                            ===================    ==================

  LIABILITIES AND SHAREHOLDERS' EQUITY

  LIABILITIES
  Non-recourse debt                                                          $      2,540,164       $     2,856,728
  Recourse debt                                                                        71,578               134,168
                                                                            -------------------    ------------------
                                                                                    2,611,742             2,990,896

  Accrued interest payable                                                              2,117                 3,775
  Accrued expenses and other liabilities                                                2,234                 7,794
  Dividends payable                                                                     1,614                     -

                                                                            -------------------    ------------------
         Total Liabilities                                                          2,617,707             3,002,465
                                                                            -------------------    ------------------

  SHAREHOLDERS' EQUITY
  Preferred stock, par value $.01 per share, 50,000,000 shares authorized:
        9.75% Cumulative Convertible Series A,
          1,106,971 and 1,309,061 issued and outstanding, respectively
       ($31,748 and $36,012 aggregate liquidation preference, respectively)            25,169                29,900

        9.55% Cumulative Convertible Series B,
          1,548,726 and 1,912,434 issued and outstanding, respectively
       ($45,192 and $53,567 aggregate liquidation preference, respectively)            36,254                44,767
        9.73% Cumulative Convertible Series C,
          1,585,197 and 1,840,000 issued and outstanding, respectively
       ($56,813 and $63,259 aggregate liquidation preference, respectively)            45,437                52,740
  Common stock,  par value $.01 per share,
    100,000,000 shares authorized,
    11,446,206 issued and outstanding                                                     114                   114
  Additional paid-in capital                                                          361,584               351,999
  Accumulated other comprehensive loss                                              (107,860)             (124,589)
  Accumulated deficit                                                               (184,995)             (197,800)
                                                                            -------------------    ------------------
         Total Shareholders' Equity                                                   175,703               157,131
                                                                               ----------------    ------------------
         Total Liabilities and Shareholders' Equity                          $      2,793,410       $     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                  Six Months Ended
                                                                           June 30,                           June 30,
                                                                -------------------------------    -------------------------------
                                                                ------------- --- -------------
                                                                    2001              2000             2001              2000
                                                                -------------     -------------    -------------     -------------
                                                                                                               

Interest income:
   Collateral for collateralized bonds                           $  56,478          $  68,393       $  117,592        $  138,623
   Securities                                                          366              1,026              674             3,002
   Other investments                                                 1,465              1,524            3,393             3,036
   Loans held for sale or securitization                               180              4,492              332             9,866
                                                                -------------     -------------    -------------     -------------
                                                                    58,489             75,435          121,991           154,527
                                                                -------------     -------------    -------------     -------------

Interest and related expense:
   Non-recourse debt                                                43,546             59,869           93,671           116,696
   Recourse debt                                                     1,837              6,407            4,423            15,293
   Other                                                               106              1,748              469             3,827
                                                                -------------     -------------    -------------     -------------
                                                                    45,489             68,024           98,563           135,816
                                                                -------------     -------------    -------------     -------------

Net interest margin before provision for losses                     13,000              7,411           23,428            18,711
Provision for losses                                                (6,589)            (5,510)         (13,177)          (10,831)
                                                                -------------     -------------    -------------     -------------
Net interest margin                                                  6,411              1,901           10,251             7,880

Net  gain (loss) on sales, write-downs, impairment charges,
   and litigation                                                      457            (71,477)           7,544          (84,910)
Equity in net earnings of Dynex Holding, Inc.                            -              2,759                             2,040
                                                                                                        -
Trading losses                                                     (1,958)                  -          (1,720)                -
Other (loss) income                                                   (77)                415             (20)              537
                                                                -------------     -------------    -------------     -------------
                                                                     4,833            (66,402)         16,055           (74,453)

General and administrative expenses                                 (2,634)            (2,175)          (4,477)           (4,578)
Net administrative fees and expenses to                                                  (118)
    Dynex Holding, Inc.                                                  -                                   -              (368)
                                                                -------------     -------------    -------------     -------------
Income (loss) before extraordinary item                              2,199            (68,695)          11,578           (79,399)

Extraordinary item  - gain on extinguishment of debt                   573                  -            2,844                 -
                                                                -------------     -------------    -------------     -------------
Net income (loss)                                                    2,772            (68,695)          14,422           (79,399)
Preferred stock benefit (charges)                                   10,493             (3,228)                            (6,456)
                                                                -------------     -------------    -------------     -------------
Net income (loss) to common shareholders                          $ 13,265          $ (71,923)         $21,687         $ (85,855)
                                                                =============     =============    =============     =============
Net income (loss) per common share before extraordinary item:
   Basic                                                          $    1.11         $ (6.28)         $    1.65         $   (7.50)
                                                                =============     =============    =============     =============
   Diluted                                                        $    1.11         $ (6.28)         $    1.65         $   (7.50)
                                                                =============     =============    =============     =============

Net income (loss) per common share after extraordinary item:
   Basic                                                          $    1.16         $ (6.28)         $    1.90         $   (7.50)
                                                                =============     =============    =============     =============
   Diluted                                                        $    1.16         $ (6.28)         $    1.90         $   (7.50)
                                                                =============     =============    =============     =============
                                                                =============     =============    =============     =============
Weighted average number of common shares outstanding
   Basic and diluted                                              11,446,206        11,444,552       11,446,206        11,444,355
                                                                =============     =============    =============     =============


See notes to unaudited consolidated financial statements.






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


                                                                                           Six Months Ended
                                                                                                June 30,
                                                                                        2001                 2000
                                                                              -------------------    ------------------
                                                                                                           
 Operating activities:
   Net income (loss)                                                          $           14,422     $        (79,399)
   Adjustments to reconcile net income (loss) to net cash provided (used) by
     operating activities:
       Provision for losses                                                               13,177               10,831
       Net (gain) loss on sales, write-downs, impairment charges and                      (7,544)              84,910
         litigation
       Equity in net earnings of Dynex Holding, Inc.                                           -               (2,040)
       AutoBond related litigation settlement (payment)                                    7,111              (20,000)
       Extraordinary item  - net gain on extinguishment of debt                           (2,844)                  -
       Amortization and depreciation                                                       8,258                8.871
       Net change in accrued interest, other assets and other liabilities                 (9,913)              (9,566)
                                                                              -------------------    ------------------
          Net cash provided (used) by operating activities                                22,667               (6,393)
                                                                              -------------------    ------------------

 Investing activities:
   Collateral for collateralized bonds:
     Principal payments on collateral                                                    315,684               255,716
     Decrease in accrued interest receivable                                                 256                   509
     Net (increase) decrease in funds held by trustee                                       (52)                   695
   Net decrease in loans held for sale or securitization                                  16,066                88,906
   Purchase of other investments                                                           (123)               (1,658)
   Payments received on other investments                                                  2,740                 2,670
   Proceeds from sales of  other investments                                                 233                 2,916
   Decrease (increase) in restricted cash                                                 20,248                     -
   Payments received on securities                                                           805                19,276
   Proceeds from sales of securities                                                         113                20,111
    Payment on tax-exempt bond obligations                                                     -              (30,418)
   Investment in and net advances to Dynex Holding, Inc.                                       -                 2,981
   Proceeds from sale of loan production operations                                        9,500                9,500
   Capital expenditures                                                                    (207)                  (54)
                                                                              -------------------    ------------------
        Net cash provided by investing activities                                        365,263               371,150
                                                                              -------------------    ------------------

 Financing activities:
   Collateralized bonds:
     Proceeds from issuance of bonds                                                           -               137,241
     Principal payments on bonds                                                        (318,315)             (255,453)
     Increase in accrued interest payable                                                  1,661                 1,184
   Repayment of recourse debt borrowings, net                                            (59,674)             (293,241)
   Capital stock transactions                                                            (10,963)                    2
                                                                              -------------------    ------------------
        Net cash used for financing activities                                          (387,291)             (410,267)
                                                                              -------------------    ------------------

 Net increase (decrease) in cash                                                             639               (45,510)
 Cash at beginning of period (unrestricted)                                                3,485                54,433
                                                                              -------------------    ------------------
 Cash at end of period (unrestricted)                                         $            4,124     $           8,923
                                                                              ===================    ==================

 Cash paid for interest                                                       $           97,152     $        129,743
                                                                              ===================    ==================

 Securities owned subsequently securitized                                    $                -     $         71,209
                                                                              ===================    ==================
See notes to unaudited consolidated financial statements.







DYNEX CAPITAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 six months ended June 30, 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 June 30, 2001, the Consolidated  Statements of Operations for the three
and six months  ended June 30,  2001 and 2000,  the  Consolidated  Statement  of
Shareholders'  Equity for the six months ended June 30, 2001,  the  Consolidated
Statements  of Cash  Flows for the six months  ended June 30,  2001 and 2000 and
related notes to  consolidated  financial  statements are  unaudited.  Operating
results for the six months ended June 30, 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. 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  current 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,  as a result  of a  previously  existing  contractual  obligation,  the
Company will likely acquire up to $8,000 in delinquent  property tax receivables
during 2001.

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, which
was  subsequently  terminated  in January 2001 by the Company due to breaches by
the other party.  See Note 11 below.  In  addition,  in an effort to improve the
liquidity  of the  Company's  Series A, Series B, and Series C  Preferred  Stock
(together,  the "Preferred  Stock"),  on June 8, 2001,  the Company  completed a
tender offer on the Preferred Stock, resulting in the purchase by the Company of
820,601 shares of the Preferred Stock for $10,918,  net of legal fees, which had
an issue price of $21,405,  and  including  cumulative  dividends in arrears,  a
liquidation preference of approximately $25,110. The Board of Directors may take
further actions to improve  shareholder  value and to provide greater  liquidity
for the Company's preferred and common stocks.

Since  December 31, 2000,  the Company has repaid  $62,590 of  on-balance  sheet
recourse  debt  outstanding,  and  released  off-balance  sheet  liabilities  of
$66,765.  While the Company's current business  prospects are limited,  based on
current projected cash flow estimates on its investment  portfolio and estimated
proceeds  on the call and  subsequent  sale or  resecuritization  of  investment
portfolio  assets,  the  Company  anticipates  that it will be able to repay its
remaining outstanding recourse debt in accordance with their respective terms.

Cash - Restricted
At June 30,  2001  and  December  31,  2000,  cash in the  aggregate  amount  of
approximately $3,040 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 and six months ended June
30, 2001 and 2000.



                                                               Three months ended June 30,        Six months ended June 30,
                                                               -------------------------------    ------------------------------
                                                                   2001             2000              2001             2000
                                                               --------------   --------------    -------------    -------------
                                                                                                             

Income (loss) before extraordinary item                            $   2,199       $ (68,695)         $ 11,578       $ (79,399)
Extraordinary item - net gain on extinguishment of debt                  573                -            2,844                -
                                                               --------------   --------------    -------------    -------------
Net income (loss)                                                      2,772         (68,695)           14,422         (79,399)
Preferred Stock benefits (charges):
     Discount to book value on Preferred Stock tender offer            9,585                -            9,585                -
     Dividends on Preferred Stock
         Series A, Series B and Series C undeclared                   (3,055)          (3,228)          (6,283)          (6,456)
         Series A, Series B and Series C tendered                      3,964                -            3,964                -
                                                               --------------   --------------    -------------    -------------

Basic and Diluted net income (loss) to common shareholders         $  13,265       $ (71,923)         $ 21,687       $ (85,855)
                                                               ==============   ==============    =============    =============

Weighted average common shares outstanding                        11,446,206       11,444,552       11,446,206       11,444,355

Basic net income (loss) per common share before
 extraordinary item:
     Basic                                                         $    1.11        $  (6.28)         $   1.65        $  (7.50)
                                                               ==============   ==============    =============    =============
     Diluted                                                       $    1.11        $  (6.28)         $   1.65        $  (7.50)
                                                               ==============   ==============    =============    =============

Basic net income (loss) per common share after
 extraordinary item:
     Basic                                                         $    1.16        $  (6.28)         $   1.90        $  (7.50)
                                                               ==============   ==============    =============    =============
     Diluted                                                       $    1.16        $  (6.28)         $   1.90        $  (7.50)
                                                               ==============   ==============    =============    =============



Reconciliation of anti-dilutive shares:
    Additional shares of preferred stock
         Series A 9.75% cumulative convertible                       642,317          654,531          648,390          654,531
         Series B 9.55% cumulative convertible                       934,235          956,217          945,165          956,217
         Series C 9.73% cumulative convertible                       904,600          920,000          912,258          920,000
    Incremental shares of stock appreciation rights                        -           25,435                -           25,435
                                                               --------------   --------------    -------------    -------------
                                                                   2,481,152        2,556,183        2,505,813        2,556,183
                                                               ==============   ==============    =============    =============




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 June  30,  2001  and
December 31, 2000, and the related average effective interest rates:



======================================================================================================================
                                                    June 30, 2001                            December 31, 2000
----------------------------------------------------------------------------------------------------------------------
                                                                Effective                                   Effective
                                                                 Interest                                    Interest
                                             Fair Value            Rate                Fair Value              Rate
----------------------------------------------------------------------------------------------------------------------
                                                                                                     
Collateral for collateralized bonds:
   Amortized cost                          $   2,850,024           7.9%             $     3,189,414           7.8%
  Allowance for losses                          (21,137)                                    (25,314)
----------------------------------------------------------------------------------------------------------------------
     Amortized cost, net                       2,828,887                                  3,164,100
  Gross unrealized gains                          28,621                                     37,803
  Gross unrealized losses                      (134,664)                                   (159,745)
------------------------------------------ ---------------- -- ------------- ------ ----------------- --- --------------
                                           $   2,722,844                            $     3,042,158
------------------------------------------ ---------------- -- ------------- ------ ----------------- --- --------------

Securities:
  Adjustable-rate mortgage securities              4,550          10.9%                       5,008           10.9%
  Fixed-rate mortgage securities                   1,398          10.8%                       1,505            9.3%
  Derivative and residual securities               5,118           9.8%                       5,553            7.9%
------------------------------------------------------------------------------------------------------------------------
                                                  11,066                                     12,066
  Allowance for losses                              (55)                                        (55)
------------------------------------------------------------------------------------------------------------------------
      Amortized cost, net                         11,011                                     12,011
   Gross unrealized gains                            493                                        411
  Gross unrealized losses                         (2,311)                                     (3,058)
------------------------------------------------------------------------------------------------------------------------
                                           $       9,193                            $         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.  Collateral  for
collateralized  bonds also includes  delinquent  property tax  receivables.  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.

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  $20,111 for the
six months  ended June 30,  2000.  There was one  security  sold  during the six
months  ended  June 30,  2001 for  $113.  See Note 9, Net Gain  (Loss) on Sales,
Write-downs, Impairment Charges and Litigation for further discussion.


NOTE 4 - USE OF ESTIMATES

Fair  Value.  Dynex  REIT uses  estimates  in  establishing  fair  value for its
financial instruments.  Estimates of fair value for financial instruments may be
based on market prices provided by certain dealers.  Estimates of fair value for
certain other  financial  instruments  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 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 June 30, 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.  In  addition  to  variations  in such  assumptions,  as
discussed  further  in  Note  11,  due  to an  adverse  ruling  rendered  by the
Commonwealth  Court of  Pennsylvania  on July 5, 2001, the Company's  ability to
collect certain  amounts of interest,  fees and costs incurred on its delinquent
property tax receivables  pledged as collateral for collateralized  bonds may be
adversely impacted. The Company, based on consultation with counsel,  reasonably
believes that the Appellate Court's decision will ultimately be reversed or that
the ultimate  outcome of the litigation  will not result in a material impact on
the carrying value of the delinquent property tax receivables.

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 June
30, 2001 and December 31, 2000:



===================================================================================================================
                                                                  June 30, 2001                December 31, 2000
                                                            -------------------------     -------------------------
                                                                                                 

  Repurchase agreements                                         $     13,058                     $ 35,015
  Credit facility                                                          -                        2,000
  Capital lease obligations                                              324                          430
                                                            -------------------------     -------------------------
                                                                      13,382                       37,445


  7.875% July 2002 Senior Notes                                       58,365                       97,250
  Net unamortized issuance costs                                       (169)                        (527)
                                                            ------------------------      -------------------------
                                                                $     71,578                 $    134,168
===================================================================================================================

At June 30, 2001 and December 31, 2000,  recourse debt  consisted of $13,058 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 $324 and $430,
respectively,  of  amounts  outstanding  under  a  capital  lease.  The  secured
revolving  credit  facility was  extinguished in January 2001. At June 30, 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 June 30, 2001 and December  31, 2000,  Dynex REIT had $58,365 and $97,250,
respectively,  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.
Through  June 30, 2001,  the Company has retired  $38,885 of July 2002 Notes for
$35,185 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%. As  discussed  in Note 11, the validity of the
March 30, 2001  amendment to the indenture and the  subsequent  entering into of
the  Purchase  Agreement  has been  challenged  in US  District  Court  Southern
District of New York by a  third-party  who insures $25 million of the July 2002
Notes for the  benefit  of the  holder of these  Notes.  Such  third  party also
purchased $1 million of the July 2002 Notes in June 2001.

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.
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
adoption  of FAS  No.  140 did  not  have a  material  impact  on the  Company's
financial statements

In June 2001,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting Standard (SFAS) No. 141, Business  Combinations.  SFAS No.
141 requires  that all business  combinations  initiated  after June 30, 2001 be
accounted for under the purchase  method and  addresses the initial  recognition
and measurement of goodwill and other  intangible  assets acquired in a business
combination. Business combinations originally accounted for under the pooling of
interest method will not be changed.  Management does not expect the adoption of
SFAS 141 to have an impact on the financial  position,  results of operations or
cash flows of the Company.

In June 2001,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standard  (SFAS) No. 142,  Goodwill and Other  Intangible
Assets.  SFAS No. 142  addresses  the initial  recognition  and  measurement  of
intangible assets acquired outside of a business  combination and the accounting
for goodwill and other intangible assets subsequent to their  acquisition.  SFAS
No. 142 provides  that  intangible  assets with finite useful lives be amortized
and that  goodwill  and  intangible  assets  with  indefinite  lives will not be
amortized,  but will rather be tested at least annually for  impairment.  As the
Company has no goodwill or intangible assets that it is amortizing, the adoption
of SFAS No.  142 will have no  effect  on the  financial  position,  results  of
operations or cash flows of the Company.


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.  In March
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.  In addition,  in April and May 2001, the Company  entered into two
short  positions on the  one-month  LIBOR futures  contract,  both of which were
settled  during the second  quarter.  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,  and the gain or loss recognized at
the  termination  of these  contracts,  will be  recognized  in  current  period
earnings. During the six months ended June 30, 2001, given the continued decline
in one-month  LIBOR due to  reductions in the targeted  Federal Funds Rate,  the
Company  recognized  $1,720 in losses  related to these  contracts.  At June 30,
2001, the aggregate  remaining  short position was $700,000 and on July 2, 2001,
the Company terminated $400,000 of the position for an additional cost of $15.


NOTE 8--PREFERRED STOCK

On June 8, 2001, the Company completed a tender offer on its Series A, Series B,
and Series C Preferred Stock (together, the "Preferred Stock"), resulting in the
purchase by the Company of 820,601 shares of the Preferred Stock,  consisting of
202,090  shares of Series A,  363,708  shares of Series B and 254,803  shares of
Series C,  respectively,  for an aggregate  $10,918,  and which had an aggregate
issue price of $21,405,  a book value of $20,503,  and  including  dividends  in
arrears, a liquidation  preference of $25,110.  The difference of $9,585 between
the  repurchase  price and the book value has been included in the  accompanying
Statement of Operations  for the three and six month periods ended June 30, 2001
as an addition to net income  available to common  shareholders in the line item
captioned Preferred Stock benefit (charges) as required by EITF's D-42 and D-53.
Also included in Preferred Stock benefit (charges) is the cumulative dividend in
arrears of $3,964  related to those shares  tendered on June 8, 2001,  and which
was  effectively  cancelled at such time. In addition,  Preferred  Stock benefit
(charges)  includes the current period  dividend  amount for the Preferred Stock
outstanding for the three and six month periods ended June 30, 2001.

     As of June 30, 2001 and December 31, 2000, the total amount of dividends in
arrears  were  $20,331 and  $19,367  respectively.  Individually,  the amount of
dividends  in arrears on the Series A, the Series B and the Series C were $4,857
($4.39 per Series A share),  $6,795 ($4.39 per Series B share) and $8,679 ($5.48
per Series C share),  at June 30,  2001 and  $4,595  ($3.51 per Series A share),
$6,713  ($3.51 per Series B share)  and  $8,059  ($4.38 per Series C share),  at
December 31,2000.


NOTE 9 - 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 six months ended June 30, 2001 and
2000.

================================================================================
                                                  Six months ended June 30,
                                             -----------------------------------
                                                       2001              2000
                                             --------------------   ------------

Phase-out of commercial production operations           401         $    (1,586)
Sales of investments                                    113             (15,639)
Impairment/Writedowns                                   -               (67,214)
AutoBond litigation and AutoBond securities           7,111                  -
Other                                                   (81)               (471)
--------------------------------------------------------------------------------
                                                   $  7,544           $ (84,910)
================================================================================

During the six months  ending  June 30,  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 six  months  ended June 30,  2000,  the  Company
recognized  losses of $67,214  related to (i) the  permanent  impairment  in the
carrying  value of  certain  securities,  (ii)  write-downs  to market  value of
commercial and  multifamily  loans held for sale and (iii) the accrual of losses
related to contingent  obligations  on its  off-balance  sheet  tax-exempt  bond
positions.  Also, securities with an aggregate principal balance of $34,448 were
sold during the six months ended June 30, 2000 for an aggregate loss of $15,639.
Loss on sale of  investments at June 30, 2000 also includes  realized  losses of
$1,586 related to the sale of $115,231 of commercial loans during the six months
ended June 30, 2000.


NOTE 10 -- 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 11 -- 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").  Among
other things,  the Merger  Agreement  obligated  CIF to,  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 forbear 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
United States  District Court for 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 as both a tort claim and a contract  claim.  On
April 19, 2001,  based on a motion brought by the Company,  the Court  dismissed
CIF's tort claim for $45,000 of damages, but let such claim remain as a contract
claim. The Company believes that the Agreement is clear that the maximum damages
that CIF may recover from the Company are $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.

GLS Capital, Inc. ("GLS"), a subsidiary of the Company, together with the County
of Allegheny, Pennsylvania ("Allegheny County"), were defendants in a lawsuit in
the Commonwealth  Court of Pennsylvania (the  "Commonwealth  Court") wherein the
plaintiffs  challenged the right of Allegheny  County and GLS to collect certain
interest,  costs and expenses related to delinquent  property tax receivables in
Allegheny County.  This lawsuit was related to the purchase by GLS of delinquent
property tax  receivables  from  Allegheny  County in 1997,  1998,  and 1999 for
approximately $58,300. On July 5, 2001, the Commonwealth Court ruling addressed,
among other  things,  (i) the right of the  Company to charge to the  delinquent
taxpayer  a rate  of  interest  of 12%  versus  10%  on  the  collection  of its
delinquent property tax receivables, (ii) the charging of attorney's fees to the
delinquent  taxpayer for the collection of such tax  receivables,  and (iii) the
charging  to the  delinquent  taxpayer  of certain  other  fees and  costs.  The
Commonwealth  Court  remanded for further  consideration  to the Court of Common
Pleas items (i) and (iii),  and ruled that neither  Allegheny County nor GLS had
the right to charge  attorney's fees to the delinquent  taxpayer  related to the
collection  of such  tax  receivables,  reversing  the  Court  of  Common  Pleas
decision.  GLS and Allegheny  County have filed an Application for Reargument of
Appellees with the Commonwealth Court of Pennsylvania.  Allegheny County and GLS
are in the process of filing a Petition for  Extraordinary  Jurisdiction as well
as a Petition for  Allowance of Appeal with the Supreme  Court of  Pennsylvania,
which will seek to reverse the Commonwealth  Court's  decision.  No damages have
been  claimed in the action;  however,  as discussed in Note 4, the decision may
impact the ultimate  recoverability of the delinquent  property tax receivables.
To date, GLS has incurred attorneys fees of $2 million, approximately $1 million
of which have been  reimbursed to GLS by the taxpayer or through  liquidation of
the underlying real property.


On May 4, 2001, ACA Financial Guaranty  Corporation  ("ACA") commenced an action
in the United States  District Court for the Southern  District of New York (the
"District Court"), (the "Action"), in which ACA sought injunctive relief as well
as money damages of $25,000 based on causes of action for fraudulent  conveyance
and breach of  contract.  The  complaint  challenged,  among other  things,  the
validity of the March 30, 2001  Supplemental  Indenture  to the 1997 Senior Note
Indenture as amended ("1997  Indenture")  discussed in Note 5, pursuant to which
in 1997 Dynex issued its 7.875% Senior Notes due July 2002. In  particular,  the
complaint  challenged  the  validity,   among  other  things,  of  the  Purchase
Agreement,  and the Supplemental  Indenture and the related amendment to certain
restrictive  covenants in the  Indenture to allow for certain  distributions  to
holders of Dynex equity  securities,  including  the Preferred  Stock.  ACA is a
financial  guaranty  company who has insured  $25,000 of the July 2002 Notes for
repayment  at  maturity on July 15,  2002,  for the benefit of the holder of the
Notes. The Company is not a party to this insurance  contract.  On June 7, 2001,
the District Court granted the Company's  cross-motion  to dismiss the Action on
the grounds that ACA lacked standing to pursue claims against the Company in its
capacity as an insurer. The District Court dismissed the action without reaching
ACA's  request for a  preliminary  injunction.  Subsequently,  ACA  purchased $1
million  of the July  2002  Notes,  and on June  12,  2001,  filed a motion  for
reconsideration  of the order  dismissing  the  Action.  On July 30,  2001,  the
District Court granted ACA leave to file an amended complaint in its capacity as
a Note holder,  and stated that it would  consider the parties'  arguments  with
respect to a  preliminary  injunction.  The Company is  vigorously  opposing the
Action and believes it to be without merit.


The Company is also subject to other lawsuits or claims which have arisen 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 12 -- 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 $754 for the six months ended June
30, 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
$143  during the six months  ended June 30,  2000 and $38 during the same period
ended June 30, 2001.

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 June 30,  2001 and  December  31,  2000,  the
outstanding  balance  of the  Potts  Note was $577 and $687,  respectively,  and
interest was current.

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

         Dynex Capital,  Inc. (the  "Company") is a financial  services  company
that 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)

================================================================================
                                         June 30, 2001         December 31, 2000
--------------------------------------------------------------------------------
Investments:
 Collateral for collateralized bonds     $   2,722,844         $       3,042,158
 Securities                                      9,193                     9,364
 Other investments                              31,857                    42,284
 Loans held for sale                             3,429                    19,102

Non-recourse debt - collateralized bonds     2,540,164                 2,856,728
Recourse debt                                   71,578                   134,168

Shareholders' equity                           175,703                   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
June 30, 2001, the Company had 24 series of  collateralized  bonds  outstanding.
The collateral for  collateralized  bonds decreased to $2.72 billion at June 30,
2001  compared to $3.04  billion at December  31, 2000.  This  decrease of $0.32
billion is primarily the result of $315.7 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 six months ended June 30,
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 June 30, 2001 consist  primarily of property tax
receivables. Other investments decreased from $42.3 million at December 31, 2000
to $31.9 million at June 30, 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 on healthcare  facilities at June 30, 2001,  decreased from
$19.1  million at  December  31,  2000 to $3.4  million at June 30,  2001 as the
result of the sale of loans during the first six months of the year. 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 $2.5
billion at June 30,  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 $71.6 million at June 30, 2001 from $134.2
million at  December  31,  2000.  This  decrease  was due to a $40.5  million of
principal  repayments  made on the July 2002 Notes,  $21.8 million of repayments
made on repurchase agreements and the $2.0 million payoff of the Dominion note.

Shareholders' equity
         Shareholders'  equity increased to $175.7 million at June 30, 2001 from
$157.1  million at December 31, 2000.  This increase was a combined  result of a
$16.7   million   decrease   in  the  net   unrealized   loss   on   investments
available-for-sale from $124.6 million at December 31, 2000 to $107.9 million at
June 30, 2001 and net income of $14.4  million  during the six months ended June
30, 2001.  This was  partially  offset by the  completion of the tender offer on
Preferred Stock completed in June 2001,  which reduced  shareholders'  equity by
$11.0 million.



                              RESULTS OF OPERATIONS



----------------------------------------------------------------------------------------------------------------------------------
                                                                     Three Months Ended                  Six Months Ended
                                                                          June 30,                           June 30,
                                                               -------------------------------------------------------------------
(amounts in thousands except per share information)                    2001              2000             2001              2000
----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                 

Net interest margin                                            $       6,411       $     1,901      $    10,251       $    7,880

Net gain (loss) on sales, write-downs, impairment charges                457           (71,477)           7,544          (84,910)
and litigation
General and administrative expenses                                    2,634             2,175            4,477            4,578
Extraordinary item - gain on extinguishment of debt                      573                 -            2,844                -
Net income (loss) before preferred stock benefits (charges)            2,772           (68,695)          14,422          (79,399)

Basic net income (loss) per common share before                $        1.11        $    (6.28)      $     1.65       $    (7.50)
 extraordinary gain
Diluted net income (loss) per common share before                       1.11             (6.28)            1.65            (7.50)
extraordinary gain

Basic net income (loss) per common share after                 $        1.16        $    (6.28)      $     1.90       $    (7.50)
 extraordinary gain
Diluted net income (loss) per common share after                        1.16             (6.28)            1.90            (7.50)
extraordinary gain

  Dividends declared per share:
     Common                                                    $         -        $          -       $         -      $         -
     Preferred:
         Series A                                                        -                   -            0.2925                -
         Series B                                                        -                   -            0.2925                -
         Series C                                                        -                   -            0.3649                -

================================================================================


Three and Six Months Ended June 30, 2001  Compared to Three and Six Months Ended
June 30, 2000. The increase in net income and net income per common share during
the three and six months  ended June 30,  2001 as compared to the same period in
2000 is primarily the result of several  positive  non-recurring  items in 2001,
including the favorable  settlement of  litigation,  and an  extraordinary  gain
related to the early  extinguishment of $38.9 million of the Company's July 2002
Notes,  versus  losses in 2000  resulting  from the  sale/write-down  of certain
securities,  the writedown of certain  commercial  mortgage loans held for sale,
and  the  accrual  of  losses  on  certain  off-balance  sheet  tax-exempt  bond
positions.  In  addition,  basic and diluted  earnings  per common share for the
second  quarter 2001 reflect the discount to book value of the purchase price of
the Company's Series A, Series B, and Series C Preferred Stock tendered pursuant
to the tender offer for the Preferred  Stock  completed on June 8, 2001, and the
associated  cumulative dividend in arrears on those tendered shares,  which were
cancelled.

         Net interest margin for the six months ended June 30, 2001 increased to
$10.3 million from $7.9 million for the same period for 2000.  This increase was
primarily  the result of an increase in net  interest  spread from 0.65% for the
six months ending June 30, 2000 to 1.16% for the six months ended June 30, 2001,
offset by the decline in average  interest-earning  assets from $4.0 billion for
the six months ended June 30, 2000 to $3.0 billion for the six months ended June
30, 2001. In addition,  provision for losses  increased to $13.2 million  during
the six months  ended June 30,  2001  compared to $10.8  million  during the six
months ended June 30, 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 $92.4 million,  from a loss of $84.9 million during the six
months  ended June 30,  2000,  to a gain of $7.5  million  during the six months
ended June 30, 2001. During 2001, the Company favorably resolved  litigation for
$7.1 million net of legal  expenses.  During the six months ended June 30, 2000,
the Company  recognized  losses of $67.2  million  related to (i) the  permanent
impairment in the carrying  value of certain  securities,  (ii)  write-downs  to
market value of  commercial  and  multifamily  loans held for sale and (iii) the
accrual of losses  related to contingent  obligations on its  off-balance  sheet
tax-exempt bond positions.  Also, securities with an aggregate principal balance
of $34.4  million  were sold  during the six months  ended June 30,  2000 for an
aggregate  loss of $13.9  million.  The  Company  also  realized  losses of $1.6
million related to the sale of $115.2 million of commercial loans during the six
months ended June 30, 2000.

         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 June 30,                     Six Months Ended June 30,
                                        --------------------------------------------------------------------------------------------
                                                2001                   2000                    2001                   2000
------------------------------------------------------------------------------------------------------------------------------------
                                         Average    Effective   Average     Effective   Average     Effective  Average     Effective
                                         Balance      Rate      Balance       Rate      Balance      Rate      Balance       Rate
                                        ---------------------- ------------ ---------- ------------ --------- ------------ ---------
                                                                                                        

Interest-earning assets: (1)
   Collateral for collateralized bonds   $2,916,429    7.75%    $3,537,317     7.73%    $2,992,157     7.86%   $3,587,203     7.73%
   (2) (3)
   Securities                                11,086   10.93         61,011     6.73         11,482    10.35        98,201     6.11
   Other investments                         35,845   14.01         43,792    14.39         35,903    15.41        46,967    13.52
   Loans held for sale or                     3,596   11.47        225,996     7.95          4,956    13.21       244,052     8.08
   securitization
                                        ---------------------- ------------ ---------- ------------ --------- ------------ ---------
     Total interest-earning assets      $ 2,986595     7.82%   $ 3,868,116     7.81%   $ 3,044,498     8.01%  $ 3,976,423     7.78%
                                        ====================== ============ ========== ============ ========= ============ =========

Interest-bearing liabilities:
   Non-recourse debt (3)                 $2,653,208    6.47%    $3,223,585     7.33%    $2,717,250     6.81%   $3,239,663     7.12%
   Recourse debt - collateralized bonds      23,741    6.17         52,267     7.66         27,503     6.54        91,896     6.85
   retained
                                        ---------------------- ------------ ---------- ------------ --------- ------------ ---------
                                          2,676,949    6.47      3,275,852     7.33      2,744,753     6.80     3,331,559     7.11

  Repurchase agreements and credit            2,105    6.50         20,793     9.11          2,105     6.53        40,164     8.69
  facilities
  Other recourse debt - secured              66,978    8.51        163,791     6.57         81,956     8.33       184,456     6.26
  Other recourse debt - unsecured                 -    -           103,383     8.57              -     -          105,009     8.66
                                        ---------------------- ------------ ---------- ------------ --------- ------------ ---------
     Total interest-bearing liabilities  $2,746,032    6.52%    $3,563,819     7.35%    $2,828,814     6.85%   $3,661,188     7.13%
                                        ====================== ============ ========== ============ ========= ============ =========
Net interest spread on all investments (3)             1.31%                   0.46%                   1.16%                  0.65%
                                                    ==========              ==========              =========              =========
Net yield on average interest-earning assets (3)       1.83%                   1.04%                   1.64%                  1.21%
                                                    ==========              ==========              =========              =========
================================================================================


(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 $490 and $956 for the
     three  months  ended  June 30,  2001 and 2000,  respectively,  and $463 and
     $1,049 for the six months ended June 30, 2001 and 2000, respectively.
(3)  Effective   rates   are   calculated    excluding    non-interest   related
     collateralized  bond expenses and provision for credit losses. If included,
     the effective rate on interest-bearing liabilities would be 7.59% and 8.26%
     for the three months ended June 30, 2001 and 2000, respectively,  and 7.90%
     and 8.02% for the six months  ended June 30,  2001 and 2000,  respectively,
     while the net yield on average  interest-earning  assets would be 0.85% and
     0.20% for the three months ended June 30, 2001 and 2000, respectively,  and
     0.67%  and  0.40%  for the  six  months  ended  June  30,  2001  and  2000,
     respectively.



     The net  interest  spread  increased  0.85%,  to 1.31% for the three months
ended June 30,  2001 from 0.46% for the same  period in 2000.  The net  interest
spread for the six months ended June 30, 2001 also improved relative to the same
period in 2000,  to 1.16% from  0.65%.  The  improvement  in the  Company's  net
interest  spread can be attributed to a decline in the cost of  interest-bearing
liabilities  for the respective  2001 periods,  which have declined as One-Month
LIBOR has declined (although not as sharply)  reflecting the recent reduction in
short-term interest rates by the Federal Reserve.  The majority of the Company's
interest-bearing   liabilities   are  priced   relative  to   One-Month   LIBOR.
Interest-bearing  liability  costs  declined  0.83%  and 0.28% for the three and
six-month periods ended June 30, 2001, compared to the same periods in 2000. For
both the three and six month periods ended June 30, 2001,  there has been little
to no  corresponding  decline  in the  effective  interest-earning  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  approximate $1 billion in
single-family   ARM  loans  that  comprise  a  portion  of  the  collateral  for
collateralized  bonds.  The Company would expect yields on its  interest-earning
assets for the balance of 2001 to decline  relative to the first  six-months  of
2001.

     Over the past 18 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 June 30, 2001  compared to the three months
ended June 30, 2000, average  interest-earning  assets declined $884 million, or
approximately  23%. The decline for the six-month  period was $933  million,  or
approximately  23%. A large portion of such reduction relates to paydowns on the
Company's   adjustable-rate   single-family  mortgage  loans  and  the  sale  of
fixed-rate  commercial  mortgage  loans that were held for sale.  The  Company's
portfolio  now  consists of $909.8  million of  adjustable  rate assets and $1.9
billion of  fixed-rate  assets.  The Company  currently  finances  approximately
$191.2  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 in future periods.

Interest Income and Interest-Earning Assets

         At June 30, 2001, $1.85 billion of the investment portfolio consists of
loans which pay a fixed-rate of interest.  Also at June 30, 2001,  approximately
$1 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  65% 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  25% 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 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
2001, Quarter 2                          604.4              224.0                81.3            1,852.7            2,762.4
--------------------------------------------------------------------------------


(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,
net  premium  on  the  collateral  for  collateralized  bonds,  ARM  securities,
fixed-rate   mortgage  securities  at  June  30,  2001  was  $25.7  million,  or
approximately  0.92% of the aggregate  balance of collateral for  collateralized
bonds, ARM securities and fixed-rate  securities.  The $25.7 million net premium
consists of gross  collateral  premiums of $54.1 million,  less gross collateral
discounts  of  $28.4  million.  Of  the  $54.1  million  in  gross  premiums  on
collateral,  $35.4 million  relates to the premium on multifamily and commercial
mortgage loans with a principal  balance of $811.9 million at June 30, 2001, and
that have average initial prepayment  lockouts or yield maintenance for at least
ten  years.  Net  premium  on such  multifamily  and  commercial  loans is $28.7
million.  Amortization  expense  as  a  percentage  of  principal  paydowns  has
decreased  from 1.56% for the three  months ended June 30, 2000 to 1.31% for the
same period in 2001. The principal prepayment rate for the Company (indicated in
the table below as "CPR Annualized  Rate") was  approximately  28% for the three
months ended June 30, 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 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%
2001, Quarter 2                   25.7                  2.3                28%                174.6                1.31%
--------------------------------------------------------------------------------


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,  and other  investments.  The Company's credit exposure declines
principally as a result of charge-offs  against the Company's  investment in the
respective security  structure,  and the amount of provision for losses that the
Company records during the period relative to such charge-offs.

         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 $1.7 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 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%
2001, Quarter 2              2,948.0             105.5                8.2          3.58%

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

         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 have decreased to 1.74% at
June 30, 2001 from 1.86% at June 30, 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 June 30, 2001,  management  believes  the credit  reserves are
sufficient  to cover  anticipated  losses  that may occur as a result of current
delinquencies presented in the table below.

                           Delinquency Statistics (1)

================================================================================


                                                              90 days and over
                                 60 to 90 days delinquent      delinquent (2)                          Total
-------------------------------------------------------------------------------------------------------------------------
                                                                                               
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%
2001, Quarter 2                            0.29%                         1.45%                         1.74%
-------------------------------------------------------------------------------------------------------------------------


(1)      Excludes 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
adoption  of FAS  No.  140 did  not  have a  material  impact  on the  Company's
financial statements.

In June 2001,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting Standard (SFAS) No. 141, Business  Combinations.  SFAS No.
141 requires  that all business  combinations  initiated  after June 30, 2001 be
accounted for under the purchase  method and  addresses the initial  recognition
and measurement of goodwill and other  intangible  assets acquired in a business
combination. Business combinations originally accounted for under the pooling of
interest method will not be changed.  Management does not expect the adoption of
SFAS 141 to have an impact on the financial  position,  results of operations or
cash flows of the Company.

In June 2001,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standard  (SFAS) No. 142,  Goodwill and Other  Intangible
Assets.  SFAS No. 142  addresses  the initial  recognition  and  measurement  of
intangible assets acquired outside of a business  combination and the accounting
for goodwill and other intangible assets subsequent to their  acquisition.  SFAS
No. 142 provides  that  intangible  assets with finite useful lives be amortized
and that  goodwill  and  intangible  assets  with  indefinite  lives will not be
amortized,  but will rather be tested at least annually for  impairment.  As the
company  has no  goodwill  or  intangible  assets  which it is  amortizing,  the
adoption of SFAS No. 142 will have no effect on the financial position,  results
of operations or cash flows of the Company.

                         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 recourse) and long-term (after
securitization,  and  non-recourse)  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,
with the possible  exception for the  resecuritization  of seasoned loans in its
investment  portfolio,  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 focused on  substantially  reducing its  recourse  debt and  minimizing  its
capital  requirements.  The Company has made substantial  progress in both areas
since 1999, and based upon its expected  investment  portfolio  cash flows,  and
anticipated  proceeds from the sale or  resecuritization  of assets, the Company
anticipates  that  it  will  repay  all  of its  recourse  debt  obligations  in
accordance with their respective terms.


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 is 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 June 30, 2001,
Dynex REIT had $2.5 billion of collateralized bonds outstanding.

Recourse Debt
         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 that is equal to the original  sales price plus
an interest component.  At June 30, 2001, the Company had repurchase  agreements
outstanding of $13.0 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  $99
million,  and an estimated fair value of approximately $67 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 June 30, 2001,  the Company has $58.4 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. 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%. Through June
30, 2001, the Company has retired $38,885 of July 2002 Notes for $35,185 in cash
under the Purchase Agreement.



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



                                                                                June 30,
                                                                                  2001
                                                                            -----------------
                                                                                

ASSETS
Investments:
   Collateral for collateralized bonds                                         $  2,722,844
   Less:  Collateralized bonds issued                                            (2,622,738)
                                                                            -----------------
     Net investment in collateralized bonds                                         100,106
   Collateralized bonds retained                                                     82,299
   Securities                                                                         9,193
   Other investments                                                                 31,857
   Loans held for sale                                                                3,429
                                                                            -----------------
                                                                                    226,884

   Investment in and advances to Dynex Holding, Inc.                                      -
   Cash, including restricted                                                         7,164
   Accrued interest receivable                                                          342
   Other assets                                                                      18,856
                                                                            -----------------
         Total Assets                                                          $    253,246
                                                                            =================

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
   Repurchase agreements                                                       $     13,058
   Notes payable                                                                     58,519
   Accrued interest payable                                                           2,117
   Other liabilities                                                                  2,234
   Dividends Payable                                                                  1,614
                                                                            -----------------
         Total Liabilities                                                           77,543
                                                                            -----------------
Shareholders' Equity:
   Preferred stock, par value $.01 per share                                        106,860

   Common stock, par value $.01 per share,                                              114

   Additional paid-in capital                                                       361,584
   Accumulated other comprehensive loss                                            (107,860)
   Accumulated deficit                                                             (184,995)
                                                                            -----------------
         Total Shareholders' Equity                                                 175,703
                                                                            -----------------
         Total Liabilities and Shareholders' Equity                            $    253,246
                                                                            =================


(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 meet its remaining  short-term  funding needs.  This
repurchase  facility is currently on an overnight  maturity basis. 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,  $191.2  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  included  in  the  Company's
investment  portfolio  may have an  adverse  impact on the  Company's  financial
performance,  if actual credit losses differ  materially  from estimates made by
the Company.  The  Company's  allowance for losses is calculated on the basis of
historical experience, industry data, and management's estimates. Actual default
rates or loss severities may differ from the Company's estimate for a variety of
reasons,  including  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
June 30, 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 June 30, 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 1 to the  Company's  audited  financial
statements for the year ended December 31, 2000.

         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 re-price  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 June 30, 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 June 30,  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                           (7.7)%
+100                           (3.0)%
Base
-100                           3.2%
-200                            9.0%

         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 $0.91 billion of the Company's investment portfolio as of
June 30, 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 65% and 25%
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 June
30, 2001,  approximately $1.85 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  $1.4 billion as of
June 30, 2001, and (ii) equity, which was $175.7 million. 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 million (the "Merger Agreement"). Among
other  things,  the Merger  Agreement  obligated  CIF  todeliver  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 forbear 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 million 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 United States  District Court for 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 million.  On April 19, 2001, on a motion
brought by the  Company,  the Court  dismissed  CIF's  claim for $45  million of
damages,  but let such claim remain as a contract  claim.  The Company  believes
that the  Agreement is clear that the maximum  damages that CIF may recover from
the Company are $2 million.  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.

GLS Capital, Inc. ("GLS"), a subsidiary of the Company, together with the County
of Allegheny, Pennsylvania ("Allegheny County"), were defendants in a lawsuit in
the Commonwealth  Court of Pennsylvania (the  "Commonwealth  Court") wherein the
plaintiffs  challenged the right of Allegheny  county and GLS to collect certain
interest,  costs and expenses related to delinquent  property tax receivables in
Allegheny County.  This lawsuit was related to the purchase by GLS of delinquent
property  tax  receivables  from  Allegheny  County  in 1997,  1998 and 1999 for
approximately  $58.3  million.  On July 5, 2001, the  Commonwealth  Court ruling
addressed,  among  other  things,  (i) the right of the Company to charge to the
delinquent  taxpayer a rate of interest of 12% versus 10% on the  collection  of
its delinquent property tax receivables, (ii) the charging of attorney's fees to
the delinquent  taxpayer for the collection of such tax  receivables,  and (iii)
the charging to the  delinquent  taxpayer of certain  other fees and costs.  The
Commonwealth  Court  remanded for further  consideration  to the Court of Common
Pleas items (i) and (iii),  and ruled that neither  Allegheny County nor GLS had
the right to charge  attorney's fees to the delinquent  taxpayer  related to the
collection  of such  tax  receivables,  reversing  the  Court  of  Common  Pleas
decision.  GLS and Allegheny  County have filed an Application for Reargument of
Appellees with the Commonwealth Court of Pennsylvania.  Allegheny County and GLS
are in the process of filing a Petition for  Extraordinary  Jurisdiction as well
as a Petition for  Allowance of Appeal with the Supreme  Court of  Pennsylvania,
which will seek to reverse the Commonwealth  Court's  decision.  No damages have
been  claimed in the action;  however,  as discussed in Note 4, the decision may
impact the ultimate  recoverability of the delinquent  property tax receivables.
To date, GLS has incurred attorneys fees of $2 million, approximately $1 million
of which have been  reimbursed to GLS by the taxpayer or through  liquidation of
the underlying real property.

On May 4, 2001, ACA Financial Guaranty  Corporation  ("ACA") commenced an action
in the United States  District Court for the Southern  District of New York (the
"District Court"), (the "Action"), in which ACA sought injunctive relief as well
as money  damages  of $25  million  based on  causes of  action  for  fraudulent
conveyance and breach of contract. The complaint challenged, among other things,
the  validity of the March 30, 2001  Supplemental  Indenture  to the 1997 Senior
Note  Indenture as amended ("1997  Indenture")  discussed in Note 5, pursuant to
which in 1997 Dynex issued its 7.875% Senior Notes due July 2002. In particular,
the  complaint  challenged  the validity,  among other  things,  of the Purchase
Agreement,  and the Supplemental  Indenture and the related amendment to certain
restrictive  covenants in the  Indenture to allow for certain  distributions  to
holders of Dynex equity  securities,  including  the Preferred  Stock.  ACA is a
financial  guaranty  company  who has insured $25 million of the July 2002 Notes
for repayment at maturity on July 15, 2002, for the benefit of the holder of the
Notes. The Company is not a party to this insurance  contract.  On June 7, 2001,
the District Court granted the Company's  cross-motion  to dismiss the Action on
the grounds that ACA lacked standing to pursue claims against the Company in its
capacity as an insurer. The District Court dismissed the action without reaching
ACA's  request for a  preliminary  injunction.  Subsequently,  ACA  purchased $1
million  of the July  2002  Notes,  and on June  12,  2001,  filed a motion  for
reconsideration  of the order  dismissing  the  Action.  On July 30,  2001,  the
District Court granted ACA leave to file an amended complaint in its capacity as
a Note holder,  and stated that it would  consider the parties'  arguments  with
respect to a  preliminary  injunction.  The Company is  vigorously  opposing the
Action and believes it to be without merit.

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
                  April 6, 2001,  regarding  (i) the  Purchase  Agreement by and
                  among Dynex Capital, Inc. and the holders of a majority of the
                  outstanding  principal  amount of its 7.875%  senior notes due
                  July 15,  2002,  and (ii) the  approval of an amendment to the
                  related indenture of senior notes.



                                   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:  August 10, 2001