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

                                  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 September 30, 2003

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

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


                          Commission file number 1-9819


                                                                                          
                           Virginia                                                       52-1549373
                (State or other jurisdiction of                                        (I.R.S. Employer
                incorporation or organization)                                        Identification No.)


            4551 Cox Road, Suite 300, Glen Allen, Virginia 23060-6740
               (Address of principal executive offices) (Zip Code)

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


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

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Exchange Act Rule 12b-2). |_| Yes |X| No

As of October 31, 2003, the  registrant  had  10,873,903  shares of common stock
outstanding with a par value of $.01 per share,  which is the registrant's  only
class of common stock.


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                               DYNEX CAPITAL, INC.
                                    FORM 10-Q

                                      INDEX


                                                                                                              

                                                                                                                Page
PART I.  FINANCIAL INFORMATION

         Item 1.  Financial Statements

                  Condensed Consolidated Balance Sheets at September 30, 2003
                  and December 31, 2002 (as restated) (unaudited).................................................1

                  Condensed Consolidated Statements of Operations for the three and nine months
                  ended September 30, 2003 and 2002  (as restated) (unaudited) ...................................2

                  Condensed Consolidated Statements of Cash Flows for
                  the nine months ended September 30, 2003 and 2002 (as restated) (unaudited) ....................3

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

         Item 2.  Management's Discussion and Analysis of
                  Financial Condition and Results of Operations..................................................12

         Item 3.  Quantitative and Qualitative Disclosures about Market Risk.....................................25

         Item 4.  Controls and Procedures........................................................................26


PART II. OTHER INFORMATION

         Item 1.  Legal Proceedings .............................................................................27

         Item 2.  Changes in Securities and Use of Proceeds......................................................28

         Item 3.  Defaults Upon Senior Securities................................................................28

         Item 4.  Submission of Matters to a Vote of Security Holders............................................28

         Item 5.  Other Information..............................................................................28

         Item 6.  Exhibits and Reports on Form 8-K...............................................................28


SIGNATURES        ...............................................................................................29


PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements

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




                                                                                  -------------------- ---- ---------------------
                                                                                     September 30,              December 31,

                                                                                         2003                       2002
                                                                                  --------------------      ---------------------
                                                                                                             (As Restated, See
                                                                                                                  Note 13)
                                                                                                                
ASSETS
Cash and cash equivalents                                                             $        9,208            $       15,077
Other assets                                                                                   3,308                     4,912
                                                                                  --------------------      ---------------------
                                                                                              12,516                    19,989
                                                                                  --------------------      ---------------------
Investments:
  Collateral for collateralized bonds:
    Loans, net                                                                            1,605,774                 1,818,577
    Debt securities, available-for-sale                                                     274,589                   329,920
  Other investments                                                                          48,195                    54,322
  Other loans                                                                                 9,647                     9,288
  Securities                                                                                  2,076                     6,208
                                                                                  --------------------      ---------------------
                                                                                          1,940,281                 2,218,315
                                                                                  --------------------      ---------------------
                                                                                     $    1,952,797            $    2,238,304
                                                                                  ====================      =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Collateralized bonds                                                                 $    1,776,110            $    2,013,271
Senior notes                                                                                 14,059                         -
Accrued expenses and other liabilities                                                        1,200                     1,612
                                                                                  --------------------      ---------------------
                                                                                          1,791,369                 2,014,883
                                                                                  --------------------      ---------------------
Commitments and contingencies (Note 11)                                                           -                         -

SHAREHOLDERS' EQUITY
Preferred stock, par value $0.01 per share, 50,000,000 shares authorized:
   9.75% Cumulative Convertible Series A, 493,595 and 992,038 shares issued and              11,274                    22,658
     outstanding, respectively ($16,033 and $31,353 aggregate liquidation
     preference, respectively)
   9.55% Cumulative Convertible Series B, 688,189 and 1,378,707 shares issued                16,109                    32,273
     and outstanding, respectively ($22,698 and $44,263 aggregate liquidation
     preference, respectively)
   9.73% Cumulative Convertible Series C, 684,893 and 1,383,532 shares issued                19,630                    39,655
     and outstanding, respectively ($27,795 and $54,634 aggregate liquidation
     preference, respectively)
Common  stock,  par  value  $0.01  per  share,  100,000,000  shares  authorized,                109                       109
   10,873,903 shares issued and outstanding
Additional paid-in capital                                                                  360,684                   364,743
Accumulated other comprehensive loss                                                         (3,965)                   (4,832)
Accumulated deficit                                                                        (242,413)                 (231,185)
                                                                                  --------------------      ---------------------
                                                                                            161,428                   223,421
                                                                                  --------------------      ---------------------
                                                                                     $    1,952,797            $    2,238,304
                                                                                  ====================      =====================


See notes to unaudited condensed consolidated financial statements.

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



                                                     ------------------------------------- --- -------------------------------------
                                                       Three Months Ended September 30,          Nine months Ended September 30,
                                                     -------------------------------------     -------------------------------------
                                                          2003                 2002                 2003                 2002
                                                     ----------------     ----------------     ----------------     ----------------
                                                                                                             
Interest income:                                                          (As Restated,                             (As Restated,
                                                                           See Note 13)                              See Note 13)
   Collateral for collateralized bonds                 $   34,457           $   41,878           $  107,927           $  129,066
   Other investments                                        1,018                1,391                3,522                4,288
   Other loans                                                175                  109                  428                  318
   Securities                                                 199                  289                  608                  746
                                                     ----------------     ----------------     ----------------     ----------------
                                                           35,849               43,667              112,485              134,418

Interest and related expense:
   Collateralized bonds                                    26,389               31,278               81,609               95,040
   Senior notes                                               556                  162                1,540                2,134
   Other                                                       72                   41                  234                  462
                                                     ----------------     ----------------     ----------------     ----------------
                                                           27,017               31,481               83,383               97,636
                                                     ----------------     ----------------     ----------------     ----------------

Net interest margin before provision for loan
   losses                                                   8,832               12,186               29,102               36,782
Provision for loan losses                                  (5,831)              (5,408)             (29,715)             (16,292)
                                                     ----------------     ----------------     ----------------     ----------------
Net interest margin                                         3,001                6,778                 (613)              20,490

Impairment charges                                         (2,277)              (2,469)              (4,482)              (9,553)
Gain (loss) on sale of investments, net                       769                 (257)               1,779                  (84)
Trading losses                                                  -               (4,035)                   -               (3,307)
Other                                                         130                  692                  170                1,403
General and administrative expenses                        (2,124)              (2,226)              (6,296)              (6,744)
                                                     ----------------     ----------------     ----------------     ----------------
Net (loss) income                                            (501)              (1,517)              (9,442)               2,205
Preferred stock (charge) benefit                           (1,191)              (2,397)               8,039               (7,189)
                                                     ----------------     ----------------     ----------------     ----------------
Net loss to common shareholders                        $   (1,692)          $   (3,914)          $   (1,403)          $   (4,984)
                                                     ----------------     ----------------     ----------------     ----------------

Change in net unrealized loss during period on:
   Investments classified as available-for-sale            (2,004)                 502                  976               (5,396)
   Hedge instruments                                        1,010               (3,952)                (109)              (3,578)
                                                     ----------------     ----------------     ----------------     ----------------
Comprehensive loss                                     $   (1,495)          $   (4,966)          $   (8,575)          $   (6,769)
                                                     ================     ================     ================     ================

Net loss per common share:
   Basic and diluted                                   $     (0.16)         $    (0.36)          $    (0.13)          $    (0.46)
                                                     ================     ================     ================     ================

Weighted average number of common shares
   outstanding; basic and diluted                      10,873,903           10,873,903           10,873,903           10,873,866
                                                     ================     ================     ================     ================


See notes to unaudited condensed consolidated financial statements.

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



                                                                                -------------------------------------------------
                                                                                               Nine months Ended
                                                                                                 September 30,
                                                                                -------------------------------------------------
                                                                                        2003                       2002
                                                                                ----------------------    -----------------------
                                                                                                            (As Restated, See
                                                                                                                 Note 13)
                                                                                                                 
 Operating activities:
   Net loss                                                                          $      (9,442)            $       2,205
   Adjustments to reconcile net loss to net cash provided by operating
     activities:
       Provision for loan losses                                                            29,715                    16,292
       Impairment charges                                                                    4,482                     9,553
       Net (gain) loss on sale of investments                                               (1,779)                       84
       Amortization and depreciation                                                           947                    10,982
       Net change in other assets, accrued expenses and other liabilities                    1,332                    (7,911)
                                                                                ----------------------    -----------------------
          Net cash and cash equivalents provided by operating activities                    25,255                    31,205
                                                                                ----------------------    -----------------------

 Investing activities:
   Purchase of or advances on investments                                                   (1,669)                 (165,149)
   Principal payments on collateral                                                        228,325                   338,716
   Principal payments on (purchase of, net) loans                                            1,622                    (5,280)
   Payments received on securities and other investments                                    11,537                    15,700
   Proceeds from sales of securities and other investments                                   2,536                       196
   Other                                                                                       170                      (238)
                                                                                ----------------------    -----------------------
        Net cash and cash equivalents provided by investing activities                     242,521                   183,945
                                                                                ----------------------    -----------------------

 Financing activities:
   Proceeds from issuance of bonds                                                               -                   605,272
   Principal payments on collateralized bonds                                             (234,285)                 (762,177)
   Repayment of senior notes                                                               (18,020)                  (57,890)
   Retirement of preferred stock                                                           (19,553)                        -
   Dividends paid                                                                           (1,787)                   (1,199)
                                                                                ----------------------    -----------------------
                                                                                ----------------------    -----------------------
        Net cash and cash equivalents used for financing activities                       (273,645)                 (215,994)
                                                                                ----------------------    -----------------------
 Net decrease in cash and cash equivalents                                                  (5,869)                     (844)
 Cash and cash equivalents at beginning of period                                           15,077                     7,129
                                                                                ----------------------    -----------------------
 Cash and cash equivalents at end of period                                          $       9,208             $       6,285
                                                                                ======================    =======================

 Supplement disclosures of cash flow information:
   Cash paid for interest                                                            $      81,610             $     100,080
                                                                                ======================    =======================

Supplemental disclosure of non-cash financing activities:
    9.50% senior unsecured notes due February 2005 issued in connection with
       Preferred Stock tender offer                                                  $      32,079             $           -
                                                                                ======================    =======================


See notes to unaudited condensed consolidated financial statements.

DYNEX CAPITAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2003
(amounts in thousands except share and per share data)


NOTE 1 - BASIS OF PRESENTATION

The accompanying  condensed 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 accounting  principles  generally  accepted in
the United States of America,  hereinafter  referred to as  "generally  accepted
accounting  principles,"  for  complete  financial  statements.   The  condensed
consolidated  financial  statements include the accounts of Dynex Capital,  Inc.
and its qualified real estate investment trust ("REIT") subsidiaries and taxable
REIT  subsidiary  ("Dynex" or the  "Company").  All  inter-company  balances and
transactions have been eliminated in consolidation of Dynex.

The Company believes it has complied with the requirements for  qualification as
a REIT under the Internal  Revenue Code (the "Code").  To the extent the Company
qualifies as a REIT, it generally  will not be subject to federal  income tax on
the  amount  of  its  income  or  gain  that  is  distributed  as  dividends  to
shareholders.

In the opinion of management, all significant adjustments,  consisting of normal
recurring  accruals,  considered  necessary  for  a  fair  presentation  of  the
condensed  consolidated  financial statements have been included.  The financial
statements  presented are  unaudited.  Operating  results for the three and nine
months ended  September 30, 2003 are not  necessarily  indicative of the results
that may be expected for the year ending December 31, 2003.

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

The  Company  uses  estimates  in  establishing  fair  value  for its  financial
instruments as discussed in Note 2.

The Company  also has credit risk on certain  investments  in its  portfolio  as
discussed  in Note 7. An  allowance  for  loan  losses  has been  estimated  and
established  for current  existing losses based on  management's  judgment.  The
allowance for loan losses is evaluated and adjusted  periodically  by management
based on the actual and projected timing and amount of credit losses. Provisions
made to increase the allowance related to credit risk are presented as provision
for  loan  losses  in the  accompanying  condensed  consolidated  statements  of
operations.  The Company's  actual credit losses may differ from those estimates
used to establish the allowance.

Certain reclassifications have been made to the financial statements for 2002 to
conform to the  presentation  for 2003,  including the  reclassification  of the
extraordinary  gain recorded in the three and nine month periods ended September
30, 2002 pursuant to the adoption of SFAS No. 145, "Recission of FASB Statements
No.  4,  44,  and  64,  Amendment  of  FASB  Statement  No.  13,  and  Technical
Corrections".


NOTE 2 - FAIR VALUE

Securities  classified  as  available-for-sale  are carried in the  accompanying
financial  statements  at  estimated  fair  value.  Estimates  of fair value for
securities may be based on market prices provided by certain dealers.  Estimates
of fair value for certain other  securities are  determined by  calculating  the
present value of the projected cash flows of the instruments using  market-based
discount rates,  prepayment rates and credit loss  assumptions.  The estimate of
fair value for  securities  pledged as collateral  for  collateralized  bonds is
determined by  calculating  the present value of the projected cash flows of the
instruments  using prepayment rate assumptions and credit loss assumptions based
on historical experience and estimated future activity, and using discount rates
commensurate  with those the Company  believes  would be used by third  parties.
Such discount rate used in the determination of fair value of securities pledged
as  collateral  for  collateralized  bonds  was 16% at  September  30,  2003 and
December 31, 2002.  Prepayment  rate  assumptions  at  September  30, 2003,  and
December  31,  2002,  were  generally  at a "constant  prepayment  rate," or CPR
ranging  from  35%-40%  for  2003  and  30%-45%  for  2002  for  collateral  for
collateralized  bonds consisting of securities backed by single-family  mortgage
loans  and a CPR  equivalent  of  9%-10%  for  2003  and  10%-12%  for  2002 for
collateral  for   collateralized   bonds  consisting  of  securities  backed  by
manufactured  housing loans.  CPR assumptions for each year are based in part on
the actual  prepayment  rates  experienced for the prior six-month period and in
part  on  management's   estimate  of  future  prepayment  activity.   The  loss
assumptions utilized vary depending on the collateral pledged.


NOTE 3 - NET LOSS PER COMMON SHARE

Net loss per common share is presented on both a basic net loss per common share
and diluted net loss per common share  basis.  Diluted net loss 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.  The preferred stock is convertible into one share of common
stock for two shares of preferred  stock.  Differences  between the  potentially
dilutive preferred stock charge and preferred stock benefit included in net loss
to common shareholders is discussed in Note 9.

The following table  reconciles the numerator and denominator for both basic and
diluted net loss per common share for the three and nine months ended  September
30, 2003 and 2002.



----------------------------------------------------------------------------------------------------------------------------
                                     Three Months Ended September 30,                Nine months Ended September 30,
                              ----------------------------------------------------------------------------------------------
                                       2003                    2002                    2003                   2002
                              ----------------------------------------------------------------------------------------------
                                           Weighted-     Loss      Weighted-     Loss      Weighted-             Weighted-
                                            Average                 Average                 Average               Average
                                            Number                  Number                  Number     Income      Number
                                 Loss      Of Shares               Of Shares               Of Shares   (loss)    Of Shares
                              ----------- ----------------------- ----------------------- ---------------------- -----------
                                                                                              
Net (loss) income              $   (501)               $ (1,517)               $ (9,442)               $ 2,205
Preferred stock (charge)
  benefit                        (1,191)                 (2,397)                  8,039                 (7,189)
                              -------------           -----------             -----------             ----------
Net loss to common
  shareholders                 $ (1,692)  10,873,903   $ (3,914)  10,873,903   $ (1,403)  10,873,903   $(4,984)  10,873,866
                              =========== ===========  ========== ===========  =========  ==========   ========  ===========

Net loss per share:
  Basic and diluted                          $ (0.16)                $ (0.36)                $ (0.13)               $ (0.46)
                                          ===========             ===========             ===========            ===========

Reconciliation of shares not
  included in calculation of
  earnings per share due to
  antidilutive effect
   Series A                    $   (289)    246,798    $   (580)    496,019    $   (964)    300,659    $(1,741)    496,019
   Series B                        (403)    344,095        (807)    689,354      (1,342)    418,711     (2,419)    689,354
   Series C                        (499)    342,447      (1,010)    691,766      (1,669)    417,940     (3,029)    691,766
   Expense and incremental
   shares of stock                    -      19,304           -      16,187           -      19,170          -      16,486
   appreciation rights
                              ----------- ----------------------- ----------------------- ---------------------- -----------
                               $ (1,191)    952,644    $ (2,397)  1,893,326    $ (3,975)  1,156,480    $(7,189)  1,893,625
                              =========== ======================= ======================= ====================== ===========



NOTE 4 - COLLATERAL FOR COLLATERALIZED BONDS

The following table summarizes the types of collateral for collateralized  bonds
as of September 30, 2003 and December 31, 2002:



----------------------------------------------------------------------------------- -------------------- -- ----------------
                                                                                       September 30,         December 31,
                                                                                           2003                  2002
----------------------------------------------------------------------------------- -------------------- -- ----------------
                                                                                                            
  Loans, at amortized cost                                                              $ 1,646,749           $ 1,844,025
  Allowance for loan losses                                                                 (40,975)              (25,448)
----------------------------------------------------------------------------------- -------------------- -- ----------------
  Loans, net                                                                              1,605,774             1,818,577
----------------------------------------------------------------------------------- -------------------- -- ----------------
  Debt securities, at fair value                                                            274,589               329,920
----------------------------------------------------------------------------------- -------------------- -- ----------------
                                                                                        $ 1,880,363           $ 2,148,497


The following table summarizes the amortized cost basis,  gross unrealized gains
and losses and estimated fair value of debt securities pledged as collateral for
collateralized bonds as of September 30, 2003 and December 31, 2002:



----------------------------------------------------------------------------- ---------------------- --- -------------------
                                                                                 September 30,           December 31, 2002
                                                                                      2003
----------------------------------------------------------------------------- ---------------------- --- -------------------
                                                                                                               
  Debt securities, at amortized cost                                              $   273,986                $   329,621
  Gross unrealized gains                                                                  603                        322
  Gross unrealized losses                                                                   -                        (23)
----------------------------------------------------------------------------- ---------------------- --- -------------------
  Estimated fair value                                                            $   274,589                $   329,920
----------------------------------------------------------------------------- ---------------------- --- -------------------


The components of collateral for collateralized  bonds at September 30, 2003 and
December 31, 2002 are as follows:



 ------------------------------------- ---------------------------------------- -- -----------------------------------------
                                                 September 30, 2003                           December 31, 2002
                                       ----------------------------------------    -----------------------------------------
                                          Loans,        Debt         Total            Loans,        Debt          Total
                                           net       Securities                        net       Securities
 ------------------------------------- ------------- ------------ -------------    ------------- ------------ --------------
                                                                                                
 Collateral, net                        $1,583,674     $271,149    $1,854,823       $1,791,679     $325,819    $2,117,498
 Funds held by trustees                        130          239           369              140          515           655
 Accrued interest receivable                10,250        1,630        11,880           11,741        2,120        13,861
 Unamortized premiums and discounts,
     net                                    11,720          968        12,688           15,017        1,167        16,184
 Unrealized gain, net                            -          603           603                -          299           299
 ------------------------------------- ------------- ------------ -------------    ------------- ------------ --------------
                                        $1,605,774     $274,589   $1,880,363        $1,818,577     $329,920    $2,148,497
 ------------------------------------- ------------- ------------ ------------- -- ------------- ------------ --------------



NOTE 5 - OTHER INVESTMENTS

The following table  summarizes the Company's other  investments as of September
30, 2003 and December 31, 2002:



---------------------------------------------------------------------------------- ------------------ -- ------------------
                                                                                     September 30,        December 31, 2002
                                                                                         2003
---------------------------------------------------------------------------------- ------------------ -- ------------------
                                                                                                           
  Delinquent property tax receivables and securities, at amortized cost                $   43,298            $   48,932
  Real estate owned                                                                         4,887                 5,251
  Other                                                                                        10                   139
---------------------------------------------------------------------------------- ------------------    ------------------
                                                                                       $   48,195            $   54,322
---------------------------------------------------------------------------------- ------------------ -- ------------------


During the nine months ended September 30, 2003 and 2002, the Company  collected
an aggregate $8,798 and $13,085, respectively, including net sales proceeds from
related real estate owned.  The Company also accrued  interest  income of $3,437
and $4,188,  respectively,  during such periods,  on a level-yield basis. During
the three months ended  September 30, 2003, as a result of a change in estimated
collections  on a certain  delinquent  property  tax  receivable  security,  the
Company recorded an other-than-temporary  impairment charge of $2,219 and ceased
interest accrual on these receivables.  This impairment charge was recorded as a
change in estimate,  and was based upon collection trends and weakening economic
conditions  in the greater  Pittsburgh  area,  where the bulk of the  delinquent
property tax  receivables  collateralizing  this  security  are  located.  These
weakening economic conditions are expected to slow collections directly,  impact
underlying real estate values, and reduce or eliminate  government programs that
in the past have been favorable to collection results.


NOTE 6 - SECURITIES

The  following  table  summarizes  Dynex's  amortized  cost basis of  securities
classified  as  held-to-maturity  and fair  value of  securities  classified  as
available-for-sale, as of September 30, 2003 and December 31, 2002:



------------------------------------------------------------------------------------- ------------------ -- ----------------
                                                                                        September 30,        December 31,
                                                                                            2003                 2002
------------------------------------------------------------------------------------- ------------------ -- ----------------
                                                                                                            
Securities:
  Fixed-rate mortgage securities, available-for-sale                                      $   877              $  1,268
  Mortgage-related securities, available-for-sale                                             172                 3,770
------------------------------------------------------------------------------------- ------------------    ----------------
                                                                                            1,049                 5,038
  Gross unrealized gains                                                                      193                   935
  Gross unrealized losses                                                                     (92)               (1,409)
------------------------------------------------------------------------------------- ------------------ -- ----------------
  Securities, available-for-sale                                                            1,150                 4,564
  Asset-backed security, held-to-maturity                                                     926                 1,644
------------------------------------------------------------------------------------- ------------------ -- ----------------
                                                                                          $ 2,076               $ 6,208
------------------------------------------------------------------------------------- ------------------ -- ----------------



NOTE 7 - ALLOWANCE FOR LOAN LOSSES

The Company reserves for credit risk where it has exposure to losses on loans in
its investment portfolio.  The following table summarizes the aggregate activity
for the  allowance  for loan losses on  investments  for the nine  months  ended
September 30, 2003 and 2002:



------------------------------------------------------------------------- --------------------------------------------------
                                                                                   Nine months Ended September 30,
------------------------------------------------------------------------- --------------------------------------------------
                                                                                    2003                      2002
------------------------------------------------------------------------- -------------------------- -----------------------
                                                                                                         
Allowance at beginning of period                                                $  25,472                  $  21,508
Provision for loan losses                                                          29,715                     16,292
Credit losses, net of recoveries                                                  (14,194)                   (16,679)
------------------------------------------------------------------------- -------------------------- -----------------------
Allowance at end of period                                                      $  40,993                  $  21,121
------------------------------------------------------------------------- -------------------------- -----------------------


The Company  continues to  experience  unfavorable  results in its  manufactured
housing loan portfolio in terms of elevated  delinquencies  and loss severity on
repossessed  units.  For the nine months ended  September 30, 2003,  the Company
added $29,715 in provisions for loan losses,  substantially all of which relates
to the manufactured  housing loan portfolio.  Included in this amount is $14,400
in provision for loan losses  recorded in June 2003  specifically  for currently
existing credit losses within  outstanding  manufactured  housing loans that are
current as to payment  but which the  Company  has  determined  to be  impaired.
Previously,  the Company had not  considered  current loans to be impaired under
generally  accepted  accounting  principles  and  therefore  had not  previously
provided  allowances  for loan losses  with  respect to these  loans.  Continued
worsening  trends in both the  industry  as a whole and the  Company's  pools of
manufactured housing loans prompted the Company to prepare extensive analysis on
these  pools of loans.  The  Company  has not  originated  any new  manufactured
housing loans since 1999,  and has extensive  empirical  data on the  historical
performance of this static pool of loans. The Company  analyzed  performance and
default  activity for loans that were current at various points in time over the
last 36 months,  and based on that analysis,  identified default trends on these
loans. The Company also considered  current market  conditions in this analysis,
with the  expectation  that  these  market  conditions  would  continue  for the
foreseeable future. Given this new observable data, the Company now believes the
inclusion  of  amounts in the  provision  for loan  losses  for loans  which are
current  as to  payment  is an  appropriate  application  of the  definition  of
impairment within generally accepted  accounting  principles,  and has accounted
for the amount as a change in accounting  estimate and accordingly  recorded the
amount as  additional  provision  for loan losses.  At September  30, 2003,  the
remaining net unreserved  principal balance on manufactured  housing loans where
the Company has credit risk was $14,490.


NOTE 8 - SENIOR NOTES

The following table  summarizes  Dynex's  recourse debt outstanding at September
30, 2003 and December 31, 2002:



----------------------------------------------------------------- -- ----------------------------
                                          September 30, 2003               December 31, 2002
----------------------------------------------------------------- -- ----------------------------
                                                                           
  9.50% Senior Notes (due 2/28/2005)          $    14,059                      $    -
----------------------------------------------------------------- -- ----------------------------


During the quarter  ended March 31, 2003,  the Company  issued  $32,079 of 9.50%
senior  unsecured  notes due February 2005 (the "February 2005 Senior Notes") in
connection with a tender offer on the Company's  Preferred  Stock.  The February
2005  Senior  Notes were issued in exchange  for  1,156,891  shares of Series A,
Series B and  Series C  Preferred  Stock.  See  Note 9 for  further  discussion.
Principal  payments in the amount of $4,010,  along with interest  payments at a
rate of 9.50% per  annum,  are due  quarterly  beginning  May 2003,  with  final
payment  due on  February  28,  2005.  The  Company at its option can prepay the
February 2005 Senior Notes in whole or in part,  without  penalty,  at any time.
The Company  redeemed  $10,000 of the February  2005 Senior Notes in addition to
the $4,010 most recent required quarterly  principal payment.  The February 2005
Senior Notes prohibit  distributions  on the Company's  capital stock until they
are fully  repaid,  except  distributions  necessary for the Company to maintain
REIT status.


NOTE 9 - PREFERRED STOCK

As of September 30, 2003 and December 31, 2002, the total liquidation preference
on the  Preferred  Stock was $66,526 and $130,250,  respectively,  and the total
amount of  dividends  in arrears on  Preferred  Stock was $17,273  and  $31,157,
respectively.  Individually, the amount of dividends in arrears on the Series A,
the Series B, and the Series C Preferred  Stock were $4,187  ($8.48 per Series A
share),  $5,837  ($8.48 per Series B share),  and  $7,249  ($10.58  per Series C
share),  respectively,  at  September  30,  2003 and $7,544  ($7.60 per Series A
share),  $10,485  ($7.60 per Series B share),  and  $13,128  ($9.49 per Series C
share), respectively, at December 31, 2002.

On February  28,  2003,  the Company  completed a tender offer for shares of its
Series A, Series B and Series C Preferred Stock. The Company  purchased for cash
188,940 shares of its Series A Preferred  Stock,  272,977 shares of its Series B
Preferred  Stock and 268,792 shares of its Series C Preferred  Stock for a total
cash payment of $19,286,  and incurred  $267 of fees and charges to complete the
tender offer. In addition, the Company exchanged $32,079 of February 2005 Senior
Notes for an  additional  309,503  shares of Series A Preferred  Stock,  417,541
shares of Series B  Preferred  Stock and  429,847  shares of Series C  Preferred
Stock.  The  tender  offer  resulted  in a  Preferred  Stock  benefit of $12,438
comprised of the elimination of  dividends-in-arrears  of $16,475 for the shares
tendered,  less the premium  paid on the  Preferred  Stock in excess of the book
value of such Preferred Stock of $4,059.


NOTE 10 - DERIVATIVE FINANCIAL INSTRUMENTS

In June 2002,  the Company  entered into an interest  rate swap which matures on
June 28,  2005,  to  mitigate  its  interest  rate risk  exposure on $100,000 in
notional value of its variable rate  collateralized  bonds, which finance a like
amount of fixed rate assets. Under the agreement,  the Company will pay interest
at a fixed rate of 3.73% on the notional amount and will receive  interest based
on One-Month LIBOR on the same amount.  This contract has been treated as a cash
flow hedge with changes in the value of the hedge being  reported as a component
of  accumulated  other  comprehensive  income.  During  the  nine  months  ended
September 30, 2003, the Company recognized $284 in other comprehensive income on
this hedge  instrument and incurred  $1,870 of interest  expense  related to net
payments made on this position. At September 30, 2003, the aggregate accumulated
other  comprehensive  loss on this hedge instrument was $3,700. As the repricing
dates,  interest rate indices and formulae for computing net  settlements of the
interest rate swap  agreement  match the  corresponding  terms of the underlying
collateralized  bonds  being  hedged,  no  ineffectiveness  is  assumed  on this
agreement  and,  accordingly,  any  prospective  gains or losses are included in
Other  Comprehensive  Income until such time as all interest  rate swap payments
have been settled.  Assuming no change in one-month  LIBOR rates from  September
30, 2003, over the next twelve months,  the Company expects to reclassify $2,467
of this other comprehensive loss to interest expense.

In October  2002,  the Company  entered into a synthetic  three-year  amortizing
interest-rate swap with an initial notional balance of approximately $80,000 and
ending in September 2005 to mitigate its exposure to rising  interest rates on a
portion of its variable rate  collateralized  bonds, which finance a like amount
of fixed rate assets.  This  contract is accounted for as a cash flow hedge with
gains and  losses  associated  with the  change in the value of the hedge  being
reported as a component of accumulated other comprehensive  income. At September
30, 2003,  the current  notional  balance of the  amortizing  synthetic swap was
$46,000,  and the remaining  weighted-average  fixed-rate payable by the Company
under the terms of the  synthetic  swap was 2.47%.  During the nine months ended
September 30, 2003, the Company recognized $393 in other  comprehensive loss for
the  synthetic  interest-rate  swap,  which  includes  unamortized  losses,  and
incurred $223 of interest expense related to net payments made on this position.
At September  30, 2003 and December 31, 2002,  the aggregate  accumulated  other
comprehensive loss on this hedge instrument was $871 and $477, respectively. The
Company evaluated hedge  effectiveness and determined that there was no material
ineffectiveness  to reflect in earnings.  Assuming no change in Eurodollar rates
from  September 30, 2003,  over the next twelve months,  the Company  expects to
reclassify $573 into earnings.


NOTE 11 - COMMITMENTS AND CONTINGENCIES

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"), the appellate
court of the state of Pennsylvania. Plaintiffs were two local businesses seeking
status to represent as a class,  delinquent  taxpayers in Allegheny County whose
delinquent tax liens had been assigned to GLS.  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, and whether
the County had the right to assign the  delinquent  property tax  receivables to
GLS and therefore employ  procedures for collection  enjoyed by Allegheny County
under  state  statute.  This  lawsuit  was  related  to the  purchase  by GLS of
delinquent  property tax receivables  from Allegheny  County in 1997,  1998, and
1999. In July 2001, the Commonwealth Court issued a ruling that addressed, among
other things,  (i) the right of GLS to charge to the delinquent  taxpayer a rate
of  interest  of 12% per annum  versus  10% per annum on the  collection  of its
delinquent  property  tax  receivables,  (ii)  the  charging  of a full  month's
interest on a partial month's delinquency; (iii) the charging of attorney's fees
to the delinquent taxpayer for the collection of such tax receivables,  and (iv)
the charging to the  delinquent  taxpayer of certain  other fees and costs.  The
Commonwealth  Court in its opinion  remanded  for further  consideration  to the
lower  trial  court  items (i),  (ii) and (iv)  above,  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.  The
Commonwealth  Court further ruled that Allegheny  County could assign its rights
in the delinquent  property tax  receivables to GLS, and that  plaintiffs  could
maintain  equitable  class in the  action.  In  October  2001,  GLS,  along with
Allegheny County,  filed an Application for Extraordinary  Jurisdiction with the
Supreme Court of Pennsylvania, Western District appealing certain aspects of the
Commonwealth Court's ruling. In March 2003, the Supreme Court issued its opinion
as follows:  (i) the Supreme  Court  determined  that GLS can charge  delinquent
taxpayers a rate of 12% per annum;  (ii) the Supreme Court  remanded back to the
lower trial court the charging of a full month's  interest on a partial  month's
delinquency;  (iii) the Supreme Court revised the  Commonwealth  Court's  ruling
regarding  recouping attorney fees for collection of the receivables  indicating
that the recoupment of fees requires a judicial review of collection  procedures
used in each case;  and (iv) the Supreme Court upheld the  Commonwealth  Court's
ruling that GLS can charge certain fees and costs,  while  remanding back to the
lower trial court for consideration the facts of each individual case.  Finally,
the  Supreme  Court  remanded  to the  lower  trial  court to  determine  if the
remaining claims can be resolved as a class action. No hearing date has been set
for the issues  remanded  back to the lower trial  court.  In August  2003,  the
Pennsylvania   legislature   signed  a  bill  amending  and  clarifying  certain
provisions of the Pennsylvania statute governing GLS' right to the collection of
certain interest,  costs and expenses. If enacted as currently proposed, the law
is  retroactive  to 1996,  and amends and clarifies  that as to items  (ii)-(iv)
noted above by the Supreme Court, that GLS can charge a full month's interest on
a partial month's delinquency,  that GLS can charge the taxpayer for legal fees,
and that GLS can charge certain fees and costs to the taxpayer at redemption.

The Company and Dynex  Commercial,  Inc.  ("DCI"),  formerly an affiliate of the
Company and now known as DCI Commercial,  Inc., are defendants in state court in
Dallas  County,  Texas in the matter of Basic  Capital  Management et al ("BCM")
versus Dynex Commercial, Inc. et al. The suit was filed in April 1999 originally
against DCI, and in March 2000,  BCM amended the complaint and added the Company
as a defendant.  The current complaint alleges that, among other things, DCI and
the  Company  failed to fund  tenant  improvement  or other  advances  allegedly
required  on various  loans made by DCI to BCM,  which  loans were  subsequently
acquired by the Company;  that DCI breached an alleged  $160,000  "master"  loan
commitment entered into in February 1998 and a second alleged loan commitment of
approximately $9,000; that DCI and the Company made negligent misrepresentations
in connection with the alleged $160,000 commitment; and that DCI and the Company
fraudulently  induced  BCM into  canceling  the  alleged  $160,000  master  loan
commitment  in January  1999.  Plaintiff  BCM is seeking  damages  approximating
$40,000,  including  approximately  $36,500  for  DCI's  breach  of the  alleged
$160,000  master loan  commitment,  approximately  $1,600 for alleged failure to
make additional tenant improvement advances,  and approximately $1,900 for DCI's
not funding the alleged  $9,000  commitment.  DCI and the Company are vigorously
defending  the claims on several  grounds.  The  Company  was not a party to the
alleged $160,000 master commitment or the alleged $9,000 commitment. The Company
has  filed  a  counterclaim  for  damages  approximating  $11,000  against  BCM.
Commencement  of the trial of the case in Dallas,  Texas is  anticipated  in the
first quarter of 2004.  During the second  quarter 2003,  BCM filed suit against
the Company  and DCI as  third-party  defendants  in related  litigation  in the
United States  District Court Eastern  District of Louisiana in the matter Kelly
Investment, Inc. versus BCM et al. The Company sold certain BCM related loans on
commercial  properties  located in Louisiana to Kelly Investment,  Inc. in 2000,
and Kelly Investment,  Inc.  subsequently filed suit against BCM in 2001. Claims
made by BCM in the US District  Court of  Louisiana  against the Company and DCI
are substantially  similar to those being made in Dallas County,  Texas.  During
the third quarter 2003, Kelly and BCM entered into a settlement  agreement where
BCM paid  certain  amounts  to Kelly.  Subsequently,  the  Louisiana  litigation
against  the  Company  and DCI was  dismissed.  Neither the company nor DCI were
impacted by the settlement.

Although no assurance  can be given with respect to the ultimate  outcome of the
above litigation, the Company believes the resolution of these lawsuits 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 - RECENT ACCOUNTING PRONOUNCEMENTS

In April 2003, the Financial  Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 149, "Amendment of Statement 133 on
Derivative  Instruments and Hedging Activities."  Effective after June 30, 2003,
this  Statement  amends FASB  Statement  No.  133,  "Accounting  for  Derivative
Instruments  and Hedging  Activities",  to provide  clarification  of  financial
accounting  and  reporting  for  derivative   instruments,   including   certain
derivative  instruments  embedded  in  other  contracts.  In  particular,   this
Statement (1) clarifies under what  circumstances a contract with an initial net
investment meets the characteristic of a derivative  discussed in paragraph 6(b)
of  Statement  133,  (2)  clarifies  when  a  derivative  contains  a  financing
component,  (3) amends the definition of an underlying to conform it to language
used in FASB Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees,  Including  Indirect  Guarantees of Indebtedness of
Others," and (4) amends  certain other  existing  pronouncements.  Those changes
will result in more consistent  reporting of contracts as either  derivatives or
hybrid instruments.  The Company's adoption of SFAS No. 149 in June 2003 has not
had a significant impact on its financial  position,  results of operations,  or
cash flows.

In May 2003,  the FASB issued SFAS No. 150,  "Accounting  for Certain  Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
is effective for financial  instruments  entered into or modified  after May 31,
2003;  and otherwise is effective at the  beginning of the first interim  period
beginning  after June 15,  2003,  except for  mandatorily  redeemable  financial
instruments of nonpublic  entities,  which are subject to the provisions of this
Statement for the first fiscal period  beginning  after December 15, 2003.  This
Statement  amends SFAS No.  133,  "Accounting  for  Derivative  Instruments  and
Hedging  Activities,"  and SFAS No.  128,  "Earnings  per  Share," to  establish
standards  outlining how to classify and measure certain  financial  instruments
with  characteristics  of both liabilities and equity.  It requires that certain
financial   instruments  that  were  previously  classified  as  equity  now  be
classified as a liability (or, in some circumstances,  as an asset). The Company
is  reviewing  the  implications  of SFAS No. 150 but does not believe  that its
adoption will have a significant  impact on its financial  position,  results of
operations, or cash flows.

In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities - an  interpretation  of ARB No. 51", which addresses  consolidation of
variable interest entities. FIN No. 46 expands the criteria for consideration in
determining  whether a variable  interest  entity  should be  consolidated  by a
business entity, and requires existing unconsolidated variable interest entities
(which include, but are not limited to, Special Purpose Entities, or SPEs) to be
consolidated by their primary  beneficiaries  if the entities do not effectively
disperse risks among parties involved.  This interpretation  applies immediately
to variable  interest  entities  created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date. It
applies in the first fiscal year or interim period  beginning after December 31,
2003,  to variable  interest  entities in which an  enterprise  holds a variable
interest that it acquired  before  February 1, 2003.  The adoption of FIN No. 46
did not have a material  effect on the  Company's  results of  operations,  cash
flows or financial position.


NOTE 13 - RESTATEMENT OF FINANCIAL STATEMENTS

Subsequent  to the issuance of its  financial  statements  for the three and six
months ended June 30, 2003 and the year ended  December  31,  2002,  the Company
determined  that  declines  in the fair  value of its  delinquent  property  tax
receivable debt security upon the reclassification  from  available-for-sale  to
held-to-maturity  in the fourth quarter of 2001were not accounted for correctly.
As a result, the accompanying  condensed  consolidated  financial statements for
the three and nine month  periods  ended  September  30, 2002 and the  condensed
consolidated  balance  sheet as of December 31, 2002 have been restated from the
amounts  previously  reported to correct  the  accounting  for these  impairment
charges.

In 2001, the Company recorded  other-than-temporary  impairment  charges of $6.3
million in the statement of operations  and a reduction in the carrying value of
the  delinquent  property  tax  receivable  security  of  $18.1  million  as  an
adjustment to accumulated  other  comprehensive  loss included in  shareholders'
equity.  The Company  subsequently  amortized a portion of this $18.1 million in
2002 and  2003 on a  level-yield  basis  as a  reduction  in  accumulated  other
comprehensive  loss  and  as an  increase  in the  carrying  value  of  the  tax
receivable  security.  As a result of the continued decline of the fair value of
this  security,  in the third  quarter of 2003,  the  Company  reconsidered  the
accounting  treatment  afforded to the security in 2001, and determined that the
$18.1  million  previously  recorded  as  an  adjustment  to  accumulated  other
comprehensive  loss  should  have  been  recorded  as  an   other-than-temporary
impairment  charge in the  statement  of  operations  in 2001.  The  Company has
further  determined  that interest income should have then been recorded in 2002
and 2003 based on estimated collections on a level-yield basis.

A summary of the significant effects of the restatement is as follows:

Condensed Consolidated Balance Sheets Data
(amounts in thousands)


----------------------------------------------------------------------------- --------------------- ---- ---------------------
                                                                               December 31, 2002          December 31, 2002
                                                                              ---------------------      ---------------------
                                                                                 (As Previously
                                                                                   Reported)                   (As Restated)
----------------------------------------------------------------------------- --------------------- ---- ---------------------
                                                                                                               
Accumulated other comprehensive loss                                              $      (17,472)            $       (4,832)
Accumulated deficit                                                                     (218,545)                  (231,185)
Total stockholders' equity                                                               223,421                    223,421
----------------------------------------------------------------------------- --------------------- ---- ---------------------


Condensed Consolidated Statements of Operations Data
(amounts in thousands, except share data)


-------------------------------------------- -------------------------------------- -- --------------------------------------
                                                Three Months Ended September 30           Nine Months Ended September 30
                                             --------------------------------------    --------------------------------------
                                                   2002                 2002                 2002                 2002
                                             -----------------    -----------------    -----------------     ----------------
                                             (As Previously        (As Restated)       (As Previously        (As Restated)
                                                Reported)                                 Reported)
-------------------------------------------- ----------------- -- ----------------- -- ----------------- --- ----------------
                                                                                                        
Interest income - Other Investments            $       45           $    1,391           $      100            $    4,288
Total interest income                              42,321               43,667              130,230               134,418
Net interest margin before provision for
     loan losses                                   10,840               12,186               32,594                36,782
Net interest margin                                 5,432                6,778               16,302                20,490
Net (loss) income                                  (2,862)              (1,517)              (1,982)                2,205
Net loss to common shareholders                    (5,259)              (3,914)              (9,171)               (4,984)
Change in net unrealized loss during
     period on:  Investments classified as
     available-for-sale                             1,848                  503               (1,208)               (5,396)
Comprehensive loss                                 (4,966)              (4,966)              (6,768)               (6,768)
Net loss per common share (basic and
     diluted)                                  $    (0.48)         $     (0.36)          $    (0.84)           $    (0.46)
-------------------------------------------- ----------------- -- ----------------- -- ----------------- --- ----------------



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

     As discussed in Note 13 to the condensed  consolidated financial statements
included in Item 1, the Company has  restated  its  financial  statements  as of
December  31, 2002 and for the three and  six-month  period ended June 30, 2003.
The following management  discussion and analysis takes into account the effects
of the restatement.  The Company intends to amend its Annual Report of Form 10-K
for the year ended December 31, 2002 and its quarterly reports on Forms 10-Q for
the  quarterly  periods  ended  March 31,  2003 and June 30, 2003 to include the
restated  financial  statements as soon as  practicable.  The  following  tables
summarize the significant effects of such restatements for such periods.

Condensed Consolidated Balance Sheets Data
(amounts in thousands, except share data)


----------------------------------------------------------------------------- --------------------- ---- ---------------------
                                                                                 (As Previously
                                                                                    Reported)                (As Restated)
------------------------------------------------------------------------------------------------------------------------------
                                                                                 June 30, 2003              June 30, 2003
                                                                              ---------------------      ---------------------
                                                                                                               
Accumulated other comprehensive loss                                              $     (13,166)             $      (2,971)
Accumulated deficit                                                                    (229,931)                  (240,126)
Total stockholders' equity                                                              164,709                    164,709

                                                                                 March 31, 2003             March 31, 2003
                                                                              ---------------------      ---------------------
Accumulated other comprehensive loss                                              $     (15,973)             $      (4,646)
Accumulated deficit                                                                    (217,813)                  (229,140)
Total stockholders' equity                                                              174,042                    174,042

                                                                               December 31, 2001          December 31, 2001
                                                                              ---------------------      ---------------------
Accumulated other comprehensive loss                                              $     (14,825)             $       3,298
Accumulated deficit                                                                    (202,502)                  (220,625)
Total stockholders' equity                                                              242,110                    242,110
----------------------------------------------------------------------------- --------------------- ---- ---------------------


Condensed Consolidated Statements of Operations Data
(amounts in thousands, except share data)


-------------------------------------------- -------------------------------------- -- --------------------------------------
                                               Three Months Ended June 30, 2003           Six Months Ended June 30, 2003
                                             --------------------------------------    --------------------------------------
                                             (As Previously        (As Restated)       (As Previously        (As Restated)
                                                Reported)                                 Reported)
-------------------------------------------- ----------------- -- ----------------- -- ----------------- --- ----------------
                                                                                                        
Interest income - Other Investments            $       30           $    1,162           $       59            $    2,503
Total interest income                              36,010               37,142               74,191                76,635
Net interest margin before provision for
     loan losses                                    7,694                8,826               17,825                20,269
Net interest margin                               (10,346)              (9,214)              (6,059)               (3,615)
Net loss                                          (12,118)             (10,986)             (11,386)               (8,942)
Net (loss) income to common shareholders          (13,332)             (12,200)              (2,156)                  288

Change in net unrealized loss during
     period on:  Investments classified as
     available-for-sale                             3,486                2,354                5,425                 2,980
Comprehensive loss                                 (9,311)              (9,311)              (7,080)               (7,081)
Net loss per common share (basic and
     diluted)                                  $    (1.23)         $     (1.12)          $    (0.20)           $     0.03
-------------------------------------------- ----------------- -- ----------------- -- ----------------- --- ----------------





-------------------------------------------- -------------------------------------- -- --------------------------------------
                                               Three Months Ended June 30, 2002           Six Months Ended June 30, 2002
                                             --------------------------------------    --------------------------------------
                                             (As Previously        (As Restated)       (As Previously        (As Restated)
                                                Reported)                                 Reported)
-------------------------------------------- ----------------- -- ----------------- -- ----------------- --- ----------------
                                                                                                         
Interest income - Other Investments            $       44           $    1,441           $       55            $    2,896
Total interest income                              44,968               46,365               87,909                90,750
Net interest margin before provision for
     loan losses                                   12,254               13,650               21,754                24,595
Net interest margin                                 7,013                8,409               10,870                13,711
Net income                                            398                1,796                  880                 3,721
Net loss to common shareholders                    (1,998)                (601)              (3,912)               (1,072)

Change in net unrealized loss during
     period on:  Investments classified as
     available-for-sale                            (4,355)              (5,752)              (3,057)               (5,898)
Comprehensive loss                                 (3,583)              (3,582)              (1,803)               (1,803)
Net loss per common share (basic and
     diluted)                                  $    (0.18)         $     (0.06)          $    (0.36)           $    (0.10)
-------------------------------------------- ----------------- -- ----------------- -- ----------------- --- ----------------





-------------------------------------------- -------------------------------------- -- --------------------------------------
                                               Three Months Ended March 31, 2003         Three Months Ended March 31, 2002
                                             --------------------------------------    --------------------------------------
                                             (As Previously        (As Restated)       (As Previously        (As Restated)
                                                Reported)                                 Reported)
-------------------------------------------- ----------------- -- ----------------- -- ----------------- --- ----------------
                                                                                                       
Interest income - Other Investments            $       28           $    1,341           $       10            $    1,454
Total interest income                              38,181               39,493               42,940                44,385
Net interest margin before provision for
     loan losses                                   10,131               11,443                9,500                10,945
Net interest margin                                 4,287                5,599                3,857                 5,302
Net income                                            732                2,044                  481                 1,925
Net income (loss) to common shareholders
                                                   11,176               12,488               (1,915)                 (471)

Change in net unrealized loss during
     period on:  Investments classified as
     available-for-sale                             1,939                  626                1,299                  (146)
Comprehensive income (loss)                        12,675                2,230                 (616)                1,779
Net income (loss) per common share (basic
     and diluted)                              $     1.03          $      1.15           $    (0.18)           $    (0.04)
-------------------------------------------- ----------------- -- ----------------- -- ----------------- --- --------------





-------------------------------------------- --------------------------------------------------------------------------------
                                                                        Years ended December 31,
                                             --------------------------------------------------------------------------------
                                                             2002                                      2001
-------------------------------------------- -------------------------------------- -- --------------------------------------
                                             (As Previously        (As Restated)       (As Previously        (As Restated)
                                                Reported)                                 Reported)
-------------------------------------------- ----------------- -- ----------------- -- ----------------- --- ----------------
                                                                                                        
Interest income - Other Investments            $      189           $    5,674           $    6,164            $    6,164
Total interest income                             170,883              176,367              222,760               222,760
Net interest margin before provision for
     loan losses                                   43,669               49,153               48,082                48,082
Net interest margin                                15,186               20,670               28,410                28,410
Net loss on sales, impairment charges and
     litigation                                   (18,299)             (18,299)             (20,954)              (39,078)
Net loss                                          (14,844)              (9,360)              (3,085)              (21,209)
Net (loss) income to common shareholders
                                                  (24,430)             (18,946)               4,632               (13,492)
Change in net unrealized loss during
     period on:  Investments classified as
     available-for-sale                             1,784               (3,669)              29,438                47,561
Comprehensive (loss) income                       (17,491)             (17,491)              26,353                26,352
Net (loss) income per common share (basic
     and diluted)                              $    (2.25)         $     (1.74)          $     0.41            $    (1.18)
-------------------------------------------- ----------------- -- ----------------- -- ----------------- --- ----------------



Dynex Capital,  Inc. was  incorporated in the  Commonwealth of Virginia in 1987.
References to "Dynex" or "the Company"  contained herein refer to Dynex Capital,
Inc.   together  with  its  qualified  real  estate   investment   trust  (REIT)
subsidiaries and taxable REIT subsidiary. Dynex is a financial services company,
which invests in loans and securities  consisting of or secured by,  principally
single family mortgage loans,  commercial mortgage loans,  manufactured  housing
installment  loans  and  delinquent  property  tax  receivables.  The  loans and
securities in which the Company  invests have  generally been pooled and pledged
(i.e.   securitized)  as  collateral  for  non-recourse  bonds  ("collateralized
bonds"),  which  provides  long-term  financing  for such loans  while  limiting
credit,  interest rate and liquidity risk. The Company has elected to be treated
as a REIT for federal  income tax purposes  under the  Internal  Revenue Code of
1986, as amended, and, as such, must distribute substantially all of its taxable
income to  shareholders.  Provided that the Company meets all of the  prescribed
Internal Revenue Code requirements for a REIT, the Company will generally not be
subject to federal income tax.

The Company's  primary  focus in the near term is on maximizing  cash flows from
its  investment  portfolio,  opportunistically  calling  securities  pursuant to
clean-up  calls if the  underlying  collateral  has  value for the  Company  and
securing third-party servicing contracts to leverage its delinquent property tax
receivables  platform.  During  the first  nine  months of 2003,  the  Company's
investment  portfolio  generated net cash flows to the Company of $43.8 million,
including $14.0 million in the third quarter.  Depending on prepayment  activity
on the underlying assets in the investment portfolio, collection activity on the
delinquent  property  tax  receivable   portfolio  and  the  absolute  level  of
short-term  interest rates which directly impacts the Company's financing costs,
the Company  estimates that cash flow for the balance of 2003 will be similar to
amounts  generated  during the first nine months of the year. In September 2003,
the Company redeemed or otherwise  retired $14 million of its 9.50% Senior Notes
due February 2005.

The Company has entered  into an  agreement  to service $7.5 million of liens on
real  estate  for a  regional  utility  in  Pennsylvania.  The  Company  will be
compensated based on the results of its collection  efforts.  Given the existing
infrastructure now in place to service the Company's  investment in property tax
receivables,  the  incremental  cost to service  these  liens is  marginal.  The
Company will seek to gain other third-party servicing contracts in the future.

The Company also owns the right to call  adjustable-rate and fixed-rate mortgage
pass-through  securities  previously  issued  and sold by the  Company  once the
outstanding balance of such securities reaches a call trigger,  generally either
10% or less of the  original  amount  issued or a  specified  date.  During  the
quarter ended September 30, 2003, the Company called approximately $23.1 million
of securities, and subsequently sold approximately $20 million of the underlying
seasoned  single-family  mortgage loan collateral at a gain of $0.8 million.  At
September 30, 2003,  the callable  balance at the time of the projected  call of
the one  remaining  security  expected  to  reach a call  trigger  this  year is
approximately $32.1 million.

The Board of  Directors  continues to evaluate  alternatives  for the use of the
Company's cash flow in an effort to improve overall  shareholder  value. To that
end, the Board has formed a committee to review possible strategic alternatives.
Such review may include a number of alternatives, including the acquisition of a
new business. The Company has a net operating loss carryforward of approximately
$130  million  which can be utilized to offset REIT  distribution  requirements,
other than  excess  inclusion  income,  which  would allow the Company to retain
capital for investment in a new strategic alternative.  In addition, the Company
could use the net operating  loss  carryforward  to shelter  taxable income from
income tax for any taxable-REIT  subsidiary or for the Company itself if it were
to forego its REIT status.  The committee of the Board also  continues to review
various alternatives with respect to the Company's capital structure.

                               FINANCIAL CONDITION
                  (amounts in thousands except per share data)



---------------------------------------------------------------------- -------------------------- --------------------------
                                                                          September 30, 2003          December 31, 2002
---------------------------------------------------------------------- -------------------------- --------------------------
                                                                                                           
Investments:
     Collateral for collateralized bonds                               $          1,880,363       $          2,148,497
     Other investments                                                               48,195                     54,322
     Other loans                                                                      9,647                      9,288
     Securities                                                                       2,076                      6,208

Collateralized bonds                                                              1,776,110                  2,013,271
Senior notes                                                                         14,059                          -

Shareholders' equity                                                                161,428                    223,421
Common book value per share (inclusive of dividends in arrears)                        8.73                       8.57
---------------------------------------------------------------------- -------------------------- --------------------------


Collateral for  collateralized  bonds. As of September 30, 2003, the Company had
21 series of collateralized bonds outstanding. The collateral for collateralized
bonds decreased to $1.88 billion at September 30, 2003 compared to $2.15 billion
at December 31, 2002. This decrease of $268.1 million is primarily the result of
$228.3  million  in  principal  paydowns  on the  collateral,  $29.7  million of
additions to allowance for loan losses,  $4.5 million of impairment  charges and
$3.4 million of net premium amortization.

Other investments.  Other investments at September 30, 2003 consist primarily of
delinquent property tax receivables and securities.  Other investments decreased
from $54.3  million at December 31, 2002 to $48.2 million at September 30, 2003.
This decrease is primarily  the result of pay-downs of  delinquent  property tax
receivables which totaled $7.9 million, sales of real estate owned properties of
$1.0  million and the  recognition  of a $2.2 million  impairment  loss on these
delinquent  property tax  receivables.  These decreases were partially offset by
$3.4  million of  interest  income  recorded  during  the period and  additional
advances for collections of $1.7 million.

Other loans. Other loans increased by $0.3 million from $9.3 million at December
31, 2002 to $9.6 million at  September  30, 2003  principally  as the result the
call and  purchase of two pools of loans for $3.4  million.  This was  partially
offset by $3.0 million of pay-downs during the quarter.

Securities. Securities decreased during the nine months ended September 30, 2003
by $4.2  million,  to $2.0  million at  September  30, 2003 from $6.2 million at
December 31, 2002 due  primarily  to principal  payments of $4.1 million and the
sale of six securities  with a book value of $1.2 million,  partially  offset by
$1.1 million of net discount amortization.

Collateralized  bonds.  Collateralized bonds decreased $237.2 million, from $2.0
billion at  December  31,  2002 to $1.8  billion at  September  30,  2003.  This
decrease was primarily a result of principal payments received of $228.3 million
on  the  associated   collateral  pledged  which  were  used  to  pay  down  the
collateralized bonds in accordance with the respective indentures. Additionally,
for  certain  securitizations,  surplus  cash in the amount of $4.5  million was
retained within the security  structure and used to repay  collateralized  bonds
outstanding,  instead  of being  released  to the  Company.  For  certain  other
securitizations,  surplus  cash in the amount of $3.8  million  was  retained to
cover   losses,   as  certain   performance   triggers  were  not  met  in  such
securitizations.

Senior Notes.  Senior Notes  increased $14.1 million as a result of the issuance
of February 2005 Senior Notes issued in exchange for Preferred Stock in February
2003.  Since their  issuance,  the Company has repaid $8.0 million of the Senior
Notes in  accordance  with their  contractual  terms and  redeemed  early  $10.0
million of the notes.

Shareholders'  equity.  Shareholders'  equity  decreased  to $161.4  million  at
September 30, 2003 from $223.4  million at December 31, 2002.  This decrease was
primarily  the  result of a $51.6  million  retirement  of  preferred  shares in
connection  with the tender offer  completed in February  2003, net loss of $9.4
million,  a $1.8 million  dividend paid on preferred  shares and $0.1 million of
deferred  losses on hedging  instruments  during the period.  This  decrease was
partially offset by a net decrease in accumulated other  comprehensive  loss due
to an unrealized gain on investments available-for-sale of $0.9 million.

                              RESULTS OF OPERATIONS



----------------------------------------- --- ------------------------------------- --- ------------------------------------
(amounts in thousands except per share         Three months ended September 30,          Nine months ended September 30,
information)
-----------------------------------------     -------------------------------------     ------------------------------------
                                                   2003                 2002                 2003                2002
-----------------------------------------     ----------------     ----------------     ----------------     ---------------
                                                                                                     
Net interest margin before provision
  for loan losses                                $    8,832            $12,186              $29,102              $36,782
Provision for loan losses                            (5,831)            (5,408)             (29,715)             (16,292)
Net interest margin                                   3,001              6,778                 (613)              20,490
Impairment charges                                   (2,277)            (2,469)              (4,482)              (9,553)
Gain (loss) on sales of investments, net                769               (257)               1,779                  (84)
Trading losses                                            -             (4,035)                   -               (3,307)
General and administrative expenses                  (2,124)            (2,226)              (6,296)              (6,744)
Net (loss) income                                      (501)            (1,517)              (9,442)               2,205
Preferred stock (charge) benefit                     (1,191)            (2,397)               8,039               (7,189)
Net loss to common shareholders
                                                     (1,692)            (3,914)              (1,403)              (4,984)

Basic and diluted net loss per common
   share                                             $(0.16)            $(0.36)              $(0.13)              $(0.46)
----------------------------------------- --- ---------------- --- ---------------- --- ---------------- --- ---------------


Three Months Ended  September 30, 2003 Compared to Three Months Ended  September
30,  2002.  Net loss and net loss per common  share  decreased  during the three
months  ended  September  30, 2003 as  compared to the same period in 2002.  The
decrease in net loss for the three months ended  September 30, 2003 is primarily
attributable  to a $4.0  non-recurring  trading loss  incurred  during the three
months ended September 30, 2002, and a $1.0 million  increase in gain on sale of
investments,  offset by a reduction in net interest margin of $3.8 million.  Net
loss to common shareholders declined for the same reasons, in addition to a $1.2
million decrease in dividends in arrears accruals.

Net   interest   margin   declined   as  a  result  of  a  decline   in  average
interest-earning  assets of approximately $350 million, and a decline in the net
interest spread earned on these assets of 0.23%. The decline in the net interest
spread  resulted  principally  from the  prepayment  of higher  coupon loans and
securities.

The Company  incurred  trading  losses of $4.0  million  during the three months
ended  September  30, 2002  related to a short  position in the 5-Year  Treasury
futures contract which was terminated  during the third quarter 2002.  Income of
$0.7 million  earned in the three  months ended June 30, 2002  resulted in a net
loss on this trading position of $3.3 million.

Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30,
2002.  The increase in net loss during the nine months ended  September 30, 2003
as compared to the same period in 2002 is primarily the result of a reduction in
net interest margin by $21.0 resulting primarily from additions of $29.7 million
to  provisions  for loan  losses.  Included in this  amount is $14.4  million in
provision  for loan losses  recorded  in June 2003  specifically  for  currently
existing credit losses within  outstanding  manufactured  housing loans that are
current as to payment  but which the  Company  has  determined  to be  impaired.
Offsetting this decline was decreased  impairment  charges of approximately $5.1
million and  incremental  net gains on sales of  investments of $1.9 million for
the nine months ended  September  30, 2003 compared to the same periods in 2002.
Net loss to common  shareholders  decreased  by $3.6 million or $0.33 per common
share, mostly due to preferred stock benefits from the tender offer completed in
February 2003.

Impairment charges decreased by $5.1 million for the nine months ended September
30, 2003 from the same period last year. This decrease was primarily a result of
a decrease of $5.4 million related to other-than-temporary impairment charges on
a debt security  comprised  largely of manufactured  housing loans. In addition,
losses  were  recorded  in the  amount  of $1.9  million  in  2002 on  valuation
adjustments on loans  held-for-sale  which were not included in the SASCO 2002-9
securitization completed in April 2002.

General and administrative expense decreased by $0.4 million to $6.3 million for
the nine months ended  September  30, 2003  compared to the same period in 2002.
Decreased personnel,  independent  contractor and legal expenses are the primary
reason for the reduction in general and administrative expense.

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 September 30,                 Nine months Ended September 30,
                       ---------------------------------------------------------------------------------------------------
                                2003                     2002                    2003                     2002
                       ---------------------------------------------------------------------------------------------------
(amounts in thousands)   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) (3)        $1,936,461       7.12%   $2,286,048       7.31%  $2,017,936        7.13%  $2,344,608       7.33%

 Other loans                10,374       6.75%       11,320       3.82%       9,142        6.25%       9,630       4.39%
 Securities                  2,167      36.77%        3,499      33.07%       3,738       21.70%       4,222      23.57%
 Cash and other
 investments                63,104       6.46%       66,740       8.37%      62,845        7.47%      75,632       7.65%
                       ---------------------------------------------------------------------------------------------------
  Total interest-
  earning assets        $2,012,106       7.13%   $2,367,607       7.36%  $2,093,661        7.16%  $2,434,092       7.36%
                       ===================================================================================================

Interest-bearing
 liabilities:
  Collateralized
   bonds (3)            $1,816,494       5.68%   $2,137,737       5.72%  $1,889,262        5.64%  $2,188,094       5.67%
 Senior notes               23,248       9.56%        7,463       8.62%      21,547        9.53%      34,816       8.15%
                       ---------------------------------------------------------------------------------------------------
  Total
  interest-bearing      $1,839,742       5.73%   $2,145,200       5.73%   $1,910,809       5.68%  $2,222,910       5.71%
  liabilities
                       ===================================================================================================
Net interest spread on
 all investments (3)                     1.39%                    1.64%                    1.48%                   1.65%
                                     ===========             ============              ===========             ============
Net yield on average
interest-earning                         1.88%                    2.18%                    1.98%                   2.15%
assets (3)
                                    ============             ============              ===========             ============
--------------------------------------------------------------------------------------------------------------------------


(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 $347 and $500 for the
     three months ended September 30, 2003 and 2002, respectively,  and $406 and
     $544 for the nine months ended September 30, 2003 and 2002, respectively.
(3)  Effective   rates   are   calculated    excluding    non-interest   related
     collateralized   bond  expenses.   If  included,   the  effective  rate  on
     interest-bearing  liabilities  would be 5.87%  for  both  the  three  month
     periods  ended  September  30, 2003 and 2002,  respectively,  and 5.82% and
     5.86% for the nine months ended September 30, 2003 and 2002,  respectively,
     while the net yield on average  interest-earning  assets would be 1.76% and
     2.06% for the three months ended September 30, 2003 and 2002, respectively,
     and 1.85% and 2.01% for the nine months ended  September 30, 2003 and 2002,
     respectively.



The net interest spread  decreased 25 basis points,  to 139 basis points for the
three months ended  September 30, 2003 from 164 basis points for the same period
in 2002 (each basis point is 0.01%). The net interest spread for the nine months
ended September 30, 2003 also decreased  relative to the same period in 2002, to
148 basis  points  from 165 basis  points.  The  decrease in the  Company's  net
interest spread for both periods can be generally attributed to the resetting of
interest  rates on adjustable  rate mortgage  loans in the Company's  investment
portfolio  and the  prepayment  of higher  rate  loans in that  portfolio  which
together caused a decline in interest earning asset yield of 23 basis points and
20 basis points for the three and nine month comparative periods,  respectively.
Interest-bearing  liability  costs were unchanged for the three month period and
decreased 3 basis points for the  nine-month  period ended  September  30, 2003,
respectively,  compared  to the same  period  in  2002.  The  Company  currently
finances  approximately  $198 million of the fixed-rate assets with non-recourse
LIBOR based floating-rate  liabilities.  In June 2002, the Company,  through the
use of an  interest-rate  swap,  converted  $100  million of such  floating-rate
liabilities into fixed rate, in effect locking the spread in for that portion of
fixed rate assets financed with floating rate  liabilities.  Under the swap, the
Company  pays a fixed rate of 3.73% and  receives  one-month  LIBOR.  In October
2002, the Company created an amortizing synthetic swap through the short sale of
a string of Eurodollar  futures  contracts,  with an initial effective  notional
balance of approximately  $80 million,  amortizing over a three-year  period. At
September 30, 2003, the notional  amount of this synthetic  amortizing  swap was
$46 million.

The Company would expect its net interest spread on its interest-earning  assets
for the balance of 2003 to continue to decrease,  on a seasonal basis, as higher
coupon loans and securities prepay,  and rates on adjustable-rate  assets in the
investment  portfolio  continue to adjust downward.  The average One-Month LIBOR
rate  declined  to 1.11% and 1.23% for the three and nine  month  periods  ended
September 30, 2003,  respectively  from 1.82% and 1.84%,  respectively,  for the
three and nine month periods ended September 30, 2002.

Interest Income and Interest-Earning Assets. At September 30, 2003, $1.5 billion
of the  investment  portfolio  consists  of loans  and  securities  which  pay a
fixed-rate  of interest,  and  approximately  $390.4  million of the  investment
portfolio  is  comprised  of loans and  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. The Company finances its
investment  portfolio with  principally  non-recourse  collateralized  bonds. At
September  30, 2003,  approximately  $1.2 billion of  fixed-rate  bonds and $587
million of adjustable rate bonds were outstanding.  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  mortgage-related  securities,  other  investments and
other loans.

                      Investment Portfolio Composition (1)
                                 ($ in millions)



---------------------------- ------------------ ----------------- ------------------ ------------------- ------------------
                                                                    Other Indices
                              LIBOR Based ARM    CMT Based ARM     Based ARM Loans    Fixed-Rate Loans
                                   Loans             Loans                                                     Total
---------------------------- ------------------ ----------------- ------------------ ------------------- ------------------
                                                                                                  
2002, Quarter 3                $      414.4       $       80.8      $       59.9       $     1,698.4        $   2,253.5
2002, Quarter 4                       384.6               73.2              57.0             1,647.0            2,161.8
2003, Quarter 1                       352.5               66.3              52.8             1,605.3            2,076.9
2003, Quarter 2                       316.9               59.6              49.9             1,564.9            1,991.3
2003, Quarter 3                       288.8               53.4              48.2             1,519.2            1,909.6
---------------------------- ------------------ ----------------- ------------------ ------------------- ------------------


(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,  and
fixed-rate  mortgage  securities at September 30, 2002,  was $12.7  million,  or
approximately  0.67% of the aggregate  balance of collateral for  collateralized
bonds, ARM securities and fixed-rate  securities.  The $12.7 million net premium
consists of gross  collateral  premiums of $33.1 million,  less gross collateral
discounts  of  $20.4  million.  Of  the  $33.1  million  in  gross  premiums  on
collateral,  $24.8 million  relates to the premium on multifamily and commercial
mortgage loans with a principal balance of $763.4 million at September 30, 2003,
and that have average prepayment  lockouts or yield maintenance to 2008. The net
premium  (i.e.,  gross  premium  less gross  discount) on such  multifamily  and
commercial  loans is $20.2  million.  Amortization  expense as a  percentage  of
principal  pay-downs  has  decreased  from  1.84%  for the  three  months  ended
September  30,  2002 to  1.27%  for the  same  period  in  2003.  The  principal
prepayment rate for the Company (indicated in the table below as "CPR Annualized
Rate") was  approximately 22% for the three months ended September 30, 2003. 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 Annualized                           Expense as a %
                                           Amortization            Rate              Principal          of Principal
                       Net Premium            Expense                                 Paydowns            Paydowns
--------------------------------------------------------------------------------------------------------------------------
                                                                                              
2002, Quarter 3        $    16.7     $           1.6                 21%             $  94.5                1.70%
2002, Quarter 4             16.2                 0.5                 19%                95.5                0.57%
2003, Quarter 1             15.1                 1.1                 24%                85.4                1.32%
2003, Quarter 2             13.7                 1.3                 22%                81.8                1.64%
2003, Quarter 2             12.7                 1.0                 22%                80.4                1.27%
--------------------------------------------------------------------------------------------------------------------------


Credit Exposures.  The Company invests in  collateralized  bonds or pass-through
securitization   structures.   Generally  these  securitization  structures  use
over-collateralization,  subordination,  third-party guarantees,  reserve funds,
bond insurance, mortgage pool insurance or any combination of the foregoing as a
form of credit enhancement. The Company generally has retained a limited portion
of the direct credit risk in these  securities.  In most instances,  the Company
retained the "first-loss" credit risk on pools of loans that it has securitized.

The following table summarizes the aggregate  principal amount of collateral for
collateralized  bonds and  securities  outstanding,  the direct credit  exposure
retained by the  Company  (represented  by the amount of  over-collateralization
pledged and  subordinated  securities  owned by the Company),  net of the credit
reserves and  discounts  maintained  by the Company for such  exposure,  and the
actual credit losses incurred for each quarter presented.

The table  excludes  other  forms of credit  enhancement  from which the Company
benefits,  and based upon the performance of the underlying  loans,  may provide
additional protection against losses. These additional  protections include loss
reimbursement  guarantees  with a  remaining  balance  of  $27.5  million  and a
remaining  deductible  aggregating  $0.9 million on $57.1 million of securitized
single family mortgage loans which are subject to such reimbursement agreements;
guarantees aggregating $28.7 million on $299.7 million of securitized commercial
mortgage loans, whereby losses on such loans would need to exceed the respective
guarantee  amount  before the Company  would  incur  credit  losses;  and $193.5
million of securitized single family mortgage loans which are subject to various
mortgage  pool  insurance  policies  whereby  losses  would  need to exceed  the
remaining  stop loss of at least 65% on such  policies  before the Company would
incur losses.

                    Credit Reserves and Actual Credit Losses
                                 ($ in millions)



---------------------------------------------------------------------------------------------------------------------------
                               Outstanding Loan     Credit Exposure, Net   Actual Credit      Credit Exposure, Net to
                               Principal Balance     of Credit Reserves        Losses         Outstanding Loan Balance
---------------------------------------------------------------------------------------------------------------------------
                                                                                             
2002, Quarter 3                $    2,340.5          $    110.2             $  8.3                     4.71%
2002, Quarter 4                     2,246.9                91.9                7.7                     4.09%
2003, Quarter 1                     2,082.3                90.1                6.2                     4.33%
2003, Quarter 2                     1,997.1                72.8                6.4                     3.65%
2003, Quarter 3                     1,903.7                67.6                5.7                     3.55%
---------------------------------------------------------------------------------------------------------------------------


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 the Company has
retained a portion of the direct credit risk. The  delinquencies as a percentage
of the outstanding  collateral  balance have increased to 4.68% at September 30,
2003 from 4.47% at September  30, 2002  primarily  due to two  commercial  loans
which have become delinquent and increased percentage of delinquencies on single
family  mortgage  loans and  manufactured  housing  loans due  primarily  to the
declining balance of these loans outstanding. 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 September  30, 2003,  management  believes the level of credit
reserves is appropriate for currently existing losses.

                           Delinquency Statistics (1)



----------------------------------------------------------------------------------------------------------------------------
                          30 to 60 days delinquent      60 to 90 days          90 days and over
                                                         delinquent             delinquent (2)               Total
----------------------------------------------------------------------------------------------------------------------------
                                                                                                 
2002, Quarter 3                    1.99%                    0.34%                   2.14%                    4.47%
2002, Quarter 4                    1.78%                    0.64%                   2.07%                    4.49%
2003, Quarter 1                    1.79%                    0.51%                   2.20%                    4.50%
2003, Quarter 2                    1.68%                    0.50%                   2.58%                    4.76%
2003, Quarter 3                    1.59%                    0.56%                   2.53%                    4.68%
----------------------------------------------------------------------------------------------------------------------------


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



General and Administrative Expense.  The following tables present a breakdown of
general and administrative expense.



-------------------------------- ------------------------------ ------------------------------ ---------------------------
                                           Servicing                Corporate/Investment                 Total
                                                                    Portfolio Management
-------------------------------- ------------------------------ ------------------------------ ---------------------------
                                                                                                 
2002, Quarter 3                           $  1,122.2                     $   1,103.7                 $    2,225.9
2002, Quarter 4                              1,221.5                         1,526.9                      2,748.4
2003, Quarter 1                              1,146.6                           874.2                      2,020.8
2003, Quarter 2                              1,262.3                           888.3                      2,150.6
2003, Quarter 3                              1,240.6                           884.1                      2,124.7
-------------------------------- ------------------------------ ------------------------------ ---------------------------


Recent  Accounting  Pronouncements.  In April  2003,  the  Financial  Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 149,  "Amendment  of Statement  133 on  Derivative  Instruments  and Hedging
Activities." Effective after June 30, 2003, this Statement amends FASB Statement
No. 133,  "Accounting  for Derivative  Instruments and Hedging  Activities",  to
provide  clarification  of financial  accounting  and reporting  for  derivative
instruments,   including  certain  derivative   instruments  embedded  in  other
contracts. In particular,  this Statement (1) clarifies under what circumstances
a  contract  with an  initial  net  investment  meets  the  characteristic  of a
derivative  discussed in paragraph  6(b) of Statement  133, (2) clarifies when a
derivative  contains a  financing  component,  (3) amends the  definition  of an
underlying to conform it to language used in FASB  Interpretation  (FIN) No. 45,
"Guarantor's  Accounting and Disclosure  Requirements for Guarantees,  Including
Indirect  Guarantees of  Indebtedness  of Others," and (4) amends  certain other
existing pronouncements.  Those changes will result in more consistent reporting
of contracts as either derivatives or hybrid instruments. The Company's adoption
of SFAS No. 149 in June 2003 has not had a  significant  impact on its financial
position, results of operations, or cash flows.

In May 2003,  the FASB issued SFAS No. 150,  "Accounting  for Certain  Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
is effective for financial  instruments  entered into or modified  after May 31,
2003;  and otherwise is effective at the  beginning of the first interim  period
beginning  after June 15,  2003,  except for  mandatorily  redeemable  financial
instruments of nonpublic  entities,  which are subject to the provisions of this
Statement for the first fiscal period  beginning  after December 15, 2003.  This
Statement  amends SFAS No.  133,  "Accounting  for  Derivative  Instruments  and
Hedging  Activities,"  and SFAS No.  128,  "Earnings  per  Share," to  establish
standards  outlining how to classify and measure certain  financial  instruments
with  characteristics  of both liabilities and equity.  It requires that certain
financial   instruments  that  were  previously  classified  as  equity  now  be
classified as a liability (or, in some circumstances,  as an asset). The Company
is  reviewing  the  implications  of SFAS No. 150 but does not believe  that its
adoption will have a significant  impact on its financial  position,  results of
operations, or cash flows.

In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities - an  interpretation  of ARB No. 51," which addresses  consolidation of
variable interest entities. FIN No. 46 expands the criteria for consideration in
determining  whether a variable  interest  entity  should be  consolidated  by a
business entity, and requires existing unconsolidated variable interest entities
(which include, but are not limited to, Special Purpose Entities, or SPEs) to be
consolidated by their primary  beneficiaries  if the entities do not effectively
disperse risks among parties involved.  This interpretation  applies immediately
to variable  interest  entities  created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date. It
applies in the first fiscal year or interim period  beginning after December 31,
2003,  to variable  interest  entities in which an  enterprise  holds a variable
interest that it acquired  before  February 1, 2003.  The adoption of FIN No. 46
did not have a material  effect on the  Company's  results of  operations,  cash
flows or financial position.

Supplemental Information for Collateralized Bond Securities

The Company, through its subsidiaries,  pledges collateral (i.e.,  single-family
mortgage  loans  and  securities,   manufactured   housing  mortgage  loans  and
securities,  or commercial  mortgage loans) for collateralized  bond obligations
that are issued  based on the pledge of such  collateral.  These  collateralized
bonds are recourse only to the collateral pledged,  and not to the Company.  The
structure  created  by the  pledge  of  collateral  and  sale of the  associated
collateralized  bonds  is  referred  to  hereafter  as  a  "collateralized  bond
security".  The "principal  balance of net investment" in a collateralized  bond
security  represents the principal  balance of the  collateral  pledged less the
outstanding  balance  of the  associated  collateralized  bonds  owned  by third
parties.    This   net   investment   is   also   commonly    referred   to   as
"over-collateralization".  The "amortized  cost basis of net  investment" is the
over-collateralization  amount plus or minus collateral and collateralized  bond
premiums and discounts  and related  costs.  The Company  generally has sold the
investment grade classes of the collateralized  bonds to third parties,  and has
retained  the  portion  of  the  collateralized  bond  security  that  is  below
investment grade.

The Company analyzes and values its investment in collateral for  collateralized
bonds on a net investment basis. The Company estimates the fair value of its net
investment  in  collateralized  bond  securities  as the  present  value  of the
projected cash flow from the collateral,  adjusted for the impact of and assumed
level of future prepayments and credit losses,  less the projected principal and
interest  due on the bonds  owned by third  parties.  Below is a  summary  as of
September  30, 2003, by each series where the fair value exceeds $0.5 million of
the Company's net  investment in  collateralized  bond  securities.  The Company
master  services four of its  collateral  for  collateralized  bond  securities.
Structured   Asset   Securitization   Corporation   (SASCO)   Series  2002-9  is
master-serviced  by  Wells  Fargo  Bank.  CCA  One  Series  2 and  Series  3 are
master-serviced  by  Bank  of  New  York.  Monthly  payment  reports  for  those
securities  master-serviced by the Company may be found on the Company's website
at www.dynexcapital.com.

The following tables show the Company's net investment in each of the securities
presented  below on both a principal  balance and amortized cost basis, as those
terms are defined above. The accompanying  consolidated  financial statements of
the Company  present the collateral for  collateralized  bonds as an asset,  and
presents  the  associated  collateralized  bond  obligation  as  a  non-recourse
liability.  In addition, the Company carries only its investment in MERIT Series
11 at fair  value.  As a result,  the table  below is not meant to  present  the
Company's  investment in collateral for  collateralized  bonds or collateralized
bonds in accordance with generally accepted accounting  principles applicable to
the  Company's  transactions.  See below  for a  reconciliation  of the  amounts
included in the table to the Company's consolidated financial statements.




--------------------------------------------------------------------------------------------------------------------------------
(amounts in thousands)                                                      Principal balance
                                                        Principal balance   of collateralized                     Amortized Cost
 Collateralized Bond                                    of collateral       bonds outstanding  Principal balance  Basis of Net
     Series (1)           Collateral Type               pledged             to third parties   of Net Investment  Investment
---------------------------------------------------------------------------------------------------------------------------

                                                                                                        
MERIT Series 11A      Debt securities backed by
                      Single-family loans and
                      Manufactured housing loans      $    277,835      $    241,394          $     36,441      $     28,266

MERIT Series 12-1     Manufactured housing loans           230,807           210,139                20,668            18,319

MERIT Series 13       Manufactured housing loans           276,192           248,708                27,484            21,679

SASCO 2002-9          Single family loans                  355,277           345,880                 9,397            17,160

MCA One Series 1      Commercial mortgage loans             80,471            75,752                 4,719                 -

CCA One Series 2      Commercial mortgage loans            290,478           268,374                22,104             8,712

CCA One Series 3      Commercial mortgage loans            391,423           350,477                40,946            50,335
---------------------------------------------------------------------------------------------------------------------------
                                                      $  1,902,483      $  1,740,724          $    161,759      $    144,471
---------------------------------------------------------------------------------------------------------------------------


(1) MERIT stands for MERIT Securities Corporation;  MCA stands for Multifamily
    Capital  Access One,  Inc. (now known as  Commercial  Capital  Access One,
    Inc.);  and CCA stands for  Commercial  Capital Access One, Inc. Each such
    entity is a wholly owned limited purpose subsidiary of the Company.  SASCO
    stands for Structured Asset Securitization Corporation.




The following  table  reconciles the balances  presented in the table above with
the amounts included for collateral for collateralized  bonds and collateralized
bonds in the accompanying consolidated financial statements.



----------------------------------------------------------------------------------------------------------------------------
(amounts in thousands)                                              Collateral
                                                                For Collateralized    Collateralized            Net
                                                                       Bonds               Bonds            Investment
----------------------------------------------------------------------------------------------------------------------------
                                                                                                            

Principal balances per the above table                            $   1,902,483       $   1,740,724       $    161,759
Principal balance of security excluded from above table                   4,007               4,132               (125)
Recorded impairments on debt securities                                 (10,692)                  -            (10,692)
Premiums and discounts                                                   12,688              23,695            (11,007)
Unrealized gain/loss                                                        603                   _                603
Accrued interest and other                                               12,249               7,559              4,690
Allowance for loan losses                                               (40,975)                 -             (40,975)
----------------------------------------------------------------------------------------------------------------------------
Balance per consolidated financial statements                     $   1,880,363       $   1,776,110       $    104,253
----------------------------------------------------------------------------------------------------------------------------



The following table summarizes the fair value of the Company's net investment in
collateralized bond securities, the various assumptions made in estimating value
and the cash flow received from such net investment during the nine months ended
September  30,  2003.  As  the  Company  does  not  present  its  investment  in
collateralized  bonds on a net investment  basis and carries only its investment
in MERIT  Series 11 at fair  value,  the table below is not meant to present the
Company's  investment in collateral for  collateralized  bonds or collateralized
bonds in accordance with generally accepted accounting  principles applicable to
the Company's transactions.



----------------------------------------------------------------------------------------------------------------------------
                                             Fair Value Assumptions                                 ($ in thousands)

                     -------------------------------------------------------------------------------------------------------
                                                                                                                Cash flows
   Collateralized       Weighted-average                            Projected cash flow      Fair value of       received
    Bond Series        prepayment speeds          Losses              termination date            net            in 2003,
                                                                                             investment (1)       net (2)
----------------------------------------------------------------------------------------------------------------------------
                                                                                                    
MERIT Series 11        35%-40% CPR on SF    3.0% annually on    Anticipated final maturity     $    28,736        $  11,953
                      securities; 10% CPR   MH securities       in 2025
                        on MH securities

MERIT Series 12-1            9% CPR         3.1% annually on    Anticipated final maturity           1,707              935
                                            MH Loans            in 2027

MERIT Series 13             10% CPR         3.5% annually       Anticipated final maturity           1,366            1,051
                                                                in 2026

SASCO 2002-9                30% CPR         0.20% annually      Anticipated call date in            23,158           11,778
                                                                2005

MCA One Series 1              (3)           0.8% annually       Anticipated final maturity           2,469              349
                                                                in 2018

CCA One Series 2              (4)           0.80% annually      Anticipated call date in            10,732            1,292
                                            beginning in 2004   2012

CCA One Series 3              (4)           1.2% annually       Anticipated call date in            17,623            1,393
                                            beginning in 2004   2009
----------------------------------------------------------------------------------------------------------------------------
                                                                                               $    85,791          $28,751
----------------------------------------------------------------------------------------------------------------------------


(1)  Calculated  as the  net  present  value  of  expected  future  cash  flows,
     discounted  at 16%.  Expected  cash flows were based on the  forward  LIBOR
     curve as of  September  30, 2003,  and  incorporates  the  resetting of the
     interest   rates  on  the   adjustable   rate   assets  and   variable-rate
     collateralized bonds to a level consistent with projected prevailing rates.
     Increases or  decreases in interest  rates and index levels from those used
     in the  projection  would impact the  calculation  of fair value,  as would
     differences  in actual  prepayment  speeds  and  credit  losses  versus the
     assumptions set forth above.
(2)  Cash flows received by the Company  during the nine months ended  September
     30, 2003,  equal to the excess of the cash flows received on the collateral
     pledged,  over  the  cash  flow  requirements  of the  collateralized  bond
     security
(3)  Computed at 0% CPR until maturity
(4)  Computed at 0% CPR until the respective call date



The above  tables  illustrate  the  Company's  estimated  fair  value of its net
investment  in  certain  collateralized  bond  securities.  In its  consolidated
financial  statements,  the Company  carries its  investments at amortized cost,
except for its investment in MERIT Series 11, which it carries at estimated fair
value.  Including the recorded  allowance for loan losses of $41.0 million,  the
Company's net  investment in  collateralized  bond  securities is  approximately
$104.3 million as set forth in the table on page 21. This amount  compares to an
estimated fair value,  utilizing a discount rate of 16%, of approximately  $85.8
million,  as set forth in the table  above.  The  difference  between the $104.3
million in net investment as included in the consolidated  financial  statements
and the $85.8 million of estimated fair value, is due to the differences between
the estimated fair value of such net investment and amortized cost.

The  following  table  compares the fair value of these  investments  at various
discount rates,  but otherwise  using the same  assumptions as set forth for the
two immediately preceding tables:



-----------------------------------------------------------------------------------------------------------------------------
                                                Fair Value of Net Investment
-----------------------------------------------------------------------------------------------------------------------------
Collateralized Bond Series                    12%                   16%                   20%                   25%
---------------------------------------------------------- -------------------------------------------- ---------------------
                                                                                                      
MERIT Series 11                           $    32,046           $    28,736           $    26,190           $    23,709
MERIT Series 12-1                               1,574                 1,707                 1,769                 1,784
MERIT Series 13                                 1,153                 1,366                 1,491                 1,570
SASCO 2002-9                                   24,064                23,158                22,298                21,282
MCA One Series 1                                3,088                 2,469                 2,012                 1,598
CCA One Series 2                               13,295                10,732                 8,824                 7,087
CCA One Series 3                               20,954                17,623                14,897                12,166
------------------------------------- --------------------- --------------------- --------------------- ---------------------
                                          $    96,174           $    85,791           $    77,481           $    69,196
------------------------------------- --------------------- --------------------- --------------------- ---------------------



                         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.  In
addition,  while the Company was actively  originating  loans for its investment
portfolio,  the Company funded these  operations  through  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). Should the Company's future operations require access to
sources  of  capital  such as lines of credit  and  repurchase  agreements,  the
Company believes that it would be able to access such sources.

The Company's cash flow from its  investment  portfolio for the three months and
nine months ended September 30, 2003 was  approximately  $14.0 million and $43.8
million, respectively. Such cash flow is after payment of principal and interest
on the associated  collateralized  bonds (i.e.,  non-recourse debt) outstanding.
From the cash flow on its investment portfolio,  the Company funds its operating
overhead  costs,   including  the  servicing  of  its  delinquent  property  tax
receivables, and repays any remaining recourse debt.

The Company's cash flow from its investment  portfolio is subject to fluctuation
due to changes in interest rates,  repayment rates and default rates and related
losses. In a period of rapidly rising interest rates, the Company's net interest
margin and cash flow from the investment portfolio is likely to be significantly
impacted  due  to  increased  borrowing  costs  on  variable-rate   non-recourse
collateralized  bonds.  The  Company  anticipates,  however,  that it will  have
sufficient  cash  flow  from  its  investment  portfolio  to  meet  all  of  its
obligations.

Collateralized Bonds. Dynex, 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.  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 on the earlier of a specified date
or when the  remaining  balance of the bonds  equals 35% or less of the original
principal balance of the bonds. At September 30, 2003, Dynex had $1.8 billion of
collateralized   bonds   outstanding.   Approximately   $1.2   billion   of  the
collateralized  bonds carry a fixed rate of  interest,  and  approximately  $0.6
billion  carries a rate of interest  which  adjusts  monthly  based on One-Month
LIBOR.

Senior notes.  On February 28, 2003,  the Company  issued $32.1 million of 9.50%
senior  unsecured  notes due February 2005 (the "February 2005 Senior Notes") in
connection with a tender offer on the Company's  preferred  stock.  The February
2005  Senior  Notes were issued in exchange  for  1,156,891  shares of Series A,
Series B and Series C preferred stock.  Principal payments in the amount of $4.0
million,  along with  interest  payments  at a rate of 9.50% per annum,  are due
quarterly  beginning May 2003,  with final payment due on February 28, 2005. The
Company at its option can prepay the  February  2005 Senior Notes in whole or in
part,  without  penalty,  at any time.  The February 2005 Senior Notes  prohibit
distributions on the Company's capital stock until they are fully repaid, except
distributions  necessary for the Company to maintain  REIT status.  At September
30, 2003,  the  outstanding  balance of the Senior Notes was $14.1  million.  In
September 2003, the Company redeemed, early, $10 million of the Senior Notes.


                           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 performance of the Company's
securitized loan pools and on the Company's overall financial performance.

Capital Resources.  Cash flows from the investment  portfolio fund the Company's
operations and  repayments of recourse debt, and are subject to fluctuation  due
to changes in interest  rates,  repayment  rates and  default  rates and related
losses.

Interest Rate  Fluctuations.  The Company's  income and cash flow 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  collateralized  bonds,  approximately  $198  million  of  which is
variable rate which resets  monthly.  Financing  fixed rate assets with variable
rate bonds exposes the Company to reductions in income and cash flow in a period
of rising interest  rates.  Through the use of interest rate swaps and synthetic
swaps,  the Company has reduced this exposure by  approximately  $146 million at
September 30, 2003 on an amortizing  basis through  approximately  June 2005. In
addition,  a  significant  amount  of the  investments  held by the  Company  is
adjustable-rate  collateral for collateralized bonds, which generally reset on a
delayed  basis and have  periodic  interest  rate caps.  These  investments  are
financed through non-recourse long-term collateralized bonds which reset monthly
and which have no periodic caps. In total at September 30, 2003, the Company has
approximately $587 million of variable-rate collateralized bonds.

The net interest spread and cash flow for the Company could decrease  materially
during a period of rapidly rising short-term interest rates,  despite the use of
interest-rate swaps and synthetic swaps, as a result of the monthly reset in the
rate on the adjustable-rate collateralized bonds issued by the Company.

Defaults.  Defaults by borrowers on loans securitized by the Company may have an
adverse impact on the Company's financial  performance,  if actual credit losses
differ materially from estimates made by the Company or exceed reserves for loss
recorded in the financial statements.  The allowance for losses is calculated on
the basis of historical  experience  and  management's  best  estimates.  Actual
default  rates or loss  severity  may differ  from the  Company's  estimate as a
result of economic conditions. In particular, the default rate and loss severity
on the Company's portfolio of manufactured housing loans and securities has been
higher than  initially  estimated.  Actual  defaults  on ARM loans may  increase
during a rising  interest rate  environment.  In addition,  commercial  mortgage
loans are generally large dollar balance loans,  and a significant  loan default
may have an adverse  impact on the  Company's  financial  results.  The  Company
believes  that its reserves are adequate for such risks on loans as of September
30, 2003.

Third-party  Servicers.  Third-party  servicers  service  the  majority  of  the
Company's  investment  portfolio.   To  the  extent  that  these  servicers  are
financially impaired,  the performance of the Company's investment portfolio may
deteriorate, and defaults and credit losses may be greater than estimated.

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  replacement of investments in its
portfolio with lower yield securities.

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 September 30, 2003 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.


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  margin  comprises  the primary
component of the Company's earnings. Additionally, cash flow from the investment
portfolio  represents the primary component of the Company's incoming cash flow.
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.  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  focuses on the  sensitivity  of its cash flow,  and  measures  such
sensitivity 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 net interest margin cash flow for
the next twenty-four  months assuming interest rates following the forward LIBOR
curve (based on 90-day Eurodollar  futures  contracts) as of September 30, 2003.
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 cash flow.

The following  table  summarizes  the  Company's  net interest  margin cash flow
sensitivity  analysis  as  of  September  30,  2003.  This  analysis  represents
management's  estimate of the percentage change in net interest margin cash flow
given a shift in interest  rates,  as discussed  above.  Other  investments  are
excluded from this analysis  because they are generally not considered  interest
rate sensitive.  The "Base" case represents the interest rate  environment as it
existed as of September  30, 2003. At September  30, 2003,  one-month  LIBOR was
1.12% and six-month LIBOR was 1.18%. 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  significantly  from the modeled results.  In addition,
certain  financial  instruments  provide  a degree  of  "optionality."  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.  The  model  applies  the  same
prepayment rate  assumptions for all five cases indicated  below.  The extent to
which  borrowers  utilize the ability to exercise  their option may cause actual
results to significantly  differ from the analysis.  Furthermore,  the 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  investment  portfolio and the liabilities
incurred  by the  Company,  including  collateralized  bonds,  to finance  their
investments.  As a result of anticipated prepayments on assets in the investment
portfolio, there are likely to be such changes in the future.

------------------------------ ---------- ---------------------------
                                               % Change in Net
         Basis Point                           Interest Margin
     Increase (Decrease)                        Cash Flow From
      in Interest Rates                           Base Case
------------------------------            ---------------------------
            +200                                   (17.0)%
            +100                                    (8.9)%
            Base                                      -
            -100                                     9.5%
            -200                                    12.5%
------------------------------ ---------- ---------------------------

Approximately  $390.4  million  of  the  Company's  investment  portfolio  as of
September  30, 2003 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 73% and 14%
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 (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 and (iii) any unhedged difference in fixed rate assets which are
financed with variable rate liabilities.  As short-term interest rates stabilize
and the ARM loans reset,  the net interest  margin may be partially  restored 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.

Approximately $1.5 billion of the Company's investment portfolio as of September
30, 2003 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 which
approximated  $1.2 billion as of  September  30,  2003,  and (ii)  shareholders'
equity,  which was $161.4 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.


Item 4.  Controls and Procedures

         (a) Evaluation of disclosure  controls and  procedures.  As required by
Rule 13a-15 under the Exchange Act, as of the end of the period  covered by this
quarterly report (the "Evaluation  Date"), the Company carried out an evaluation
of the  effectiveness  of the design and operation of the  Company's  disclosure
controls and  procedures.  This evaluation was carried out under the supervision
and  with  the  participation  of the  Company's  management.  Based  upon  that
evaluation,  the Company's  management  concluded that the Company's  disclosure
controls and procedures are  effective.  Disclosure  controls and procedures are
controls  and other  procedures  that are  designed to ensure  that  information
required to be disclosed in the Company's  reports filed or submitted  under the
Exchange Act is recorded,  processed,  summarized  and reported  within the time
periods  specified  in the  SEC's  rules  and  forms.  Disclosure  controls  and
procedures  include,  without  limitation,  controls and procedures  designed to
ensure that information  required to be disclosed in the Company's reports filed
under the Exchange Act is accumulated and communicated to management,  including
the Company's  management,  as appropriate,  to allow timely decisions regarding
required disclosures.

         (b) Changes in internal controls.  There were no significant changes in
the  Company's  internal  controls  or in other  factors  that could  materially
affect,  or are reasonably  likely to materially  affect the Company's  internal
controls subsequent to the Evaluation Date, nor any significant  deficiencies or
material weaknesses in such internal controls requiring corrective actions.


PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

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"), the appellate
court of the state of Pennsylvania. Plaintiffs were two local businesses seeking
status to represent as a class,  delinquent  taxpayers in Allegheny County whose
delinquent tax liens had been assigned to GLS.  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, and whether
the County had the right to assign the  delinquent  property tax  receivables to
GLS and therefore employ  procedures for collection  enjoyed by Allegheny County
under  state  statute.  This  lawsuit  was  related  to the  purchase  by GLS of
delinquent  property tax receivables  from Allegheny  County in 1997,  1998, and
1999. In July 2001, the Commonwealth Court issued a ruling that addressed, among
other things,  (i) the right of GLS to charge to the delinquent  taxpayer a rate
of  interest  of 12% per annum  versus  10% per annum on the  collection  of its
delinquent  property  tax  receivables,  (ii)  the  charging  of a full  month's
interest on a partial month's delinquency; (iii) the charging of attorney's fees
to the delinquent taxpayer for the collection of such tax receivables,  and (iv)
the charging to the  delinquent  taxpayer of certain  other fees and costs.  The
Commonwealth  Court in its opinion  remanded  for further  consideration  to the
lower  trial  court  items (i),  (ii) and (iv)  above,  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.  The
Commonwealth  Court further ruled that Allegheny  County could assign its rights
in the delinquent  property tax  receivables to GLS, and that  plaintiffs  could
maintain  equitable  class in the  action.  In  October  2001,  GLS,  along with
Allegheny County,  filed an Application for Extraordinary  Jurisdiction with the
Supreme Court of Pennsylvania, Western District appealing certain aspects of the
Commonwealth Court's ruling. In March 2003, the Supreme Court issued its opinion
as follows:  (i) the Supreme  Court  determined  that GLS can charge  delinquent
taxpayers a rate of 12% per annum;  (ii) the Supreme Court  remanded back to the
lower trial court the charging of a full month's  interest on a partial  month's
delinquency;  (iii) the Supreme Court revised the  Commonwealth  Court's  ruling
regarding  recouping attorney fees for collection of the receivables  indicating
that the recoupment of fees requires a judicial review of collection  procedures
used in each case;  and (iv) the Supreme Court upheld the  Commonwealth  Court's
ruling that GLS can charge certain fees and costs,  while  remanding back to the
lower trial court for consideration the facts of each individual case.  Finally,
the  Supreme  Court  remanded  to the  lower  trial  court to  determine  if the
remaining claims can be resolved as a class action. No hearing date has been set
for the issues  remanded  back to the lower trial  court.  In August  2003,  the
Pennsylvania   legislature   signed  a  bill  amending  and  clarifying  certain
provisions of the Pennsylvania statute governing GLS' right to the collection of
certain interest,  costs and expenses. If enacted as currently proposed, the law
is  retroactive  to 1996,  and amends and clarifies  that as to items  (ii)-(iv)
noted above by the Supreme Court, that GLS can charge a full month's interest on
a partial month's delinquency,  that GLS can charge the taxpayer for legal fees,
and that GLS can charge certain fees and costs to the taxpayer at redemption.

The Company and Dynex  Commercial,  Inc.  ("DCI"),  formerly an affiliate of the
Company and now known as DCI Commercial,  Inc., are defendants in state court in
Dallas  County,  Texas in the matter of Basic  Capital  Management et al ("BCM")
versus Dynex Commercial, Inc. et al. The suit was filed in April 1999 originally
against DCI, and in March 2000,  BCM amended the complaint and added the Company
as a defendant.  The current complaint alleges that, among other things, DCI and
the  Company  failed to fund  tenant  improvement  or other  advances  allegedly
required  on various  loans made by DCI to BCM,  which  loans were  subsequently
acquired by the Company; that DCI breached an alleged $160 million "master" loan
commitment entered into in February 1998 and a second alleged loan commitment of
approximately   $9   million;   that  DCI  and  the   Company   made   negligent
misrepresentations  in connection with the alleged $160 million commitment;  and
that DCI and the Company  fraudulently  induced BCM into  canceling  the alleged
$160 million  master loan  commitment in January 1999.  Plaintiff BCM is seeking
damages approximating $40 million, including approximately $37 million for DCI's
breach of the alleged $160 million master loan  commitment,  approximately  $1.6
million for alleged failure to make additional tenant improvement advances,  and
approximately  $1.9  million  for DCI's  not  funding  the  alleged  $9  million
commitment.  DCI and the Company are vigorously  defending the claims on several
grounds.  The  Company  was not a  party  to the  alleged  $160  million  master
commitment  or the  alleged  $9  million  commitment.  The  Company  has filed a
counterclaim for damages  approximating $11 million against BCM. Commencement of
the trial of the case in Dallas,  Texas is  anticipated  in the first quarter of
2004. During the second quarter 2003, BCM filed suit against the Company and DCI
as third-party  defendants in related  litigation in the United States  District
Court Eastern District of Louisiana in the matter Kelly Investment,  Inc. versus
BCM et al. The Company sold certain BCM related loans on  commercial  properties
located in Louisiana to Kelly  Investment,  Inc. in 2000, and Kelly  Investment,
Inc.  subsequently  filed suit against BCM in 2001. Claims made by BCM in the US
District  Court of  Louisiana  against  the  Company  and DCI are  substantially
similar to those being made in Dallas  County,  Texas.  During the third quarter
2003,  Kelly and BCM entered into a settlement  agreement where BCM paid certain
amounts to Kelly. Subsequently, the Louisiana litigation against the Company and
DCI was dismissed. Neither the Company nor DCI were impacted by the settlement.

Although no assurance  can be given with respect to the ultimate  outcome of the
above litigation, the Company believes the resolution of these lawsuits 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

None


Item 3.  Defaults Upon Senior Securities

See Note 9 to accompanying condensed consolidated financial statements in Part I
Item 1.


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

None


Item 5.  Other Information

None

Item 6.  Exhibits and Reports on Form 8-K

         (a) Exhibits

             31.1 Certification of Principal Executive Officer pursuant to
                  Section 302 of the Sarbanes-Oxley Act of 2002.

             31.2 Certification of Chief Financial Officer pursuant to
                  Section 302 of the Sarbanes-Oxley Act of 2002.

             32.1 Certification of Principal Executive Officer and
                  Chief Financial Officer pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.

         (b) Reports on Form 8-K

             Current  report on Form 8-K as filed  with the  Commission  on
             August 11, 2003  providing a copy of the Dynex  Capital,  Inc.
             Press Release dated August 11, 2003.



                                    SIGNATURE

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.



Dated:  November 25, 2003              By:  /s/ Stephen J. Benedetti
                                            ------------------------------------
                                            Stephen J. Benedetti
                                            Executive Vice President
                                            (authorized officer of registrant,
                                             principal accounting officer)

                                                                    Exhibit 31.1
                                  CERTIFICATION
                          PURSUANT TO 17 CFR 240.13a-14
                                PROMULGATED UNDER
                  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Stephen J. Benedetti, certify that:

  1.   I have reviewed this quarterly  report on Form 10-Q of Dynex Capital,
       Inc.;

  2.   Based on my  knowledge,  this  report  does not  contain  any  untrue
       statement of a material fact or omit to state a material fact or omit
       to state a material fact  necessary to make the  statements  made, in
       light of the circumstances under which such statements were made, not
       misleading with respect to the period covered by this report;

  3.   Based on my knowledge, the financial statements,  and other financial
       information  included in this report,  fairly present in all material
       respects the  financial  condition,  results of  operations  and cash
       flows of the registrant as of, and for, the periods presented in this
       report;

  4.   The registrant's other certifying  officers and I are responsible for
       establishing and maintaining  disclosure  controls and procedures (as
       defined  in  Exchange  Act  Rules  13a-15(e)  and  15d-15(e)  for the
       registrant and have:

       (a) designed  such  disclosure controls and  procedures, or caused such
           disclosure  controls to be designed under our supervision, to ensure
           that material information  relating to the registrant, including its
           consolidated subsidiaries, is made known to us by others within
           those entities,  particularly  during the  period in which  this
           report is being prepared;

       (b) evaluated the effectiveness of the registrant's  disclosure  controls
           and procedures and presented in this report our conclusions about the
           effectiveness of the disclosure controls and procedures as of the end
           of the period covered by this report based on such evaluation; and

       (c) disclosed  in this  report  any change in the  registrant's  internal
           control  over   financial   reporting   that   occurred   during  the
           registrant's  most recent  fiscal  quarter (the  registrant's  fourth
           fiscal  quarter in the case of an annual  report) that has materially
           affected,   or  is  reasonably  likely  to  materially   affect,  the
           registrant's internal control of financial reporting; and

  5.  The  registrant's  other  certifying  officers and I have  disclosed,
      based  on  our  most  recent  evaluation  of  internal  control  over
      financial  reporting,  to the  registrant's  auditors  and the  audit
      committee of registrant's  board of directors (or persons  performing
      the equivalent function):

      (a)  all significant deficiencies and material weaknesses in the design or
           operation of internal  control  over  financial  reporting  which are
           reasonably  likely to adversely  affect the  registrant's  ability to
           record, process, summarize and report financial information; and

      (b)  any fraud, whether or not material, that involves management or other
           employees who have a significant  role in the  registrant's  internal
           control over financial reporting; and




Date: November 25, 2003               /s/  Stephen J. Benedetti
                                      ------------------------------------------
                                      Stephen J. Benedetti
                                      Principal Executive Officer

                                                                    Exhibit 31.2
                                  CERTIFICATION
                          PURSUANT TO 17 CFR 240.13a-14
                                PROMULGATED UNDER
                  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Stephen J. Benedetti, certify that:

  1.   I have reviewed this quarterly  report on Form 10-Q of Dynex Capital,
       Inc.;

  2.   Based on my  knowledge,  this  report  does not  contain  any  untrue
       statement of a material fact or omit to state a material fact or omit
       to state a material fact  necessary to make the  statements  made, in
       light of the circumstances under which such statements were made, not
       misleading with respect to the period covered by this report;

  3.   Based on my knowledge, the financial statements,  and other financial
       information  included in this report,  fairly present in all material
       respects the  financial  condition,  results of  operations  and cash
       flows of the registrant as of, and for, the periods presented in this
       report;

  4.   The registrant's other certifying  officers and I are responsible for
       establishing and maintaining  disclosure  controls and procedures (as
       defined  in  Exchange  Act  Rules  13a-15(e)  and  15d-15(e)  for the
       registrant and have:

       (a) designed  such  disclosure controls and  procedures, or caused such
           disclosure  controls to be designed under our supervision, to ensure
           that material information  relating to the registrant, including its
           consolidated subsidiaries, is made known to us by others within
           those entities,  particularly  during the  period in which  this
           report is being prepared;

       (b) evaluated the effectiveness of the registrant's  disclosure  controls
           and procedures and presented in this report our conclusions about the
           effectiveness of the disclosure controls and procedures as of the end
           of the period covered by this report based on such evaluation; and

       (c) disclosed  in this  report  any change in the  registrant's  internal
           control  over   financial   reporting   that   occurred   during  the
           registrant's  most recent  fiscal  quarter (the  registrant's  fourth
           fiscal  quarter in the case of an annual  report) that has materially
           affected,   or  is  reasonably  likely  to  materially   affect,  the
           registrant's internal control of financial reporting; and

  5.  The  registrant's  other  certifying  officers and I have  disclosed,
      based  on  our  most  recent  evaluation  of  internal  control  over
      financial  reporting,  to the  registrant's  auditors  and the  audit
      committee of registrant's  board of directors (or persons  performing
      the equivalent function):

      (a)  all significant deficiencies and material weaknesses in the design or
           operation of internal  control  over  financial  reporting  which are
           reasonably  likely to adversely  affect the  registrant's  ability to
           record, process, summarize and report financial information; and

      (b)  any fraud, whether or not material, that involves management or other
           employees who have a significant  role in the  registrant's  internal
           control over financial reporting; and




Date: November 25, 2003                    /s/  Stephen J. Benedetti
                                           -------------------------------------
                                           Stephen J. Benedetti
                                           Chief Financial Officer



                                                                    Exhibit 32.1


                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Quarterly  Report of Dynex Capital,  Inc. (the "Company")
on Form  10-Q for the  quarter  ended  September  30,  2003,  as filed  with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Stephen
J. Benedetti, the Principal Executive Officer and the Chief Financial Officer of
the Company, certify, pursuant to and for purposes of 18 U.S.C. Section 1350, as
adopted  pursuant to Section 906 of the  Sarbanes-Oxley  Act of 2002, that to my
knowledge:

     (1) The Report fully  complies  with the  requirements  of Section 13(a) or
         15(d) of the Securities Exchange Act of 1934; and

     (2) The  information  contained  in  the  Report  fairly  presents,  in all
         material respects, the financial condition and results of operations of
         the Company.



November 25, 2003                         /s/ Stephen J. Benedetti
                                         ---------------------------------------
                                         Stephen J. Benedetti
                                         Principal Executive Officer
                                         Chief Financial Officer