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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-K
(Mark One)
     |X|  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 2004
                                       OR
     |_|  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
          SECURITIES EXCHANGE ACT OF 1934

                                     1-9819
                            (Commission file number)

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



                                                                                                  
                                Virginia                                                  52-1549373
     (State or other jurisdiction of incorporation or organization)          (I.R.S. Employer 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)

           Securities registered pursuant to Section 12(b) of the Act:
Title of each class                    Name of each exchange on which registered
-------------------                    -----------------------------------------
Common Stock, $.01 par value           New York Stock Exchange
Series D 9.50% Cumulative Convertible  New York Stock Exchange
 Preferred Stock, $.01 par value

           Securities registered pursuant to Section 12(g) of the Act:
                                      None
                                (Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.
Yes   |X|     No   |_|

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

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

As of June 30,  2004,  the  aggregate  market  value of the voting stock held by
non-affiliates  of the  registrant  was  approximately  $64,808,462 at a closing
price on The New York Stock  Exchange of $5.96.  Common stock  outstanding as of
February 28, 2005 was 12,162,391 shares.

                       DOCUMENTS INCORPORATED BY REFERENCE
Portions of the  Definitive  Proxy  Statement to be filed pursuant to Regulation
14A within 120 days from December 31, 2004, are  incorporated  by reference into
Part III.

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                               DYNEX CAPITAL, INC.
                          2004 FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS




                                                                                                   
                                                                                                            Page
                                                                                                           Number

PART I.

         Item 1.      Business.................................................................................1
         Item 2.      Properties..............................................................................11
         Item 3.      Legal Proceedings.......................................................................11
         Item 4.      Submission of Matters to a Vote of Security Holders.....................................12


PART II.

         Item 5.      Market for Registrant's Common Equity, Related Stockholder Matters and
                      Issuer Purchases of Equity Securities...................................................12
         Item 6.      Selected Financial Data.................................................................13
         Item 7.      Management's Discussion and Analysis of Financial Condition and
                      Results of Operations...................................................................13
         Item 7A.     Quantitative and Qualitative Disclosures about Market Risk..............................28
         Item 8.      Financial Statements and Supplementary Data.............................................29
         Item 9.      Changes in and Disagreements with Accountants on Accounting and
                      Financial Disclosure....................................................................29
         Item 9A.     Controls and Procedures.................................................................30
         Item 9B.     Other Information.......................................................................30


PART III.

         Item 10.     Directors and Executive Officers of the Registrant......................................30
         Item 11.     Executive Compensation..................................................................30
         Item 12.     Security Ownership of Certain Beneficial Owners and Management and Related
                      Stockholder Matters.....................................................................31
         Item 13.     Certain Relationships and Related Transactions..........................................31
         Item 14.     Principal Accounting Fees and Services..................................................31


PART IV.

         Item 15.     Exhibits, Financial Statement Schedules.................................................31

SIGNATURES            ........................................................................................34


                                     PART I

Item 1.    Business

                              AVAILABLE INFORMATION
                              ---------------------


         This annual report on Form 10-K, our quarterly reports on Form 10-Q and
our  current  reports on Form 8-K,  and  amendments  to those  reports  filed or
furnished  pursuant to Section 13(a) or 15(d) of the Securities  Exchange Act of
1934 are made available as soon as reasonably practicable after such material is
electronically   filed  with  or  furnished  to  the   Securities  and  Exchange
Commission,  free of  charge,  through  our  website.  Our  website  address  is
www.dynexcapital.com.

         We have adopted a code of conduct that applies to all of our employees,
officers and directors.  Our code of conduct is also available,  free of charge,
on our website,  along with our Audit  Committee  Charter,  our  Nominating  and
Corporate Governance Committee Charter, and our Compensation  Committee Charter.
We will post on our website any  amendments to the code or waivers from our code
of conduct,  if any,  which are  applicable to any of our directors or executive
officers.


                                     GENERAL

         We were  incorporated in the Commonwealth of Virginia in 1987. We are a
financial  services  company,  which has  investments  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 we invest  have
generally been pooled and pledged to  securitization  trusts,  which issue bonds
collateralized by the assets pledged to the trust.  These bonds are non-recourse
to us and are  utilized  as a means of  providing  long-term  financing  for our
investments. The process of pooling investments, creating a securitization trust
and issuing bonds is referred to as  securitization.  From an economic  point of
view,  the  securitization  of collateral  limits the credit,  interest rate and
liquidity risk resulting from the ownership of the collateral.  Assets that have
been pledged as collateral in a securitization  transaction are presented in our
financial  statements as  securitized  finance  receivables,  and the associated
financing is presented as non-recourse  securitization financing.  Together, the
securitized  finance  receivables  and  associated   financing  are  hereinafter
referred to as securitization trusts.

         We have elected to be treated as a real estate  investment trust (REIT)
for federal  income tax  purposes  under the Internal  Revenue Code of 1986,  as
amended,  and, as such, must distribute  substantially all of our taxable income
to  shareholders.  Provided that we meet all of the prescribed  Internal Revenue
Code requirements for a REIT, we will generally not be subject to federal income
tax.

         In recent years,  we have elected to shrink our  investment  portfolio,
converting  what we deem to be non-core  assets into cash,  while  improving our
overall  financial  position  and  flexibility.  Our non-core  assets  currently
include  manufactured  housing loans and  delinquent  property tax  receivables.
During 2004, we engaged in a number of strategic sales of assets,  including the
sale of our delinquent  property tax receivables  portfolio  located in Cuyahoga
County,  Ohio for $19.2 million,  and the sale of our interest in a manufactured
housing loan securitization trust for $11.9 million. These two sales resulted in
the  derecognition  of  approximately  $241.5 million of investments  and $226.7
million  in  securitization  financing,  at a net  gain of  $14.3  million.  Our
investments  at  the  end of  2004  included  approximately  $347.7  million  of
manufactured  housing loans and debt securities,  as well as approximately  $7.6
million of delinquent  property tax receivable  securities.  We will continue to
attempt to convert these assets to cash, but only at amounts we deem reasonable.
See  Business  Focus and  Strategy  below for a  discussion  of our  current and
potential long-term investment strategies.

         In May 2004,  we  completed a  recapitalization  of our equity  capital
structure  through the exchange of our outstanding  shares of Series A, Series B
and Series C preferred  stock into  shares of new Series D  preferred  stock and
common   stock.   The   recapitalization   resulted   in  the   elimination   or
payment-in-kind  of $18.5  million of  dividends  in arrears and the issuance of
1,288,488  shares of common  stock.  The  shares  of  Series D  preferred  stock
automatically  convert to 9.50%  senior  notes if the  Company  fails to pay two
consecutive  quarterly  preferred  dividends or if the Company fails to maintain
consolidated  shareholders' equity of at least 200% of the aggregate issue price
of the Series D preferred stock.

         We are currently  precluded  from paying a dividend on our common stock
under the terms of the  Series D  Preferred  Stock  until  such time that  total
shareholders'  equity  equals or exceeds  300% of the Series D  Preferred  Stock
outstanding.  We do not  anticipate  meeting this  covenant for the  foreseeable
future.  Assuming that we properly execute our investment strategy, as indicated
above and as discussed  further below, we should be able to compound the returns
on our investable capital as a result of not paying a common dividend.  Once the
Series D Preferred Stock covenant is met, we will continually review the payment
of a common dividend to our shareholders, balancing the benefit of retaining and
reinvesting  capital with providing the common  shareholders a cash distribution
on their investment.

         We had net operating loss  carryforwards  (NOLs) of approximately  $149
million at December 31,  2004,  which  expire  beginning  in 2018.  Unlike other
mortgage REITs, our required REIT income  distributions are likely to be limited
well into the future due to the reduction of our future  taxable income by these
NOL  carryforwards.  As a result,  we anticipate that we will invest our capital
and compound the returns on such  invested  capital on an  essentially  tax-free
basis for the  foreseeable  future.  Over the  long-term  this will  allow us to
increase  our book value per common  share while  potentially  utilizing a lower
risk investment  strategy than some of our competitors  would have to utilize in
order to achieve similar results.

Business Focus and Strategy
---------------------------

         Our current business strategy is to manage our investment  portfolio to
maximize our overall  cash flow and  earnings in order to improve our  financial
flexibility  and to  position us to be an  opportunistic  investor in equity and
fixed-income  instruments in the future.  Our principal  source of cash flow and
earnings  has  historically  been the net  interest  income from our  investment
portfolio.

          Over the last year, we have elected to sell certain  non-core  assets,
improving our financial flexibility by converting  investments into cash, and we
completed a restructuring of our equity capital while simultaneously eliminating
preferred  dividends  in  arrears.  Our  focus for 2005  will be  similar  as we
continue to attempt to sell non-core assets and improve the  transparency of our
balance  sheet.  As we sell  non-core  assets,  we  expect  that our  investment
portfolio will evolve  principally into  investments in  single-family  mortgage
loans and securities and commercial  mortgage loans. We believe that competitive
pressures overall in the fixed-income  markets, the current rising interest-rate
environment,  and the fundamental changes in the mortgage market, which have led
to  less  predictable  prepayment  patterns  and  credit  loss  expectations  on
single-family   mortgage  loans  and   securities,   have   diminished   current
opportunities  to earn  acceptable  longer-term  risk-adjusted  returns on newly
invested capital. As a result, we have been investing our capital in short-term,
fixed income  instruments  of  high-credit  quality and using modest  amounts of
repurchase agreement leverage to increase the returns on our invested capital.

         On a  longer-term  basis,  we will  continue  to  evaluate  a number of
different  investment  alternatives.  Our Board has formed a committee to review
long-term  strategic  alternatives  for us, and the Board believes that it is in
the best interests of the shareholders to remain an independent  company for the
foreseeable future.  Because of our NOL carryforwards and our related ability to
compound our capital on a tax-free basis,  our return  requirements  can be less
than our  competitors'  until our NOL  carryforwards  are fully utilized.  Other
mortgage  REITs do not pay taxes but  instead  must  distribute  at least 90% of
their  taxable  income to their  shareholders  in order to  maintain  their REIT
status. Upon receiving those distributions, shareholders in other mortgage REITs
must  then  pay  taxes  on the  distributions,  which  are  generally  taxed  as
non-qualifying  ordinary  income.  The current  maximum Federal rate on ordinary
income is 35%; therefore,  for every $1.00 distributed as a dividend of ordinary
income by a mortgage REIT, the investor retains as little as $0.65, after taxes.
In addition,  REIT income  distribution  requirements limit the ability of other
mortgage REITs to retain capital created from organic growth of their investment
portfolios (either through earnings or sales of appreciated investments),  which
requires the REITs,  therefore, to continually raise capital in the market place
in order to grow its book value and earnings.  On the other hand,  given our NOL
carryforwards,  we can  retain the $1.00  earned  instead  of  distributing  it,
thereby  increasing  our  book  value  until  the NOL  carryforwards  are  fully
utilized.

         In our  securitization  trusts,  we have  retained  the right to redeem
outstanding  securitization financing bonds based on percentages of the original
financing that remains  outstanding,  or at a certain date.  Approximately  $217
million in securitization financing outstanding  collateralized by approximately
$225 million in single-family  loans will be redeemable in March 2005. We intend
to redeem these bonds and either reissue them under new terms or retire them and
securitize the remaining $225 million in loans in a new securitization trust.


                              INVESTMENT PORTFOLIO
                              --------------------

         The Company primarily invests in loans and securities on single family,
manufactured  housing and commercial  mortgages.  The following section provides
detail on the  Company's  investments,  financing for such  investments  and the
related risks.

Composition
-----------

         The  following   table  presents  the  composition  of  the  investment
portfolio by investment type and the percentage of total  investments  each type
represents  as of December 31, 2004 and 2003.  Securitized  finance  receivables
include loans,  which are carried at amortized cost, and debt securities,  which
are  considered  available-for-sale  pursuant to the  provisions of Statement of
Financial  Accounting  Standards  ("SFAS")  No.  115,  "Accounting  for  Certain
Investments in Debt and Equity Securities," and are carried at fair value. Other
investments  include a security backed by delinquent  property tax  receivables,
which  is  classified  as  available-for-sale  and is  carried  at  fair  value.
Securities  consist of  mortgage-related  debt  securities  and an  asset-backed
security collateralized by consumer installment loans. Securities are considered
available-for-sale  and are  carried at fair  value.  Other loans are carried at
amortized cost.



--------------------------------------------------- ------------------------------------------------------------------------
                                                                              As of December 31,
                                                                   2004                                 2003
                                                    ------------------------------------ -----------------------------------
(amounts in thousands)                                   Amount          % of Total           Amount          % of Total
--------------------------------------------------- ----------------- ------------------ ----------------- -----------------
                                                                                                      
Investments:
  Securitized finance receivables:
    Loans                                              $1,036,123           77.1%           $1,518,613            81.9%
    Debt securities                                       206,434           15.4               255,580            13.8
  Securities                                               87,706            6.5                33,275             1.8
  Other investments                                         7,596            0.6                37,903             2.0
  Other loans                                               5,589            0.4                 8,304             0.5
--------------------------------------------------- ----------------- ------------------ ----------------- -----------------
         Total investments                             $1,343,448          100.0%           $1,853,675           100.0%
--------------------------------------------------- ----------------- ------------------ ----------------- -----------------


         Securitized  Finance   Receivables.   Securitized  finance  receivables
include loans and securities,  consisting of, or secured by, adjustable-rate and
fixed-rate  mortgage  loans  secured by first  liens on single  family  housing,
fixed-rate   loans  secured  by  first  liens  on  multifamily   and  commercial
properties,  and manufactured  housing installment loans secured by either a UCC
filing or a motor  vehicle  title.  Securitized  finance  receivables  have been
pledged  to a  securitization  trust to  support  the  repayment  of  associated
non-recourse  securitization financing outstanding.  Non-recourse securitization
financing is  non-recourse to us in that the financing is repaid solely from the
cash flow from the securitized  finance  receivables.  Should the cash flow from
the securitized  finance  receivables be insufficient to repay the  non-recourse
securitization financing, we are not obligated to fund the shortfall. Our return
on our investment in securitized  finance  receivables is affected  primarily by
changes in interest rates,  prepayment rates and credit losses on the underlying
loans.  By virtue of our investment in the  securitization  trust,  we generally
retain the net interest income cash flow generated by the securitization trust.

         Securities. Securities at December 31, 2004 include fixed-rate mortgage
securities  consisting  of  mortgage-related  debt  securities  with a  recorded
balance of $79.1 million that have a fixed-rate of interest over their remaining
life,  an  asset-backed  security  with  a  recorded  balance  of  $0.4  million
collateralized  by  consumer  installment  loans and  equity  securities  with a
recorded balance of $7.4 million.  Except for the equity securities,  the yields
on the  above  referenced  securities  are  affected  primarily  by  changes  in
prepayment  rates on the  underlying  mortgage  and consumer  loans.  The equity
security represents an investment in another mortgage REIT.

         Other Investments.  Other investments include our remaining  investment
in  delinquent  property  tax  securities  and  receivables  (collectively,  the
delinquent property tax receivable portfolio). During the third quarter of 2004,
we sold all of our rights,  title and  interest in our  delinquent  property tax
receivable portfolio and servicing operation located in Cuyahoga County, Ohio to
a third party for $19.2 million.  Of this amount,  $0.7 million is being held in
escrow for up to one year for customary representations and warranties.

         Other Loans. As of December 31, 2004,  other loans consist  principally
of single-family  mortgage loans,  both current and delinquent,  mezzanine loans
secured by healthcare  properties,  and  participations  in first mortgage loans
secured by multifamily and commercial mortgage properties.

Financing For Our Investment Portfolio
--------------------------------------

         Securitization  Trusts.  Our  predominate  securitization  structure is
non-recourse securitization financing,  whereby loans and securities are pledged
to a trust, and the trust issues bonds pursuant to an indenture.  Generally, for
accounting  and tax  purposes,  the loans and  securities  financed  through the
issuance  of bonds in the  securitization  financing  are  treated as our assets
(securitized finance receivables), and the non-recourse securitization financing
is treated as our debt.  We earn the net  interest  income  between the interest
income  on the  securitized  finance  receivables  and the  interest  and  other
expenses  associated with the  securitization  financing bonds. The net interest
income is directly  impacted by the credit  performance of the underlying  loans
and  securities,  by the  level  of  prepayments  of the  underlying  loans  and
securities,  and, to the extent bond  classes are  variable-rate,  by changes in
short-term interest rates. We typically retain the overcollateralization tranche
of the  securitization  trust.  Overcollateralization  is essentially the equity
investment in the trust and represents the excess of the collateral pledged over
the  securitization  financing bonds  outstanding.  We analyze our investment in
securitization financing based on our overcollateralization investment (which is
commonly referred to as our "net investment",  as further discussed below).  The
ownership of the  overcollateralization  tranche subjects us to credit risk. See
Investment Portfolio Risks - Credit Risk, below.

         Master  Servicing.  As well as being the  issuer of the  securitization
financing  bonds,  we also master service most of the associated  securitization
trusts.  Our  function as master  servicer  typically  includes  monitoring  and
reconciling  the loan payments  remitted by the primary  servicers of the loans,
determining  the payments due on the securities and  determining  that the funds
are  correctly  sent to a trustee or  investors  for each series of  securities.
Master servicing responsibilities also include monitoring the primary servicers'
compliance with servicing guidelines.  At December 31, 2004, as master servicer,
we monitored  the  performance  of four  third-party  servicers of single family
loans, the servicer of one of the series of our securitized  commercial mortgage
loan pools, and the servicer of our manufactured  housing loans. In our capacity
as master servicer, we are obligated to advance scheduled principal and interest
payments  on  delinquent  loans  in  accordance  with the  underlying  servicing
agreements  should the primary  servicer  fail to make such  advance.  As master
servicer,  we are paid a monthly fee based on the outstanding  principal balance
of each loan for which we act as  master  servicer.  During  2004,  we  received
approximately $0.1 million of master servicing fees. As of December 31, 2004, we
master serviced $688.7 million in securities.

Investment Portfolio Risks
--------------------------

         We are exposed to several  types of risks  inherent  in our  investment
portfolio. These risks include credit risk (inherent in the loan and/or security
structure),  prepayment/interest rate risk (inherent in the underlying loan) and
margin  call risk  (inherent  in the  security if it is used as  collateral  for
recourse borrowings).

         Credit    Risk.    As   the   result   of   our    ownership   of   the
overcollateralization  portion of the securitization trust, the predominant risk
to us in our  investment  portfolio is credit  risk.  Credit risk is the risk of
loss to us from the failure by a borrower (or the proceeds from the  liquidation
of the underlying  collateral) to fully repay the principal balance and interest
due on a loan.  A  borrower's  ability to repay and the value of the  underlying
collateral  could be negatively  influenced  by economic and market  conditions.
These conditions could be global,  national,  regional or local in nature.  Upon
securitization  of the pool of loans or securities  backed by loans,  the credit
risk retained by us from an economic  point of view is generally  limited to the
overcollateralization  tranche  of the  securitization  trust.  We  provide  for
estimated losses on the gross amount of loans pledged to  securitization  trusts
included  in our  financial  statements  as required  by  accounting  principles
generally  accepted in the United States of America  ("GAAP").  As a result,  we
establish  reserves  for loan  losses in excess of our  retained  credit risk as
discussed further in "Non-GAAP  Information on Securitized  Finance  Receivables
and Non-Recourse Securitization Financing" below. In some instances, we may also
retain  subordinated  bonds from the  securitization  trust, which increases our
credit   risk  above  the   overcollateralization   tranche   from  an  economic
perspective.  In some instances,  cash flow from the trust which otherwise would
be distributed to us as the holder of the  overcollateralization  tranche may be
retained within the trust if certain performance triggers are not met.

         In our securitization trusts, losses of principal and interest from the
liquidation  of the  underlying  loans  pledged to the trust are  applied  first
against  the  principal  balance of the  overcollateralization  tranche,  and in
certain instances,  to the cash flow which would otherwise be distributed to the
overcollateralization tranche. If cumulative losses on loans are incurred by the
trust in excess of the principal balance of the  overcollateralization  tranche,
such losses will then generally be applied against  subordinate  bonds issued by
the  trust.  We  provide  reserves  for  existing  losses  based on the  current
performance of the respective pool or on an individual loan basis. If losses are
experienced  more rapidly due to market  conditions than we have provided for in
our reserves,  we may be required to provide for  additional  reserves for these
losses.  For debt  securities  pledged as securitized  finance  receivables,  we
recognize losses when incurred or when such security is deemed to be impaired on
an  other-than-temporary  basis in accordance with generally accepted accounting
principles.

         We also have credit risk on  investments  that are not  securitized  or
that are  securitized  and with  respect to which we retain the entire  security
issued. Such investments include loans, which are carried at amortized cost less
reserves  for  estimated  losses,  and  securitized   delinquent   property  tax
receivables, which are carried at fair value.

         We also have various  other forms of credit  enhancement  which,  based
upon the  performance  of the  underlying  loans  and  securities,  may  provide
additional  protection  against losses.  These other forms of credit enhancement
pertain  principally to  securitization  trust structures.  Specifically,  as of
December 31, 2004,  two separate  commercial  mortgage loan pools totaling $97.1
million and $103.9 million are subject to loss reimbursement  guarantees of $8.0
million  and $11.5  million,  respectively.  The losses on the loans  covered by
these  loss  reimbursement  guarantees  would  have  to  exceed  the  respective
guarantee  amount before we would incur credit  losses.  Single family  mortgage
loans of $114.3 million  pledged to  securitization  trusts benefit from various
mortgage pool insurance  policies,  which limit our credit risk until the losses
on the  covered  loans  exceed  the  remaining  stop loss of at least 68% on the
policies.   An  additional   $33.3  million  of  single  family  mortgage  loans
principally  pledged  to  securitization  trusts are  subject  to  various  loss
reimbursement  agreements  totaling  $29.5  million  with a remaining  aggregate
deductible of approximately $0.4 million.

         Prepayment/Interest  Rate Risk.  Our  investment in  single-family  and
commercial  mortgage loans and securities and manufactured  housing  installment
contracts  subject  us to the risk of early  prepayment  of  principal  on these
assets and to interest-rate risk. In a rising rate environment, our net interest
income may be  reduced,  as the  interest  cost for our  funding  sources  could
increase more rapidly than the interest earned on the associated asset financed.
To the extent that assets and liabilities are both fixed-rate or adjustable rate
with  corresponding  payment dates,  interest-rate  risk may be mitigated.  In a
declining interest-rate environment,  net interest income may be enhanced as the
interest cost for our funding  sources  decreases more rapidly than the interest
earned on the  associated  assets.  In a period  of  declining  interest  rates,
however,  loans and securities in the investment portfolio will generally prepay
more rapidly (to the extent that such loans are not prohibited from prepayment),
which may result in additional  amortization  of asset premium.  In a flat yield
curve  environment  (i.e.,  when the spread  between  the yield on the  one-year
Treasury  security and the yield on the ten-year  Treasury security is less than
1.0%),  adjustable  rate mortgage loans and securities  tend to rapidly  prepay,
causing  additional  amortization  of asset  premium.  In  addition,  the spread
between  our  funding  costs and asset  yields may  compress,  causing a further
reduction in our net interest income.

         Along with match-funding  assets and liabilities,  we may, on occasion,
utilize various  derivative  financial  instruments to manage our sensitivity to
changes in interest rates, principally when the Company has financed investments
carrying a fixed rate of interest with floating rate liabilities. As of December
31, 2004,  approximately $227.1 million in fixed-rate  investments were financed
with floating-rate  securitization financing and repurchase agreement financing.
We had  entered  into an  interest-rate  swap with a  notional  balance  of $100
million and a maturity date of June 30, 2005 to hedge a portion of this risk.

         Margin  Call  Risk.  The  Company  finances  some  of its  investments,
primarily high  credit-quality,  liquid  securities,  with recourse  borrowings,
primarily  repurchase  agreements.  These  arrangements  require  the Company to
maintain  a certain  level of  collateral  for the  related  borrowings.  If the
collateral should fall below the required level, the repurchase agreement lender
could initiate a margin call.  This would require that the Company either pledge
additional collateral acceptable to the lender or repay a portion of the debt in
order to meet the margin  requirement.  Should  the  Company be unable to meet a
margin call, it might have to liquidate the collateral or other assets  quickly.
Because a margin  call and quick  sale could  result in a lower  than  otherwise
expected and attainable  sale price,  the Company could be unable to achieve its
anticipated results in the event of a margin call.

Non-GAAP Information on Securitized Finance Receivables and
Non-Recourse Securitization Financing
-----------------------------------------------------------

         As previously discussed, we finance our securitized finance receivables
through the issuance of  non-recourse  securitization  financing  bonds.  In our
consolidated financial statements we present the securitized finance receivables
as assets, and the associated  securitization financing as a liability.  Because
the securitization financing is recourse only to the finance receivables pledged
and is,  therefore,  not our general  obligation,  the risk on our investment in
securitized finance receivables from an economic point of view is limited to our
net retained  investment in the securitization  trust, as previously  discussed.
However, GAAP requires, and our financial statements reflect,  reserves for loan
losses on all of the loans pledged as collateral on  securitization  financings,
which resulted in our providing for loan losses of a cumulative  $1.1 million as
of December 31, 2004 in which we do not retain the credit  risk.  The purpose of
the information  presented in this section is to present the securitized finance
receivables  on a net  investment  basis and to  provide  estimated  fair  value
information  using various  assumptions on our net  investment.  We believe this
information  is  useful to  investors  in  understanding  the risks to which our
business and cash flows are subject. We generally have sold the investment grade
classes of the  securitization  financing to third parties and have retained the
portion  of  the  securitization  financing  that  is  below  investment  grade,
generally consisting of the overcollateralization  tranche. We estimate the fair
value of our net  investment in securitized  finance  receivables as the present
value of the projected  cash flow from the  collateral,  adjusted for the impact
and assumed level of future  prepayments  and credit losses,  less the projected
principal  and  interest  due on the  bonds  owned by third  parties.  We master
service  four of the  securitization  trusts.  Structured  Asset  Securitization
Corporation  (SASCO)  Series  2002-9  and  CCA One  Series  2 and  Series  3 are
master-serviced  by other parties.  Monthly payment reports for those securities
master-serviced by us may be found on our website at www.dynexcapital.com.

         Below is a summary,  as of December 31, 2004, of our net  investment in
securitized  finance  receivables  by series  where the fair value  exceeds $0.5
million.  The following tables show our 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  table  below is not  intended  to  present  our
investment in securitized finance receivables or the non-recourse securitization
financing  in  accordance  with  generally  accepted  accounting  principles.  A
reconciliation  of the  amounts  included  in  the  table  to  our  consolidated
financial statements is provided below the following table.



-----------------------------------------------------------------------------------------------------------------------------
  (amounts in thousands)
                                                              Principal       Principal        Principal       Amortized
                                                               Balance        Balance of        Balance        Cost Basis
                                                                 Of             Bonds             Of               Of
      Securitization                                         Collateral     Outstanding to        Net             Net
         Trust (1)                 Collateral Type             Pledged      Third Parties    Investment(2)   Investment(3)
-----------------------------------------------------------------------------------------------------------------------------

                                                                                                           
MERIT Series 11             Securities backed by             $   215,169      $  188,094       $   27,075      $   13,160
                            single-family mortgage and
                            manufactured housing loans

MERIT Series 12             Manufactured housing loans           198,246         185,764           12,482           2,508

SASCO 2002-9                Single family mortgage loans         225,055         217,142            7,913          11,735

MCA Series 1                Commercial mortgage loans             69,923          65,205            4,718             794

CCA One Series 2            Commercial mortgage loans            218,953         196,850           22,103          12,565

CCA One Series 3            Commercial mortgage loans            351,214         310,267           40,947          48,899
-----------------------------------------------------------------------------------------------------------------------------

                                                             $ 1,278,560      $1,163,322       $  115,238      $   89,661
-----------------------------------------------------------------------------------------------------------------------------


(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 us. SASCO stands for
     Structured Asset Securitization Corporation.
(2)  Calculated as the amount by which the principal  balance of the  collateral
     pledged  exceeds the  principal of the related bonds  outstanding  to third
     parties.
(3)  Represents the net investment plus or minus the related premiums, discounts
     and related costs.



         The  following  table  reconciles  the balances  presented in the table
above  with  the  amounts  included  for  securitized  finance  receivables  and
securitization financing in the accompanying consolidated financial statements.



----------------------------------------------------------------------------------------------------------------------------
                                                                                        Securitized          Non-recourse
                                                                                          Finance           Securitization
(amounts in thousands)                                                                  Receivables            Financing
----------------------------------------------------------------------------------------------------------------------------

                                                                                                            
Principal balances per the above table                                                 $   1,278,560       $   1,163,322
Principal balance of security excluded from above table                                        2,600               2,586
Recorded impairments on debt securities                                                      (15,596)                  -
Discounts and premiums, net                                                                   (2,980)              6,135
Unrealized gain                                                                                1,064                   -
Accrued interest and other                                                                     6,923               5,237
Allowance for loan losses                                                                    (28,014)                 -
----------------------------------------------------------------------------------------------------------------------------
Balance per consolidated financial statements                                          $   1,242,557       $   1,177,280
----------------------------------------------------------------------------------------------------------------------------


         The following table  summarizes the fair value of our net investment in
securitized  finance  receivables,  the various  assumptions  made in estimating
value and the cash flow related to those net  investments  during 2004. As we do
not  present  our  investment  in  securitized  finance  receivables  on  a  net
investment basis in our consolidated  financial  statements,  the table below is
not meant to present our  investment in the  securitization  trust in accordance
with GAAP.



----------------------------------------------------------------------------------------------------------------------------
                                         Fair Value Assumptions                                ($ in thousands)
                      ------------------------------------------------------------------------------------------------------
                                                                                                               Cash flows
   Securitization        Weighted-average                      Projected cash flow     Fair value of net       received in
        Trust           prepayment speeds        Losses          termination date        investment (1)       2004, net (2)
----------------------------------------------------------------------------------------------------------------------------

                                                                                                     
MERIT Series 11           30% CPR on         4.0% annually     Anticipated final      $      10,149        $      11,581
                         Single-Family       on MH loans       maturity in 2025
                      securities; 7% CPR
                        on Manufactured
                      Housing securities

MERIT Series 12             8% CPR           3.5% annually     Anticipated final                706                1,061
                                             on MH loans       maturity in 2027

SASCO 2002-9                30% CPR          0.1% annually     Anticipated call              12,254                9,531
                                                               date in 2005

MCA One Series 1              (3)            1.0% annually     Anticipated final              2,729                1,301
                                                               maturity in 2018

CCA One Series 2              (4)            0.8% annually     Anticipated call              12,512                1,726
                                                               date in 2011

CCA One Series 3              (4)            1.2% annually     Anticipated call              21,611                1,578
                                                               date in 2009
----------------------------------------------------------------------------------------------------------------------------
                                                                                      $      59,961        $      26,778
----------------------------------------------------------------------------------------------------------------------------


(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  December  31,  2004,  and  incorporate  the  resetting  of the
     interest rates on the  adjustable  rate assets to a level  consistent  with
     projected  prevailing  rates.  Increases or decreases in interest rates and
     index levels from those used would impact the calculation of fair value, as
     would  differences in actual prepayment speeds and credit losses versus the
     assumptions set forth above.
(2)  Represents the excess of the cash flows received on the collateral  pledged
     over  the cash  flow  requirements  of the  securitization  financing  bond
     security.
(3)  Computed at 0% CPR through June 2008 due to  prepayment  lockouts and yield
     maintenance  provisions.
(4)  Computed at 0% CPR until the respective  call date due to prepayment
     lockouts and yield maintenance provisions.



         The  above  tables  illustrate  the  estimated  fair  value  of our net
investment  in  the   securitization   trust.  In  our  consolidated   financial
statements,  we  carry  our  investments  at  amortized  cost,  except  for  our
investment  in MERIT  Series 11, which is carried at its  estimated  fair value.
Including recorded allowance for losses of $28.0 million,  our net investment in
securitized  finance  receivables  as  reported  in our  consolidated  financial
statements is approximately $61.6 million.  This amount compares to an estimated
fair value, utilizing a discount rate of 16%, of approximately $60.0 million, as
set forth in the table above.

         The  following  table  compares  the fair value of our  investments  in
securitized finance receivables at various discount rates but otherwise uses the
same assumptions as set forth in the above table:



----------------------------------------------------------------------------------------------------------------------------
                                               Fair Value of Net Investment
                                               ----------------------------
                                                  (amounts in thousands)
  Securitization Trust              12%                      16%                      20%                     25%
----------------------------------------------------------------------------------------------------------------------------
                                                                                                   
MERIT Series 11A              $    11,993              $    10,149              $     8,794              $     7,538
MERIT Series 12-1                     626                      706                      750                      777
SASCO 2002-9                       13,956                   12,254                   10,948                    9,695
MCA One Series 1                    3,305                    2,729                    2,281                    1,856
CCA One Series 2                   14,965                   12,512                   10,548                    8,624
CCA One Series 3                   24,857                   21,611                   18,842                   15,940
----------------------------------------------------------------------------------------------------------------------------
                              $    69,702              $    59,961              $    52,163              $    44,430
----------------------------------------------------------------------------------------------------------------------------



                        FEDERAL INCOME TAX CONSIDERATIONS
                        ---------------------------------

General
-------

         We  believe  that  we  have   complied   with  the   requirements   for
qualification as a REIT under the Internal  Revenue Code (the "Code").  As such,
we believe  that we qualify as a REIT for federal  income tax  purposes,  and we
generally  will not be subject to federal income tax on the amount of our income
or gain that is  distributed as dividends to  shareholders.  We use the calendar
year for both tax and financial  reporting  purposes.  There may be  differences
between  taxable  income and income  computed  in  accordance  with GAAP.  These
differences  primarily  arise from  timing  differences  in the  recognition  of
revenue and expense for tax and GAAP  purposes.  Our  estimated net taxable loss
for 2004,  excluding net operating  losses carried forward from prior years, was
$6.3  million,  comprised of ordinary  loss of $13.3 million and capital gain of
$7.0  million.   We  currently   have  tax  operating  loss   carryforwards   of
approximately $149 million. The $149 million in net operating loss carryforwards
expire between 2018 and 2024. We do not have any meaningful remaining amounts of
capital  loss  carryforward  at the end of 2004.  We also had  excess  inclusion
income of $1.4 million.  REIT rules require that we distribute all of our excess
inclusion income as discussed below.

         The REIT rules generally  require that a REIT invest  primarily in real
estate-related  assets,  that our  activities be passive  rather than active and
that we distribute annually to our shareholders substantially all of our taxable
income.  We could be  subject  to  income  tax if we  failed  to  satisfy  those
requirements or if we acquired certain types of income-producing  real property.
Although no complete  assurances can be given,  we do not expect that we will be
subject to material amounts of such taxes.

         Failure to satisfy certain Code requirements could cause us to lose our
status as a REIT. If we failed to qualify as a REIT for any taxable year, we may
be subject to federal income tax (including any applicable  alternative  minimum
tax) at regular  corporate rates and would not receive  deductions for dividends
paid to shareholders.  We could utilize loss carryforwards to offset any taxable
income.  In  addition,  given the size of our tax loss  carryforwards,  we could
pursue a business  plan in the future in which we would  voluntarily  forego our
REIT status. If we lost our status as REIT, we could not elect REIT status again
for five years.

Qualification of Us As A REIT
-----------------------------

         Qualification  as a REIT  requires  that we  satisfy a variety of tests
relating to our income,  assets,  distributions  and ownership.  The significant
tests are summarized below.

         Sources of Income.  To continue  qualifying  as a REIT, we must satisfy
two distinct  tests with  respect to the sources of our income:  the "75% income
test" and the "95% income  test." The 75% income test requires that we derive at
least  75%  of  our  gross  income   (excluding  gross  income  from  prohibited
transactions) from certain real estate-related  sources. In order to satisfy the
95% income  test,  95% of our gross  income for the  taxable  year must  consist
either of income that qualifies under the 75% income test or certain other types
of passive income.

         If we fail to meet either the 75% income  test or the 95% income  test,
or both, in a taxable year, we might nonetheless  continue to qualify as a REIT,
if our  failure  was due to  reasonable  cause and not  willful  neglect and the
nature and amounts of our items of gross income were  properly  disclosed to the
Internal Revenue Service.  However, in such a case we would be required to pay a
tax equal to 100% of any excess non-qualifying income.

         Nature  and  Diversification  of  Assets.  At the end of each  calendar
quarter, three asset tests must be met by us. Under the 75% asset test, at least
75% of the  value  of our  total  assets  must  represent  cash  or  cash  items
(including receivables),  government securities or real estate assets. Under the
"10%  asset  test,"  we may not own  more  than  10% of the  outstanding  voting
securities of any single  non-governmental  issuer,  provided such securities do
not  qualify  under the 75% asset test or relate to taxable  REIT  subsidiaries.
Under the "5% asset  test,"  ownership of any stocks or  securities  that do not
qualify  under the 75% asset  test must be  limited,  in  respect  of any single
non-governmental  issuer,  to an amount not greater  than 5% of the value of the
total assets of us.

         If we  inadvertently  fail to satisfy one or more of the asset tests at
the end of a calendar quarter,  such failure would not cause us to lose our REIT
status,  provided that (i) we satisfied all of the asset tests at the close of a
preceding  calendar  quarter and (ii) the discrepancy  between the values of our
assets  and the  standards  imposed  by the  asset  tests  either  did not exist
immediately  after the acquisition of any particular  asset or was not wholly or
partially  caused by such an acquisition.  If the condition  described in clause
(ii)  of the  preceding  sentence  was  not  satisfied,  we  still  could  avoid
disqualification  by eliminating any discrepancy  within 30 days after the close
of the calendar quarter in which it arose.

         Distributions.  With respect to each taxable year, in order to maintain
our REIT status,  we generally must distribute to our  shareholders an amount at
least equal to 90% of the sum of our "REIT taxable income"  (determined  without
regard to the  deduction  for  dividends  paid and by excluding  any net capital
gain) and any after-tax net income from certain  types of  foreclosure  property
minus any "excess non-cash  income" (the "90%  distribution  requirement").  The
Code  provides  that  in  certain  circumstances  distributions  relating  to  a
particular  year  may be made in the  following  year  for  purposes  of the 90%
distribution  requirement.  REIT  taxable  income  may be  offset by our tax net
operating  loss  carryforwards.  At a minimum,  we must  distribute  100% of our
excess inclusion income (defined below), if any.

         Ownership.  In order to maintain our REIT status, we must not be deemed
to be closely  held and must have more than 100  shareholders.  The closely held
prohibition  requires  that not more  than 50% of the  value of our  outstanding
shares be owned by five or fewer persons at anytime  during the last half of our
taxable year. The more than 100 shareholders rule requires that we have at least
100 shareholders for 335 days of a twelve-month  taxable year. In the event that
we failed to satisfy the ownership requirements we would be subject to fines and
be required to take curative action to meet the ownership  requirements in order
to maintain our REIT status.

         For federal income tax purposes, we are required to recognize income on
an accrual basis and to make  distributions to our  shareholders  when income is
recognized.  Accordingly,  it is possible  that income could be  recognized  and
distributions required to be made in advance of the actual receipt of such funds
by us. The nature of our investments,  coupled with our tax loss  carryforwards,
is such that we expect to have  sufficient  assets to meet  federal  income  tax
distribution requirements.

Taxation of Distributions
-------------------------

         By  maintaining  our  status  as a REIT,  any  distributions  that  are
properly  designated  as "capital  gain  dividends"  will  generally be taxed to
shareholders  as long-term  capital gains,  regardless of how long a shareholder
has owned his shares. Any other  distributions out of our current or accumulated
earnings and profits will be dividends taxable as ordinary income. Distributions
in excess of our current or accumulated  earnings and profits will be treated as
tax-free returns of capital,  to the extent of the shareholder's basis in his or
her shares  and,  as gain from the  disposition  of shares,  to the extent  they
exceed such basis.  Shareholders may not include on their own tax returns any of
our ordinary or capital losses.  Distributions  to shareholders  attributable to
"excess  inclusion  income" will be  characterized as excess inclusion income in
the hands of the  shareholders.  Excess  inclusion  income  can  arise  from our
holdings of residual interests in real estate mortgage  investment  conduits and
in certain other types of mortgage-backed security structures.  Excess inclusion
income  constitutes  unrelated  business  taxable income ("UBTI") for tax-exempt
entities (including employee benefit plans and individual  retirement accounts),
and  it  may  not  be  offset  by  current  deductions  or  net  operating  loss
carryforwards. In the event that our excess inclusion income is greater than our
taxable  income,  our  distribution  requirement  would be  based on our  excess
inclusion  income.  Dividends  paid by us to  organizations  that  generally are
exempt from federal  income tax under  Section  501(a) of the Code should not be
taxable to them as UBTI  except to the extent  that (i)  purchase  of shares was
financed by "acquisition  indebtedness" or (ii) such dividends constitute excess
inclusion  income.  In 2004,  we  declared  and paid  dividends  on our Series D
preferred  stock equal to  approximately  $2.6  million,  of which $1.4  million
represented  excess  inclusion  income and $1.2  million  return of capital.  We
declared a dividend on our Series D preferred stock in December 2004,  which was
paid in January 2005 and which will be used by us for our 2005 REIT distribution
requirements.

Taxable Income
--------------

         We use the calendar year for both tax and financial reporting purposes.
However,  there may be differences between taxable income and income computed in
accordance with GAAP. These differences  primarily arise from timing differences
in the  recognition  of  revenue  and  expense  for tax and GAAP  purposes.  The
principal    difference    relates   to    reserves    for   loan   losses   and
other-than-temporary  impairment  charges provided for GAAP purposes,  which are
not deductible for tax purposes,  versus actual  charge-offs on loans, which are
deductible for tax purposes as ordinary losses.


                                   REGULATION
                                   ----------

         Our  existing   consumer-related   servicing   activities   consist  of
collections on the  delinquent  property tax  receivables.  We believe that such
servicing  operations are managed in compliance  with the Fair Debt  Collections
Practices Act.

         We believe that we are in material  compliance  with all material rules
and regulations to which we are subject.


                                   COMPETITION
                                   -----------

         The financial services industry is a highly competitive market in which
we compete with a number of institutions  with greater financial  resources.  In
purchasing  portfolio  investments  and in issuing  securities,  we compete with
other mortgage REITs,  investment banking firms,  savings and loan associations,
commercial  banks,  mortgage  bankers,  insurance  companies,  federal agencies,
foreign  investors,  and other  entities,  many of which have greater  financial
resources and a lower cost of capital than we do.  Increased  competition in the
market and our competitors'  greater financial resources have adversely affected
the  Company's  ability to invest its  capital  on an  acceptable  risk-adjusted
basis, and may continue to do so. Competition may also continue to keep pressure
on spreads  resulting in the Company  being unable to reinvest its capital at an
acceptable risk-adjusted basis.


                                    EMPLOYEES
                                    ---------

         As of December 31, 2004, we had 34 employees. Our relationship with our
employees  is  good.  None  of our  employees  are  covered  by  any  collective
bargaining  agreements,  and we are not aware of any union  organizing  activity
relating to our employees.


Item 2.  Properties

         Our executive and  administrative  offices and  operations  offices are
both located in Glen Allen, Virginia, on properties leased by us. The address is
4551 Cox Road,  Suite 300, Glen Allen,  Virginia 23060. As of December 31, 2004,
we leased 11,194 square feet. The lease,  which originally  expired in May 2005,
was  amended  subsequent  to  December  31,  2004 to reduce the  square  footage
occupied from 11,194 square feet to 8,244 square feet, and reduce the lease rate
per square foot. The term of the lease was extended to May 2008.

         We also own and lease  space  located in the  Pittsburgh,  Pennsylvania
metropolitan area. These locations consist of approximately  14,039 square feet,
4,039  square  feet of which we lease,  and the  leases  associated  with  these
properties  expire  in 2005.  Subsequent  to  December  31,  2004,  the lease on
approximately 3,200 square feet was terminated early for a payment equal to four
months rent.

         We  believe  that  our  properties  are  maintained  in good  operating
condition and are suitable and adequate for our purposes.


Item 3.  Legal Proceedings

         We and our subsidiaries are involved in certain  litigation  arising in
the ordinary course of their businesses.  Although the ultimate outcome of these
matters cannot be ascertained at this time, and the results of legal proceedings
cannot be predicted with certainty, we believe, based on current knowledge, that
the  resolution of these matters will not have a material  adverse effect on our
financial  position or results of operations.  Information on litigation arising
out of the ordinary course of business is described below.

         GLS Capital,  Inc. ("GLS"), one of our subsidiaries,  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.  In  August  2003,  the
Pennsylvania   legislature   enacted  a  law  amending  and  clarifying  certain
provisions of the Pennsylvania statute governing GLS' right to the collection of
certain interest, costs and expenses. 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. Subsequent to the enactment of the law,
challenges  to the  retroactivity  provisions  of the law were filed in separate
cases,  which did not include GLS as a defendant.  In September  2004, the trial
court in that  litigation  upheld the  retroactive  provisions  enacted in 2003.
Plaintiffs  in the case are seeking  class action  status and have not currently
set forth a damage claim. A hearing on the class-action  status is currently set
for late April 2005.  We believe  that the ultimate  outcome of this  litigation
will not have a  material  impact  on our  financial  condition,  but may have a
material impact on reported results for the particular period presented.

         We and Dynex Commercial,  Inc.  ("DCI"),  formerly an affiliate of ours
and now known as DCI Commercial,  Inc., were defendants in state court in Dallas
County,  Texas in the matter of Basic Capital  Management  et al  (collectively,
"BCM" or "the  Plaintiffs")  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 us as a defendant. The complaint,  which was further amended
during pretrial proceedings, alleged that, among other things, DCI and we failed
to fund tenant improvement or other advances allegedly required on various loans
made by DCI to BCM,  which  loans were  subsequently  acquired  by us;  that DCI
breached an alleged  $160  million  "master"  loan  commitment  entered  into in
February  1998;  and  that DCI  breached  another  alleged  loan  commitment  of
approximately $9 million.  The trial commenced in January 2004, and, in February
2004,  the jury in the case rendered a verdict in favor of one of the Plaintiffs
and  against  us on  the  alleged  breach  of the  loan  agreements  for  tenant
improvements and awarded that Plaintiff  damages in the amount of $0.25 million.
The jury  entered  a  separate  verdict  against  DCI in favor of BCM  under two
mutually   exclusive  damage  models,   for  $2.2  million  and  $25.6  million,
respectively.  The jury found in favor of DCI on the  alleged  $9  million  loan
commitment, but did not find in favor of DCI for counterclaims made against BCM.
The jury also  awarded  the  Plaintiffs  attorneys'  fees in the  amount of $2.1
million.  After  considering  post-trial  motions,  the presiding  judge entered
judgment in favor of us and DCI,  effectively  overturning  the  verdicts of the
jury and  dismissing  damages  awarded  by the jury.  Plaintiffs  have  filed an
appeal.  DCI is a  former  affiliate,  and we  believe  that  we  will  have  no
obligation  for amounts,  if any,  awarded to the  Plaintiffs as a result of the
actions of DCI.

         On  February  11,  2005,  we became a defendant  in a lawsuit  filed in
United  States  District  Court  for the  Southern  District  of New York by the
Teamsters  Local 445 Freight  Division  Pension Fund.  The  allegations  include
securities laws violations in connection with the issuance in August 1999 by our
subsidiary and co-defendant,  MERIT Securities Corporation,  of our MERIT Series
13  securitization  financing bonds,  which are  collateralized  by manufactured
housing loans. The suit also alleges fraud and negligent  misrepresentations  in
connection  with the MERIT Series 13 issuance.  We are currently  evaluating the
allegations  made in the  lawsuit  and  intend to  vigorously  defend  ourselves
against them.

         Although no assurance can be given with respect to the ultimate outcome
of the above  litigation,  we believe the  resolution of these lawsuits will not
have a material effect on our  consolidated  balance sheet, but could materially
affect our consolidated results of operations in a given year.


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

         No matters  were  submitted  to a vote of our  shareholders  during the
fourth quarter of 2004.


                                     PART II
                                     -------


Item 5.  Market for Registrant's Common Equity, Related Stockholder Matters and
         Issuer Purchases of Equity Securities

         Dynex  Capital,  Inc.'s  common  stock is traded on the New York  Stock
Exchange   under  the  trading  symbol  "DX".  The  common  stock  was  held  by
approximately  1,810  holders of record and  beneficial  holders who hold common
stock in street name as of December  31,  2004.  During the last two years,  the
high and low closing  stock prices and cash  dividends  declared on common stock
were as follows:



----------------------------------------------------------------------------------------------------------------------------
                                                            High                     Low            Cash Dividends Declared
----------------------------------------------------------------------------------------------------------------------------
                                                                                                   
2004:
   First quarter                                         $  7.65                  $  6.15                 $  -
   Second quarter                                           7.71                     6.35                    -
   Third quarter                                            7.24                     6.48                    -
   Fourth quarter                                           7.83                     6.70                    -

2003:
   First quarter                                         $  5.33                  $  4.26                 $  -
   Second quarter                                           5.96                     4.46                    -
   Third quarter                                            6.02                     5.30                    -
   Fourth quarter                                           6.15                     5.11                    -
----------------------------------------------------------------------------------------------------------------------------


         Dividends  declared by the Board of Directors  have  generally been for
the purpose of  maintaining  the Company's REIT status,  and in compliance  with
requirements  set forth at the time of the  issuance  of the Series D  Preferred
Shares.  The  quarterly  dividend  on Series D  Preferred  Shares is $0.2375 per
share.  In accordance  with the terms of the Series D Preferred  Shares,  if the
Company fails to pay two  consecutive  quarterly  preferred  dividends or if the
Company fails to maintain consolidated  shareholders' equity of at least 200% of
the  aggregate  issue price of the Series D preferred  stock,  then these shares
automatically convert into a new series of 9.50% senior notes. Dividends for the
preferred stock must be fully paid before dividends can be paid on common stock.
No  common  dividends  have  been  paid  since  1998.  See  Federal  Income  Tax
Considerations in Item 1 above.

         The Company did not repurchase any of its equity  securities during the
fourth quarter of 2004.


Item 6.  Selected Financial Data



------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,                                       2004         2003         2002         2001          2000
------------------------------------------------------------------------------------------------------------------------------
(amounts in thousands except share and per share data)
                                                                                                      
Net interest income(1)                                       $  23,281    $  38,971    $  49,153    $  48,082    $  31,487
Net interest income after provision for loan losses(1)           4,818        1,889       20,670       28,410        2,377
Impairment charges(2)                                          (14,756)     (16,355)     (18,477)     (43,439)     (84,039)
Other (expense) income and trading losses(3)                      (179)         436        1,397        7,876       (1,489)
General and administrative expenses                             (7,748)      (8,632)      (9,493)     (10,526)      (8,712)
Net loss                                                     $  (3,375)   $ (21,107)   $  (9,360)   $ (21,209)   $ (91,863)
Net loss to common shareholders                              $  (5,194)   $ (14,260)   $ (18,946)   $ (13,492)   $(104,774)
Net loss per common share:
Basic & diluted                                              $    (0.46)  $    (1.31)  $    (1.74)  $    (1.18)  $    (9.15)
Dividends declared per share:
Common                                                       $       -    $       -    $       -    $       -    $     -
Series A and B Preferred                                             -        0.8775       0.2925       0.2925         -
Series C Preferred                                                   -        1.0950       0.3651       0.3649         -
Series D Preferred                                               0.6993           -            -            -          -

------------------------------------------------------------------------------------------------------------------------------
December 31,                                                   2004         2003         2002         2001          2000
------------------------------------------------------------------------------------------------------------------------------
Investments(4)                                              $1,343,448   $1,853,675   $2,185,746   $2,511,229   $3,148,667
Total assets(4)                                              1,400,934    1,865,235    2,205,735    2,531,509    3,195,354
Non-recourse securitization financing(4)                     1,177,280    1,679,830    1,980,702    2,225,863    2,812,161
Recourse debt                                                   70,468       33,933            -       58,134      134,168
Total liabilities(4)                                         1,252,168    1,715,389    1,982,314    2,289,399    2,957,898
Shareholders' equity                                           148,766      149,846      223,421      242,110      237,456
Number of common shares outstanding                         12,162,391   10,873,903   10,873,903   10,873,853   11,446,206
Average number of common shares                             11,272,259   10,873,903   10,873,871   11,430,471   11,445,236
Book value per common share(5)                             $      7.60  $      7.55  $      8.57  $     11.06  $      7.39
------------------------------------------------------------------------------------------------------------------------------


(1)  Net interest  income after  provision  for loan losses  increased due to a
     reduction in the manufactured  housing loan loss provision  associated with
     the derecognition of the MERIT Series 13 securitization.
(2)  Impairment  charges for the year ended  December 31, 2000 included  several
     adjustments  related largely to non-recurring  items.
(3)  Other (expense) income for 2000 included our equity in the net loss of
     Dynex  Holding,  Inc.  which was liquidated at the end of 2000.
(4)  Certain  deferred  hedging  gains and losses for 2002 and prior  years were
     reclassified from securitized finance receivables to non-recourse
     securitization financing.
(5)  Inclusive of the effects of the  liquidation  preference  on the  Company's
     preferred stock.



Item 7.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations

         The Company is a financial services company, which invests in loans and
securities  principally  consisting  of, or secured by, 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  ("non-recourse  securitization  financing"),
which  provides  long-term  financing  for such  loans  while  limiting  credit,
interest rate and  liquidity  risk.  The Company  earns the net interest  spread
between  the  interest  income  on the loans and  securities  in its  investment
portfolio and the interest and other expenses  associated with the  non-recourse
securitization  financing.  The Company also  collects  payments  from  property
owners on its  investment in delinquent  property tax  receivables.  The Company
manages the cash flow on these investments to maximize shareholders' value.

         In May 2004,  the Company  completed a  recapitalization  of its equity
capital structure through the restructuring of its outstanding  shares of Series
A, Series B and Series C preferred stock, resulting in the exchange of 5,628,727
shares of Series D preferred stock and 1,288,488  shares of common stock for the
shares  of  Series  A,  Series B and  Series C  preferred  stock.  The  Series D
preferred  stock has an issue price of $10 per share,  is  convertible  into one
share of common  stock and has the right to  receive  a  quarterly  dividend  of
$0.2375 per share.

         During  2003,  the Company  completed a tender  offer for its Series A,
Series B and Series C preferred  stock resulting in a preferred stock benefit of
$6.8 million.  The Company  purchased and retired $51.6 million shares of Series
A, Series B and Series C preferred stock in 2003. The resulting  preferred stock
benefit of $6.8 million which was comprised of the  elimination of $16.1 million
of dividends in arrears which was partially  offset by a $4.1 million premium to
book value paid to obtain the  preferred  shares  tendered  and $5.2  million of
period accrual of dividends on the shares  remaining after the completion of the
tender offer.

         The  following   discussion   provides   information  about  the  major
components of the results of operations and financial condition,  liquidity, and
capital resources of the Company. This discussion and analysis should be read in
conjunction with the Company's  Consolidated  Financial  Statements and Notes to
Consolidated  Financial  Statements.  It should also be read in conjunction with
the  "Caution  About  Forward  Looking  Statements"  section  at the end of this
discussion.


                          CRITICAL ACCOUNTING POLICIES
                          ----------------------------

         The  discussion and analysis of the Company's  financial  condition and
results of operations  are based in large part upon its  consolidated  financial
statements,  which have been prepared in conformity with  accounting  principles
generally  accepted in the United  States of  America.  The  preparation  of the
financial  statements 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.

         Critical  accounting  policies are defined as those that are reflective
of significant  judgments or  uncertainties,  and which may result in materially
different results under different assumptions and conditions, or the application
of which may have a material impact on the Company's financial  statements.  The
following are the Company's critical accounting policies.

         Consolidation of Subsidiaries.  The consolidated  financial  statements
represent  the  Company's   accounts  after  the  elimination  of  inter-company
transactions.  The Company consolidates  entities in which it owns more than 50%
of the voting  equity and control of the entity does not rest with  others.  The
Company  follows the equity method of accounting  for  investments  with greater
than 20% and less  than a 50%  interest  in  partnerships  and  corporate  joint
ventures or when it is able to influence the financial and operating policies of
the  investee  but  owns  less  than 50% of the  voting  equity.  For all  other
investments, the cost method is applied.

         Impairments.  The Company  evaluates all  securities in its  investment
portfolio for other-than-temporary  impairments. A security is generally defined
to  be  other-than-temporarily  impaired  if,  for a  maximum  period  of  three
consecutive quarters,  the carrying value of such security exceeds its estimated
fair value and the Company  estimates,  based on projected  future cash flows or
other  fair  value  determinants,  that the fair  value  will  remain  below the
carrying value for the foreseeable future. If an other-than-temporary impairment
is deemed to exist,  the  Company  records  an  impairment  charge to adjust the
carrying  value of the security  down to its  estimated  fair value.  In certain
instances,  as a result of the  other-than-temporary  impairment  analysis,  the
recognition or accrual of interest will be discontinued and the security will be
placed on non-accrual status.

         The Company considers an investment to be impaired if the fair value of
the  investment  is less than its  recorded  cost  basis.  Impairments  of other
investments are generally  considered to be  other-than-temporary  when the fair
value remains below the carrying value for three  consecutive  quarters.  If the
impairment  is determined to be  other-than-temporary,  an impairment  charge is
recorded  in  order to  adjust  the  carrying  value  of the  investment  to its
estimated value.

         Allowance for Loan Losses. The Company has credit risk on loans pledged
in securitization  financing  transactions and classified as securitized finance
receivables in its investment  portfolio.  An allowance for loan losses has been
estimated  and  established  for currently  existing  probable  losses.  Factors
considered in  establishing  an allowance  include  current loan  delinquencies,
historical cure rates of delinquent  loans,  and historical and anticipated loss
severity of the loans as they are  liquidated.  The allowance for loan losses is
evaluated  and  adjusted  periodically  by  management  based on the  actual and
estimated timing and amount of probable credit losses,  using the above factors,
as well as industry loss experience. Where loans are considered homogeneous, the
allowance for losses is  established  and evaluated on a pool basis.  Otherwise,
the allowance for losses is established and evaluated on a loan-specific  basis.
Provisions  made to  increase  the  allowance  are a current  period  expense to
operations.  Generally,  the Company considers  manufactured housing loans to be
impaired  when they are 30-days past due. The Company also provides an allowance
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  based on default  trends,  current  market  conditions  and  empirical
observable  performance  data on the loans.  Single-family  loans are considered
impaired when they are 60-days past due. Commercial mortgage loans are evaluated
on an individual basis for impairment.  Generally, a commercial loan with a debt
service coverage ratio of less than one is considered impaired.  However,  based
on a commercial loan's details,  commercial loans with a debt service ratio less
than one may not be considered  impaired;  conversely,  commercial  loans with a
debt service coverage ratio greater than one may be considered impaired. Certain
of the commercial  mortgage loans are covered by loan  guarantees that limit the
Company's  exposure  on these  loans.  The level of  allowance  for loan  losses
required for these loans is reduced by the amount of applicable loan guarantees.
The  Company's  actual  credit  losses may  differ  from the  estimates  used to
establish the allowance.


                               FINANCIAL CONDITION
                               -------------------

         Below is a discussion of the Company's financial condition.



---------------------------------------------------------------------------------------
                                                              December 31,
                                                      ---------------------------------
(amounts in thousands except per share data)            2004               2003
---------------------------------------------------------------------------------------
Investments:
                                                                        
Securitized finance receivables:
     Loans, net                                       $1,036,123         $1,518,613
     Debt securities                                     206,434            255,580
Securities                                                87,706             33,275
Other investments                                          7,596             37,903
Other loans                                                5,589              8,304

Non-recourse securitization financing                  1,177,280          1,679,830
Repurchase agreements                                     70,468             23,884
Senior notes                                                   -             10,049

Shareholders' equity                                     148,766            149,846

Book value per common share (inclusive of preferred
stock liquidation preference)                              $7.60              $7.55

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


Securitized Finance Receivables
-------------------------------

         Securitized finance receivables include loans and securities consisting
of or secured by adjustable-rate  and fixed-rate mortgage loans secured by first
liens on single family  properties,  fixed-rate  loans secured by first liens on
multifamily and commercial  properties,  and  manufactured  housing  installment
loans secured by either a UCC filing or a motor vehicle title.  The  securitized
finance  receivables  decreased to $1.24 billion at December 31, 2004 from $1.77
billion at December 31, 2003.  This decrease of $531.6  million is primarily the
result of $286.2 million in principal  pay-downs,  the  derecognition  of $219.2
million  of  manufactured  housing  loans  associated  with the sale of the call
rights on the related securitization trust, $18.5 million of decreased allowance
for loan  losses,  net,  $9.1  million of  impairment  charges  recorded on debt
securities  and decreases in accrued  interest  payable of $4.7  million.  These
decreases  were  partially  offset by an  increase in the  unrealized  gains and
premiums of $3.5 million and $0.8  million of  amortization  of loan  discounts.
Principal   pay-downs  resulted  from  normal  principal   amortization  of  the
underlying loan or security,  and higher than  anticipated  prepayments on these
assets due to the low interest-rate  environment.  The allowance for loan losses
decreased  primarily as a result of the sale of the  manufactured  housing loans
and charge-offs during the year on the manufactured housing and commercial loans
exceeding  the  provisions  on such  loans.  Impairment  charges  resulted  from
other-than-temporary  decreases  in market  value on debt  securities  backed by
manufactured housing loan collateral.

Securities
----------

         Securities  increased to $87.7 million at December 31, 2004 compared to
$33.3 million at December 31, 2003,  primarily as a result of the purchases of a
$62.1  million  debt  security  and a $4.9  million  equity  security and a $1.1
million net increase in market  value of  available-for-sale  securities.  These
increases  were partially  offset by principal  payments of $13.2 million during
the year and the sale of equity securities with a balance of $0.5 million.

Other Investments
-----------------

         Other  investments  at December 31, 2004 and 2003 consist  primarily of
delinquent  property tax receivables,  a security  collateralized  by delinquent
property  tax  receivables,   and  the  associated  real  estate  owned.   Other
investments  decreased to $7.6  million at December  31, 2004  compared to $37.9
million at December 31, 2003.  This decrease of $30.3 million  resulted from the
sale of a portfolio of tax lien  receivables  located in Ohio  portfolio  with a
basis of $22.3 million,  payments of $5.7 million  collected in 2004 and applied
against the carrying value of the  investment,  $1.0 million in sales of related
real estate owned, and a $4.9 million  other-than-temporary  impairment  charge.
These  decreases  were  partially  offset by  increases  related to  foreclosure
advances  made  of  $1.5  million  and  the  purchase  of  new   receivables  of
approximately  $2.7 million,  which were substantially sold in the Ohio tax lien
portfolio sale described above.

Other Loans
-----------

         Other loans  decreased  to $5.6  million at December 31, 2004 from $8.3
million at December 31, 2003 due primarily to payments  received on the loans of
$2.9 million.

Non-recourse Securitization Financing
-------------------------------------

         Non-recourse  securitization  financing  decreased to $1.18  billion at
December 31, 2004 from $1.68  billion at December 31,  2003.  This  decrease was
primarily  a result of  principal  payments  received  of $286.2  million on the
associated  collateral  pledged  which were used to pay down the  securitization
financing in accordance with the respective  indentures,  the  derecognition  of
$226.7 million of non-recourse  securitization financing as a result of the sale
of the call rights on the related securitization trust as described above, and a
$2.2 million  decrease of accrued interest  payable.  Offsetting these decreases
was  the  receipt  of  $7.4  million  from  the  redemption  and  reissuance  of
approximately  $226.7  million in bonds  outstanding,  and net  amortization  of
approximately $3.9 million of bond discounts and issuance and hedging costs.

Repurchase Agreements
---------------------

         In December 2004, the Company  entered into a $56.6 million  repurchase
agreement to finance the purchase of  approximately  $62.0 million of fixed-rate
securities.  This  increase  was  partially  offset by net  repayments  of $10.0
million on repurchase agreement borrowings during 2004.

Senior Notes
------------

         The $10.0  million of February  2005  Senior  Notes  outstanding  as of
December 31, 2003 were paid in March 2004.

Shareholders' Equity
--------------------

         Shareholders' equity decreased from $149.8 million at December 31, 2003
to $148.8 million at December 31, 2004.  This decrease of $1.0 million  resulted
from a net loss of $3.4 million,  a net decrease of $1.5 million  resulting from
the shares  tendered for senior notes in  connection  with the  recapitalization
transaction  completed in May 2004 and dividends  declared on shares of Series D
Preferred  Stock of $3.9 million.  These  decreases were partially  offset by an
increase  in  accumulated  other  comprehensive  income  of $7.7  million  which
resulted  principally  from  the  increase  in fair  value  of debt  and  equity
securities  of $4.7  million,  and an increase of $3.0 million on  interest-rate
swap and synthetic  interest-rate  swap contracts from the realization of losses
on settled contracts and deferred gains on the remaining hedge contracts.


                              RESULTS OF OPERATIONS
                              ---------------------



------------------------------------------------------------------------------------------------------------------------
                                                                             For the Year Ended December 31,
                                                                  ------------------------------------------------------
(amounts in thousands except per share information)                     2004              2003               2002
----------------------------------------------------------------------------------- ------------------ -----------------
                                                                                                              
Net interest income                                                  $    23,281       $    38,971        $    49,153
Provision for loan losses                                                (18,463)          (37,082)           (28,483)
Net interest income after provision for loan losses                        4,818             1,889             20,670
Impairment charges                                                       (14,756)          (16,355)           (18,477)
Gain (loss) on sales of investments                                       14,490             1,555               (150)
General and administrative expenses                                       (7,748)           (8,632)            (9,493)
Net loss                                                                  (3,375)          (21,107)            (9,360)
Preferred stock (charge) benefit                                          (1,819)            6,847             (9,586)
Net loss to common shareholders                                      $    (5,194)      $   (14,260)       $   (18,946)

Basic & diluted net loss per common share                            $     (0.46)      $     (1.31)       $     (1.74)

Dividends declared per share:
     Common                                                          $         -       $         -        $         -
     Series A and B Preferred                                                  -            0.8775             0.2925
     Series C Preferred                                                        -            1.0950             0.3651
     Series D Preferred                                                   0.6993                -                  -
------------------------------------------------------------------------------------------------------------------------


2004 Compared to 2003
---------------------

         Net loss  decreased in 2004 by $17.7  million,  to $3.4 million in 2004
from a loss of $21.1 million in 2003, as a result of an increase in net interest
income after  provision  for loan losses of $2.9 million and an increase in gain
on sales  of  investments  of $12.9  million.  Net loss to  common  shareholders
decreased by $9.1 million in 2004, from $14.3 million in 2003 to $5.2 million in
2004. The improvement in net loss to common  shareholders was due to reduced net
loss of $17.7  million,  offset by the  reduction in preferred  stock benefit of
$8.7 million. The preferred stock benefit in 2003 resulted from the effects of a
tender offer on the outstanding preferred stock completed in 2003 as compared to
the net effect of the  recapitalization  of the preferred stock in 2004 and 2004
preferred stock dividends.

         Net interest  income for the year ended  December 31, 2004 decreased to
$23.3  million,  from $39.0  million for the same period in 2003.  Net  interest
income  decreased  $15.7 million,  or 40.3%, as a result of a decline in average
interest-earning   assets  and  a  decrease  in  the  net  interest   spread  on
interest-earning  assets.  Net interest spread  decreased in 2003 as a result of
prepayments of higher coupon assets,  the proceeds of which have been reinvested
in lower-yielding cash equivalents, and also decreased due in part to increasing
borrowing  costs from both  increasing  LIBOR rates and  repayment of lower-cost
securitization  financing  bonds  pursuant  to the  terms of the  securitization
trust. See further  discussion below as to changes in the net interest spread on
the Company's investment portfolio during 2004.

         Net interest  income  after  provision  for loan losses  increased as a
result of the decline of the  provision for loan losses in 2004 compared to 2003
of $18.6 million.  Provision for loan losses decreased to $18.5 million in 2004,
from  $37.1  million  in 2003.  The  decrease  of $18.6  million  from  2003 was
primarily due to $14.4 million of provision for loan losses  recorded during the
second quarter of 2003 specifically for currently  existing credit losses within
outstanding manufactured housing loans that were current as to payment but which
the Company had  determined to be impaired.  The  remaining  $4.2 million of the
decrease was primarily  due to a decrease in the estimated  losses on commercial
and manufactured housing loans.

         Impairment  charges  decreased  from  $16.4  million  in 2003 to  $14.8
million in 2004.  Impairment  charges in 2004  included  $9.1  million on a debt
security collateralized by manufactured housing loans and $4.9 million on a debt
security    collateralized    by    delinquent    property   tax    receivables.
Other-than-temporary  impairment  charges  were  recorded  as a  result  of  the
carrying value of the debt securities  referenced above exceeded their estimated
fair value and the Company  determined  that the  carrying  value  would  likely
exceed the fair value for the foreseeable  future.  Impairment  charges for 2003
included $5.5 million on manufactured  housing loan securities and $10.4 million
on delinquent property tax receivable securities.

         Gain on sale of investments for 2004 included a $17.6 million gain from
the sale of  securitized  finance  receivables  with a carrying  value of $219.2
million,   net  of  allowance  for  loan  losses  of  $16.2  million,   and  the
de-recognition of the associated  securitization financing bonds with a carrying
amount of $226.7 million.  The Company  received a net $11.9 million in proceeds
from the sale of these  receivables.  This gain was  partially  offset by a $3.2
million  loss  on the  sale  of  the  Company's  Ohio  delinquent  property  tax
receivable investment.

         The Company  reported a preferred  stock charge of $1.8 million for the
year ended  December 31, 2004,  which  represents a decline of $8.6 million from
the preferred stock benefit of $6.8 million reported for the year ended December
31, 2003. This decrease in the preferred  stock (charge)  benefit was due to the
recapitalization  completed  in 2004  and the  tender  offer  completed  in 2003
described in more detail above.

2003 Compared to 2002
---------------------

         Net loss  increased to $21.1  million in 2003 from $9.4 million in 2002
as a result of the  decline  in net  interest  margin,  offset  by a decline  in
impairment  charges,  an increase in gain on sale of investments,  a decrease in
other (expense) income relating to decreased  trading losses,  and a decrease in
general and administrative  expenses. Net loss per common share decreased during
2003 as compared  to 2002 as a result of the  preferred  stock  benefit for 2003
from the tender offer on the preferred stock completed in February 2003.

         Net interest income before provision for loan losses for the year ended
December 31, 2003  decreased to $39.0  million,  from $49.2 million for the same
period in 2002.  The decrease in net interest  income before  provision for loan
losses of $10.2  million,  or 20.7%,  was the  result  of a decline  in  average
interest-earning   assets,   a   decrease   in  the  net   interest   spread  on
interest-earning  assets, and a reduction in interest income in 2003 compared to
2002 for a security collateralized by delinquent property tax receivables which,
due to further  impairment  of the asset,  was placed on  non-accrual  status in
2003.

         Provision  for loan losses  increased  to $37.1  million in 2003,  from
$28.5 million in 2002.  Provision for losses increased by $8.6 million from 2002
as a result of  additions to allowance  for loan losses on  commercial  mortgage
loans of $6.1  million and  reserves on losses on current  manufactured  housing
loans in the Company's  investment  portfolio of $31.0 million for 2003 compared
to $28.6 million for 2002. For commercial mortgage loans,  underlying commercial
properties  concentrated in the health care and hospitality industries generally
under-performed  relative to  expectations  and suffered from high vacancy rates
and lower fees and rents.  Included in 2003 is $13.8  million in  provision  for
loan losses recorded  specifically  for currently  existing credit losses within
outstanding manufactured housing loans that were 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 an allowance for losses for
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 an
extensive  analysis on these pools of loans.  Loss severity on the  manufactured
housing loans continued to remain high during 2003 as a result of the saturation
in the market place with both new and used  (repossessed)  manufactured  housing
units.  Defaults  in 2003 on  manufactured  housing  loans  averaged  4.0% on an
annualized  basis,  compared  to 4.5% in 2002,  and loss  severity on such loans
approximated 77% during the year.  While defaults on manufactured  housing loans
declined  relative to 2002,  defaults  are  expected  to remain at 2003  levels.
Defaults are  influenced  by general  economic  conditions  in the various local
markets.

         Impairment charges decreased from $18.5 million in 2002 to an aggregate
$16.4 million in 2003. Such  impairment  charges  included  other-than-temporary
impairment of debt securities pledged as securitized finance receivables of $5.5
million for 2003. In addition,  the Company incurred  impairment charges in 2003
of $10.4  million  related  to a  security  where the  underlying  property  tax
receivable  collateral has been foreclosed and represents real estate owned, and
$0.6 million of losses on investments in a limited  liability  partnership.  The
impairment  charges on the debt securities  result from revised  expectations on
related  collateral.  All cash received was applied to reduce the carrying value
of the security.

         Gain on sale of investments for 2003 included the gain from the sale of
loans acquired through the redemption of adjustable-rate and fixed-rate mortgage
pass-through  securities  previously  issued  and  sold  by  the  Company.  Upon
redemption, the Company collapsed the security structure and sold the underlying
loans.

         In  2002,  the  Company  entered  into a $100  million  notional  short
position on 5-Year  Treasury Notes futures to, in effect,  mitigate its exposure
to rising interest rates on a like amount of  floating-rate  liabilities.  These
instruments  failed to meet the hedge criteria of SFASards No. 133,  "Accounting
for Derivative  Instruments and Hedging Activities," and were accounted for on a
trading basis. The Company  terminated these contracts at a loss of $3.3 million
in 2002. No such trading activity was engaged in by the Company in 2003.

         The Company purchased and retired $51.6 million of its Series A, Series
B and Series C preferred  shares in 2003 resulting in a preferred  stock benefit
of $6.8 million  which was  comprised  of the  elimination  of $16.1  million of
dividends in arrears  which was  partially  offset by a $4.1 million  premium to
book value paid to obtain the  preferred  shares  tendered  and $5.2  million of
period accrual of dividends on the shares  remaining after the completion of the
tender offer.


                 Average Balances and Effective Interest Rates
                 ---------------------------------------------

         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.  Assets that are on  non-accrual  status are
excluded from the table below for each period presented.



---------------------------------------------------------------------------------------------------------------------------
                                                                            Year ended December 31,
---------------------------------------------------------------------------------------------------------------------------
                                                              2004                    2003                    2002
---------------------------------------------------- ----------------------- ----------------------- -----------------------
                                                      Average    Effective    Average    Effective    Average    Effective
(amounts in thousands)                                Balance       Rate      Balance       Rate      Balance       Rate
---------------------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
                                                                                                      
Interest-earning assets(1):
    Securitized finance receivables(2)(3)            $1,601,553       7.41%  $1,948,204       7.56%  $2,272,387       7.69%
    Securities                                           25,476       7.74%       5,631      13.74%       4,816      21.31%
    Other loans                                           6,825      10.34%       9,048       6.72%       9,706       4.54%
    Cash and other investments                           24,532       1.37%      58,128       6.09%      72,663       7.81%
                                                     ----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets                        $1,658,386       7.34%  $2,021,011       7.53%  $2,359,572       7.71%
                                                     =========== =========== =========== =========== =========== ===========
Interest-bearing liabilities:
    Securitization financing(3)                      $1,499,772       6.40%  $1,826,827       5.85%  $2,113,330       6.12%
    Senior notes                                          2,020       9.90%      19,330       9.53%      26,112       8.14%
    Repurchase agreements                                21,040       1.75%         398       1.79%           -           -
                                                     ----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities                   $1,522,832       6.34%  $1,846,555       5.88%  $2,139,442       6.15%
                                                     =========== =========== =========== =========== =========== ===========

Net interest spread(3)                                                1.00%                   1.65%                   1.56%

Net yield on average interest-earning assets(3)                       1.51%                   2.15%                   2.14%
---------------------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------


(1)  Average balances exclude  adjustments made in accordance with SFAS 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 $342,  $374,and $2,590
     for the years ended December 31, 2004, 2003, and 2002, respectively.
(3)  Effective rates are calculated excluding  non-interest related non-recourse
     securitization financing expenses and provision for credit losses.



2004 compared to 2003

         The net interest  spread for the year ended December 31, 2004 decreased
to 1.00% from 1.65% for the year ended  December 31, 2003.  This decrease can be
generally attributed to the prepayment of higher coupon investments, principally
securitized finance receivables,  and the resulting reinvestment of net proceeds
available as a result of these  prepayments  into lower  yielding  cash and cash
equivalents.  In addition, net interest spread declined approximately 0.17% from
the non-accrual status of a delinquent  property tax receivable in 2004 compared
to 2003, and declined  approximately  0.07% as a result of net asset premium and
bond  discount   amortization   expense  from  the   unexpected   prepayment  of
approximately  $98.0  million in  commercial  mortgage  loans during  2004.  The
overall yield on interest-earnings assets, decreased to 7.34% for the year ended
December  31,  2004 from 7.53% for the same period in 2003.  The  overall  yield
declined by 0.17% as a result of the non-accrual  status in 2004 of a delinquent
property  tax  receivable  security,  with the balance of the decline due to the
prepayment of higher coupon investments.  In addition to declining asset yields,
interest-bearing  liability  costs  increased from 5.88% to 6.34% as a result of
the overall  increase in market interest rates,  including LIBOR rates,  and the
repayment of lower-cost  securitization financing bonds pursuant to the terms of
the securitization  trust.  Approximately 38% of the Company's  interest-bearing
liabilities  re-price monthly and are indexed to one-month LIBOR, which averaged
1.50%  for 2004,  compared  to 1.21% for 2003.  In  addition,  interest  bearing
liability  costs  increased  by  approximately  a net  0.04%  for bond  discount
amortization  resulting  from the prepayment of  approximately  $98.0 million of
securitization  financing  related to commercial  loans which prepaid during the
year.

2003 compared to 2002

         The net interest  spread for the year ended December 31, 2003 increased
to 1.65% from 1.56% for the year ended  December 31, 2002.  While  overall asset
yields  decreased,  principally  as a result of the  prepayment of higher coupon
investments,  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, the overall  weighted-average  liability costs decreased as well
as a result of the overall  decline in short-term  market  interest  rates.  The
change in one-month  LIBOR is a proxy for the change in the  Company's  yield on
the  adjustable-rate  investments  in its  portfolio  (which have reset  periods
ranging  from six  months to one  year)  and a proxy  for  change in the cost of
borrowing for the Company's  floating rate liabilities (which reset, on average,
every month). During 2003, the one-month LIBOR averaged 1.21% for 2003, compared
to 1.76% for 2002. The overall yield on interest-earnings  assets,  decreased to
7.53% for the year ended  December  31,  2003 from 7.71% for the same  period in
2002,  following the falling-rate  environment and reflecting payments on higher
coupon investments in the portfolio.  Average  interest-bearing  liability costs
decreased  from  6.15% to 5.88% in 2003,  principally  as a result  of the above
referenced decline in short-term market rates, which was partially offset by the
prepayment of lower cost  securitization  finance bonds outstanding  pursuant to
the  terms  of  the   securitization   trust.   A  portion   of  the   Company's
interest-bearing  liabilities  re-price  monthly,  and are indexed to  one-month
LIBOR.  As indicated  above,  one-month  LIBOR on average was 0.55% less in 2003
than 2002.

         The following table  summarizes the amount of change in interest income
and interest expense due to changes in interest rates versus changes in volume:



----------------------------------------------------------------------------------------------------------------------------
                                                     2004 to 2003                               2003 to 2002
----------------------------------------------------------------------------------------------------------------------------
        (amounts in thousands)             Rate         Volume         Total          Rate         Volume        Total
----------------------------------------------------------------------------------------------------------------------------

                                                                                                   
Securitized finance receivables          $   (2,915)   $  (25,735)   $  (28,650)    $   (2,932)   $  (24,556)   $  (27,488)
Other investments                            (1,835)       (1,367)       (3,202)        (1,121)       (1,016)       (2,137)
Securities                                     (470)        1,667         1,197           (406)          154          (252)
Other loans                                     273          (175)           98            199           (32)          167
----------------------------------------------------------------------------------------------------------------------------

Total interest income                        (4,947)      (25,610)      (30,557)        (4,260)      (25,450)      (29,710)
----------------------------------------------------------------------------------------------------------------------------

Securitization financing                      9,527       (20,321)      (10,794)        (5,548)      (16,948)      (22,496)
Senior notes                                     69        (1,711)       (1,642)           325          (609)         (284)
Repurchase agreements                            (3)          361           358              -             7             7
----------------------------------------------------------------------------------------------------------------------------

Total interest expense                        9,593       (21,671)      (12,078)        (5,223)      (17,550)      (22,773)
----------------------------------------------------------------------------------------------------------------------------

Net interest income                      $  (14,540)   $   (3,939)   $  (18,479)    $      963    $   (7,900)   $   (6,937)
----------------------------------------------------------------------------------------------------------------------------


Note:  The change in interest income and interest expense due to changes in both
       volume  and  rate,  which  cannot  be  segregated,   has  been  allocated
       proportionately  to the  change due to volume and the change due to rate.
       This  table  excludes  non-interest  related   securitization   financing
       expense, other interest expense and provision for credit losses.



Interest Income and Interest-Earning Assets
-------------------------------------------

       Approximately $1.3 billion of the investment portfolio as of December 31,
2004,  or 84%, was  comprised of loans or  securities  that pay a fixed-rate  of
interest.  Also at December 31, 2004,  approximately  $251 million,  or 16%, was
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. The following table presents a breakdown,
by principal  balance,  of the Company's  securitized  finance  receivables  and
securities,  by type of underlying  loan as of December 31, 2004, 2003 and 2002.
LIBOR Based ARM Loans are adjustable rate mortgage loans,  which carry a rate of
interest  based  on a spread  to  six-month  LIBOR.  CMT  Based  ARM  Loans  are
adjustable rate mortgage loans, which carry a rate of interest based on a spread
to the one-year Constant Maturity Treasury index.  Other Indices Based ARM Loans
carry a rate of  interest  based on a spread to an index  other  than  six-month
LIBOR,  such as the Prime Rate. The percentage of fixed-rate  loans to all loans
increased from 81% at December 31, 2003, to 84% at December 31, 2004. Fixed-rate
loans at December 31, 2004 consisted  principally of manufactured  housing loans
which have  historically  had low rates of prepayment,  and commercial  mortgage
loans which are prohibited  from prepayment for a period of up to ten years from
their date of funding. A substantial portion of the prepayments in the Company's
investment portfolio have occurred in the single-family ARM loans which carry no
prepayment  penalties.   Given  the  low  absolute  interest-rate   environment,
single-family  ARM loans and  fixed-rate  loans  have  experienced  higher  than
historical  average  prepayment  experience over the years presented.  The table
below  excludes  various  investments  in  the  Company's  portfolio,  including
securities backed by delinquent  property tax receivables,  and  non-securitized
investments  including  other  investments  and  loans.  Most of these  excluded
investments would be considered fixed-rate,  and amounted to approximately $21.3
million at December 31, 2004.

                       Investment Portfolio Composition(1)
                       -----------------------------------
                                 ($ in millions)



----------------------------------------------------------------------------------------------------------------------------
                                                                          Other Indices        
                                   LIBOR Based          CMT Based           Based ARM          Fixed-Rate
         December 31,               ARM Loans           ARM Loans            Loans                Loans           Total
----------------------------------------------------------------------------------------------------------------------------
                                                                                                     
             2002                   $  384.6             $  73.2              $ 57.0           $  1,647.0      $  2,161.8
             2003                   $  258.2             $  48.8              $ 45.4           $  1,512.2      $  1,864.6
             2004                   $  178.4             $  34.5              $ 37.6           $  1,347.4      $  1,597.9
----------------------------------------------------------------------------------------------------------------------------


(1) Only principal amounts are included.



Credit Exposures
----------------

         As discussed in  Investment  Portfolio - Financing  for Our  Investment
Portfolio -  Securitization  Trusts in Item 1 above,  the Company's  predominate
securitization structure is non-recourse securitization financing, whereby loans
and securities are pledged to a trust, and the trust issues bonds pursuant to an
indenture. 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.  From an economic point of view, the Company generally has retained
a  limited  portion  of the  direct  credit  risk in these  structures.  In many
instances,  the Company retained the "first-loss"  credit risk on pools of loans
and securities that it has securitized.

         The  following  table  summarizes  the  aggregate  principal  amount of
certain  investments of the Company;  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 year. Credit Exposure,  Net of Credit Reserves is based
on the credit risk retained by the Company for the loans and securities  pledged
to the securitization  trust, from an economic point of view. For 2004 and 2003,
the table  includes  any  subordinated  security  retained by the  Company.  The
Company's  credit exposure,  net of credit reserves,  has decreased from 2003 by
$26.2  million  due to  the  sale  of  $219.2  million  of  securitized  finance
receivables, resulting in a net decrease of $6.5 million, reduction of principal
on loans of $19.4  million,  and an increase in reserves,  net of losses of $0.3
million.  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  as  discussed  in  Investment
Portfolio-  Investment Portfolio Risks in Item 1 above. This table also excludes
any risks related to representations  and warranties made on single-family loans
funded by the  Company  and  securitized  in  mortgage  pass-through  securities
generally  funded prior to 1995. This table also excludes any credit exposure on
loans and other investments.

                    Credit Reserves and Actual Credit Losses
                    ----------------------------------------
                                 ($ in millions)


----------------------------------------------------------------------------------------------------------------------------
                                                             Credit Exposure,       Actual       Credit Exposure, Net of
                                         Outstanding Loan      Net of Credit        Credit          Credit Reserves to
                                         Principal Balance       Reserves           Losses       Outstanding Loan Balance
----------------------------------------------------------------------------------------------------------------------------
                                                                                              
                2002 (1)                     $2,246.9             $ 91.8            $30.3                 4.09%
                2003 (1)                     $1,859.1             $ 66.1            $25.5                 3.56%
                2004                         $1,296.5             $ 39.9            $25.1                 3.08%
----------------------------------------------------------------------------------------------------------------------------

 (1)     In 2004, the Company began including certain subordinated securities in
         the table above. The previously reported  information for 2003 and 2002
         has been adjusted to be consistent with the 2004 presentation



         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 structures in which
the Company  has  retained a portion of the direct  credit risk  included in the
table above. The delinquencies as a percentage of the outstanding collateral was
6.97% at December  31,  2004,  an increase  from 4.81% and 4.49% at December 31,
2003 and 2002,  respectively,  primarily from  increasing  delinquencies  in the
Company's  commercial mortgage loan and manufactured housing loan portfolios and
a declining overall  outstanding  collateral balance as a result of prepayments.
The trend of  delinquencies in the  manufactured  housing  portfolio arises from
general economic conditions,  the maturity of the portfolio and depressed values
of  manufactured  housing  properties.  The  increase  in  delinquencies  in the
commercial mortgage loan portfolio was largely due to one loan with a balance of
approximately  $23.6  million  in  the  accompanying  financial  statements.   A
forbearance  agreement  with the  borrower has been reached in principal on this
loan, but it is subject to receipt of payment for certain costs  associated with
the  loan  before  the  agreement  takes  effect.   Overall,  less  than  90-day
delinquencies on loans have improved as a result of improving performance in the
single-family and commercial mortgage loan portfolios.  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.  Management  believes the level of credit reserves was proper for the
inherent  probable losses in the portfolio as of December 31, 2004. The trend of
delinquencies within the portfolio is presented in the table below.

                             Delinquency Statistics
                             ----------------------


----------------------------------------------------------------------------------------------------------------------------
                                     30 to 59 days         60 to 89 days         90 days and over
          December 31,                delinquent             delinquent           delinquent (1)             Total
----------------------------------------------------------------------------------------------------------------------------
                                                                                                 
             2002 (2)                    1.78%                 0.64%                  2.07%                  4.49%
             2003 (2)                    1.67%                 0.44%                  2.70%                  4.81%
             2004                        1.27%                 0.32%                  5.38%                  6.97%
----------------------------------------------------------------------------------------------------------------------------


(1)      Includes foreclosures, repossessions and real estate owned.
(2)      In 2004, the Company began including certain subordinated securities in
         the  calculations  used to produce the  information in the table above.
         The previously reported information for 2003 and 2002 has been adjusted
         to be consistent with the 2004 presentation.



                       General and Administrative Expense
                       ----------------------------------

         The following table presents a breakdown of general and  administrative
expense by business unit.



----------------------------------------------------------------------------------------------------------------------------
                                                                      Corporate/Investment
     (amounts in thousands)                 Servicing                 Portfolio Management                 Total
----------------------------------------------------------------------------------------------------------------------------
                                                                                                  
              2002                      $      4,274.0               $        5,218.7              $      9,492.7
              2003                             4,848.9                        3,783.4                     8,632.3
              2004                             3,483.4                        4,264.4                     7,747.8
----------------------------------------------------------------------------------------------------------------------------


         General and  administrative  expense  decreased  $0.9 million from $8.6
million in 2003 to $7.7 million in 2004. General and administrative expenses for
servicing  decreased during 2004 with the sale in October of the Ohio delinquent
property tax  receivable  servicing  operation.  Corporate/Investment  Portfolio
Management expenses have increased primarily as a result of litigation and legal
expenses. The Company's legal and litigation expenses incurred in 2004 were $1.2
million compared to $0.9 million in 2003. The Company anticipates  reductions in
2005 general and  administrative  expenses due to reduced  litigation  costs and
reductions in its delinquent property tax lien servicing operations.


                         LIQUIDITY AND CAPITAL RESOURCES
                         -------------------------------

         The Company has historically  financed its operations from a variety of
sources.  The  Company's  primary  source of  funding  its  operations  today is
principally  the cash  flow  generated  from  the  investment  portfolio,  which
includes net interest  income and principal  payments and  prepayments  on these
investments. The Company also sold investments and other of its interests during
the year generating approximately $32.1 million in net cash flow, which included
the  proceeds  from the sale of its rights to redeem (and  subsequently  resell)
securitization financing bonds for a net $19.2 million. The Company's investment
portfolio  continues to provide positive cash flow, which can be utilized by the
Company for  reinvestment or other  purposes.  The Company has utilized its cash
flow to repay recourse debt outstanding and to purchase loans and securities for
its investment  portfolio.  In 2004, the Company completed a recapitalization of
its  capital  structure  resulting  in the  issuance of a new Series D preferred
stock and common stock in exchange for all outstanding shares of Series A, B and
C preferred stock.

         The Company's cash flow from its investment  portfolio for the year and
quarter  ended  December  31,  2004 was  approximately  $40.5  million  and $6.8
million,  respectively,  excluding proceeds from the sales of investments.  Such
cash  flow  is  after  payment  of  principal  and  interest  on the  associated
non-recourse  securitization  financing (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.  Excluding any cash flow
derived  from  the  sale or  re-securitization  of  assets,  and  assuming  that
short-term  interest rates remain stable, the Company  anticipates that the cash
flow from its investment  portfolio will decline in 2005 compared to 2004 as the
investment  portfolio continues to pay down. The Company  anticipates,  however,
that it will have sufficient cash flow from its investment portfolio to meet all
of its obligations on both a short-term and long-term basis.

         In the second quarter of 2004, the Company completed a recapitalization
plan  whereby  the  Company  converted  its  Series A,  Series  B, and  Series C
preferred  stock  into a new Series D  preferred  stock and  common  stock.  The
aggregate  required quarterly dividend on the shares of Series D preferred stock
outstanding as of December 31, 2004 was approximately $1.3 million. The Series D
preferred stock automatically converts to 9.50% subordinate notes if the Company
fails to pay two  consecutive  quarterly  dividends  or if the Company  fails to
maintain  consolidated  stockholders  equity of at least  200% of the  aggregate
issue price of the Series D preferred stock.

         In  September  2004,  the  Company  sold its  delinquent  property  tax
receivable  portfolio  located  in  Cuyahoga  County,  Ohio  and its  associated
servicing  operation,  for $19.2 million.  In addition,  the Company may receive
contingent  consideration of up to approximately $0.8 million that also would be
held in escrow for  customary  representations  and  warranties  until the first
anniversary of the sale.

         We  will  continue  to  look  to sell  non-core  assets  including  our
remaining  investments in manufactured housing loans and delinquent property tax
receivables.  At the same time,  we are reducing our overhead and  rationalizing
our infrastructure  costs. As discussed in General - Business Focus and Strategy
in Item 1 above,  our goal is to be invested in  short-duration  assets and cash
while we evaluate  opportunities that provide acceptable  risk-adjusted rates of
return.

Securitization Financing
------------------------

         We  have  historically  used  securitization   financing  to  fund  our
investment  portfolio.  The obligations under the securitization trust structure
are payable  solely from the  securitized  finance  receivables  pledged and are
otherwise  non-recourse to us.  Securitized  trust structures are not subject to
margin  calls.  The  maturity  of  each  class  of  non-recourse  securitization
financing  is directly  affected  by the rate of  principal  prepayments  on the
related  collateral.  Each series is also subject to  redemption  in whole or in
part at our option according to specific terms of the respective indentures.  At
December 31, 2004, we had $1.2 billion of securitization financings outstanding.
One  securitization  trust is redeemable at our option  beginning in April 2005.
The respective  indenture for the trust provides for increases in interest rates
ranging  from  0.30 -  0.575%  on  the  underlying  non-recourse  securitization
financing  classes if such classes are not called by the issuer.  We  anticipate
redeeming these bonds and initially  financing the redemption  using  repurchase
agreement  financing.  After the redemption,  we will evaluate our  alternatives
with  respect  to this trust and may  reissue  the bonds.  For  purposes  of the
"Contractual Obligations" table below, these obligations are not redeemed.

Repurchase Agreements
---------------------

         We have  repurchase  agreement  relationships  with a counterparty  for
temporary  financing  of  eligible  investments.  We  may  continue  to  utilize
repurchase  agreement  financing in the future, but we will manage the amount of
this type of financing  that we use as it is largely  collateral  dependent  and
puts our capital at risk if the  collateral  securing the  repurchase  agreement
financing  declines in value.  If we redeem the  securitization  financing trust
redeemable  in  April  2005,  we  anticipate  financing  the  redemption  of the
outstanding bonds using repurchase  agreement financing on a temporary basis, as
discussed above.

Contractual Obligations and Commitments
---------------------------------------

         The  following  table  shows  expected  cash  payments  on  contractual
obligations  of the  Company as of  December  31,  2004 for the  following  time
periods:



-----------------------------------------------------------------------------------------------------------------------------
                                                                           Payments due by period
                                                 ----------------------------------------------------------------------------
Contractual Obligations (1)                          Total        < 1 year       1-3 years       3-5 years      > 5 years
-----------------------------------------------------------------------------------------------------------------------------
                                                                                                       
Long-Term Debt Obligations: (2)
    Non-recourse securitization financing (3)     $1,570,611     $  213,760      $  540,201      $  368,939     $  447,711
    Repurchase agreements                              70,615        70,615              -               -              -
Operating lease obligations                               232           205              27              -              -
-----------------------------------------------------------------------------------------------------------------------------
Total                                             $1,641,458     $  284,580      $  540,228      $  368,939     $  447,711
-----------------------------------------------------------------------------------------------------------------------------


(1)  As  the  master   servicer  for  certain  of  the  series  of  non-recourse
     securitization  financing securities which it has issued, and certain loans
     which  have  been  securitized  but  which the  Company  is not the  master
     servicer  of the  security,  the  Company  has  an  obligation  to  advance
     scheduled principal and interest on delinquent loans in accordance with the
     underlying  servicing  agreements  should the primary servicer fail to make
     such advance.  Such advance amounts are generally  repaid in the same month
     as they are made, or shortly  thereafter,  and the  contractual  obligation
     with respect to these advances is excluded from the above table.
(2)  Amounts   presented  for  Long-Term  Debt  Obligations   include  estimated
     principal  and  interest on the  related  obligations.
(3)  Securitization financing is  non-recourse  to the Company as the bonds are
     payable  solely from loans and securities pledged as securitized  finance
     receivables.  Payments due by period were  estimated based on the principal
     repayments forecast for the  underlying loans and securities, substantially
     all of which is used to  repay  the  associated securitization financing
     outstanding.



Off-Balance Sheet Arrangements
------------------------------

         The Company does not believe that any  off-balance  sheet  arrangements
exist that are reasonably  likely to have a material current or future effect on
the Company's financial condition,  changes in financial condition,  revenues or
expenses,  results of operations,  liquidity,  capital  expenditures  or capital
resources.

Selected Quarterly Results
--------------------------

         The following table presents the Company's unaudited selected quarterly
results for 2004.

                Summary of Selected Quarterly Results (unaudited)
             (amounts in thousands except share and per share data)



-----------------------------------------------------------------------------------------------------------------------------
               Year ended December 31, 2004                  First Quarter   Second Quarter  Third Quarter   Fourth Quarter
-----------------------------------------------------------------------------------------------------------------------------
                                                                                                        
Operating results:
Total interest income                                           $   33,631      $ 33,217        $ 30,026        $ 25,349
Net interest income after provision for loan losses                   (765)       (3,428)          5,103           3,908
Net (loss) income (2)                                               (5,387)      (12,953)            (56)         15,021
Basic net (loss) income per common share                             (0.60)        (0.95)          (0.12)           1.13
Diluted net (loss) income per common share                           (0.60)        (0.95)          (0.12)           0.77
Cash dividends declared per common share                                 -             -               -               -
------------------------------------------------------------ --------------- --------------- --------------- ----------------

Average interest-earning assets                                  1,813,282     1,753,743       1,635,146        1,431,374
Average borrowed funds                                           1,710,843     1,622,815       1,503,468        1,282,657
------------------------------------------------------------ --------------- --------------- --------------- ----------------

Net interest spread on interest-earning assets                     1.21%         0.92%           1.21%            0.71%
Average asset yield                                                7.42%         7.56%           7.32%            6.98%
Net yield on average interest-earning assets (1)                   1.56%         1.41%           1.69%            1.35%
Cost of funds                                                      6.21%         6.64%           6.11%            6.27%
-----------------------------------------------------------------------------------------------------------------------------

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

-----------------------------------------------------------------------------------------------------------------------------
                                                                 First           Second          Third           Fourth
               Year Ended December 31, 2003                     Quarter         Quarter         Quarter         Quarter
-----------------------------------------------------------------------------------------------------------------------------

Operating results:
Total interest income                                           $  39,493       $   37,142      $   35,849      $  39,731
Net interest income after provision for loan losses                 5,599           (9,214)          3,001          2,503
Net income (loss)                                                   2,044          (10,986)           (501)       (11,664)
Basic net income (loss) per common share                             1.15            (1.12)          (0.16)         (1.18)
Diluted net income (loss) per common share                           1.13            (1.12)          (0.16)         (1.18)
------------------------------------------------------------ --------------- --------------- --------------- ---------------
Cash dividends declared per common share                               -                 -               -              -
------------------------------------------------------------ --------------- --------------- --------------- ---------------

Average interest-earning assets                                 2,146,752        2,060,132       1,983,146       1,894,014
Average borrowed funds                                          1,952,341        1,894,099       1,810,782       1,728,998
------------------------------------------------------------ --------------- --------------- --------------- ---------------

Net interest spread on interest-earning assets                   1.68%           1.40%           1.39%           2.16%
Average asset yield                                              7.61%           7.48%           7.50%           7.53%
Net yield on average interest-earning assets (1)                 2.22%           1.88%           1.91%           2.62%
Cost of funds                                                    5.93%           6.08%           6.12%           5.38%
----------------------------------------------------------------------------------------------------------------------------


  (1) Computed  as  net  interest  margin  excluding  non-interest  non-recourse
      securitization  financing  expenses  divided by average  interest  earning
      assets.

(2)   During the three months ended December 31, 2004, the Company  recognized a
      gain of $17.6 million associated with the de-recognition of the assets and
      liabilities  of  a  securitization   trust  resulting  from  the  sale  of
      redemption  rights and other retained  interests of the trust. The Company
      recognized  impairment charges of $5.2 million,  made up primarily of $4.9
      million on its investment in a security backed by delinquent  property tax
      receivables and related real estate owned.




                           FORWARD-LOOKING STATEMENTS
                           --------------------------

         Certain  written  statements in this Form 10-K 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. All statements contained
in this Item as well as those discussed  elsewhere in this Report addressing the
results of operations,  our operating performance,  events, or developments that
we expect or anticipate will occur in the future,  including statements relating
to investment strategies,  net interest income growth,  earnings or earnings per
share growth,  and market share,  as well as statements  expressing  optimism or
pessimism about future operating results,  are forward-looking  statements.  The
forward-looking  statements are based upon management's views and assumptions as
of the date of this Report,  regarding  future events and operating  performance
and are applicable only as of the dates of such statements. 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.

         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..  An increase in the risk of defaults and credit risk resulting from
an economic slowdown or recession could result in a decrease in the value of the
Company's  investments  and  the  over-collateralization   associated  with  its
securitization  transactions.  As a result of the Company being heavily invested
in short-term high quality  investments,  a worsening economy could also benefit
the Company by creating  opportunities  for the Company to invest in assets that
become distressed as a result of the worsening  conditions.  These changes could
have an effect on the Company's financial performance and the performance on the
Company's securitized loan pools.

         Investment   Portfolio  Cash  Flow.  Cash  flows  from  the  investment
portfolio fund the Company's  operations and repayments of outstanding debt, and
are subject to fluctuation due to changes in interest rates, repayment rates and
default rates and related losses.  Cash flows from the investment  portfolio are
likely to sequentially decline until the Company meaningfully begins to reinvest
its capital.  There can be no  assurances  that the Company will be able to find
suitable  investment  alternatives for its capital,  nor can there be assurances
that the Company will meet its reinvestment and return hurdles.

         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 losses recorded in the financial  statements.  The allowance for loan 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.  Actual defaults on adjustable-rate
mortgage  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.

         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
Company's  investments,  including  loans and  securities  currently  pledged as
securitized  finance  receivables  and securities,  are fixed-rate.  The Company
currently finances these fixed-rate assets through  non-recourse  securitization
financing  and  repurchase  agreements,  approximately  $227 million of which is
variable rate and 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 $120 million as of
December 31, 2004. In addition, a portion of the investments held by the Company
are  adjustable-rate  securitized  finance  receivables.  These  investments are
financed through non-recourse long-term  securitization  financing,  which reset
monthly.  The net interest spread for these  investments could decrease during a
period of  rapidly  rising  short-term  interest  rates,  since the  investments
generally  have interest  rates which reset on a delayed basis and have periodic
interest rate caps; the related borrowing has no delayed resets or such interest
rate caps.

         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.  In
addition,  third-party  servicers are generally  obligated to advance  scheduled
principal and interest on a loan if such loan is securitized,  and to the extent
the third-party servicer fails to make this advance, the Company may be required
to make the advance.  The actual credit losses experienced by the Company are in
large  part  influenced  by  the  quality  of  servicing  by  these  third-party
servicers.

         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 yielding investments.

         Competition.  The financial  services industry is a highly  competitive
market in which we compete with a number of institutions  with greater financial
resources.  In purchasing  portfolio  investments and in issuing securities,  we
compete with other mortgage REITs,  investment  banking firms,  savings and loan
associations,  commercial banks, mortgage bankers, insurance companies,  federal
agencies and other entities,  many of which have greater financial resources and
a lower cost of capital than we do. Increased  competition in the market and our
competitors greater financial resources have adversely affected the Company, and
may continue to do so. Competition may also continue to keep pressure on spreads
resulting in the Company being unable to reinvest its capital at a  satisfactory
risk-adjusted basis.

         Regulatory  Changes.  The  Company's  businesses as of and for the year
ended  December  31,  2004 were 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.  The Company is a REIT and is required to meet certain
tests  in  order to  maintain  its  REIT  status  as  described  in the  earlier
discussion of "Federal Income Tax Considerations." If the Company should fail to
maintain its REIT status,  it would not be able to hold certain  investments and
would be subject to income taxes

         Section 404 of the  Sarbanes-Oxley  Act of 2002. Based on the Company's
expected market capitalization at June 30, 2005, the Company anticipates that it
will be  required  to be  compliant  with the  provisions  of Section 404 of the
Sarbanes-Oxley  Act of 2002 by December  31, 2005.  Failure to be compliant  may
result in doubt in the capital  markets  about the  quality and  adequacy of the
Company's internal disclosure controls.  This could result in the Company having
difficulty  in or being unable to raise  additional  capital in these markets in
order to finance its operations and future investments.

RECENT ACCOUNTING PRONOUNCEMENTS

         In December 2003, the Accounting  Standards Executive Committee (AcSEC)
of the American Institute of Certified  Professional  Accountants (AICPA) issued
Statement of Position  (SOP) No.  03-3,  "Accounting  for Certain  Loans or Debt
Securities Acquired in a Transfer." SOP No. 03-3 is effective for loans acquired
in  fiscal  years  beginning  after  December  15,  2004,  with  early  adoption
encouraged.  A certain transition provision applies for certain aspects of loans
currently within the scope of Practice  Bulletin 6, Amortization of Discounts on
Certain  Acquired  Loans.  SOP No. 03-3  addresses  accounting  for  differences
between  contractual  cash flows and cash flows expected to be collected from an
investor's  initial investment in loans or debt securities (loans) acquired in a
transfer if those  differences  are  attributable,  at least in part,  to credit
quality. It includes loans acquired in business  combinations and applies to all
non-governmental entities, including not-for-profit organizations.  SOP No. 03-3
does not apply to loans  originated by the entity.  The Company has reviewed the
implications  of SOP No. 03-3 but does not believe that its adoption will have a
significant  impact on its  financial  position,  results of  operations or cash
flows.

         In December 2004,  the Financial  Accounting  Standards  Board ("FASB")
issued  SFAS  No.  123  (Revised  2004),  Share-Based  Payment.  This  statement
supersedes  APB  Opinion  No. 25 and its related  implementation  guidance.  The
statement  establishes standards for the accounting for transactions in which an
entity exchanges its equity  instruments for goods and services.  This statement
focuses  primarily on accounting  for  transactions  in which an entity  obtains
employee  services in share-based  payment  transactions.  The most  significant
change  resulting from this statement is the requirement for public companies to
expense employee share-based payments under fair value as originally  introduced
in SFAS No. 123.  This  statement  is effective  for public  companies as of the
beginning of the first interim or annual reporting period that begins after June
15, 2005.  The Company will adopt this  statement  effective July 1, 2005 and is
currently  evaluating  the  impact it will have on net  income  had the  Company
adopted the provisions of SFAS No. 123, for each year presented.


Item 7A.  Quantitative and Qualitative Disclosures about Market Risk

         Market risk generally  represents the risk of loss that may result from
the potential change in the value of a financial  instrument due to fluctuations
in  interest  and foreign  exchange  rates and in equity and  commodity  prices.
Market  risk  is  inherent  to  both  derivative  and  non-derivative  financial
instruments,  and accordingly, the scope of the Company's market risk management
extends  beyond  derivatives  to include  all market  risk  sensitive  financial
instruments.  As a financial services company, net interest income comprises the
primary  component  of the  Company's  earnings  and cash flows.  The Company is
subject to risk  resulting  from interest rate  fluctuations  to the extent that
there is a gap between the amount of the Company's  interest-earning  assets and
the amount of interest-bearing  liabilities that are prepaid, mature or re-price
within specified periods.

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

         The Company focuses on the sensitivity of its investment portfolio 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  income cash flow for the next  twenty-four  months  assuming  interest
rates over such time  period  follow the forward  LIBOR  curve  (based on 90-day
Eurodollar  futures  contracts) as of December 31, 2004.  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.  Cash flow changes from interest
rate swaps, caps, floors or any other derivative instrument are included in this
analysis.

         The following  table  summarizes the Company's net interest income cash
flow and market  value  sensitivity  analyses as of  December  31,  2004.  These
analyses  represent  management's  estimate  of  the  percentage  change  in net
interest  margin  cash  flow and  value  expressed  as a  percentage  change  of
shareholders'  equity,  given a parallel shift in interest  rates,  as discussed
above.  Other  investments are excluded from this analysis  because they are not
considered interest rate sensitive. The "Base" case represents the interest rate
environment  as it existed as of  December  31,  2004.  At  December  31,  2004,
one-month LIBOR was 2.40% and six-month LIBOR was 2.78%. 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. As a result of anticipated  prepayments
on assets in the  investment  portfolio,  there are likely to be such changes in
the future.

                            Projected Change in Net       Projected Change in
    Basis Point                Interest Margin          Value, Expressed as a
Increase (Decrease)             Cash Flow From              Percentage of
 in Interest Rates                Base Case              Shareholders' Equity
--------------------------------------------------------------------------------
       +200                         (12.6)%                    (4.5)%
       +100                          (6.0)%                    (2.0)%
       Base
       -100                           9.8%                      2.3%
       -200                          23.4%                      5.5%

         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.
Approximately $1.3 billion of the Company's investment portfolio is comprised of
loans or securities  that have coupon rates that are fixed.  Approximately  $251
million of the  Company's  investment  portfolio  as of  December  31,  2004 was
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  70%  and  14%  of  the
adjustable-rate  loans underlying the Company's  securitized finance receivables
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  income  earned and the  corresponding  cash flow on its
investment  portfolio  will  decrease.  The decrease of the net interest  spread
results from (i) fixed-rate  loans and investments  financed with  variable-rate
debt,  (ii)  the lag in  resets  of the  adjustable-rate  loans  underlying  the
securitized  finance  receivables  relative to the rate resets on the associated
borrowings,  and  (iii)  rate  resets  on the  adjustable-rate  loans  which are
generally  limited to 1% every six months or 2% every twelve  months and subject
to lifetime caps, while the associated borrowings have no such limitation. As to
item (i), the Company has  substantially  limited its interest rate risk on such
investments through (x) the issuance of fixed-rate non-recourse  securitization
financing  which  approximated  $800 million as of December  31,  2004,  and (y)
equity,  which was $148.8  million.  In  addition,  the Company has entered into
interest  rate swaps and  synthetic  swaps to mitigate  its  interest  rate risk
exposure on fixed-rate  investments financed with variable rate bonds as further
discussed  below.  As to items  (ii) and (iii),  as  short-term  interest  rates
stabilize and the  adjustable-rate  loans reset,  the net interest margin may be
partially restored as the yields on the  adjustable-rate  loans adjust to market
conditions.

         In  addition,  the Company has  entered  into an interest  rate swap to
mitigate its interest  rate risk  exposure on $100 million in notional  value of
its variable rate bonds.  The swap agreement has been  constructed such that 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  notional  amount
through June 2005. The impact on cash flows from the interest rate swap has been
included in the table above for each of the respective  interest-rate scenarios.
An additional  approximate  $20 million of  floating-rate  liabilities are being
converted to a fixed rate through an  amortizing  synthetic  swap created by the
short sale of a string of  Eurodollar  futures  contract  in October  2002.  The
synthetic swap has remaining an estimated duration of 0.72 years. As of December
31, 2004,  the  weighted-average  fixed rate cost of the  synthetic  swap to the
Company was 2.70%.

         Net  interest  income  may  increase  following  a fall  in  short-term
interest   rates.   This  increase  may  be  temporary  as  the  yields  on  the
adjustable-rate  loans adjust to the new market  conditions  after a lag period.
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.


Item 8.  Financial Statements and Supplementary Data

         The  consolidated  financial  statements of the Company and the related
notes, together with the Report of the Independent  Registered Public Accounting
Firm thereon, are set forth on pages F-1 through F-25 of this Form 10-K.


Item 9.  Changes in and Disagreements With Accountants on Accounting and
         Financial Disclosure

         None.


Item 9A. Controls and Procedures

         (a) Evaluation of disclosure controls and procedures.

         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.

         As of the end of the period covered by this annual report,  the Company
carried out an  evaluation of the  effectiveness  of the design and operation of
the Company's  disclosure  controls and procedures pursuant to Rule 13a-15 under
the Exchange Act. This evaluation was carried out under the supervision and with
the participation of the Company's management, including the Company's Principal
Executive Officer and Chief Financial Officer.  Based upon that evaluation,  the
Company's  management  concluded  that the  Company's  disclosure  controls  and
procedures are effective.

         In conducting its review of disclosure  controls,  management concluded
that  sufficient  disclosure  controls and  procedures  did exist 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.

         (b) Changes in internal controls.

         The  Company's  management is also  responsible  for  establishing  and
maintaining  adequate internal control over financial  reporting.  There were no
changes in the Company's internal controls or in other factors during the fourth
quarter of 2004 that materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting. There were also
no significant  deficiencies  or material  weaknesses in such internal  controls
requiring corrective actions.


Item 9B. Other Information

         None.


                                    PART III
                                    --------


Item 10. Directors and Executive Officers of the Registrant

         The information  required by Item 10 is included in the Company's proxy
statement for its 2005 Annual Meeting of Stockholders (the 2005 Proxy Statement)
in the Election of Directors,  Corporate  Governance and the Board of Directors,
Ownership of Stock and  Management  and  Executive  Compensation  of the Company
sections and is incorporated herein by reference.


Item 11. Executive Compensation

         The  information  required  by Item 11 is  included  in the 2005  Proxy
Statement in the  Management of the Company and Executive  Compensation  section
and is incorporated herein by reference.


Item 12. Security Ownership of Certain Beneficial Owners and Management and
         Related Stockholder Matters

         The  information  required  by Item 12 is  included  in the 2005  Proxy
Statement in the Ownership of Stock and  Management of the Company and Executive
Compensation sections and is incorporated herein by reference.


Item 13. Certain Relationships and Related Transactions

         The  information  required  by Item 13 is  included  in the 2005  Proxy
Statement in Management of the Company and Executive Compensation section and is
incorporated herein by reference.


Item 14. Principal Accounting Fees and Services

         The  information  required  by Item 14 is  included  in the 2005  Proxy
Statement  in the  Audit  Information  section  and is  incorporated  herein  by
reference.


                                     PART IV
                                     -------


Item 15. Exhibits, Financial Statement Schedules

         (a) Documents filed as part of this report:

             1. and 2.  Financial Statements and Schedules
                        The information  required by this section of Item
                        15 is set  forth  in the  Consolidated  Financial
                        Statements and Report of  Independent  Registered
                        Public  Accounting  Firm beginning at page F-1 of
                        this  Form  10-K.  The  index  to  the  Financial
                        Statements  is set forth at page F-2 of this Form
                        10-K.

             3.         Exhibits

                       Number    Exhibit

                         3.1     Articles of  Incorporation  of the  Registrant,
                                 as amended,  effective  as of February  4,
                                 1988.  (Incorporated  herein  by  reference  to
                                 the  Company's Amendment  No. 1 to the
                                 Registration  Statement  on Form S-3 (No.  333-
                                 10783) filed March 21, 1997.)

                         3.2     Amended    Bylaws   of   the    Registrant.
                                 (Incorporated by reference to the Company's
                                 Annual  Report  on Form  10-K  for the year
                                 ended December 31, 1992, as amended.)

                         3.3     Amendment  to  Articles  of  Incorporation,
                                 effective   December  29,  1989.  (Incorporated
                                 herein by reference  to the  Company's  Amend-
                                 ment  No. 1 to the Registration Statement on
                                 Form S-3 (No. 333-10783) filed March 21, 1997.)

                         3.4     Amendment  to  Articles  of  Incorporation,
                                 effective  October 9,  1996.  (Incorporated
                                 herein  by  reference  to the  Registrant's
                                 Current  Report on Form 8-K,  filed October
                                 15, 1996.)

                         3.5     Amendment  to  Articles  of  Incorporation,
                                 effective  October 19, 1992.  (Incorporated
                                 herein  by  reference   to  the   Company's
                                 Amendment   No.   1  to  the   Registration
                                 Statement on Form S-3 (No. 333-10783) filed
                                 March 21, 1997.)

                         3.6     Amendment  to  Articles  of  Incorporation,
                                 effective  April  25,  1997.  (Incorporated
                                 herein  by  reference   to  the   Company's
                                 Quarterly  Report  on  Form  10-Q  for  the
                                 quarter ended March 31, 1997.)

                         3.7     Amendment  to  Articles  of  Incorporation,
                                 effective  June 17,  1998  (filed herewith).

                         3.8     Amendment  to  Articles  of  Incorporation,
                                 effective  August 2, 1999  (filed herewith).

                         3.9     Amendment  to  Articles  of  Incorporation,
                                 effective   May  19,  2004.   (Incorporated
                                 herein  by  reference   to  the   Company's
                                 Quarterly  Report  on  Form  10-Q  for  the
                                 quarter ended June 30, 2004.)

                        3.10     Amendments  to the  Bylaws of the  Company.
                                 (Incorporated  herein by  reference  to the
                                 Company's  Annual  Report  on Form 10-K for
                                 the  year  ended   December  31,  2002,  as
                                 amended.)

                        10.1     Dynex Capital, Inc. 2004 Stock Incentive Plan
                                 (filed herewith)

                        21.1     List of consolidated entities of the Company
                                 (filed herewith)

                        23.1     Consent of Deloitte & Touche LLP
                                 (filed herewith)

                        31.1     Certification   of   Principal    Executive
                                 Officer  and  Principal  Financial  Officer
                                 pursuant    to    Section    302   of   the
                                 Sarbanes-Oxley    Act   of   2002    (filed
                                 herewith).

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


         (b)  Exhibits: See Item 15(a)(3) above.

         (c)  Financial Statement Schedules:

              None.


                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                     DYNEX CAPITAL, INC.
                                     (Registrant)



April 14, 2005                       -------------------------------------------
                                     Stephen J. Benedetti,
                                     Executive Vice President


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



Signature                                              Capacity                                    Date
---------                                              --------                                    ----



                                                                                                 
/s/ Stephen J. Benedetti                               Principal Executive Officer                 April 14, 2005
-------------------------------------------------      Principal Financial Officer
Stephen J. Benedetti                                   Principal Accounting Officer



/s/ Thomas B. Akin                                     Director                                    April 14, 2005
-------------------------------------------------
Thomas B. Akin



/s/ J. Sidney Davenport, IV                            Director                                    April 14, 2005
-------------------------------------------------
J. Sidney Davenport, IV



/s/ Leon A. Felman                                     Director                                    April 14, 2005
-------------------------------------------------
Leon A. Felman



/s/ Barry Igdaloff                                     Director                                    April 14, 2005
-------------------------------------------------
Barry Igdaloff



/s/ Donald B. Vaden                                    Director                                    April 14, 2005
-------------------------------------------------
Donald B. Vaden


/s/ Eric P. Von der Porten                             Director                                    April 14, 2005
-------------------------------------------------
Eric P. Von der Porten


                              DYNEX CAPITAL, INC.

                      CONSOLIDATED FINANCIAL STATEMENTS AND

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

                           For Inclusion in Form 10-K

                            Annual Report Filed with

                       Securities and Exchange Commission

                                December 31, 2004

DYNEX CAPITAL, INC.
INDEX TO FINANCIAL STATEMENTS


Financial Statements:
                                                                     Page

   Report of Independent Registered Public Accounting Firm...........F-3
   Consolidated Balance Sheets
     December 31, 2004 and 2003......................................F-4
   Consolidated Statements of Operations -- Years ended
     December 31, 2004, 2003 and 2002................................F-5
   Consolidated Statements of Shareholders' Equity -- Years ended
     December 31, 2004, 2003 and 2002................................F-6
   Consolidated Statements of Cash Flows -- Years ended
     December 31, 2004, 2003 and 2002................................F-7
   Notes to Consolidated Financial Statements
     December 31, 2004, 2003, and 2002...............................F-8

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Dynex Capital, Inc.
Glen Allen, Virginia

We have audited the accompanying  consolidated  balance sheets of Dynex Capital,
Inc. and subsidiaries  (the "Company") as of December 31, 2004 and 2003, and the
related consolidated  statements of operations,  shareholders'  equity, and cash
flows for each of the three years in the period ended  December 31, 2004.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility is to express an opinion on the financial statements based on our
audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements  are free of material  misstatement.  The Company is not  required to
have,  nor were we engaged to perform,  an audit of its  internal  control  over
financial reporting.  Our audit included  consideration of internal control over
financial  reporting  as  a  basis  for  designing  audit  procedures  that  are
appropriate  in the  circumstances  but not for the  purpose  of  expressing  an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a  test  basis,  evidence  supporting  the  amounts  and  disclosures  in the
financial statements, assessing the accounting principles used and  significant
estimates made by  management,  as well as evaluating the overall financial
statement  presentation.  We believe that our audits provide a reasonable basis
for our opinion.

In our opinion,  such consolidated  financial  statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2004
and 2003,  and the results of their  operations and their cash flows for each of
the three years in the period  ended  December  31,  2004,  in  conformity  with
accounting principles generally accepted in the United States of America.



Princeton, New Jersey
April 7, 2005

CONSOLIDATED BALANCE SHEETS
DYNEX CAPITAL, INC.
December 31, 2004 and 2003
(amounts in thousands except share data)



                                                                                    2004                2003
                                                                               ---------------     ---------------
ASSETS
                                                                                                               
Cash and cash equivalents                                                      $      52,522       $       7,386
Other assets                                                                           4,964               4,174
                                                                               ---------------     ---------------
                                                                                      57,486              11,560
Investments:
  Securitized finance receivables:
     Loans, net                                                                    1,036,123           1,518,613
     Debt securities                                                                 206,434             255,580
  Securities                                                                          87,706              33,275
  Other investments                                                                    7,596              37,903
  Other loans                                                                          5,589               8,304
                                                                               ---------------     ---------------
                                                                                   1,343,448           1,853,675
                                                                               ---------------     ---------------
                                                                               $   1,400,934       $   1,865,235
                                                                               ===============     ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Non-recourse securitization financing                                          $   1,177,280       $   1,679,830
Repurchase agreements                                                                 70,468              23,884
Senior notes                                                                               -              10,049
                                                                                --------------      --------------
                                                                                   1,247,748           1,713,763


Accrued expenses and other liabilities                                                 4,420               1,626
                                                                               ---------------     ---------------
                                                                                   1,252,168           1,715,389
                                                                               ---------------     ---------------

Commitments and Contingencies (Note 16)                                                    -                   -

SHAREHOLDERS' EQUITY
Preferred stock, par value $.01 per share, 50,000,000 shares authorized:
     9.75% Cumulative Convertible Series A,
        None and 493,595 shares issued and outstanding, respectively                       -              11,274
        (None and $16,322 aggregate liquidation preference, respectively)
     9.55% Cumulative Convertible Series B,
        None and 688,189 shares issued and outstanding, respectively                       -              16,109
        (None and $23,100 aggregate liquidation preference, respectively)
     9.73% Cumulative Convertible Series C,
        None and 684,893 shares issued and outstanding, respectively                       -              19,631
        (None and $28,295 aggregate liquidation preference, respectively)
     9.75% Cumulative Convertible Series D,
        5,628,737 and no shares issued and outstanding, respectively                  55,666                   -
        ($58,040 and None aggregate liquidation preference, respectively)
Common stock, par value $.01 per share, 100,000,000 shares authorized,
     12,162,391 and 10,873,903 shares issued and outstanding, respectively               122                 109
Additional paid-in capital                                                           366,896             360,684
Accumulated other comprehensive income (loss)                                          3,817              (3,882)
Accumulated deficit                                                                 (277,735)           (254,079)
                                                                               ---------------     ---------------
                                                                                     148,766             149,846
                                                                                --------------     ---------------
                                                                               $   1,400,934       $   1,865,235
                                                                               ===============     ===============
See notes to consolidated financial statements.


CONSOLIDATED STATEMENTS OF OPERATIONS
DYNEX CAPITAL, INC.

Years ended December 31, 2004, 2003 and 2002
(amounts in thousands except share data)



                                                          2004                   2003                  2002
                                                   --------------------  ---------------------  --------------------
Interest income:
                                                                                                             
   Securitized finance receivables                 $        118,647      $        147,297       $       174,999
   Securities                                                 2,535                   773                 1,026
   Other investments                                            335                 3,537                 5,673
   Other loans                                                  706                   608                   441
                                                   --------------------  ---------------------  --------------------
                                                            122,223               152,215               182,139
                                                   --------------------  ---------------------  --------------------

Interest and related expense:
   Non-recourse securitization financing                     98,271               111,056               130,768
   Senior notes and repurchase agreements                       567                 1,849                 2,132
   Other                                                        104                   339                    86
                                                   --------------------  ---------------------  --------------------
                                                             98,942               113,244               132,986
                                                   --------------------  ---------------------  --------------------

Net interest income                                          23,281                38,971                49,153
Provision for loan losses                                   (18,463)              (37,082)              (28,483)
                                                   --------------------  ---------------------  --------------------
Net interest income after provision for loan losses           4,818                 1,889                20,670

Impairment charges                                          (14,756)              (16,355)              (18,477)
Gain (loss) on sale of investments, net                      14,490                 1,555                  (150)
Trading losses                                                    -                     -                (3,307)
General and administrative expenses                          (7,748)               (8,632)               (9,493)
Other (expense) income                                         (179)                  436                 1,397
                                                   --------------------  ---------------------  --------------------
Net loss                                                     (3,375)              (21,107)               (9,360)
Preferred stock (charge) benefit                             (1,819)                6,847                (9,586)
                                                   --------------------  ---------------------  --------------------
Net loss to common shareholders                    $         (5,194)     $        (14,260)      $       (18,946)
                                                   ====================  =====================  ====================

Net loss per common share :
    Basic and diluted                               $     (0.46)          $     (1.31)          $     (1.74)
                                                   ====================  =====================  ====================


See notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
DYNEX CAPITAL, INC.

Years ended December 31, 2004, 2003, and 2002
(amounts in thousands except share data)



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

Balance at January 1, 2002            $  94,588    $     109     $ 364,740    $  3,298      $(220,625)    $242,110

Comprehensive loss:

Net loss - 2002                               -            -             -           -         (9,360)      (9,360)
Change in net unrealized
   gain/(loss) on:
     Investments classified as
       available for sale                     -            -             -      (3,669)             -        (3,669)
     Hedge instruments                        -            -             -      (4,461)             -        (4,461)
                                                                                                        -------------
Total comprehensive loss                                                                                    (17,490)

Conversion of preferred to                   (2)           -             3           -              -             1
   common stock
Dividends on preferred stock                  -            -             -           -         (1,200)       (1,200)
                                    ---------------------------------------------------------------------------------
Balance at December 31, 2002             94,586          109       364,743      (4,832)      (231,185)      223,421

Comprehensive loss:

Net loss - 2003                               -            -             -           -        (21,107)      (21,107)
Change in net unrealized
   gain/(loss) on:
     Investments classified as
       available for sale                     -            -             -         115              -           115
     Hedge instruments                        -            -             -         835              -           835
                                                                                                      -------------
Total comprehensive loss                                                                                    (20,157)

Repurchase of preferred stock           (47,572)           -        (4,059)          -              -       (51,631)
Dividends on preferred stock                  -            -             -           -         (1,787)       (1,787)
                                    ---------------------------------------------------------------------------------
Balance at December 31, 2003             47,014          109       360,684      (3,882)      (254,079)      149,846

Comprehensive loss:

Net loss - 2004                               -            -             -           -         (3,375)       (3,375)
Change in net unrealized
   gain/(loss) on:
     Investments classified as
       available for sale                     -            -             -       4,681              -         4,681
     Hedge instruments                        -            -             -       3,018              -         3,018
                                                                                                       -------------
Total comprehensive income                    -            -             -                                    4,324

Recapitalization                          8,652           13         6,212           -        (16,345)       (1,468)
Dividends on preferred stock                  -            -             -           -         (3,936)       (3,936)
                                   ---------------------------------------------------------------------------------
Balance at December 31, 2004          $  55,666    $     122     $ 366,896    $  3,817      $(277,735)    $ 148,766
=====================================================================================================================


See notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS
DYNEX CAPITAL, INC.

Years ended December 31, 2004, 2003 and 2002
(amounts in thousands except share data)


                                                                        2004             2003             2002
                                                                   ---------------- ---------------- ----------------
                                                                                                   
Operating activities:
Net loss                                                              $   (3,375)     $   (21,107)     $   (9,360)
Adjustments to reconcile net loss to cash provided by operating
   activities:
Provision for loan losses                                                 18,463           37,082          28,483
Impairment charges                                                        14,756           16,355          18,477
(Gain) loss on sale of investments                                       (14,490)          (1,555)            150
Amortization and depreciation                                              3,726            3,072           6,446
Net change in other assets and other liabilities                           3,953           (4,031)         (4,266)
                                                                   ---------------- ---------------- ----------------
Net cash and cash equivalents provided by operating activities            23,033           29,816          39,930
                                                                   ---------------- ---------------- ----------------

Investing activities:
Principal payments received on collateral                                286,212          294,785         416,370
Purchase of securities and other investments                             (71,468)         (32,196)       (152,928)
Payments received on securities, other investments and loans              21,601           17,781          17,150
Proceeds from sales of securities and other investments                   32,066            2,937           2,191
Other                                                                        180              245            (444)
                                                                   ---------------- ---------------- ----------------
Net cash and cash equivalents provided by investing activities           268,591          283,552         282,339
                                                                   ---------------- ---------------- ----------------

Financing activities:
Proceeds from issuance of bonds                                            7,377                -         172,898
Principal payments on bonds                                             (286,330)        (301,573)       (428,027)
Repayment of  senior notes                                               (10,872)         (22,030)        (57,994)
Proceeds from recourse debt borrowings                                    46,584           23,884               -
Retirement of preferred stock                                               (648)         (19,552)              -
Dividends paid                                                            (2,599)          (1,787)         (1,199)
                                                                   ---------------- ---------------- ----------------
Net cash and cash equivalents used for financing activities             (246,488)        (321,058)       (314,322)
                                                                   ---------------- ---------------- ----------------
Net increase (decrease) in cash and cash equivalents                      45,136           (7,690)          7,947
Cash and cash equivalents at beginning of period                           7,386           15,076           7,129
                                                                   ---------------- ---------------- ----------------
Cash and cash equivalents at end of period                            $   52,522       $    7,386      $   15,076
                                                                   ================ ================ ================


See notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.

December 31, 2004, 2003, and 2002
(amounts in thousands except share and per share data)

NOTE 1 - BASIS OF PRESENTATION

Basis of Presentation

         The accompanying  consolidated  financial statements have been prepared
in  accordance  with  the  instructions  to Form  10-K  and  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 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").  As such,
the Company  believes that it qualifies as a REIT,  and 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  Company  uses  estimates  in  establishing   fair  value  for  its
securities as discussed in Note 2.

         The  Company  also  has  credit  risk  on  certain  investments  in its
portfolio  as  discussed  in Note 4. An  allowance  for  loan  losses  has  been
estimated and  established  for currently  existing losses based on management's
judgment.  The allowance for loan losses is evaluated and adjusted  periodically
by management  based on the actual and estimated  timing and amount of currently
existing  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 amounts for 2002 and 2003 have been  reclassified to conform to
the presentation adopted in 2004.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation of Subsidiaries

         The consolidated  financial statements represent the Company's accounts
after the elimination of inter-company  transactions.  The Company  consolidates
entities in which it owns more than 50% of the voting  equity and  control  does
not rest with others.  The Company  follows the equity method of accounting  for
investments  with greater than 20% and less than a 50% interest in  partnerships
and corporate  joint  ventures or when it is able to influence the financial and
operating  policies of the investee but owns less than 50% of the voting equity.
For all other investments, the cost method is applied.

Federal Income Taxes

         The  Company  believes  it  has  complied  with  the  requirements  for
qualification as a REIT under the Internal  Revenue Code (the "Code").  As such,
the  Company  believes  that it  qualifies  as a REIT  for  federal  income  tax
purposes,  and 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.
The  Company  uses  the  calendar  year for  both  tax and  financial  reporting
purposes. There may be differences between taxable income and income computed in
accordance with accounting principles generally accepted in the United States of
America ("GAAP").  The Company's estimated taxable loss for 2004,  excluding net
operating losses carried forward from prior years, was $13,276.  At December 31,
2004, the Company's cumulative tax operating loss carry-forwards is an estimated
$148,917. The Company paid dividends on the Series D Preferred Stock during 2004
of $2,599 or $0.4618 per share,  which  consisted of $1,358 or $0.2412 per share
of ordinary income and $1,241 or $0.2206 per share return of capital. The $1,358
dividends  of ordinary  income are due to the  Company's  ownership  of residual
interests in certain REMIC securitizations.

Investments

         Pursuant to the  requirements  of  Statement  of  Financial  Accounting
Standards  ("SFAS") No. 115,  "Accounting  for Certain  Investments  in Debt and
Equity  Securities,"  the Company is required  to classify  certain  investments
considered   debt   securities   as  either   trading,   available-for-sale   or
held-to-maturity.

         Securitized  Finance   Receivables.   Securitized  finance  receivables
consist  of  collateral   pledged  to  support  the  repayment  of  non-recourse
securitization financing issued by the Company.  Securitized finance receivables
include loans and debt securities  consisting of, or secured by  adjustable-rate
and  fixed-rate   mortgage  loans  secured  by  first  liens  on  single  family
properties,   fixed-rate  loans  secured  by  first  liens  on  multifamily  and
commercial  properties,  and manufactured  housing  installment loans secured by
either a UCC filing or a motor  vehicle  title.  Loans  included in  securitized
finance  receivables  are reported at  amortized  cost.  An  allowance  has been
established  for  currently  existing  losses  on such  loans.  Debt  securities
included in securitized  finance  receivables are considered  available-for-sale
and are reported at fair value,  with unrealized  gains and losses excluded from
earnings and reported as accumulated other  comprehensive  income. The basis for
any  gain/loss  on any debt  securities  sold is  computed  using  the  specific
identification method.  Securitized finance receivables can only be sold subject
to the lien of the respective  securitization  financing  indenture,  unless the
related bonds have been redeemed.

         Other Investments.  Other investments include unsecuritized  delinquent
property  tax  receivables,   securities  backed  by  delinquent   property  tax
receivables,  and real estate owned. The unsecuritized  delinquent  property tax
receivables  are carried at  amortized  cost.  Securities  backed by  delinquent
property   tax   receivables   were   transferred   from   held-to-maturity   to
available-for-sale  during 2004 and are carried at fair value as of December 31,
2004.  As  of  December  31,  2003,   these   securities   were   classified  as
held-to-maturity  and recorded at amortized cost. Other investments include real
estate owned acquired through,  or in lieu of foreclosure in connection with the
servicing of the delinquent tax lien receivables portfolio. Such investments are
considered  held for sale and are initially  recorded at fair value less cost to
sell ("net  realizable  value") at the date of  foreclosure,  establishing a new
cost  basis.   Subsequent  to  foreclosure,   management  periodically  performs
valuations if such amount is less than the current  amortized  cost basis of the
real estate  owned.  Revenue and  expenses  from  operations  and changes in the
valuation of the real estate owned are included in other income (expense).

         Securities.  Securities include debt and equity  securities,  which are
considered available-for-sale under SFAS No. 115 and are reported at fair value,
with  unrealized  gains and  losses  excluded  from  earnings  and  reported  as
accumulated  other  comprehensive  income.  The  basis  used  to  determine  the
gain/loss on any debt and equity securities sold is the specific  identification
method and average cost method, respectively.

         Other loans.  Other loans are carried at amortized cost.

         Interest Income. Interest income is recognized when earned according to
the terms of the  underlying  investment and when, in the opinion of management,
it is collectible.  For loans, the accrual of interest is discontinued  when, in
the opinion of management,  the interest is not collectible in the normal course
of business, when the loan is past due and when the primary servicer of the loan
fails to advance the interest  and/or  principal due on the loan. For securities
and other  investments,  the accrual of interest is  discontinued  when,  in the
opinion of management,  it is probable that all amounts  contractually  due will
not be collected.  Loans are considered past due when the borrower fails to make
a timely payment in accordance with the underlying loan agreement,  inclusive of
all  applicable  cure  periods.  All  interest  accrued  but not  collected  for
investments  that are  placed  on a  non-accrual  status or are  charged-off  is
reversed against interest income. Interest on these investments is accounted for
on the  cash-basis  or  cost-recovery  method,  until  qualifying  for return to
accrual  status.  Investments  are  returned  to  accrual  status  when  all the
principal and interest amounts  contractually due are brought current and future
payments are reasonably assured.

Premiums, Discounts and Hedging Basis Adjustments

         Premiums and discounts on  investments  and  obligations  are amortized
into  interest  income or  expense,  respectively,  over the life of the related
investment  or  obligation  using the  effective  yield  method.  Hedging  basis
adjustments  on associated  debt  obligations  are  amortized  over the expected
remaining life of the debt  instrument.  If the indenture for a particular  debt
obligation  provides for a step-up of interest rates on the optional  redemption
date and the Company has the  ability  and intent to exercise  its call  option,
then  premiums,  discounts,  and deferred  hedging  losses are amortized to that
optional  redemption  date.  Otherwise,  these  amounts are  amortized  over the
estimated remaining life of the obligation.

Debt Issuance Costs

         Costs incurred in connection with the issuance of non-recourse debt and
recourse  debt are  deferred and  amortized  over the  estimated  lives of their
respective debt obligations using the effective yield method.

Derivative Financial Instruments

         On occasion,  the Company may enter into interest rate swap agreements,
interest  rate  cap  agreements,  interest  rate  floor  agreements,   financial
forwards,  financial  futures and options on financial  futures  ("Interest Rate
Agreement")  to manage  its  sensitivity  to changes in  interest  rates.  These
interest rate  agreements are intended to provide income and cash flow to offset
potential  reduced net interest income and cash flow under certain interest rate
environments. At the inception of the Interest Rate Agreement, these instruments
are  designated as either hedge  positions or trading  positions  using criteria
established in SFAS No. 133, "Accounting for Derivative  Instruments and Hedging
Activities"  (as amended).  If, at the inception of the Interest Rate Agreement,
formal   documentation  is  prepared  that  describes  the  risk  being  hedged,
identifies  the hedging  instrument  and the means to be used for  assessing the
effectiveness  of the  hedge  and if it can be  demonstrated  that  the  hedging
instrument will be highly effective at hedging the risk exposure, the derivative
instrument  will be designated  as a cash flow hedge  position.  Otherwise,  the
Interest Rate Agreement will be classified as a trading position.

         For  Interest  Rate  Agreements  designated  as cash flow  hedges,  the
Company  evaluates  the  effectiveness  of these  hedges  against the  financial
instrument being hedged.  The effective portion of the hedge  relationship on an
interest  rate  agreement  designated  as a  cash  flow  hedge  is  reported  in
accumulated  other  comprehensive  income,  and the ineffective  portion of such
hedge is reported in income.  Amounts in accumulated other comprehensive  income
are  reclassified  into  earnings  in the same  period  during  which the hedged
transaction affects earnings.  Derivative  instruments are carried at fair value
in the financial statements of the Company.

         As a part of the Company's interest rate risk management  process,  the
Company may be required  periodically to terminate hedge instruments.  Any basis
adjustments  or  changes  in  the  fair  value  of  hedges   recorded  in  other
comprehensive  income are recognized into income or expense in conjunction  with
the original hedge or hedged exposure.

         If the  underlying  asset,  liability or commitment is sold or matures,
the hedge is deemed  partially or wholly  ineffective,  or the criteria that was
executed at the time the hedge instrument was entered into no longer exists, the
interest rate agreement no longer qualifies as a designated  hedge.  Under these
circumstances,  such changes in the market value of the interest rate  agreement
are recognized in current income.

         For  interest  rate  agreements  entered  into  for  trading  purposes,
realized  and  unrealized  changes  in  fair  value  of  these  instruments  are
recognized in the  consolidated  statements  of operations as trading  income or
loss in the period in which the changes occur or when such trade instruments are
settled.  Amounts receivable from  counter-parties,  if any, are included on the
consolidated balance sheets in other assets.

Cash Equivalents

         The Company  considers  investments  with original  maturities of three
months or less to be cash equivalents.

Net Income Per Common Share

         Net income per common share is presented on both a basic net income per
common share and diluted net income per common  share basis.  Diluted net income
per common share assumes the conversion of the convertible  preferred stock into
common stock,  using the if-converted  method,  and stock  appreciation  rights,
using the  treasury  stock  method,  but only if these items are  dilutive.  The
preferred stock is convertible  into one share of common stock for two shares of
preferred stock.

Use of Estimates

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

         Fair Value.  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 estimates of market-based discount rates, prepayment rates and credit loss
assumptions.  The estimate of fair value for  securities  pledged as securitized
finance  receivables  is  determined  by  calculating  the present  value of the
projected cash flows of the instruments,  using discount rates,  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  in a  market  purchase.  The
discount rate used in the  determination of fair value of securities  pledged as
securitized  finance  receivables  was  16%  at  December  31,  2004  and  2003.
Prepayment  rate  assumptions  at December 31, 2004 and 2003 were generally at a
"constant  prepayment  rate," or CPR,  were 30% for 2004,  and were  30%-50% for
2003, for securitized  finance  receivables  consisting of securities  backed by
single-family mortgage loans, and a CPR equivalent of 7% for 2004 and 9%-10% for
2003, for securitized  finance  receivables  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 for each series of securitized  finance  receivables,
depending on the collateral pledged.

         Estimates of fair value for financial  instruments  are based primarily
on  management's  judgment.  Since  the fair  value of the  Company's  financial
instruments is based on estimates, actual fair values recognized may differ from
those estimates  recorded in the  consolidated  financial  statements.  The fair
value of all financial instruments is presented in Note 10.

         Allowance  for Loan  Losses.  An  allowance  for loan  losses  has been
estimated and  established for currently  existing  probable losses for loans in
the  Company's  investment  portfolio.  Factors  considered in  establishing  an
allowance  include  current  loan   delinquencies,   historical  cure  rates  of
delinquent  loans,  and historical and anticipated loss severity of the loans as
they are  liquidated.  The  allowance  for  losses  is  evaluated  and  adjusted
periodically by management  based on the actual and estimated  timing and amount
of probable  credit losses,  using the above  factors,  as well as industry loss
experience. Where loans are considered homogeneous, the allowance for losses are
established and evaluated on a pool basis.  Otherwise,  the allowance for losses
is  established  and  evaluated on a  loan-specific  basis.  Provisions  made to
increase the allowance are charged as a current period expense.  Generally,  the
Company  considers  manufactured  housing  loans to be  impaired  when  they are
30-days past due. The Company also provides an allowance 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 based on default
trends,  current market conditions and empirical observable  performance data on
the loans.  Single-family  loans are  considered  impaired when they are 60-days
past due.  Commercial  mortgage  loans are evaluated on an individual  basis for
impairment.  Generally,  a commercial loan with a debt service coverage ratio of
less than one is  considered  impaired.  However,  based on a commercial  loan's
details,  commercial  loans with a debt  service  ratio less than one may not be
considered impaired;  conversely,  commercial loans with a debt service coverage
ratio greater than one may be  considered  impaired.  Certain of the  commercial
mortgage loans are covered by loan guarantees that limit the Company's  exposure
on these loans.  The level of allowance for loan losses required for these loans
is reduced by the amount of applicable  loan  guarantees.  The Company's  actual
credit losses may differ from the estimates used to establish the allowance.

         Impairments.  The Company  evaluates all  securities in its  investment
portfolio for other-than-temporary  impairments. A security is generally defined
to  be  other-than-temporarily  impaired  if,  for a  maximum  period  of  three
consecutive quarters,  the carrying value of such security exceeds its estimated
fair value and the Company  estimates,  based on projected  future cash flows or
other  fair  value  determinants,  that the fair  value  will  remain  below the
carrying value for the foreseeable future. If an other-than-temporary impairment
is deemed to exist,  the  Company  records  an  impairment  charge to adjust the
carrying  value of the security  down to its  estimated  fair value.  In certain
instances,  as a result of the  other-than-temporary  impairment  analysis,  the
recognition or accrual of interest will be discontinued and the security will be
placed on non-accrual status.

         The Company considers an investment to be impaired if the fair value of
the  investment  is less than its  recorded  cost  basis.  Impairments  of other
investments are generally  considered to be  other-than-temporary  when the fair
value remains below the carrying value for three  consecutive  quarters.  If the
impairment  is determined to be  other-than-temporary,  an impairment  charge is
recorded  in  order to  adjust  the  carrying  value  of the  investment  to its
estimated value.

         Mortgage-Related   Securities.   Income  on  certain   mortgage-related
securities is accrued using the effective  yield method based upon  estimates of
future  cash flows to be  received  over the  estimated  remaining  lives of the
related  securities.  Reductions  in  carrying  value  are made  when the  total
discounted projected cash flow is less than the Company's basis, based on either
the dealers' prepayment assumptions or, if it would accelerate such adjustments,
management's expectations of interest rates and future prepayment rates. In some
cases, mortgage-related securities may also be placed on non-accrual status.

         Mortgage Servicing Liability. The Company retains the primary servicing
rights for certain of its loans, and subcontracts the performance of the primary
servicing to unrelated third parties. The Company recognizes a liability for the
amount by which the estimated value of the payments to the third-party  servicer
exceeds the estimated value of the Company's  expected servicing cash inflows on
the related loans.  The value of the mortgage  servicing  liability is estimated
using a  discounted  cash  flow  model.  The  mortgage  servicing  liability  is
amortized in  proportion  to and over the period of the  estimated net servicing
loss.

Securitization Transactions

         The  Company  securitizes  loans  and  securities  in a  securitization
financing transaction by transferring  financial assets to a wholly owned trust,
and the trust issues non-recourse bonds pursuant to an indenture. Generally, the
Company  retains some form of control over the  transferred  assets,  and/or the
trust is not deemed to be a qualified special purpose entity. In instances where
the trust is deemed not to be a qualified  special purpose entity,  the trust is
included in the consolidated  financial statements of the Company. A transfer of
financial  assets in which the Company  surrenders  control over those assets is
accounted for as a sale to the extent that  consideration  other than beneficial
interests in the transferred assets is received in exchange.  For accounting and
tax purposes, the loans and securities financed through the issuance of bonds in
a securitization financing transaction are treated as assets of the Company, and
the associated bonds issued are treated as debt of the Company as securitization
financing.  The Company may retain certain of the bonds issued by the trust, and
the Company  generally  will transfer  collateral in excess of the bonds issued.
This  excess  is   typically   referred  to  as   over-collateralization.   Each
securitization  trust generally provides the Company the right to redeem, at its
option,  the remaining  outstanding  bonds prior to their  maturity date. If the
Company  does not exercise  its option,  the interest  rates on the bonds issued
will increase on rates ranging from 0.30% to 2.0%.

Recent Accounting Pronouncements

         In December 2003, the Accounting  Standards Executive Committee (AcSEC)
of the American Institute of Certified  Professional  Accountants (AICPA) issued
Statement of Position  (SOP) No.  03-3,  "Accounting  for Certain  Loans or Debt
Securities Acquired in a Transfer." SOP No. 03-3 is effective for loans acquired
in  fiscal  years  beginning  after  December  15,  2004,  with  early  adoption
encouraged.  A certain transition provision applies for certain aspects of loans
currently within the scope of Practice  Bulletin 6, Amortization of Discounts on
Certain  Acquired  Loans.  SOP No. 03-3  addresses  accounting  for  differences
between  contractual  cash flows and cash flows expected to be collected from an
investor's  initial investment in loans or debt securities (loans) acquired in a
transfer if those  differences  are  attributable,  at least in part,  to credit
quality. It includes loans acquired in business  combinations and applies to all
non-governmental entities, including not-for-profit organizations.  SOP No. 03-3
does not apply to loans  originated by the entity.  The Company has reviewed the
implications  of SOP No. 03-3 but does not believe that its adoption will have a
significant  impact on its  financial  position,  results of  operations or cash
flows.

         In December 2004,  the Financial  Accounting  Standards  Board ("FASB")
issued  SFAS No. 123  (Revised  2004),  "Share-Based  Payment."  This  statement
supersedes  APB  Opinion  No. 25 and its related  implementation  guidance.  The
statement  establishes standards for the accounting for transactions in which an
entity exchanges its equity  instruments for goods and services.  This statement
focuses  primarily on accounting  for  transactions  in which an entity  obtains
employee  services in share-based  payment  transactions.  The most  significant
change  resulting from this statement is the requirement for public companies to
expense employee share-based payments under fair value as originally  introduced
in SFAS No. 123.  This  statement  is effective  for public  companies as of the
beginning of the first interim or annual reporting period that begins after June
15, 2005.  The Company will adopt this  statement  effective July 1, 2005 and is
currently  evaluating  the  impact it will have on net  income  had the  Company
adopted the provisions of SFAS No. 123, for each year presented.


NOTE 3 - SECURITIZED FINANCE RECEIVABLES

         The following  table  summarizes the components of securitized  finance
receivables as of December 31, 2004 and 2003.



------------------------------------------------------------------------------------------------------------------------------
                                                             2004                                      2003
------------------------------------------------------------------------------------------------------------------------------
                                                                                                             
Loans, at amortized cost                            $      1,064,137                         $      1,561,977
Allowance for loan losses                                    (28,014)                                 (43,364)
------------------------------------------------------------------------------------------------------------------------------
Loans, net                                                 1,036,123                                1,518,613
Debt securities, at fair value                               206,434                                  255,580
------------------------------------------------------------------------------------------------------------------------------
                                                    $      1,242,557                         $      1,774,193
------------------------------------------------------------------------------------------------------------------------------


         The  following  table  summarizes  the  amortized  cost  basis,   gross
unrealized gains and losses and estimated fair value of debt securities  pledged
as securitized finance receivables as of December 31, 2004 and 2003.



 -----------------------------------------------------------------------------------------------------------------------------
                                                                                2004                        2003
 -----------------------------------------------------------------------------------------------------------------------------
                                                                                                            
 Debt securities, available-for-sale, at amortized cost                   $        205,370             $         255,462
 Gross unrealized gains                                                              1,064                           118
 -----------------------------------------------------------------------------------------------------------------------------
 Estimated fair value                                                     $        206,434              $        255,580
 -----------------------------------------------------------------------------------------------------------------------------


         The components of securitized  finance receivables at December 31, 2004
and 2003 are as follows:



----------------------------------------------------------------------------------------------------------------------------
                                                    2004                                           2003
----------------------------------------------------------------------------------------------------------------------------
                                  Loans, net        Debt           Total        Loans, net         Debt           Total
                                                 Securities                                     Securities
------------------------------- --------------- -------------- --------------- -------------- --------------- --------------
                                                                                                   
Collateral:
     Commercial                  $   640,090     $       -      $   640,090     $   758,144    $       -       $   758,144
     Manufactured housing            198,246       149,420          347,666         491,230      172,847           664,077
     Single-family                   225,055        52,753          277,808         317,631       80,468           398,099
                                --------------- -------------- --------------- -------------- --------------- --------------
                                   1,063,391       202,173        1,265,564       1,567,005      253,315         1,820,320
Allowance for loan losses            (28,014)            -          (28,014)        (43,364)           -           (43,364)
Funds held by trustees                   130            43              173             131          147               278
Accrued interest receivable            6,548           202            6,750           9,878        1,594            11,472
Unamortized premiums and
    (discounts), net                  (5,932)        2,952           (2,980)        (15,037)         406           (14,631)
Unrealized gain, net                       -         1,064            1,064               -          118               118
------------------------------- --------------- -------------- --------------- -------------- --------------- --------------
                                 $ 1,036,123      $206,434      $ 1,242,557      $1,518,613     $255,580        $1,774,193
----------------------------------------------------------------------------------------------------------------------------


All of the  securitized  finance  receivables  are  encumbered  by  non-recourse
securitization financing (see Note 8).

         During the  three-months  ended December 31, 2004, the Company sold its
rights and interests in a  securitization  trust for $11,888,  which resulted in
the  derecognition  of the  securitization  trust from the  Company's  financial
statements.  As part of the  de-recognition,  the Company was considered to have
sold all of the assets and  liabilities  associated  with the trust,  which were
$219,178 and $226,674, respectively, and resulted in a gain of $17,578. The gain
also  reflects a mortgage  servicing  liability  of  $1,806,  which the  Company
recorded to reflect its obligation to continue to provide the primary  servicing
on the assets in the trust.

         The fair value of the mortgage  servicing  liability of $1,806 recorded
in connection with the derecognition of the securitization trust discussed above
was estimated  using a discount rate of 5% and the cash flows were modeled using
a CPR and default rate of  approximately 7% and 4%,  respectively.  The mortgage
servicing  fees are  calculated  on the  outstanding  principal  balance  of the
underlying loans,  which is projected based on the scheduled  principal payments
and expected prepayment speeds.


NOTE 4 - ALLOWANCE FOR LOAN LOSSES

         The Company reserves for credit risk where it has exposure to losses on
loans in its securitized finance receivables  portfolio.  The allowance for loan
losses is  included  in  securitized  finance  receivables  in the  accompanying
consolidated  balance  sheets.  The  following  table  summarizes  the aggregate
activity  for the  allowance  for loan losses for the years ended  December  31,
2004, 2003 and 2002:

--------------------------------------------------------------------------------
                                           2004           2003          2002
--------------------------------------------------------------------------------
Allowance at beginning of year       $    43,364    $    25,472    $    21,508
Provision for loan losses                 18,463         37,082         28,483
Credit losses, net of recoveries         (17,651)       (19,190)       (24,519)
Transfers                                (16,162)             -              -
--------------------------------------------------------------------------------
Allowance at end of year             $    28,014    $    43,364    $    25,472
--------------------------------------------------------------------------------

         For the year 2004,  the Company added  $18,463 in  provisions  for loan
losses,  $3,218 of which relates to the  commercial  mortgage loan portfolio and
$15,245 of reserves on its manufactured housing loan portfolio.  The transfer of
$16,162  represents  the  elimination  of  the  reserves   associated  with  the
securitization  trust  derecognized  as  described  above in Note 3. The Company
enhanced its model used to estimate probable losses on its manufactured  housing
loans for the year  ended  December  31,  2004 to account  for the  impact  loan
modifications  have on  anticipated  losses.  If the  Company  had  applied  its
previous  methodology to calculate the allowance for loan losses on manufactured
housing,  the net loss for the year would have decreased by $2,093 to $11,450 or
$0.19 per share.

         The following table presents certain information on commercial mortgage
loans that the Company has determined to be impaired.



----------------------------------------------------------------------------------------------------------
                      Total Recorded             Amount for Which There            Amount for Which There
                      Investment in            is a Related Allowance for          is no Related Allowance
December 31,          Impaired Loans                 Credit Losses                    for Credit Losses
----------------------------------------------------------------------------------------------------------
                                                                                        
    2002              $  160,563                      $   4,748                       $  155,815
    2003                 191,484                         10,861                          180,623
    2004                  72,431                         17,379                           55,052
----------------------------------------------------------------------------------------------------------


         Certain of the commercial  mortgage loans  considered  impaired in 2003
and 2002 as a result of inadequate  debt service  coverage on the loan,  are not
considered  impaired in 2004. These loans, which are included in the above table
and which had a recorded  investment  at 2003 and 2002 of $90,088  and  $91,690,
respectively,  had loss reimbursement  guarantees from a `AAA'-rated third party
insurance  company of up to a maximum of $28,739 at December  31, 2003 and 2002.
During 2004,  approximately  $76,382 of these loans repaid in full, and based on
the repayment  history of the loans and the  remaining  balance of the guarantee
with the third party  insurer of  approximately  $19,536 at December  31,  2004,
these loans were deemed not to be impaired for 2004.


NOTE 5 - OTHER INVESTMENTS

         The following table summarizes the Company's other  investments for the
years ended December 31, 2004 and 2003:

------------------------------------------------------------------------------
                                                          2004          2003
------------------------------------------------------------------------------
 Delinquent property tax receivables and security     $  6,000     $  34,939
 Real estate owned                                       1,595         2,960
 Other                                                       1             4
------------------------------------------------------------------------------
                                                      $  7,596     $  37,903
------------------------------------------------------------------------------

         As of December  31,  2004,  delinquent  property  tax  receivables  and
security  include  principally a pool of  receivables  located in  Pennsylvania.
During the fourth quarter of 2004, the Company began actively  pursuing the sale
of its  Pennsylvania  tax  lien  portfolio  and  related  servicing  operations.
Consequently,  the Company  transferred  the tax lien  receivable  security from
held-to-maturity  to  available-for-sale.  The tax lien receivable  security was
transferred at its fair value of $6,000 and the unrecognized  loss of $4,891 was
recorded as an  impairment,  because the Company  believes the decrease in value
represents an other than temporary change. Because of such transfer, the Company
was no  longer  able to  assert  its  intent  to hold any of its  securities  to
maturity and, therefore,  transferred its other  held-to-maturity  securities to
available for sale.  Such  securities  were  transferred  at their fair value of
$204,154  and the  related  unrealized  gain of  $1,064  was  recorded  in other
comprehensive income.

         During 2004,  the Company sold its  delinquent  property tax receivable
portfolio and servicing operation located in Cuyahoga County,  Ohio, in which it
had a basis of approximately  $22,260, to a third party for $19,219 resulting in
a loss of approximately $3,241, which includes approximately $200 of transaction
expenses. Of the $19,219 in consideration received, $700 is being held in escrow
for up to one year for customary  representations and warranties and is included
within Other Assets.

         At December 31, 2004 and 2003, the Company has real estate owned with a
current  carrying  value of $1,595  and  $2,960,  respectively,  resulting  from
foreclosures on delinquent  property tax  receivables.  Cash  collections on all
delinquent  property  tax  receivables,  including  proceeds  from sales of real
estate owned, amounted to $7,165 and $12,317 during 2004 and 2003, respectively.


NOTE 6 - SECURITIES

         The following table  summarizes the Company's  amortized cost basis and
fair value of securities, all of which are classified as available-for-sale,  as
of December 31, 2004 and 2003, and the related average effective interest rates:



--------------------------------------------------------------------------------------------------------------
                                                      2004                                2003
--------------------------------------------------------------------------------------------------------------
                                              Fair           Effective           Fair           Effective
                                              Value        Interest Rate         Value        Interest Rate
--------------------------------------------------------- ----------------- ---------------- -----------------
                                                                                        
Securities, available-for-sale:
Fixed-rate mortgage securities            $    79,081            4.54%        $    29,713           14.0%
Mortgage-related securities                        28            0.33%                 54           12.7%
Asset-backed security                             381                                   -
Equity securities                               7,438                               3,000
--------------------------------------------------------- ----------------- ---------------- -----------------
                                               86,928                              32,767
Gross unrealized gains                            852                                 517
Gross unrealized losses                           (74)                               (810)
--------------------------------------------------------- ----------------- ---------------- -----------------
Securities, available-for-sale                 87,706                              32,474
Asset-backed security, held-to-maturity             -                                 801
--------------------------------------------------------- ----------------- ---------------- -----------------
                                          $    87,706                         $    33,275
--------------------------------------------------------------------------------------------------------------


         In 2003,  securities  with little or no remaining  recorded  investment
were receiving  interest  payments,  which caused an unusually  large  effective
interest rate for the aggregate securities balance.

         Purchase of  investments.  During  2004,  the Company  purchased a debt
security with a principal  balance of $62,000 at a premium of $136. In addition,
the Company  purchased  340,000  shares of common  stock in a REIT at a price of
$14.50 per share. During the year, 33,500 shares were sold for a gain of $38.

         Sale of  investments.  Proceeds from sales of securities  totaled $530,
$482, and none in 2004, 2003 and 2002,  respectively.  Gross gains of $38, $715,
and none and gross losses of none, $26, and none were realized on those sales in
2004, 2003 and 2002, respectively.

         Unrealized  gain/loss on securities.  At December 31, 2004,  unrealized
gains on securities were $852 and unrealized  losses were $74 on securities with
a balance  of  $61,817,  none of which  were more than  twelve  months old as of
December 31, 2004.

NOTE 7 - OTHER LOANS

         The following table  summarizes the Company's  carrying basis for other
loans at December 31, 2004 and 2003, respectively.

--------------------------------------------------------------------------------
                                                   2004          2003
--------------------------------------------------------------------------------
Single-family mortgage loans                 $    3,693    $    5,560
Multifamily and commercial mortgage loans         2,878         2,912
--------------------------------------------------------------------------------
                                                  6,571         8,472
Unamortized discounts                              (982)         (168)
--------------------------------------------------------------------------------
                                             $    5,589    $    8,304
--------------------------------------------------------------------------------

NOTE 8 -- NON RECOURSE SECURITIZATION FINANCING

         The Company,  through limited-purpose finance subsidiaries,  has issued
bonds  pursuant  to  indentures  in  the  form  of  non-recourse  securitization
financing.  Each  series of  securitization  financing  may  consist  of various
classes  of  bonds,  either at fixed or  variable  rates of  interest.  Payments
received on securitized  finance receivables and any reinvestment income thereon
are used to make  payments  on the  securitization  financing  (see Note 3). The
obligations  under the  securitization  financings  are payable  solely from the
securitized finance  receivables and are otherwise  non-recourse to the Company.
The stated maturity date for each class of bonds is generally  calculated  based
on the final scheduled payment date of the underlying  collateral  pledged.  The
actual maturity of each class will be directly affected by the rate of principal
prepayments on the related collateral. Each series is also subject to redemption
at  the  Company's   option  according  to  specific  terms  of  the  respective
indentures.  As a  result,  the  actual  maturity  of any  class of a series  of
securitization financing is likely to occur earlier than its stated maturity. If
the Company  does not  exercise its option to redeem a class or classes of bonds
when it first  has the  right to do so,  the  interest  rates on the  bonds  not
redeemed will  automatically  increase from 0.30% to 2.00%. One series of bonds,
with a  principal  balance  at  December  31,  2004 of  $217,142  will reach its
optional  redemption  date in the first  quarter  2005.  The Company  recorded a
premium  of $7,377 as a result  of its  redemption  and  reissuance  of  certain
classes of bonds in a securitization trust during 2004.

         The Company may retain certain bond classes of securitization financing
issued, including investment grade classes,  financing these retained bonds with
equity.  Total investment grade bonds at December 31, 2004 and 2003 were $20,000
and  carried  a rating  of `BBB' as  rated by a  nationally  recognized  ratings
agency.  As these  limited-purpose  finance  subsidiaries  are  included  in the
consolidated  financial  statements  of the  Company,  such  retained  bonds are
eliminated  in the  consolidated  financial  statements,  while  the  associated
repurchase agreements outstanding, if any, are included as recourse debt.

         The  components of  non-recourse  securitization  financing  along with
certain  other  information  at  December  31, 2004 and 2003 are  summarized  as
follows:



------------------------------------------------------------------------------------------------------------------
                                                 2004                                      2003
------------------------------------------------------------------------------------------------------------------
                                Bonds Outstanding    Range of Interest    Bonds Outstanding    Range of Interest
                                                           Rates                                     Rates
--------------------------------------------------- -------------------- -------------------- --------------------
                                                                                         
Variable-rate classes              $   405,236          2.6% - 3.7%          $   536,381          1.4% - 2.8%
Fixed-rate classes                     760,672         6.3% - 11.5%            1,141,186         6.3% - 11.5%
Accrued interest payable                 5,237                                     7,413
Deferred bond issuance costs            (2,889)                                   (4,428)
Deferred hedge losses                  (22,769)                                  (29,945)
Unamortized net bond premium            31,793                                    29,223
--------------------------------------------------- -------------------- -------------------- --------------------
                                   $ 1,177,280                               $ 1,679,830
------------------------------------------------------------------------------------------------------------------

Range of stated maturities           2009-2033                                 2009-2033
Estimated weighted average life      4.7 years                                 5.0 years
Number of series                        17                                        20
------------------------------------------------------------------------------------------------------------------


         The  variable  rate  classes are based on  one-month  London  InterBank
Offered Rate (LIBOR). At December 31, 2004, the weighted-average  effective rate
of the variable-rate  classes was 2.9%, and the weighted-average  effective rate
of fixed rate  classes was 7.6%.  The  average  effective  rate of interest  for
non-recourse  securitization  financing was 6.3%,  6.2%, and 6.1%, for the years
ended December 31, 2004, 2003, and 2002, respectively.

NOTE 9 - REPURCHASE AGREEMENTS AND SENIOR NOTES

The Company utilizes  repurchase  agreements and senior notes to finance certain
of its investments.  The following table summarizes the amounts  outstanding and
the weighted-average annual rates at December 31, 2004:



---------------------------------------------------------------------------------------------------------------------------
                                                          2004                                      2003
---------------------------------------------------------------------------------------------------------------------------
                                                                 Weighted-                                 Weighted-
                                              Amount          Average Annual         Amount             Average Annual
                                            Outstanding            Rate            Outstanding               Rate
--------------------------------------- -------------------- -------------------- -------------------- --------------------
                                                                                                    
Repurchase agreements - securities          $    70,468         2.48%             $    23,884                 1.79%
February 2005 Senior Notes                            -            -                   10,049                 9.53%
--------------------------------------- -------------------- -------------------- -------------------- --------------------
                                            $    70,468         2.48%             $    23,884                 4.07%
---------------------------------------------------------------------------------------------------------------------------


         The repurchase  agreements mature monthly and bear interest at a spread
of 0.13% and 0.24% on a weighted-average basis to one-month LIBOR as of December
31,  2004 and 2003,  respectively.  The  repurchase  agreements  are  secured by
fixed-rate  mortgage  backed  securities  with a market value as of December 31,
2004 and 2003 of $78,491 and $26,517, respectively.

         The  "February  2005 Senior  Notes" were  issued in  connection  with a
tender  offer on the  Company's  Preferred  Stock in  February  2003.  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 part,  without  penalty,  at any time.  The  Company  redeemed
$10,000 of the  February  2005  Senior  Notes in August  2003 and  redeemed  the
remaining notes outstanding in 2004 as part of the recapitalization described in
Note 13.


NOTE 10 - FAIR VALUE AND ADDITIONAL INFORMATION ABOUT FINANCIAL INSTRUMENTS

         SFAS No. 107,  "Disclosures about Fair Value of Financial  Instruments"
requires the  disclosure of the estimated  fair value of financial  instruments.
The following table presents the recorded basis and estimated fair values of the
Company's financial instruments as of December 31, 2004 and 2003:



------------------------------------------------------------------------------------------------------------------------------
                                                           2004                                       2003
                                         ------------------------------------------ ------------------------------------------
                                              Recorded                Fair               Recorded                Fair
                                                Basis                Value                 Basis                Value
---------------------------------------- -------------------- --------------------- -------------------- ---------------------
Assets:
                                                                                                    
  Securitized finance receivables
     Loans, net                           $ 1,036,123          $ 1,096,971           $ 1,518,613          $ 1,572,038
     Debt securities                          206,434              206,434               255,580              255,580
                                         -------------------- --------------------- -------------------- ---------------------
  Securitized finance receivables           1,242,557            1,303,405             1,774,075            1,827,618
  Other investments                             7,596                7,596                34,943               23,714
  Securities                                   87,706               87,706                33,275               33,275
  Other loans                                   5,589                7,872                 8,304               10,258
Liabilities:
  Non-recourse securitization financing     1,177,280            1,236,899             1,679,830            1,741,385
  Repurchase agreements                        70,468               70,468                23,884               23,884
  Senior Notes                                      -                    -                10,049               10,049
------------------------------------------------------------------------------------------------------------------------------


         Estimates  of  fair  value  for  securitized  finance  receivables  are
determined by  calculating  the present value of the projected cash flows of the
instruments,  using discount rates,  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.  The discount rate used in the  determination of fair value of
securities  pledged as securitized  finance  receivables was 16% at December 31,
2004 and 2003.  Prepayment  rate  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 for each series of securitized  finance  receivables,
depending  on  the  collateral  pledged.  Estimates  of  fair  value  for  other
investments are determined by calculating the present value of the projected net
cash  flows,  inclusive  of the  estimated  cost to service  these  investments.
Estimates of fair value for  securities  are based  principally on market prices
provided by certain  dealers.  Non-recourse  securitization  financing  are both
floating and fixed-rate,  and fair value is determined for fixed-rate  financing
based on estimated current market rates for similar instruments.


NOTE 11 - 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  non-recourse  securitization
financing,  which  finance  a like  amount  of  fixed  rate  assets.  Under  the
agreement,  the Company  pays  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  gains and losses
associated  with the  change  in the  value of the  hedge  being  reported  as a
component of  accumulated  other  comprehensive  income.  Amounts in accumulated
other  comprehensive  income are  reclassified  into earnings in the same period
during  which the hedged  transaction  affects  earnings.  During the year ended
December 31, 2004, the Company recognized $2,455 in other  comprehensive  income
on this  hedge  instrument.  At  December  31,  2004  and  2003,  the  aggregate
accumulated  other  comprehensive  loss on this  hedge  instrument  was $493 and
$2,938, respectively. 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  non-recourse  securitization  financing
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 the interest  rate swap  payments  are  settled.  Over the next six
months, the Company expects to reclassify $493 of this other  comprehensive loss
to interest expense.

         In October  2002,  the  Company  entered  into a  synthetic  three-year
amortizing  interest-rate  swap (using  Eurodollar  Futures  contracts)  with an
initial notional  balance of  approximately  $81,000 to mitigate its exposure to
rising   interest  rates  on  a  portion  of  its  variable  rate   non-recourse
securitization financing, 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.   Amounts  in  accumulated   other
comprehensive  income are  reclassified  into earnings in the same period during
which the hedged transaction affects earnings. At December 31, 2004, the current
notional balance of the amortizing synthetic swap was $20,000, and the remaining
weighted-average  fixed-rate  payable  by the  Company  under  the  terms of the
synthetic  swap was 2.70%.  During 2004,  the Company  recognized  $572 in other
comprehensive income for the synthetic  interest-rate swap. At December 31, 2004
and 2003,  the  aggregate  accumulated  other  comprehensive  loss on this hedge
instrument was $116 and $688, respectively.  During 2004, the Company determined
that  this  hedge  instrument  ceased  to  be  effective  due  to a  significant
deterioration in the correlation  between the synthetic  interest rate swap cash
flow hedge and the  financing  being  hedged,  as  measured  by the  correlation
between the three-month Eurodollar futures and one-month LIBOR. Accordingly, the
Company has  discontinued  hedge  accounting and reflected the changes in market
value of the hedge  instrument  in its  statement of  operations as other income
(expense).  The remaining unrealized loss included in other comprehensive income
at the time the Company  discontinued  hedge  accounting is being amortized over
the remaining term of the hedge  exposure.  The following  tables  summarize the
Company's derivative positions at December 31, 2004:

----------------------------------------------------------------------------
                             Notional        Fair       Weighted Average
                              Amount        Value       Maturity in Years
----------------------------------------------------------------------------
Interest Rate Swap         $   100,000   $    (493)           0.50
Eurodollar Futures              20,000         (72)           0.72
----------------------------------------------------------------------------
                           $   120,000   $    (565)           0.54
----------------------------------------------------------------------------

NOTE 12 - LOSS PER SHARE

         The following  table  reconciles the numerator and denominator for both
the basic and diluted EPS for the years ended December 31, 2004, 2003, and 2002.



------------------------------------------------------------------------------------------------------------------------------
                                             2004                          2003                            2002
------------------------------- --------------- --------------- --------------- -------------- --------------- ---------------
                                                Weighted-Average                Weighted-Average               Weighted-Average
                                    Income        Number of         Income        Number of        Income        Number of
                                    (loss)          Shares          (loss)         Shares          (loss)          Shares
------------------------------- --------------- --------------- --------------- -------------- --------------- ---------------

                                                                                                    
Net loss                          $ (3,375)                      $ (21,107)                     $  (9,360)
Preferred stock (charge)            (1,819)                          6,847                         (9,586)
benefit
                                --------------- --------------- --------------- -------------- --------------- ---------------
Net loss available to common
   shareholders                   $ (5,194)        11,272,259    $ (14,260)       10,873,903    $ (18,946)       10,873,871
                                =============== =============== =============== ============== =============== ===============

Net loss per share:
     Basic and diluted EPS                        $     (0.46)                   $     (1.31)                     $   (1.74)
                                                ===============                 ==============                 ===============


Dividends and potentially
   anti-dilutive common
   shares assuming conversion
   of preferred stock:                              Shares                          Shares                         Shares
                                                ---------------                 ---------------                ---------------
     Series A                     $    337             94,403    $   1,252           287,083     $  2,321         496,019
     Series B                          537            131,621        1,745           399,903        3,226         689,354
     Series C                          666            130,990        2,170           398,912        4,039         691,766
     Series D                        3,936          3,491,047            -                 -            -               -
Expense and incremental                  -             21,045            -            20,164           -           15,346
   shares of stock
   appreciation rights
------------------------------------------------------------------------------------------------------------------------------

                                  $  5,476          3,869,106    $   5,167         1,106,062     $  9,586       1,892,485
------------------------------------------------------------------------------------------------------------------------------


         The  Company  issued  1,288,488  shares of common  stock as part of the
recapitalization  plan  completed in May 2004. In 2003 and 2002, the Company did
not issue any shares of common stock.

NOTE 13 - PREFERRED AND COMMON STOCK

         The  following  table  presents a summary of the  Company's  issued and
outstanding preferred stock:



-----------------------------------------------------------------------------------------------------------------------------
                                                                                             Dividends Paid Per Share
                                                                     Issue Price   ------------------------------------------
                                                                      Per share        2004           2003          2002
-----------------------------------------------------------------------------------------------------------------------------
                                                                                                        
Series A 9.75% Cumulative Convertible Preferred Stock ("Series A")     $  24.00      $      -     $   0.8775     $ 0.2925
Series B 9.55% Cumulative Convertible Preferred Stock ("Series B")     $  24.50      $      -     $   0.8775     $ 0.2925
Series C 9.73% Cumulative Convertible Preferred Stock ("Series C")     $  30.00      $      -     $   1.0950     $ 0.3651
Series D 9.75% Cumulative Convertible Preferred Stock ("Series D")     $  10.00      $ 0.6993     $        -     $      -
----------------------------------------------------------------------------------------------------------------------------


         On May 19, 2004, the Company completed a recapitalization  plan whereby
the Company  converted the Series A, Series B, and Series C preferred stock into
a new Series D preferred stock and common stock. As part of the recapitalization
plan,  the Company  also  exchanged  9.50%  Senior  Notes due 2007 for Series A,
Series B and Series C preferred  stock. The remaining shares of Series A, Series
B and Series C preferred stock were converted into 5,628,737  shares of Series D
preferred  stock and 1,288,488  shares of common  stock.  The Series D preferred
stock had an issue price of $10 per share and pays $0.95 per year in  dividends.
All prior  dividends-in-arrears on the Series A, Series B and Series C preferred
stock were extinguished.

         The Company is authorized to issue up to 50,000,000 shares of preferred
stock.  For all series issued,  dividends are cumulative  from the date of issue
and are payable quarterly in arrears. The dividends are equal, per share, to the
greater of (i) the per  quarter  base rate of $0.2375  for Series D, or (ii) the
quarterly dividend declared on the Company's common stock. One share of Series D
preferred  stock is convertible at any time at the option of the holder into one
share of common  stock.  The series is redeemable by the Company at any time, in
whole or in part, (i) at a rate of one share of preferred stock for one share of
common stock,  plus accrued and unpaid  dividends,  provided that for 20 trading
days within any period of 30 consecutive  trading days, the closing price of the
common stock  equals or exceeds the issue  price,  or (ii) for cash at the issue
price, plus any accrued and unpaid dividends.

         In the event of  liquidation,  the holders of this series of  preferred
stock will be entitled to receive out of the assets of the Company, prior to any
such distribution to the common shareholders, the issue price per share in cash,
plus any accrued and unpaid  dividends.  For purposes of determining  net income
(loss) to common  shareholders  used in the  calculation of earnings  (loss) per
share,  preferred  stock charge  includes the current  period  dividend  accrual
amount for the  Preferred  Stock  outstanding  for the years ended  December 31,
2004, 2003 and 2002 of $3,936, $5,167, and $9,586, respectively.  As of December
31, 2004,  2003,  and 2002, the total amount of  dividends-in-arrears  was none,
$18,466,  and $31,157,  respectively.  If the Company fails to pay dividends for
two quarterly dividend periods or if the Company fails to maintain  consolidated
shareholders' equity of at least 200% of the aggregate issue price of the Series
D preferred stock, then these shares automatically  convert into a new series of
9.50% senior notes.

         The following table presents the changes in the number of preferred and
common shares outstanding:



------------------------------------------------------------------------------------------------------------------------------
                                                              Preferred Shares                                     Common
                                   Series A        Series B        Series C       Series D         Total           Shares
------------------------------- --------------- --------------- --------------- -------------- --------------- ---------------
                                                                                                         
January 1, 2002                      992,038       1,378,807       1,383,532               -      3,754,377       10,873,853
Preferred share conversion                 -            (100)              -               -           (100)              50
                                --------------- --------------- --------------- -------------- --------------- ---------------
December 31, 2002                    992,038       1,378,707       1,383,532               -      3,754,277       10,873,903
Tender offer                        (498,443)       (690,518)       (698,639)              -     (1,887,600)               -
                                --------------- --------------- --------------- -------------- --------------- ---------------
December 31, 2003                    493,595         688,189         684,893               -      1,866,677       10,873,903
Recapitalization                    (493,595)       (688,189)       (684,893)      5,628,737      3,762,060        1,288,488
                                --------------- --------------- --------------- -------------- --------------- ---------------
December 31, 2004                          -               -               -       5,628,737      5,628,737       12,162,391
------------------------------------------------------------------------------------------------------------------------------



NOTE 14 - IMPAIRMENT CHARGES

         Impairment  charges  for 2004,  2003,  and 2002 are  summarized  below.
Impairment  charges include  other-than-temporary  impairment of debt securities
arising from  deteriorating  market values of securities  backed by manufactured
housing  loans.  Impairment  charges  for  2002  also  included  $1,883  for the
adjustment to the lower of cost or market for certain  delinquent  single-family
mortgage  loans  acquired  in  2002  which  at  that  time  were  considered  as
held-for-sale.    During   2004,   2003   and   2002,   the   Company   incurred
other-than-temporary impairment charges on its investment in delinquent property
tax receivables and valuation  adjustments for related real estate owned.  These
impairments  arose from revised  projections  of  collections  on the delinquent
property tax  receivable  portfolio,  as discussed in Note 5, and lower expected
recoveries on real estate owned.



------------------------------------------------------------------------------------------------------------------------------
                                                                      2004                   2003                    2002
--------------------------------------------------------- ---------------------- ---------------------- ----------------------
                                                                                                           
Debt securities, manufactured housing                         $       9,072         $        5,494         $        15,563
Debt securities, delinquent property tax receivables                  4,891                 10,364                   1,064
Single-family loans                                                       -                      -                   1,850
Other                                                                   793                    497                       -
--------------------------------------------------------- ---------------------- ---------------------- ----------------------
Total impairments                                             $      14,756         $       16,355         $        18,477
------------------------------------------------------------------------------------------------------------------------------



NOTE 15 - EMPLOYEE BENEFITS

Stock Incentive Plan

         Pursuant to the Company's 2004 Stock Incentive Plan, as approved by the
shareholders at the Company's 2004 annual  shareholders'  meeting (the "Employee
Incentive  Plan"),  the Company may grant to eligible  officers,  directors  and
employees stock options, stock appreciation rights ("SARs") and restricted stock
awards.  An  aggregate of  1,500,000  shares of common  stock is  available  for
distribution pursuant to the Employee Incentive Plan. The Company may also grant
dividend  equivalent  rights ("DERs") in connection with the grant of options or
SARs.

     The Company  issued 30,000 SARs to an executive  during 2001 at an exercise
price of $2.00 and which were exercised in 2004. The Company incurred expense of
$13, $38 and $85 for SARs and DERs related to the Employee Incentive Plan during
2004, 2003 and 2002, respectively.

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



----------------------------------------------------------------------------------------------------------------------------
                                                                      Year ended December 31,
                                                    2004                        2003                        2002
---------------------------------------- --------------------------- --------------------------- ---------------------------
                                                        Weighted-                   Weighted-                   Weighted-
                                            Number       Average        Number       Average        Number       Average
                                              Of         Exercise         Of         Exercise         Of         Exercise
                                            Shares        Price         Shares        Price         Shares        Price
---------------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
                                                                                                     
SARs outstanding at beginning of year       30,000       $ 2.00        30,000        $ 2.00        30,000         $ 2.00
SARs granted                                  -               -          -                -          -                 -
SARs forfeited or redeemed                    -               -          -                -          -                 -
SARs exercised                              30,000         2.00          -                -          -                 -
SARs outstanding at end of year               -               -        30,000          2.00        30,000           2.00
---------------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
SARs vested and exercisable                   -          $    -        30,000        $ 2.00        30,000         $ 2.00
----------------------------------------------------------------------------------------------------------------------------


Employee Savings Plan

         The Company  provides an Employee  Savings Plan under Section 401(k) of
the Internal Revenue Code. The Employee  Savings Plan allows eligible  employees
to defer up to 25% of their income on a pretax  basis.  The Company  matches the
employees' contribution,  up to 6% of the employees' eligible compensation.  The
Company may also make discretionary  contributions based on the profitability of
the  Company.   The  total  expense  related  to  the  Company's   matching  and
discretionary  contributions  in 2004,  2003, and 2002 was $122,  $136 and $127,
respectively.  The Company does not provide post  employment or post  retirement
benefits to its employees.

401(k) Overflow Plan

         During 1997, the Company adopted a  non-qualifying  overflow plan which
covers  employees who have  contributed to the Employee Savings Plan the maximum
amount  allowed under the Internal  Revenue Code. The excess  contributions  are
made to the overflow plan on an after-tax basis.  However, the Company partially
reimburses  employees  for the  effect  of the  contributions  being  made on an
after-tax basis. The Company matches the employee's contribution up to 6% of the
employee's eligible compensation.  There was no reimbursement expense in 2004 or
2003. The total expense related to the Company's reimbursements in 2002 was $11.


NOTE 16 - COMMITMENTS AND CONTINGENCIES

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

         As of December 31, 2004, the Company is obligated under  non-cancelable
operating  leases with  expiration  dates through  2007.  Rent and lease expense
under those leases was $473,  $489, and $442,  respectively  in 2004,  2003, and
2002. The future minimum lease payments under these non-cancelable leases are as
follows:

       --------------------------------------------- -------------------
       Years Ending December 31,
       --------------------------------------------- -------------------
       2005                                                 $  205
       2006                                                     12
       2007                                                     11
       2008                                                      4
       2009 and thereafter                                       -
       --------------------------------------------- -------------------
       Total                                                $  232
       --------------------------------------------- -------------------


NOTE 17 - LITIGATION

         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.  In  August  2003,  the
Pennsylvania   legislature   enacted  a  law  amending  and  clarifying  certain
provisions of the Pennsylvania statute governing GLS' right to the collection of
certain interest, costs and expenses. 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. Subsequent to the enactment of the law,
challenges  to the  retroactivity  provisions  of the law were filed in separate
cases,  which did not include GLS as a defendant.  In September  2004, the Trial
Court in that  litigation  upheld the  retroactive  provisions  enacted in 2003.
Plaintiffs  in the case are seeking  class action  status and have not currently
set forth a damage claim. A hearing on the class-action  status is currently set
for late April 2005.  We believe  that the ultimate  outcome of this  litigation
will not have a  material  impact  on our  financial  condition,  but may have a
material impact on reported results for the particular period presented.

         The Company and Dynex Commercial,  Inc. ("DCI"),  formerly an affiliate
of the Company and now known as DCI  Commercial,  Inc., were defendants in state
court in Dallas  County,  Texas in the matter of Basic Capital  Management et al
(collectively,  "BCM" or "the Plaintiffs") 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 complaint, which
was further  amended  during  pretrial  proceedings,  alleged 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 that DCI breached
another alleged loan commitment of approximately  $9,000. The trial commenced in
January 2004 and in February  2004,  the jury in the case  rendered a verdict in
favor of one of the  plaintiffs and against the Company on the alleged breach of
the loan agreements for tenant  improvements and awarded that plaintiff  damages
in the amount of $253. The jury also awarded the  Plaintiffs'  attorneys fees in
the amount of $2,100.  The jury entered a separate  verdict against DCI in favor
of BCM under two  mutually  exclusive  damage  models,  for $2,200 and  $25,600,
respectively.  The  jury  found  in  favor  of DCI on the  alleged  $9,000  loan
commitment, but did not find in favor of DCI for counterclaims made against BCM.
After considering  post-trial  motions,  the presiding judge entered judgment in
favor of the Company and DCI,  effectively  overturning the verdicts of the jury
and dismissing damages awarded by the jury. Plaintiffs have filed an appeal. DCI
is a former affiliate of the Company, and the Company believes that it will have
no obligation for amounts,  if any, awarded to the plaintiffs as a result of the
actions of DCI.

         On February 11, 2005, a putative class action lawsuit was filed against
the Company, our subsidiary MERIT Securities  Corporation,  Stephen J. Benedetti
and Thomas H. Potts in United States District Court for the Southern District of
New York by the Teamsters Local 445 Freight  Division  Pension Fund. The lawsuit
purports  to be a class  action  on  behalf  of  purchasers  of MERIT  Series 13
securitization financing bonds, which are collateralized by manufactured housing
loans. The allegations  include federal securities laws violations in connection
with the issuance in August 1999 by MERIT  Securities  Corporation  of our MERIT
Series 13 bonds..  The suit also alleges fraud and negligent  misrepresentations
in connection with MERIT Series 13. We are currently  evaluating the allegations
made in the lawsuit and intend to vigorously defend ourselves against them.

         Although no assurance can be given with respect to the ultimate outcome
of the above  litigation,  we believe the  resolution of these lawsuits will not
have a material effect on our  consolidated  balance sheet, but could materially
affect our consolidated results of operations in a given year.


NOTE 18 - SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS INFORMATION




--------------------------------------------------------------------------------------------------------------------------
                                                                                      Years ended December 31,
                                                                               2004               2003               2002
--------------------------------------------------------------------------------------------------------------------------
                                                                                                             
  Cash paid for interest                                                  $   96,473         $  107,737        $  130,654

    Supplemental disclosure of non-cash activities:
    9.75% senior unsecured notes due April 2007 issued in connection
     with recapitalization plan                                                  823                  -                 -
    9.50% senior unsecured notes due February 2005 issued in connection
     with Preferred Stock tender offer                                             -             32,079                 -
    Securitized finance receivables owned subsequently securitized                 -                  -           453,400
    Securities owned subsequently securitized                                      -                  -             2,020
--------------------------------------------------------------------------------------------------------------------------



NOTE 19 - RELATED PARTY TRANSACTIONS

         The Company and Dynex  Commercial,  Inc., now known as DCI  Commercial,
Inc ("DCI") have been jointly  named in litigation  regarding the  activities of
DCI while it was an operating  subsidiary  of an  affiliate of the Company.  The
Company and DCI entered into a Litigation  Cost  Sharing  Agreement  whereby the
parties set forth how the costs of defending against litigation would be shared,
and whereby the Company agreed to fund all costs of such  litigation,  including
DCI's portion.  DCI's cumulative portion of costs associated with litigation and
funded  by  the  Company  is  $3,134  and is  secured  by  the  proceeds  of any
counterclaims  that DCI may receive in the  litigation.  DCI costs funded by the
Company are considered loans, and bear simple interest at the rate of Prime plus
8.0% per annum. At December 31, 2004, the total amount due the Company under the
Litigation Cost Sharing Agreement,  including  interest,  was $4,034,  which has
been  fully  reserved  by the  Company.  DCI is  currently  wholly  owned by ICD
Holding,  Inc.  An  executive  of the  Company  is the sole  shareholder  of ICD
Holding.


NOTE 20 - NON-CONSOLIDATED AFFILIATES

         The following  tables  summarize the financial  condition and result of
operations  of all  entities  for which the Company  accounts  for by use of the
equity method.

--------------------------------------------------------------------------------
                        Condensed Statement of Operations
------------------------------------------------------------------------------
                        2004           2003               2002
------------------------------------------------------------------------------
Total revenues      $   2,537      $    2,537       $     2,538
Total expenses          1,832           1,948             2,048
Net income                706             589               490
------------------------------------------------------------------------------
------------------------------------------------------------------------------

                            Condensed Balanced Sheet
-----------------------------------------------------------------------------
                                      December 31,
-----------------------------------------------------------------------------
                            2004                     2003
-----------------------------------------------------------------------------
Total assets          $    16,587             $     17,070
Total liabilities          13,533                   14,721
Total equity                3,054                    2,349
-----------------------------------------------------------------------------

         The  Company has a 99% limited  partnership  interest in a  partnership
that owns a  commercial  office  building  located in St. Paul,  Minnesota.  The
building is leased pursuant to a triple-net  master lease to a single-tenant and
the  second  mortgage  lender  has a bargain  purchase  option to  purchase  the
building in 2007.  Rental  income  derived from the master lease for the term of
the lease  exactly  covers the  operating  cash  requirements  on the  building,
including the payment of debt service.  The Company accounts for the partnership
using the cost method. The partnership had net income of $706, $589 and $490 for
the years ended  December  31,  2004,  2003 and 2002,  respectively.  Due to the
bargain  purchase  option,  any increase in basis of the  investment  due to the
accrual of its share of earnings of the partnership is immediately  reduced by a
charge of a like amount to the same account,  given the  probability of exercise
of the option by the second mortgage  lender.  The Company's  investment in this
partnership amounted to $11 at December 31, 2004, 2003 and 2002.

         The Company  owns a 1% limited  partnership  interest in a  partnership
that owns a low income housing tax credit  multifamily  housing property located
in Texas. In May 2001, the Company sold a 98% limited partnership  interest in a
partnership to a former  director for a purchase price of $198,  which was equal
to its  estimated  fair value.  By reason of the  director's  investment  in the
partnership,  the  Company  has  guaranteed  to  the  director  the  use  of the
low-income  housing tax credits  associated with the property,  proportionate to
his  investment,  that are reported  annually to the Internal  Revenue  Service.
During 2004,  2003 and 2002, the Company loaned the  partnership  none, none and
$17,  respectively.  These advances bear interest at a rate of 7.50% and are due
on demand.  The Company,  through its subsidiary  Commercial Capital Access One,
Inc., has made a first mortgage loan to the partnership secured by the Property,
with a current unpaid principal  balance of $1,787. As the Company does not have
control  or  exercise   significant   influence  over  the  operations  of  this
partnership,  its  investment  and  advances  of $249 at  December  31, 2004 are
accounted for using the cost method.


NOTE 21 - SUMMARY OF FOURTH QUARTER RESULTS

The  following  table  summarizes  selected  information  for the quarter  ended
December 31, 2004:

-----------------------------------------------------------------------------
                                                      Fourth Quarter, 2004
-----------------------------------------------------------------------------
Operating results:
Net interest income                                $          4,933
Provisions for losses                                        (1,025)
Net interest income after provision for losses                3,908
Impairment charges                                           (5,187)
Gain of sale of investments                                  17,633
Net income                                                   15,021
Net income to common shareholders                            13,729
-----------------------------------------------------------------------------
Basic earnings per common share                     $          1.13
Diluted earnings per common share                              0.77
-----------------------------------------------------------------------------

         During the three-months ended December 31, 2004, the Company recognized
a gain of $17,578 associated with the de-recognition of a securitization  trust,
as discussed  in Note 3. The Company  recognized  impairment  charges of $5,187,
made up  primarily  of $4,891  on its  investment  in  delinquent  property  tax
receivables and related real estate owned.