UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC 20549

                                 ____________


                                   FORM 8-K

                                CURRENT REPORT

    Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

                       Date of Report: November 8, 2000


                              DYNEX CAPITAL, INC.
              (Exact Name of Registrant as Specified in Charter)


      Virginia                      1-9819                    52-1549373
 (State or Other            (Commission File Number)        IRS Employer
 Jurisdiction of                                            Identification No.)
  Incorporation)


 4551 Cox Road, Suite 300, Glen Allen, Virginia                    23060
 (Address of Principal Executive Offices)                          (Zip Code)


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




Item 5.       OTHER EVENTS.


     On November 7, 2000, the Company and CIF entered into an Agreement and Plan
of Merger, dated as of November 7, 2000 (the "Merger Agreement"),  by and among,
the Company, CIF and DCI Acquisition Corporation,  a newly created subsidiary of
CIF. The Merger Agreement  provides for CIF to acquire 100% of the equity of the
Company for a purchase price of $90 million in cash. CIF will acquire the common
stock of the  Company  for a price of $2.00 per share,  the  Series A  Preferred
Stock of the  Company  for a price of $12.07 per share,  the Series B  Preferred
Stock of the  Company for a price of $12.32 per share and the Series C Preferred
Stock of the Company for a price of $15.08 per share.

     The transaction is expected to close in the first quarter of 2001,  subject
to the approval of the Company's  shareholders and customary closing conditions.
The transaction is also  conditioned upon CIF securing  necessary  financing and
the consent of the holders of the Company's  senior notes.  Regarding the senior
notes,  CIF has thirty days from the date of the Merger  Agreement to obtain any
necessary  consents.  In addition,  CIF must confirm its  financing  commitments
prior to the Company  filing with the  Securities  and Exchange  Commission  the
preliminary proxy statement relating to the transaction and prior to the mailing
of the proxy to the Company's shareholders.


     The  foregoing  is  qualified  in its entirety by reference to the complete
text of the Merger Agreement, which is filed as Exhibit 99.1 hereto.



     Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.

(c)      Exhibits

     99.1  Agreement  and Plan of Merger,  dated as of November 7, 2000,  by and
among  the  Company,   California  Investment  Fund,  LLC  and  DCI  Acquisition
Corporation.


     99.2 Escrow  Agreement,  dated as of November  7, 2000,  by and among,  the
Company,  California  Investment  Fund,  LLC and U.S.  Trust  Company,  National
Association.




                                                              SIGNATURES

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


     Date: November 8, 2000 DYNEX CAPITAL, INC.


                                                  By:      /s/ Thomas H. Potts
                                                           Thomas H. Potts
                                                           President





<PAGE>

              EXHIBIT INDEX                             Method of Filing

Number        Description
                                                        Filed herewith
99.1          Agreement and Plan of Merger, dated as of
              November 7, 2000, by and among the Company,
              California Investment Fund, LLC and DCI Acquisition
              Corporation.

                                                        Filed herewith
99.2          Escrow Agreement, dated as of November 7, 2000,
              by and among the Company, California Investment
              Fund LLC and U.S. Trust Company, National
              Association.

                                        Exhibit 99.1
                              AGREEMENT AND PLAN OF MERGER


     THIS AGREEMENT AND PLAN OF MERGER (this  "Agreement") is entered into as of
November 7, 2000, by and among  CALIFORNIA  INVESTMENT  FUND,  LLC, a California
limited liability company (the "Buyer"), DCI ACQUISITION CORPORATION, a Virginia
corporation  and  a  wholly-owned  Subsidiary  of  the  Buyer  (the  "Transitory
Subsidiary"),  and DYNEX CAPITAL,  INC., a Virginia  corporation (the "Target").
The Buyer, the Transitory Subsidiary, and the Target are each referred to herein
as a "Party" and are referred to collectively herein as the "Parties."

     This  Agreement  contemplates a transaction in which the Buyer will acquire
all of the  outstanding  capital  stock of the Target for cash through a reverse
subsidiary merger of the Transitory Subsidiary with and into the Target.

     NOW,  THEREFORE,  in  consideration of the premises and the mutual promises
herein  made,  and in  consideration  of the  representations,  warranties,  and
covenants  herein   contained,   the  Parties  agree  as  follows:   SECTION  1.
DEFINITIONS.

     "Affiliate"  has the  meaning  set forth in Rule  12b-2 of the  regulations
promulgated under the Securities Exchange Act.

 "Acquisition Transaction" has the meaning set forth in Section 5(m) below.

 "Articles of Merger" has the meaning set forth in Section 2(c) below.

 "Buyer" has the meaning set forth in the preface above.

 "Buyer Disclosure Schedule" has the meaning set forth in Section 4 below.

 "Buyer Material Adverse Effect" has the meaning setforth in Section 4(d) below.

 "Buyer-owned Shares" means the 572,178 Target Common Shares owned by the Buyer.

     "Buyer-REIT"  means the REIT  Subsidiary or REIT  Affiliate to be formed by
the Buyer for the purpose of acquiring the Excluded Target REIT Assets.

   "Certificate of Merger" has the meaning set forth in Section 2(d) below.

   "Certificates" has the meaning set forth in Section 2(e)(i) below.

   "Closing" has the meaning set forth in Section 2(b) below.

   "Closing Date" has the meaning set forth in Section 2(b) below.

   "Code" means the Internal Revenue Code of 1986, as amended.

     "Confidential  Information" means any information concerning the businesses
and affairs of the Target and its  Subsidiaries  other than information that (i)
is already generally  available to the public,  (ii) was available to the Buyer,
Transitory  Subsidiary or their  respective  Representatives  or Affiliates on a
non-confidential   basis  prior  to  its   disclosure   by  the  Target  or  its
Subsidiaries,  or (iii) becomes available to the Buyer, Transitory Subsidiary or
their respective  Representatives or Affiliates on a non-confidential basis from
a source other than the Target or its Subsidiaries,  provided,  that such source
is not known by such Person to be prohibited from  transmitting  the information
to such Person by a contractual,  legal, fiduciary or other obligation,  or (iv)
was or is independently  developed by the Buyer,  Transitory Subsidiary or their
respective  Representatives  or  Affiliates  without  the  use  of  Confidential
Information of the Target or its Subsidiaries.

     "Confidentiality  Agreement" means that certain  Confidentiality  Agreement
dated April 6, 2000 between the Buyer and the Target.

     "Confirmation"  means a  confirmation  from each lender or equity  provider
under a  Financing  Commitment  that such  commitment  remains in full force and
effect  and  without  material  modification.  A  Confirmation  may  be  from  a
replacement  lender  or equity  provider  as long as the  replacement  lender or
equity provider is capable of financing the transactions contemplated hereby.

     "Definitive Financing Agreements" has the meaning set forth in Section 5(e)
below.

     "Definitive  Proxy  Materials"  means the proxy  materials  relating to the
Special Meeting which are mailed to the holders of Target Shares.

     "DHI" means Dynex Holding, Inc., a Virginia corporation and an Affiliate of
the Target.

     "DOJ" means the  Antitrust  Division  of the United  States  Department  of
Justice.

     "Effective Time" has the meaning set forth in Section 2(d)(i) below.

     "Employee" shall mean each current,  former, or retired employee,  officer,
consultant,  advisor, independent contractor, agent or director of the Target or
any of its Subsidiaries.

     "End Date" has the meaning set forth in Section 7(a)(ii)(A) below.

     "ERISA" shall mean the Employee  Retirement Income Security Act of 1974, as
amended from time to time, and all applicable rules and regulations thereunder.



     "ERISA Affiliate" shall mean each business or entity which is a member of a
"controlled  group of  corporations,"  under "common  control" or a member of an
"affiliated  service  group"  with the  Target  within the  meaning of  Sections
414(b),  (c) or (m) of the Code,  or required to be  aggregated  with the Target
under Section 414(o) of the Code, or is under "common  control" with the Target,
within the meaning of Section 4001(a)(14) of ERISA.

"Escrow Agent" has the meaning set forth in Section 2(g) below.

"Escrow Agreement" has the meaning set forth in Section 2(g) below.

"Escrow Amount" has the meaning set forth in Section 2(g) below.

"Escrowed Shares" has the meaning set forth in Section 2(g) below.

"Excluded Target REIT Assets" has the meaning set forth in Section 2(h) below.

"Financing Commitments" has the meaning set forth in Section 4(b) below.

     "GAAP" means United States generally accepted  accounting  principles as in
effect from time to time.

     "Governmental  Entity"  means any  governmental  or  regulatory  authority,
court,  agency,  commission  or  other  governmental  entity  or any  securities
exchange or other self-regulatory body, domestic or foreign.

     "Hart-Scott-Rodino Act" means the Hart-Scott-Rodino  Antitrust Improvements
Act of 1976, as amended.

 "Insurance Premium Cap" has the meaning set forth in Section 5(j)(i) below.

 "IRS" means the United States Internal Revenue Service.

 "Knowledge" means actual knowledge of a Person.

 "Merger" has the meaning set forth in Section 2(a) below.

     "Merger  Consideration"  means collectively the Target Common Shares Merger
Consideration, the Target Series A Share Merger Consideration, the Target Series
B  Share   Merger   Consideration,   and  the  Target   Series  C  Share  Merger
Consideration.

     "Ordinary  Course of  Business"  means  the  ordinary  course  of  business
consistent with past custom and practice (including with respect to quantity and
frequency), but in any event shall exclude any extraordinary transaction.

"Party" has the meaning set forth in the preface above.

"Paying Agent" has the meaning set forth in Section 2(e) below.

"Payment Fund" has the meaning set forth in Section 2(e) below.

"PBGC" shall mean the Pension Benefit Guaranty Corporation.

     "Person" means an  individual,  a  partnership,  a  corporation,  a limited
liability  company,  an  association,  a joint stock  company,  a trust, a joint
venture, an unincorporated  organization,  a group (as defined in the Securities
Exchange Act), an entity, or a Governmental  Entity (or any department,  agency,
or political subdivision thereof).

     "Preferred  Stock  Charter  Amendment"  has the  meaning  set  forth in the
definition of Requisite Stockholder Approval.

"Public Reports" has the meaning set forth in Section 3(e) below.

"Regulatory Law" has the meaning set forth in Section 5(c)(ii)(B) below.

"REIT" has the meaning set forth in Section 3(p)(ix) below.

"Representatives" has the meaning set forth in Section 5(m)(i) below.

     "Requisite Stockholder Approval" means the affirmative vote in favor of the
Merger and the transactions contemplated hereby of the holders of (i) two-thirds
of the Target Common  Shares and (ii)  two-thirds of the Target Series A Shares,
the  Target  Series B Shares and the Target  Series C Shares,  each  voting as a
separate class.  Requisite Stockholder Approval shall require that two-thirds of
the Target  Series A Shares,  the Target Series B Shares and the Target Series C
Shares,  each  voting as a separate  class,  approve an  amendment  to  Target's
charter documents,  satisfactory to Buyer,  providing for the conversion of each
such series of  preferred  stock into the right to receive  the Target  Series A
Merger  Consideration,  the Target Series B Merger  Consideration  or the Target
Series C Merger  Consideration,  as  applicable  (the  "Preferred  Stock Charter
Amendment")

  "SEC" means the Securities and Exchange Commission.

     "Securities Act" means the Securities Act of 1933, as amended and the rules
and regulations thereunder.

     "Securities  Exchange  Act" means the  Securities  Exchange Act of 1934, as
amended and the rules and regulations thereunder.

 "SEC Mail Date" has the meaning set forth in Section 5(c)(i) below.

     "Security Interest" means any mortgage, pledge, lien, encumbrance,  charge,
or other  security  interest,  other  than (a)  mechanic's,  materialman's,  and
similar liens,  or (b) liens for taxes not yet due and payable or for taxes that
the taxpayer is contesting in good faith through appropriate proceedings.

 "Shareholder Mail Date" has the meaning set forth in Section 5(c)(i) below.

 "Special Meeting" has the meaning set forth in Section 5(c)(i) below.

     "Subsidiary"  of a  Person  means  any  corporation,  limited  partnership,
general  partnership,  joint venture,  limited  liability company or other legal
entity of which such Person  (either alone or through or together with any other
Subsidiary  or  Subsidiaries)  is the general  partner or managing  entity or of
which 50% or more of the capital stock or other equity  interests the holders of
which are generally  entitled to vote for the election of the board of directors
or others performing similar functions of such corporation or other legal entity
is directly or indirectly  owned or  controlled by such Person  (either alone or
through or together with any other Subsidiary or Subsidiaries).

"Superior Proposal" has the meaning set forth in Section 5(l) below.

"Surviving Corporation" has the meaning set forth in Section 2(a) below.

"Takeover Proposal" has the meaning set forth in Section 5(m) below.

"Target" has the meaning set forth in the preface above.

     "Target Common Shares" means the Common Stock, $.01 par value per share, of
the Target.

     "Target  Common  Share Merger  Consideration"  has the meaning set forth in
Section 2(d)(v) below.

"Target Disclosure Schedule" has the meaning set forth in Section 3 below.

"Target Employee Plans" has the meaning set forth in Section 3(h) below.

    "Target  Equity  Equivalent  Security"  means any  subscriptions,  options,
warrants, calls, commitments,  agreements,  conversion rights or other rights of
any  character  (contingent  or  otherwise)  entitling any Person to purchase or
otherwise  acquire from the Target or any of its  Subsidiaries  at any time,  or
upon the happening of any stated  event,  any shares of the capital stock of the
Target.

     "Target  Material Adverse Effect" has the meaning set forth in Section 3(a)
below.

    "Target Option" means any option,  warrant or other instrument  convertible
into Target Shares that is outstanding  immediately prior to the Effective Time,
whether  or not then  exercisable,  including  without  limitation  an option to
purchase  Target Common Shares  granted under the Target's 1992 Stock  Incentive
Plan.

 "Target Permits" has the meaning set forth in Section 3(m) below.

 "Target REIT" means collectively the Target and its REIT Subsidiaries.

     "Target SAR" means a stock appreciation right,  phantom stock unit or other
similar right of the Target.

     "Target  Senior  Notes" means the 7.875% Senior Notes due July 15, 2002, of
the Target.

     "Target Senior Notes  Indenture"  means that certain  Indenture dated as of
July 14, 1997, as supplemented by that certain  Officers'  Certificate of Thomas
H. Potts and Lynn K. Geurin,  dated July 14, 1997 and by that certain Instrument
of Resignation,  Appointment and Acceptance  dated as of June 12, 2000,  between
the  Target,  Chase  Bank of Texas,  NA,  and HSBC Bank USA,  providing  for the
issuance of the Target Senior Notes.

     "Target  Series A Shares" means the Series A 9.75%  Cumulative  Convertible
Preferred Stock, $.01 par value per share, of the Target.

     "Target Series A Share Merger  Consideration"  has the meaning set forth in
Section 2(d)(v) below.

     "Target  Series B Shares" means the Series B 9.55%  Cumulative  Convertible
Preferred Stock, $.01 par value per share, of the Target.

     "Target Series B Share Merger  Consideration"  has the meaning set forth in
Section 2(d)(v) below.

     "Target  Series C Shares" means the Series C 9.73%  Cumulative  Convertible
Preferred Stock, $.01 par value per share, of the Target.

     "Target Series C Share Merger  Consideration"  has the meaning set forth in
Section 2(d)(v) below.

    "Target  Shares" means  collectively  the Target Common Shares,  the Target
Series A Shares, the Target Series B Shares, and the Target Series C Shares.

"Target Stockholder" means any Person who or which holds any Target Shares.

    "Target's  Knowledge"  means the  Knowledge  of Thomas  H.Potts  or Stephen
J.Benedetti.

"Tax" has the meaning set forth in Section 3(p)(xi) below.

"Tax Return" has the meaning set forth in Section 3(p)(xi) below.

"Transitory Subsidiary" has the meaning set forth in the preface above.

"Virginia Corporation Law" means the Virginia Stock Corporation Act, as amended.


SECTION 2.    BASIC TRANSACTION.

     (a)  The  Merger.  On and  subject  to the  terms  and  conditions  of this
Agreement,  the Transitory  Subsidiary  will merge with and into the Target (the
"Merger") at the Effective Time. The Target shall be the  corporation  surviving
the Merger (the "Surviving Corporation").

     (b) The  Closing.  The  closing of the  transactions  contemplated  by this
Agreement (the  "Closing")  shall take place at the offices of Venable,  Baetjer
and Howard,  LLP, 2010  Corporate  Ridge,  Suite 400,  McLean,  Virginia  22102,
commencing  at 10:00 a.m.  local time on the second  business day  following the
satisfaction  or waiver of all  conditions to the  obligations of the Parties to
consummate the  transactions  contemplated  hereby (other than  conditions  with
respect to actions the  respective  Parties will take at the Closing  itself) or
such other date as the Parties may mutually determine (the "Closing Date").

     (c) Actions at the Closing. At the Closing,  (i) the Target will deliver to
the Buyer and the Transitory Subsidiary the various  certificates,  instruments,
and  documents  referred  to in  Section-6(a)  below,  (ii)  the  Buyer  and the
Transitory  Subsidiary  will  deliver to the Target  the  various  certificates,
instruments,  and documents  referred to in Section 6(b) below, (iii) the Target
and  the  Transitory   Subsidiary  will  file  Articles  of  Merger   reasonably
satisfactory  to each of the Parties and  meeting the  requirements  of Sections
13.1-604 and 13.1-720, and any other relevant provisions of Virginia Corporation
Law (the "Articles of Merger") with the Virginia State  Corporation  Commission,
and all other filings or recordings  required  under Virginia  Corporation  Law,
including  any  plan  of  merger,  (iv)  the  Buyer  will  cause  the  Surviving
Corporation  to  deliver  the  Payment  Fund to the  Paying  Agent in the manner
provided  below in Section 2(e),  and (v) the Parties will comply with all other
covenants and obligations imposed upon it under the terms of the Agreement.

(d)      Effect of Merger.

     (i)  General.  The  Merger  shall  become  effective  at the time  that the
Virginia State  Corporation  Commissioner  shall have issued a  "Certificate  of
Merger"  pursuant  to Section  13.1-720  of the  Virginia  Corporation  Law (the
"Effective  Time").  The  Merger  shall  have the  effect  set forth in  Section
13.1-721 of the Virginia Corporation Law. The Surviving  Corporation may, at any
time  after  the  Effective  Time,  take any  action  (including  executing  and
delivering  any  document) in the name and on behalf of either the Target or the
Transitory  Subsidiary  in order to carry out and  effectuate  the  transactions
contemplated by this Agreement. (ii) Articles of Incorporation.  The Articles of
Incorporation  of the Surviving  Corporation  shall,  at and as of the Effective
Time,  read as did the Articles of  Incorporation  of the Transitory  Subsidiary
immediately  prior to the  Effective  Time.  (iii)  Bylaws.  The  Bylaws  of the
Surviving  Corporation  shall,  at and as of the Effective Time, read as did the
Bylaws of the Transitory  Subsidiary  immediately  prior to the Effective  Time.
(iv)  Directors  and  Officers.  The  directors  and officers of the  Transitory
Subsidiary shall become the directors and officers of the Surviving  Corporation
at and as of the Effective Time (retaining their respective  positions and terms
of office).  (v) Conversion of Target Shares.  At and as of the Effective  Time,
without any action on the part of the holders of Target Shares,  (A) each Target
Common Share (other than any  Buyer-owned  Shares)  shall be converted  into the
right to receive an amount (the  "Target  Common  Share  Merger  Consideration")
equal to $2.00 in cash (without interest),  (B) each Target Series A Share shall
be  converted  into the right to receive an amount (the  "Target  Series A Share
Merger  Consideration")  equal to $12.07 in cash  (without  interest),  less any
dividend declared or paid on such shares subsequent to the date hereof, (C) each
Target  Series B Share  shall be  converted  into the right to receive an amount
(the  "Target  Series B Share  Merger  Consideration")  equal to  $12.32 in cash
(without interest), less any dividend declared or paid on such shares subsequent
to the date hereof (D) each Target  Series C Share shall be  converted  into the
right to receive an amount (the"Target  Series C Share  Merger  Consideration")
equal to $15.08 in cash (without  interest),  less any dividend declared or paid
on such  shares  subsequent  to the date hereof and (E) each  Buyer-owned  Share
shall be cancelled and all rights with respect  thereto shall cease to exist and
no consideration  shall be delivered in exchange  therefor;  provided,  however,
that the Merger Consideration shall be subject to proportional adjustment in the
event of any stock split,  stock dividend,  reverse stock split, or other change
in the number of Target Shares outstanding occurring between the date hereof and
the date of filing of the Articles of Merger. No Target Share shall be deemed to
be  outstanding or to have any rights  (monetary or otherwise)  other than those
set forth above in this Section  2(d)(v) after the Effective  Time.  All accrued
dividends on the Target  Shares shall be canceled at the  Effective  Time.  (vi)
Conversion  of  Capital  Stock of the  Transitory  Subsidiary.  At and as of the
Effective  Time,  each share of Common Stock,  $.01 par value per share,  of the
Transitory  Subsidiary  shall be converted into one share of Common Stock,  $.01
par value per share, of the Surviving Corporation. (vii) Termination of Dividend
Reinvestment and Stock Purchase Plan,  Directors Stock Appreciation  Rights Plan
and 1992 Stock Incentive  Plan.  Except as may otherwise be agreed to in writing
by the Buyer, the Transitory  Subsidiary,  and the Target,  the Target covenants
that (A) its Dividend  Reinvestment  and Stock  Purchase Plan,  Directors  Stock
Appreciation  Rights Plan and its 1992 Stock Incentive  Plan,  together with any
similar plan,  shall  terminate as of the Effective Time, (B) all Target Options
and Target SARs shall be  cancelled  as of the  Effective  Time for an aggregate
amount  not to  exceed  $265,000  in cash and (C) it shall use best  efforts  to
obtain all  necessary  consents of the holders of the Target  Options and Target
SARs to the  cancellation  of the Target Options and Target SARs as set forth in
this Section 2(d)(vii).

     (e) Procedure for Payment.  (i) Promptly after the Effective  Time, (A) the
Buyer will cause the  Surviving  Corporation  to furnish a bank or trust company
designated  by the Buyer and  reasonably  acceptable  to the Target (the "Paying
Agent") with cash  sufficient for the Paying Agent to make prompt payment of the
Merger Consideration to all holders of outstanding Target Shares (other than any
Buyer-owned  Shares),  upon the  surrender  of the  Target  Shares by the holder
thereof to the Paying Agent along with a properly executed letter of transmittal
(the  "Payment  Fund") and (B) the Buyer  will cause the Paying  Agent to mail a
letter of transmittal  (with  instructions  for its use) in a form and substance
reasonably  satisfactory  to  each  of the  Parties  to each  record  holder  of
outstanding Target Shares for the holder to use in surrendering the certificates
which represented his, her or its Target Shares ("Certificates") against payment
of the Merger Consideration. Upon surrender of a Certificate to the Paying Agent
together  with such  letter of  transmittal,  duly  executed  and  completed  in
accordance  with the  instructions  thereto,  and such  other  documents  as may
reasonably be required by the Paying Agent, the holder of such Certificate shall
be entitled to receive in exchange  therefor  the amount of cash payable for the
Target Shares  represented by such Certificate  pursuant to Section 2(d)(v).  In
the event of a transfer of ownership of Target Shares which is not registered in
the  transfer  records of the Target,  payment may be made with  respect to such
Target Shares to such a transferee if the Certificate  representing  such Target
Shares is presented to the Paying Agent,  accompanied by all documents  required
to evidence and effect such transfer and to evidence that any  applicable  stock
transfer  taxes have been paid. No interest will accrue or be paid to the holder
of any outstanding  Target Shares.  (ii) The Buyer may cause the Paying Agent to
invest the cash  included  in the Payment  Fund in one or more of the  permitted
investments set forth in the agreement  between the Payment Agent and the Buyer,
which agreement shall be in form and substance  reasonably  satisfactory to each
of the  Parties;  provided,  however,  that  the  terms  and  conditions  of the
investments  shall be such as to permit the Paying Agent to make prompt  payment
of the Merger  Consideration as necessary.  The Buyer may cause the Paying Agent
to pay over to the  Surviving  Corporation  any net earnings with respect to the
investments,  and the Buyer  will  cause the  Surviving  Corporation  to replace
promptly any portion of the Payment  Fund which the Paying  Agent loses  through
investments.  (iii) The Buyer  may  cause  the  Paying  Agent to pay over to the
Surviving  Corporation  any portion of the Payment Fund  (including any earnings
thereon) in excess of $100,000  remaining 60 days after the Effective  Time, and
any or all of the Payment Fund  (including any earnings  thereon)  remaining 180
days  after the  Effective  Time,  and after  such  180-day  period  all  former
shareholders shall be entitled to look to the Surviving  Corporation (subject to
abandoned  property,  escheat,  and other  similar  laws) as  general  creditors
thereof with respect to the cash payable upon  surrender of their  certificates.
(iv) The Buyer  shall  cause the  Surviving  Corporation  to pay all charges and
expenses of the Paying Agent.

     (f) Closing of Transfer Records. After the close of business on the Closing
Date,  transfers of Target Shares  outstanding prior to the Effective Time shall
not be made on the stock transfer books of the Surviving Corporation.  If, after
the Effective  Time,  Certificates  are presented to the Surviving  Corporation,
they shall be exchanged as provided in Section 2(e).

     (g) Escrow.  Immediately  following  the execution of this  Agreement,  the
Buyer shall  deliver to U.S.  Trust  Company (the "Escrow  Agent")  certificates
representing the Buyer-owned Shares (the "Escrowed Shares"),  together with duly
executed  instruments  of transfer or assignment in blank.  Additionally,  on or
prior to the date that is thirty (30) days from the date hereof (or on the first
business day  following  such 30th day if such 30th day is not a business  day),
and provided the Buyer has not earlier  terminated  this  Agreement  pursuant to
Section 7(a)(vi) hereof,  the Buyer shall deliver to the Escrow Agent $1,000,000
in immediately  available funds (such funds,  together with any and all interest
earned thereon,  together with the Escrowed Shares,  the "Escrow  Amount").  The
Escrow Amount shall be held and distributed as provided in the Escrow  Agreement
in the form attached hereto as Exhibit A (the "Escrow Agreement") and subject to
terms and conditions of this Agreement.

     (h) Transfer of Excluded Target REIT Assets to Buyer-REIT.  Buyer agrees to
create,  establish or enter into an arrangement with the Buyer-REIT to which the
Target  will  transfer  the  assets and  associated  liabilities  identified  in
Schedule 2(h)  accompanying  this Agreement (the "Excluded  Target REIT Assets")
simultaneously  with  or,  at the  Buyer's  election,  immediately  prior to the
Closing (but in any event,  after satisfaction of all Closing  conditions).  The
Target's  obligation to transfer such assets and the Buyer's obligation to cause
the  Buyer-REIT  to assume  such  liabilities  will  terminate  in the event the
Closing does not occur.

     (i) Subsequent Actions.  Without limiting the terms of Section 2(d)(i), if,
at any time after the Effective Time, the Surviving  Corporation  shall consider
or be advised  that any deeds,  bills of sale,  assignments,  assurances  or any
other actions or things are necessary or desirable to continue in, vest, perfect
or confirm of record or otherwise the Surviving  Corporation's  right,  title or
interest in, to or under any of the rights, properties,  privileges,  franchises
or assets of either of its constituent  corporations  acquired or to be acquired
by the Surviving  Corporation as a result of, or in connection with, the Merger,
or  otherwise  to carry  out the  intent of this  Agreement,  the  officers  and
directors  of the  Surviving  Corporation  shall be  authorized  to execute  and
deliver, in the name and on behalf of either of the constituent  corporations of
the Merger,  all such deeds,  bills of sale,  assignments  and assurances and to
take  and do,  in the  name  and on  behalf  of each  of  such  corporations  or
otherwise, all such other actions and things as may be necessary or desirable to
vest,  perfect or confirm any and all right, title and interest in, to and under
such  rights,  properties,  privileges,  franchises  or assets in the  Surviving
Corporation or otherwise to carry out the intent of this Agreement.  (j) Further
Assurances.  Each Party hereto  shall  execute and cause to be delivered to each
other Party hereto such  instruments  and other  documents,  and shall take such
other actions, as such other Party may reasonably request (prior to, at or after
the  Closing)  for  the  purpose  of  carrying  out  or  evidencing  any  of the
transactions contemplated by this Agreement.

     SECTION 3.  REPRESENTATIONS AND WARRANTIES OF TARGET. The Target represents
and  warrants to the Buyer and the  Transitory  Subsidiary  that the  statements
contained  in this  Section 3 are  correct  and  complete as of the date of this
Agreement and will be correct and complete as of the Closing Date, except as set
forth in the Target disclosure schedule accompanying this Agreement (the "Target
Disclosure  Schedule").  The Target  Disclosure  Schedule  will be  arranged  in
paragraphs  corresponding to the lettered and numbered  paragraphs  contained in
this Section 3.

     (a)  Organization,  Qualification,  and Corporate Power. Each of the Target
and its Subsidiaries is a corporation duly organized,  validly existing,  and in
good standing under the laws of the jurisdiction of its  incorporation.  Each of
the Target and its Subsidiaries is duly authorized to conduct business and is in
good standing under the laws of each  jurisdiction  where such  qualification is
required,  except  where  the  lack  of such  qualification  would  not  have or
reasonably  be  expected  to result in any  changes  in or  effects  that in the
aggregate together with all other changes and effects (x) are materially adverse
to the  business,  assets,  liabilities,  results  of  operations  or  condition
(financial or otherwise)  of the Target and its  Subsidiaries  taken as a whole,
except,  to the extent  resulting from (1) any  changes in general United States
economic  conditions,  or (2) any  changes  affecting  the mortgage  industry in
general  (including  changes in interest rates),  but not to the extent that the
changes  disproportionately  affect the Target, or (y) will prevent the Target's
consummating  the  transactions  contemplated  hereby  or  materially  delay the
Target's  ability to  consummate  the  transactions  contemplated  hereby  (such
changes and effects described in clauses (x) and (y), a "Target Material Adverse
Effect").  Each of the Target and its  Subsidiaries has full corporate power and
authority to carry on the  businesses  in which it is engaged and to own and use
the properties owned and used by it.

         (b)      Capitalization.

     (i) The authorized  capital stock of Target consists of 100,000,000  shares
of Target Common Stock, par value $.01 per share,  1,552,000 shares of Preferred
Series A Stock, par value $.01 per share, 4,760,000 shares of Preferred Series B
Stock,  par value $.01 per share,  and  1,840,000  shares of Preferred  Series C
Stock, par value $.01 per share. At the close of business on September 30, 2000,
the issued and outstanding capital stock of the Target consists of:

(A)      11,446,206 Target Common Shares;
(B)      1,309,061 Target Series A Shares;
(C)      1,912,434 Target Series B Shares; and
(D)      1,840,000 Target Series C Shares.

     No shares of capital  stock of the  Target are held by any of the  Target's
Subsidiaries.

     (ii) All of the  issued  and  outstanding  Target  Shares  have  been  duly
authorized  and are  validly  issued,  fully  paid,  non-assessable  and free of
preemptive  rights.  All of the  outstanding  shares of capital  stock and other
equity  securities  of  the  Subsidiaries  of  Target  are  owned,  directly  or
indirectly,  by the  Target  free and  clear  of all  liens,  pledges,  security
interests, or other encumbrances.

     (iii) Except for the right of the Target  Series A Shares,  Target Series B
Shares and Target Series C Shares to convert into Target Common Shares under the
Target's  charter,  there are no  outstanding or authorized  options,  warrants,
purchase rights,  subscription  rights,  calls,  agreements,  conversion rights,
exchange  rights,  or other  contracts or commitments  (contingent or otherwise)
that could  require the Target to issue,  sell,  transfer or otherwise  cause to
become  outstanding any of its capital stock or otherwise  entitle any Person to
purchase or otherwise  acquire from the Target or any of its Subsidiaries at any
time,  or upon the happening of any stated events any shares of capital stock or
other  equity stock of the Target and its  Subsidiaries.  As of the date of this
Agreement, there are no outstanding obligations, contingent or otherwise, of the
Target or any of its Subsidiaries to repurchase, redeem or otherwise acquire any
Target Shares or any Target Equity Equivalent  Securities  (except in connection
with  the  exercise,   conversion  or  exchange  of  outstanding  Target  Equity
Equivalent Securities).

     (iv) There are no outstanding  or authorized  stock  appreciation,  phantom
stock units, profit participation,  or similar rights with respect to the Target
or its Subsidiaries.

     (v) The Target Disclosure  Schedule sets forth the name and jurisdiction of
incorporation  or  organization  of each  Subsidiary of the Target.  Neither the
Target nor any of its  Subsidiaries  owns directly or indirectly any interest or
investment  (whether equity or debt) in any Person.  (vi) As of the date of this
Agreement,  there are no bonds,  debentures,  notes or other indebtedness issued
and outstanding having the right to vote together with Target's  stockholders on
any matter in respect of which the Target's stockholders are entitled to vote.

     (c)  Authorization of Transaction.  The Target has full corporate power and
authority to execute and deliver this  Agreement and to perform its  obligations
hereunder;  provided,  however,  that the Target  cannot  consummate  the Merger
unless and until it receives the Requisite Stockholder Approval.  This Agreement
constitutes the valid and legally binding obligation of the Target,  enforceable
in accordance with its terms and conditions.

(d)      Noncontravention.

     (i) Neither the  execution  and the  delivery  of this  Agreement,  nor the
consummation of the transactions  contemplated  hereby, will (A) (1) violate any
constitution,  statute, regulation,  rule, injunction,  judgment, order, decree,
ruling,  charge,  or other  restriction of any Governmental  Entity, or court to
which any of the Target and its Subsidiaries is subject, (2) violate or conflict
with  any  provision  of the  charter  or  bylaws  of any of the  Target  or its
Subsidiaries or (3) conflict with,  result in a breach of,  constitute a default
under,  result  in the  acceleration  of,  create  in any  party  the  right  to
accelerate,  terminate,  modify,  or  cancel,  or require  any notice  under any
agreement,   contract,  lease,  license,   instrument,   bond,  note,  mortgage,
indenture,  franchise or other  arrangement (with or without notice or any lapse
of time) to which any of the Target and its  Subsidiaries is a party or by which
it is  bound  or to  which  any of its  assets  is  subject  (or  result  in the
imposition of any lien, claim or encumbrance upon any of its assets), except, in
the case of  clauses  (A) (1) and  (A) (3)  above  only,  where  the  violation,
conflict,   breach,   default,    acceleration,    termination,    modification,
cancellation,  failure to give notice,  or lien, claim or encumbrance  would not
have, or reasonably be expected to have, a Target Material  Adverse  Effect,  or
(B)  result  in  any  obligation  on  the  part  of  the  Target  or  any of its
Subsidiaries  (with or  without  notice or any lapse of time) to  repurchase  or
repay  any  debenture,  bond,  note or other  indebtedness  for  borrowed  money
(including, without limitation, the Target Senior Notes).

     (ii) To the  Target's  Knowledge,  and other  than in  connection  with the
provisions  of the  Hart-Scott-Rodino  Act,  the Virginia  Corporation  Law, the
Securities Exchange Act, the Securities Act, and any applicable federal or state
securities laws, none of the Target or any of its Subsidiaries needs to give any
notice  to,  make any filing  with,  or obtain any  authorization,  consent,  or
approval of any  Governmental  Entity in order for the Parties to consummate the
transactions  contemplated by this  Agreement,  except where the failure to give
notice, to file, or to obtain any authorization,  consent, or approval would not
have, or reasonably be expected to have, a Target Material Adverse Effect.

     (e) Filings with the SEC.  The Target has timely filed all forms,  reports,
statements,  schedules and other  documents  (including  all annexes,  exhibits,
schedules,  amendments and supplements  thereto) required to be filed by it with
the SEC since  December 31, 1996,  has delivered or made  available to the Buyer
upon  written  request  all  forms,  reports,  statements,  schedules  and other
documents (except for preliminary  materials) (including all annexes,  exhibits,
schedules,  amendments and  supplements  thereto) filed by it with the SEC since
December 31, 1996 (such forms,  reports,  statements,  schedules  and  documents
filed by the Target with the SEC, including any such forms, reports, statements,
schedules and other documents filed by the Target with the SEC after the date of
this  Agreement  and  prior  to  the  Closing  Date,  are  referred  to  herein,
collectively,  as the 'Public  Reports,' and with respect to the Public  Reports
filed by the Target  after the date of this  Agreement  and prior to the Closing
Date,  will deliver or make available to the Buyer upon Buyer's  written request
all of such  Public  Reports  in the  form  filed  with  the  SEC.  As of  their
respective   filing  dates,  the  Public  Reports   (including  all  information
incorporated  therein  by  reference)  (i) complied  as to form in all  material
respects with the requirements of the Securities Act or the Securities  Exchange
Act, as applicable,  and (ii) did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.  Each 'material contract'(as such term is
defined in Item 601 (b)(10) of  Regulation  S-K of the SEC) of the Target or any
of its Subsidiaries and each non-competition agreement or any other agreement or
obligation  of the Target or any of its  Subsidiaries  that purports to limit in
any  respect  the  manner  in  which  or the  localities  in  which,  all or any
substantial  portion of the  business  of the Target or any of its  Subsidiaries
would be conducted is  disclosed in the Public  Reports  filed prior to the date
hereof.

     (f)  Brokers'  Fees.  Except for  PaineWebber  Incorporated  pursuant to an
engagement  letter,  a true and  complete  copy of  which  has  previously  been
delivered to the Buyer,  none of the Target or any of its  Subsidiaries  has any
liability or obligation to pay any fees or  commissions  to any broker,  finder,
agent, investment banker,  financial advisor or other person with respect to the
transactions contemplated by this Agreement.

     (g) Disclosure.  The Definitive Proxy Materials will comply as to form with
the requirements of the Securities  Exchange Act in all material  respects.  The
Definitive  Proxy Materials will not contain any untrue  statement of a material
fact or omit to state a material fact  necessary in order to make the statements
made therein,  in the light of the circumstances  under which they will be made,
not misleading;  provided,  however,  that the Target makes no representation or
warranty  with  respect  to any  information  that the  Buyer or the  Transitory
Subsidiary will supply specifically for use in the Definitive Proxy Materials.

     (h) Employee Benefits.  Target Disclosure Schedule 3(h) contains a true and
complete list of each written bonus, vacation,  deferred compensation,  pension,
retirement,  profit-sharing,  thrift, savings,  employee stock ownership,  stock
bonus,  stock purchase,  restricted stock and stock option plans, all employment
or  severance  contracts,  all  medical,  dental,  disability,  health  and life
insurance plans, all other employee benefit and fringe benefit plans,  contracts
or arrangements and any applicable  'change of control' or similar provisions in
any plan, contract or arrangement  maintained or contributed to by the Target or
any of its Subsidiaries for the benefit of Employees or the beneficiaries of any
Employee (collectively,  'Target Employee Plans'). Neither the Target nor any of
its  Subsidiaries  has any plan or commitment to establish or enter into any new
Target Employee Plan, or to modify or, except as contemplated by this Agreement,
to terminate any Target  Employee  Plan. The Target has made  available,  or has
caused to be made available, to the Buyer current,  accurate and complete copies
of all documents  embodying or relating to each Target Employee Plan. (i) To the
Target's  Knowledge,  each of the Target and its  Subsidiaries has performed all
obligations required to be performed by it under each Target Employee Plan. Each
Target  Employee  Plan  has  been  established  and  maintained  in  substantial
accordance  with its terms and in  substantial  compliance  with all  applicable
laws.  Each Target Employee Plan which is intended to be qualified under Section
401(a)  of the Code has  received  a  favorable  determination  letter  from the
Internal Revenue Service,  and it is not aware of any  circumstances  reasonably
likely to result in the revocation or denial of any such favorable determination
letter.  There is no  litigation  pending  or, to the  Knowledge  of the Target,
threatened or anticipated  (other than routine claims for benefits) with respect
to any Target Employee Plan or by any Employee with respect to the Target or any
of its Subsidiaries.  No Target Employee Plan is under audit or investigation by
the  Internal  Revenue  Service,  the  Department  of  Labor,  the PBGC or other
Governmental  Entity,  and to the  Knowledge  of the  Target,  no such  audit or
investigation is threatened.

     (ii) Neither the Target,  any of its Subsidiaries,  nor any ERISA Affiliate
presently  sponsors,  maintains,  contributes to, nor is the Target,  any of its
Subsidiaries  or any ERISA  Affiliate  required  to  contribute  to, nor has the
Target,  any of  its  Subsidiaries  nor  any  ERISA  Affiliate  ever  sponsored,
maintained,  contributed  to, or been  required  to  contribute  to, a "employee
pension  benefit  plan"  (within the meaning of Section  3(2) of ERISA) which is
subject to Title IV of ERISA.

     (iii)  Neither  the  Target  nor  any  of  its  Subsidiaries  maintains  or
contributes to any Target Employee Plan which provides,  or has any liability to
provide, life insurance,  medical,  severance or other employee welfare benefits
to any Employee upon his retirement or termination of employment,  except as may
be required by Section  4980B of the Code and Sections 601 through 609 of ERISA.
(iv) The execution of, and performance of the transactions  contemplated by this
Agreement will not (either individually, in the aggregate or upon the occurrence
of any additional or subsequent events) (A) constitute an event that will or may
result in any payment  (whether of severance pay or otherwise),  acceleration of
benefits,  forgiveness of  indebtedness,  vesting or  distribution  of benefits,
increase  in  benefits  or  obligation  to fund  benefits  with  respect  to any
Employee,  or (B) result in the triggering or imposition of any  restrictions or
limitations on the right of the Buyer,  the Target or any of its Subsidiaries to
amend or terminate any Target Employee Plan. No payment or benefit which will or
may be made by the Buyer, the Target, or any of its Subsidiaries or any of their
respective  Affiliates with respect to any Employee may be  characterized  as an
"excess parachute  payment" within the meaning of Section 280G(b)(1) of the Code
which is contingent on the change in ownership of the Target  resulting from the
Merger.  No  officer,  director  or  Employee  of  the  Target  or  any  of  its
Subsidiaries  is entitled to any "sale bonus payment,"  "retention  payment," or
any other  payment  or  benefit  in  connection  with,  or as a result  of,  the
transactions contemplated by this Agreement.

     (v)  To  the  Target's  Knowledge,  each  of  the  Target  and  any  of its
Subsidiaries is in compliance in all material  respects with all applicable laws
(domestic and foreign) respecting employment, employment practices, labor, terms
and conditions of employment,  wages and hours, withholding taxes,  unemployment
compensation  and Social  Security.  (i) Labor and Employment  Matters.  No work
stoppage  or labor  strike  against  the  Target or any of its  Subsidiaries  by
Employees is pending or, to the Knowledge of the Target, threatened. Each of the
Target and its  Subsidiaries  (i) is not involved in or, to the Knowledge of the
Target, threatened with any labor dispute,  grievance, or litigation relating to
labor matters and (ii) is not presently, nor has it been in the past a party to,
or bound by, any collective bargaining,  union or similar agreement,  nor is any
such  agreement  currently  being  negotiated  by  the  Target  or  any  of  its
Subsidiaries.  No Employees are currently or while employed by the Target or any
of its  Subsidiaries  have ever been represented by any labor union with respect
to their  employment by Target or its  Subsidiaries  and to the Knowledge of the
Target, no activities the purpose of which is to achieve such  representation of
all or some of such  Employees  are  threatened  or  ongoing.  (j)  Articles  of
Incorporation  and Bylaws of the Target.  The Target has  furnished or otherwise
made available to the Buyer a complete and correct copy of the Target's Articles
of  Incorporation  and  Bylaws,  in each  case as  amended  to the  date of this
Agreement.  Such  Articles  of  Incorporation  and  Bylaws of the Target and all
similar organizational documents of Subsidiaries of the Target are in full force
and effect.  The Target is not in violation of its Articles of  Incorporation or
Bylaws and,  except as would not,  in the  aggregate,  have,  or  reasonably  be
expected to have, a Target Material Adverse Effect,  none of the Subsidiaries of
the Target is in violation of any similar organizational documents.

     (k) Absence of Certain  Changes.  Except as disclosed in the Public Reports
filed prior to the date of this  Agreement  or as  otherwise  permitted  hereby,
since June 30,  2000,  (i) the Target and its Subsidiaries  have conducted their
respective  businesses  in all  material  respects  in the  Ordinary  Course  of
Businesses and there have not been any changes,  or any other  developments with
respect to the Target or any of its Subsidiaries, in each case whether or not in
the Ordinary  Course of Business,  that, in the aggregate with all other changes
and  developments,  have had, or would  reasonably be expected to have, a Target
Material  Adverse Effect  (excepting any ratings decline or similar action taken
with  respect  to  the  Target  by  any  rating  agency   following  the  public
announcement  of the execution of this  Agreement),  and (ii) there has not been
(A) any  declaration,  setting  aside  or  payment  of  any  dividend  or  other
distribution  (whether  in cash,  stock or  property)  in  respect of any Target
Shares or other equity  securities,  Target Equity Equivalent  Securities or any
other securities convertible,  exercisable or exchangeable for or into shares of
capital  stock  or  other  equity  securities,  of  the  Target  or  any  of its
Subsidiaries,   other  than   dividends  and   distributions   by  wholly  owned
Subsidiaries  of the  Target;  (B)any  change by the  Target to its  accounting
policies,  practices or methods; (C)other than in connection with the exercise,
exchange or conversion of Target Equity Equivalent  Securities,  any repurchase,
redemption or other  acquisition  of any shares of capital stock or other equity
securities or any securities  convertible,  exchangeable  or exercisable  for or
into shares of capital stock or other equity securities, of the Target or any of
its  Subsidiaries;  (D) except  as  required  by  applicable  law or pursuant to
contractual  obligations  existing  as  of  June30,  2000,  (w)any  execution,
establishment,  adoption or amendment of, or  acceleration of rights or benefits
under,  any  agreement  relating to severance,  any Target  Employee  Plan,  any
employment  or  consulting  agreement or any  collective  bargaining  agreement,
(x)any  increase  in the  compensation  payable  or to  become  payable  to any
officer,  director or employee of the Target or any of its Subsidiaries  (except
increases  permitted  hereunder),  (y)any grant of any severance or termination
paid to any officer or director  of the  Target,  or (z)any  grant of any stock
options  or other  equity  related  awards  other  than in the  ordinary  course
consistent  with past  practice;  (E) any default (with or without notice or any
lapse  of time) in the due  performance  or  observance  of any  term,  covenant
(financial or otherwise), representation, warranty or agreement of the Target or
its Subsidiaries under any agreement relating to indebtedness for borrowed money
(including,  without limitation,  the Target Senior Notes Indenture); or (F) any
agreement or commitment entered into with respect to the foregoing.

     (l) Litigation; Liabilities. (i)Except as disclosed in the Public Reports
filed  prior to the date of this  Agreement,  there  are no civil,  criminal  or
administrative  actions, suits, claims,  proceedings,  or investigations pending
or, to the Knowledge of the Target, threatened, against the Target or any of its
Subsidiaries or any of their respective properties,  except as would not, in the
aggregate,  have, or reasonably be expected to have, a Target  Material  Adverse
Effect.

     (ii) Except as set forth in the Public  Reports  filed prior to the date of
this Agreement, neither the Target nor any of its Subsidiaries has or is subject
to  any  liabilities  (absolute,   accrued,  contingent  or  otherwise),  except
liabilities (A)adequately reflected on the unaudited consolidated balance sheet
of the Target and its  Subsidiaries  (including any related notes thereto) as of
June 30, 2000  included in the Target's  Quarterly  Report on Form 10-Q  for the
quarter ended June 30, 2000, or (B) which, in the aggregate,  would not have, or
reasonably be expected to have, a Target Material  Adverse Effect.  (m) Permits.
Except  as  disclosed  in the  Public  Reports  filed  prior to the date of this
Agreement,  the  Target  and  its  Subsidiaries  hold  all  permits,   licenses,
easements, rights-of-way,  variances, exemptions, consents, certificates, orders
and  approvals  which are  material to the  operation of the  businesses  of the
Target and its Subsidiaries  (collectively,  the "Target Permits"), except where
the failure to hold such Target  Permits,  in the aggregate,  would not have, or
reasonably be expected to have, a Target Material Adverse Effect. The Target and
its Subsidiaries are in compliance with the terms of the Target Permits,  except
as described in the Public  Reports  filed prior to the date hereof or where the
failure  to so  comply,  in the  aggregate,  would not have,  or  reasonably  be
expected to have, a Target Material Adverse Effect.

         (n) Board Action; Statutory Rights; Vote Required.

     (i) Not  less  than a  majority  of the  Target's  board of  directors  has
approved this Agreement and the  transactions  contemplated  hereby and thereby,
has determined that each of the transactions  contemplated hereby is in the best
interests of the Target and has resolved to recommend to its  stockholders  that
they vote in favor of the Merger. (ii) Neither the Virginia  Corporation Law nor
any  other  state  takeover   statute  or  regulation  under  the  laws  of  the
Commonwealth  of  Virginia  or any  other  state  applies  to the  Merger,  this
Agreement,  or any of the transactions  contemplated hereby or thereby. No "fair
price," "moratorium," "control share acquisition" or other similar anti-takeover
statute   applicable  to  the  Target  will  prevent  or  otherwise   delay  the
consummation of the transaction as contemplated hereby.

     (iii)  Neither  the  Virginia  Corporation  Law nor any  other  statute  or
regulation  under the law of the  Commonwealth of Virginia  (including,  without
limitation,  Sections  13.1-730 and 13.1-737 of the  Virginia  Corporation  Law)
provides any right of dissent or appraisal to any holder of any Target Shares or
any Target Equity Equivalent Security which are issued and outstanding. (iv) The
Requisite  Stockholder  Approval  is the only  approval of  stockholders  of the
Target necessary to approve the Merger as provided in this Agreement.  (iv) Upon
receipt of the Requisite Stockholder  Approval,  pursuant to Section 13.1 721 of
the Virginia Corporation Law, and as set forth in the Articles of Merger, all of
the Target  Series A Shares,  Target  Series B Shares and Target Series C Shares
(including all unpaid  dividends with respect  thereto) shall be canceled at the
Effective  Time by operation of law without any further action by the holders of
such shares.

     (o) Opinion of Financial Advisor.  The board of directors of the Target has
received the written opinion of PaineWebber  Incorporated,  dated as of or prior
to the date of this Agreement, to the effect that, subject to the qualifications
and limitations  contained therein,  as of the date of such opinion,  the Merger
Consideration  is fair to the  holders  of each  class of Target  Shares  from a
financial point of view.

     (p) Taxes. (i) Each of the Target and its Subsidiaries has timely filed all
Tax Returns  required to be filed by any of them and paid (or  established  full
and  adequate  reserves  or accruals on the  financial  statements  filed in the
Public  Records for) all Taxes  required to be paid by any of them in respect of
periods covered by such Tax Returns (whether or not shown as due on any such Tax
Returns) or which are  otherwise  due and payable,  and all such Tax Returns are
true,  correct  and  complete,  except for  failures  to timely  file,  pay,  or
omissions or inaccuracies which would not have a Target Material Adverse Effect.
(ii) No deficiencies  for any Taxes have been proposed,  asserted or assessed in
writing or, to the Knowledge of the executive officers of the Target, orally, by
any Taxing  authority  against  the Target or any of its  Subsidiaries  which if
adversely  determined would have a Target Material Adverse Effect,  and no audit
of any Tax Return of the Target or any of its  Subsidiaries  is currently  being
conducted by any Taxing  authority.  (iii) Except with respect to any claims for
refunds,  the  federal  income  Tax  returns  of  the  Target  and  each  of its
Subsidiaries for all such periods ended on or before December 31, 1993 have been
examined by and settled with the IRS, or the  applicable  statute of limitations
with respect to such years, including extensions thereof, has expired. As of the
date of this Agreement,  none of the Target or any of its  Subsidiaries  (A) has
requested any extension of time within which to file any material federal income
Tax return,  which Tax return has not since been filed and (B) has in effect any
extension,  outstanding  waivers  or  comparable  consents  with  respect to any
federal income Taxes or federal  income Tax Returns.  (iv) Copies of all federal
Tax  returns  required  to be filed  by the  Target  or any of its  Subsidiaries
(including any predecessors) for each of the last three years, together with all
schedules and attachments thereto,  have been delivered or made available by the
Target  to the  Buyer.  (v)  None  of  the  Target  or  any of its  Subsidiaries
(including any  predecessors)  is a party to, is bound by, or has any obligation
under any Tax  sharing or similar  agreement.  (vi) None of the Target or any of
its Subsidiaries (A) has received a Tax ruling from any federal Taxing authority
or entered into a closing agreement with any federal Taxing authority that would
have a continuing  material effect after the Closing Date, (B) would be required
to  include  in income  for any period  after the  Closing  Date any  adjustment
pursuant  to  Section  481(a)  of the Code by reason  of a  voluntary  change in
accounting method initiated by it for any tax year, and, to the Knowledge of the
executive  officers of the Target,  the IRS has not proposed any such adjustment
or change  in  accounting  method  for any tax year for  which  the  statute  of
limitations  remains  open or (C) would be  required  to  include  any amount in
income after the Closing Date  pursuant to Section 453 of the Code as the result
of sales of assets before the Closing Date under the installment  method.  (vii)
None of the Target or any of its  Subsidiaries  has constituted a "distributing
corporation" in a distribution of stock qualifying for tax-free treatment under
Section 355 of the Code in the past 24 month period or in a  distribution  which
could  otherwise  constitute  part  of a  "plan"  or  a  series  of  "related
transactions"  within the meaning of Section  355(e) of the Code.  (viii) Since
December 31, 1999,  the Target has incurred no liability for any material  Taxes
under  Sections  857(b),  860(c)  or 4981 of the  Code or IRS  Notice  88-19  or
Treasury  Temporary   Regulation   Section   1.337(d)-5T,   including,   without
limitation,  any material Tax arising from a prohibited transaction described in
Section  857(b)(6)  of  the  Code,  and  neither  the  Target  nor  any  of  its
Subsidiaries  has incurred any  material  liability  for Taxes other than in the
Ordinary  Course of  Business.  To the  Knowledge  of the  Target,  no event has
occurred,  and no condition or circumstance  exists,  which presents a risk that
any material  Tax  described in the  preceding  sentence  will be imposed on the
Target or any Target Subsidiary prior to the Effective Time. (ix) The Target (A)
for each  taxable year  beginning  with the taxable year ended on, and ending at
the  Effective  Time,  has been and will be subject to taxation as a real estate
investment trust (a "REIT") within the meaning of the Code and has satisfied the
requirements to qualify as a REIT for such years, (B) has operated,  and intends
to continue to operate,  consistent with the requirements for  qualification and
taxation  as  a  REIT  through  the  Effective   Time,  (C)  will  maintain  its
qualification  as a REIT  through  the date of closing  by making all  necessary
undertakings that are consistent with the Code; and (D) has not taken or omitted
to take any action which could  reasonably  be expected to result in a challenge
to its status as a REIT,  and no such  challenge is pending,  or to the Target's
Knowledge,  threatened.  (x)  Each  Subsidiary  of the  Target  (A)  which  is a
partnership or limited  liability  company or files Tax Returns as a partnership
for federal  income tax purposes (i) has since its formation or its  acquisition
by Target been, and continues to be,  classified for federal income tax purposes
as a partnership  or disregarded  entity and not as an association  taxable as a
corporation, or a "publicly traded partnership" that is treated as a corporation
for federal  income tax  purposes;  and (ii) has not since its  formation or its
acquisition  by the Target  owned any  assets  (including,  without  limitation,
securities)  that would  cause the Target to violate  Section  856(c)(4)  of the
Code; or (B) which is a corporation  or treated as an  association  taxable as a
corporation has been since the date of its formation or acquisition by Target, a
qualified REIT subsidiary under Section 856(i) of the Code. (xi) For the purpose
of this Agreement,  the term "Tax" (including,  with correlative  meaning, the
terms "Taxes",  "Taxing", and "Taxable") shall include all federal, state,
local and foreign income, profits,  franchise,  gross receipts,  payroll, sales,
employment,  use, property, gains, transfer,  recording,  license,  value-added,
withholding,  excise  and other  taxes,  duties  or  assessments  of any  nature
whatsoever  (whether payable directly or by withholding),  together with any and
all estimated Tax interest,  penalties and additions to Tax imposed with respect
to such amounts and any  obligations  in respect  thereof under any Tax sharing,
Tax  allocation,  Tax indemnity or similar  agreement as well as any obligations
arising pursuant to Regulation 1.1502-6 promulgated under the Code or comparable
state, local or foreign provision.  The term "Tax Return" shall mean any return,
declaration,  report,  claim for  refund,  or  information  return or  statement
relating to Taxes,  including any schedule or attachment thereto,  and including
any amendment thereof.

     (q) Financial  Statements;  Accounting.  Each of the  consolidated  balance
sheets of the Target and its Subsidiaries (including all related notes) included
in the financial  statements  contained in the Public  Reports (or  incorporated
therein by reference) present fairly, in all material respects, the consolidated
financial position of the Target and its Subsidiaries as of the respective dates
indicated,  and each of the  consolidated  statements  of  income,  consolidated
statements of cash flows and consolidated statements of changes in stockholders'
equity  of the  Target  and  its  Subsidiaries  (including  all  related  notes)
contained in such financial statements present fairly, in all material respects,
the consolidated results of operations,  cash flows and changes in stockholders'
equity of the Target and its Subsidiaries for the respective  periods indicated,
in each case in conformity  with GAAP applied on a consistent  basis  throughout
the periods involved (except for changes in accounting  principles  disclosed in
the notes  thereto)  and the  rules  and  regulations  of the SEC,  except  that
un-audited  interim  financial  statements  are subject to normal and  recurring
year-end  adjustments  and any other  adjustments  described  therein and do not
include  certain notes and other  information  which may be required by GAAP but
which  are not  required  under  the  Securities  Exchange  Act.  The  financial
statements  included  in the Public  Reports  are in all  material  respects  in
accordance with the books and records of the Target and its Subsidiaries.  There
has been no change in the accounting  policies,  practices or methods the Target
and its Subsidiaries since June 30, 2000.

     (r) Intellectual  Property.  The Target and its Subsidiaries own the entire
right,  title and interest in and to or have the right to use (pursuant to valid
and defensible license arrangements), all intellectual property used or held for
use  in,  or  otherwise   necessary  for,  the  operation  of  their  respective
businesses,  except  as would  not,  in the  aggregate,  have or  reasonably  be
expected to have a Target Material Adverse Effect.  There are no pending,  or to
the  Knowledge of the Target,  threatened  proceedings  or  litigation  or other
adverse claims affecting or relating to any such intellectual property,  nor, to
the  Knowledge  of the Target,  any  reasonable  basis upon which a claim may be
asserted  by or against  the Target for  infringement  of any such  intellectual
property that, in the aggregate,  would  reasonably be expected to have a Target
Material Adverse Effect.

     (s) Indebtedness for Borrowed Money.  The Target  Disclosure  Schedule sets
forth  a  true  and  correct  list  of all  agreements  of the  Target  and  its
Subsidiaries   relating  to  indebtedness   for  borrowed  money  in  excess  of
$1,000,000.  The Target is not, and at Closing will not be (and, in either case,
would not be upon the passage of time or but for the waiver by or forbearance of
any other Person),  in default in the due performance or observance of any term,
covenant (financial or otherwise), representation,  warranty or agreement in any
such  agreement  (including,   without  limitation,   the  Target  Senior  Notes
Indenture).

     (t)  Properties.  Except as  disclosed in the Public  Reports,  each of the
Target and its Subsidiaries

     (i) has  good  and  marketable  title  to all  the  properties  and  assets
reflected in the latest audited  balance sheet included in the Public Reports as
being owned by the Target or one of its  Subsidiaries or acquired after the date
thereof which are, alone or in the aggregate,  material to the Target's business
on a consolidated  basis (except  properties sold or otherwise disposed of since
the date thereof in the Ordinary Course of Business),  free and clear of (A) all
Security Interests except such imperfections or irregularities of title or other
Security  Interests (other than real property mortgages or deeds of trust) as do
not materially  affect the use of the  properties or assets  subject  thereto or
affected  thereby  or  otherwise   materially  impair  the  business  operations
presently conducted at such properties,  and (B) all real property mortgages and
deeds of trust, and (ii) is the lessee of all leasehold estates reflected in the
latest audited financial  statements  included in the Public Reports or acquired
after the date thereof  which are,  alone or in the  aggregate,  material to its
business  on a  consolidated  basis  and  is in  possession  of  the  properties
purported to be leased thereunder,  and each such lease is valid without default
thereunder by the lessee, or, to the Target's Knowledge, the lessor.

     SECTION  4.   REPRESENTATIONS   AND  WARRANTIES  OF  BUYER  AND  TRANSITORY
SUBSIDIARY.  Each of the  Buyer and the  Transitory  Subsidiary  represents  and
warrants  to the Target  that the  statements  contained  in this  Section 4 are
correct and  complete as of the date of this  Agreement  and will be correct and
complete as of the  Closing  Date (as though made then and as though the Closing
Date were substituted for the date of this Agreement throughout this Section 4),
except as set forth in the Buyer disclosure schedule accompanying this Agreement
(the  "Buyer  Disclosure  Schedule").  The  Buyer  Disclosure  Schedule  will be
arranged in  paragraphs  corresponding  to the numbered and lettered  paragraphs
contained in this Section 4. (a) Organization.  The Buyer is a limited liability
company duly organized, validly existing, and in good standing under the laws of
the  State of  California.  The  Transitory  Subsidiary  is a  corporation  duly
organized,  validly  existing,  and in  good  standing  under  the  laws  of the
Commonwealth of Virginia.  (b) Financing.  The Buyer has furnished to the Target
correct and complete copies of written  commitments  from a third party or third
parties (the  "Financing  Commitments")  committing to provide the Buyer and the
Transitory  Subsidiary  with  sufficient  financing  to  consummate  the  Merger
according  to  the  terms  (and  subject  to the  conditions)  of  such  written
commitments.  (c)  Authorization  of  Transaction.  Each  of the  Buyer  and the
Transitory  Subsidiary has requisite  power and authority to execute and deliver
this  Agreement  and  to  perform  its  obligations  hereunder.  This  Agreement
constitutes  the valid and legally  binding  obligation of each of the Buyer and
the  Transitory  Subsidiary,  enforceable  in  accordance  with  its  terms  and
conditions.  (d)  Non-contravention.  Neither the  execution and the delivery of
this Agreement,  nor the consummation of the transactions  contemplated  hereby,
will (i)  violate  any  constitution,  statute,  regulation,  rule,  injunction,
judgment,   order,  decree,   ruling,   charge,  or  other  restriction  of  any
Governmental  Entity,  or court  to which  either  the  Buyer or the  Transitory
Subsidiary  is subject,  (ii)  violate or  conflict  with any  provision  of the
charter or bylaws of either the Buyer or the  Transitory  Subsidiary  or;  (iii)
conflict with,  result in breach of,  constitute a default under,  result in the
acceleration of, create in any party the right to accelerate, terminate, modify,
or cancel, or require any notice under any agreement,  contract, lease, license,
instrument, bond, note mortgage indenture,  franchise or other arrangement (with
or  without  any  notice  or lapse of time)  to which  either  the  Buyer or the
Transitory  Subsidiary is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any lien, claim or encumbrance
upon any of its assets), except in the case of clauses (i) and (iii) above only,
where the  violation,  conflict,  breach,  default,  acceleration,  termination,
modification,   cancellation,   failure  to  give  notice,  or  lien,  claim  or
encumbrance  would not have,  or reasonably be expected to result in any changes
in or effects that in the aggregate  together with all other changes and effects
(x) will  prevent the Buyer or the Transitory  Subsidiary from  consummating the
transactions  contemplated  hereby or  materially  delay the Buyer's  ability to
consummate the  transactions  contemplated  hereby or (y) materially  impair the
Buyer's ability to perform its obligations under Sections 2(c)(iv) or 2(e) (such
changes and effects  described in clauses (x) and (y), a "Buyer Material Adverse
Effect").  To the  Knowledge of any director or officer of the Buyer,  and other
than in  connection  with  the  provisions  of the  Hart-Scott-Rodino  Act,  the
Virginia  Corporation Law, the Securities  Exchange Act, the Securities Act, and
any  applicable  state  securities  laws,  neither the Buyer nor the  Transitory
Subsidiary  needs to give any notice to,  make any  filing  with,  or obtain any
authorization,  consent, or approval of any government or governmental agency in
order for the  Parties  to  consummate  the  transactions  contemplated  by this
Agreement,  except where the failure to give notice,  to file,  or to obtain any
authorization,  consent,  or approval  would not have a Buyer  Material  Adverse
Effect.

     (e) Brokers' Fees. Neither the Buyer nor the Transitory  Subsidiary has any
liability or obligation to pay any fees or  commissions  to any broker,  finder,
agent, investment banker,  financial advisor or other person with respect to the
transactions  contemplated  by this Agreement for which any of the Target or its
Subsidiaries could become liable or obligated.

     (f) Escrowed  Shares.  The Buyer is the full legal and beneficial  owner of
all of the Escrowed Shares and such shares are owned by the Buyer free and clear
of any lien, charge, security interest, restriction or encumbrance whatsoever on
such shares.

     (g) Disclosure.  None of the  information  that the Buyer or the Transitory
Subsidiary will supply  specifically  for use in the Definitive  Proxy Materials
will contain any untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements made therein, in the light of the
circumstances under which they will be made, not misleading.

     (h) Funds.  At Closing,  Buyer will have  adequate  funds to pay the Merger
Consideration.

     SECTION 5.  COVENANTS.  The Parties  agree as follows  with  respect to the
period from and after the execution of this Agreement.

     (a) General.  Each of the Parties will use commercially  reasonable efforts
to take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this Agreement
(including satisfaction,  but not waiver, of the closing conditions set forth in
Section 6 below) as soon as practicable after the date hereof.

     (b) Notices and Consents.  The Target will give any notices (and will cause
each of its  Subsidiaries  to give any notices) to third  parties,  and will use
commercially   reasonable  efforts  to  obtain  (and  will  cause  each  of  its
Subsidiaries to use commercially  reasonable  efforts to obtain) any third party
consents,  waivers  or  licenses  that  the  Buyer  reasonably  may  request  in
connection with the matters referred to herein.

     (c)  Regulatory  Matters and  Approvals.  Each of the Parties will (and the
Target  will cause each of its  Subsidiaries  to) give any  notices to, make any
filings  with,   and  use   commercially   reasonable   efforts  to  obtain  any
authorizations,  consents, permits, orders, requisitions,  tax rulings, waivers,
licenses and approvals of  Governmental  Entities in connection with the matters
referred to in Sections 3(d) and 4(d) above.  Without limiting the generality of
the  foregoing:  (i)  Securities  Exchange  Act.  The  Target  will,  as soon as
practicable following the date of this Agreement,  prepare and file with the SEC
preliminary  proxy materials  under the Securities  Exchange Act relating to the
special  meeting  of its  shareholders  (the  "Special  Meeting")  to be  called
pursuant to Section 5(l) below in order that the  shareholders  may consider and
vote upon the adoption of this  Agreement  and the  approval of the Merger.  The
Target will use  commercially  reasonable  efforts to respond to the comments of
the SEC thereon  and will make any further  filings  (including  amendments  and
supplements)  in  connection  therewith  that  may  be  necessary,   proper,  or
advisable.  The Buyer will  provide the Target  with  whatever  information  and
assistance in connection  with the foregoing  filing that the Target  reasonably
may request and will supply the Buyer with copies of all correspondence  between
the Target or any of its  representatives,  on the one hand,  and the SEC or its
staff, on the other hand, with respect to the proxy statement or the Merger. The
Target  shall give the Buyer and its counsel  (who shall  provide  any  comments
thereon as soon as reasonably  practicable)  the opportunity to review the proxy
statement prior to its being filed with the SEC and shall give the Buyer and its
counsel  (who  shall  provide  any  comments   thereon  as  soon  as  reasonably
practicable)  the  opportunity to review all  amendments and  supplements to the
proxy  statement and all responses to requests for  additional  information  and
replies to comments  prior to their being filed with,  or sent to, the SEC.  The
Target will provide to the Buyer at least five days' prior notice of the date of
mailing (the "SEC Mail Date") of the preliminary  proxy materials to the SEC and
at least five days' prior notice of the date of mailing (the  "Shareholder  Mail
Date") of the Definitive  Proxy  Materials to the Target's  shareholders,  which
Shareholder Mail Date shall be as soon as practicable  after  preliminary  proxy
materials  have been cleared by the SEC but in no event shall be earlier than 33
days after the date hereof.

                  (ii)     Hart-Scott-Rodino Act.

     (A) Each of the  Parties  will file (and the Target  will cause each of its
Subsidiaries  to file) any  Notification  and Report Forms and related  material
that it may be required to file with the Federal Trade Commission and the DOJ or
any  other  Governmental  Entity  under  the  Hart-Scott-Rodino  Act,  will  use
commercially  reasonable  best efforts to obtain (and the Target will cause each
of its Subsidiaries to use commercially  reasonable  efforts to obtain) an early
termination of the applicable waiting period, and will make (and the Target will
cause each of its  Subsidiaries  to make) any further filings  pursuant  thereto
that may be necessary, proper, or advisable.

     (B) In connection with the foregoing Section 5(c)(ii)(A), the Buyer and the
Target and each of their respective  Subsidiaries  shall use their  commercially
reasonable  efforts  to (i)  cooperate  in  all  respects  with  each  other  in
connection   with  any  filing  or  submission   and  in  connection   with  any
investigation or other inquiry,  including any proceeding  initiated by a Party,
(ii) promptly inform the other Party of any communication received by such Party
from, or given by such Party to, the DOJ or any other Governmental Entity and of
any material  communication  received or given in connection with any proceeding
by a private party, in each case regarding any of the transactions  contemplated
hereby, and (iii) permit the other Party to review any communication given by it
to, and consult  with each other in advance of any meeting or  conference  with,
the DOJ or any  such  other  Governmental  Entity  or,  in  connection  with any
proceeding  by a  private  party,  with  any  other  Person,  and to the  extent
permitted  by the DOJ or such  other  applicable  Governmental  Entity  or other
Person,  give the other Party the  opportunity to attend and participate in such
meetings and conferences. For purposes of this Agreement, "Regulatory Law" means
the Sherman Act, as amended, the Clayton Act, as amended, the  Hart-Scott-Rodino
Act, the Federal Trade Commission Act, as amended, and all other federal,  state
and foreign statutes,  rules, regulations,  orders, decrees,  administrative and
judicial  doctrines  and other laws that are  designed or intended to  prohibit,
restrict or regulate actions having the purpose or effect of  monopolization  or
restraint of trade or lessening of the competition.

     (C) Subject to the terms and conditions of this  Agreement,  in furtherance
and not in  limitation  of the  covenants  of the Parties  contained in Sections
5(c)(ii)(A)  and (B), if any  administrative  or judicial  action or proceeding,
including any proceeding by a private party,  is instituted (or threatened to be
instituted)  challenging  any  transaction  contemplated  by this  Agreement  as
violative  of any  Regulatory  Law,  each  of the  Target  and the  Buyer  shall
cooperate in all respects  with each other and use its  respective  commercially
reasonable  efforts to contest and resist any such action or  proceeding  and to
have vacated, lifted, reversed or overturned any decree, judgment, injunction or
other order, whether temporary,  preliminary or permanent, that is in effect and
that  prohibits,   prevents  or  restricts   consummation  of  the  transactions
contemplated  by this  Agreement.  Notwithstanding  the  foregoing  or any other
provision  of this  Agreement,  nothing in this Section  5(c)(ii)  shall limit a
Party's right to terminate this Agreement pursuant to Section 7.

     (D) If  any  objections  are  asserted  with  respect  to the  transactions
contemplated hereby under any Regulatory Law or if any suit is instituted by any
Governmental  Entity or any private party  challenging  any of the  transactions
contemplated  hereby as violative of any Regulatory  Law, each of the Target and
the  Buyer  shall  use  commercially  reasonable  efforts  to  resolve  any such
objections or challenge as such Governmental Entity or private party may have to
such transactions under such Regulatory Law so as to permit  consummation of the
transactions contemplated by this Agreement.

     (E) Nothing in this Section  5(c)(ii) shall require the Buyer or any of its
Subsidiaries  (including the Surviving  Corporation  after the Closing) to sell,
hold separate or otherwise  dispose of or conduct their  business in a specified
manner, or agree to sell, hold separate or otherwise dispose of or conduct their
business in a specified  manner,  or permit the sale,  holding separate or other
disposition  of,  any  assets of the Buyer or its  Subsidiaries  (including  the
Surviving  Corporation  after the Closing) or the conduct of their business in a
specified  manner,  whether as a condition  to  obtaining  any  approval  from a
Governmental Entity or any other Person or for any other reason.

     (d) No Poison Pill. The Target shall not adopt any shareholder rights plan,
"poison  pill"  or  other  plan  or  agreement  prohibiting   shareholders  from
purchasing  additional securities of the Target unless the Buyer, the Transitory
Subsidiary and their  respective  Subsidiaries  and Affiliates are exempted from
such plan, pill or arrangement.

     (e)  Financing.  The Buyer  shall  provide to the Target (i) at least three
days prior to the SEC Mail Date, a Confirmation dated as of a then current date,
if the SEC Mail Date is later than thirty days from the date of this  Agreement,
and (ii) at least  three days  prior to the  Shareholder  Mail Date,  either (x)
copies  of  written  binding  commitments  from a third  party or third  parties
committing to provide the Buyer and the Transitory  Subsidiary  with  sufficient
financing  to  consummate  the Merger  according  to the terms (and  without any
conditions  other than those  conditions  customarily  contained in such written
binding  commitments  by such  third  party or third  parties)  of such  written
commitments, or (y) definitive agreements for sufficient financing to consummate
the Merger (such commitments or agreements described in clauses (x) and (y), the
"Definitive  Financing  Agreements").  On or prior  to the  date of the  Special
Meeting,  the Buyer will have  sufficient  financing in place to consummate  the
Merger.

     (f) Target SARs and Target Options.  Target shall take all necessary action
to cause  all  outstanding  Target  SARs and  Target  Options  to be  purchased,
terminated,  cancelled or otherwise  satisfied by payment to the holders thereof
of not more than $265,000 in the aggregate.

     (g)  Operation  of  Business.  The  Target  will not (and will not cause or
permit any of its Subsidiaries to) engage in any practice,  take any action,  or
enter into any  transaction  outside the Ordinary  Course of  Business.  Without
limiting the generality of the foregoing,  except as expressly  contemplated  by
this Agreement:  (i) none of the Target and its  Subsidiaries  will authorize or
effect any change in its charter or bylaws,  other than amendments of the bylaws
as  needed  for the  holders  of the  Target's  preferred  stock  to  elect  two
additional  directors as permitted  by the  Target's  charter;  (ii) none of the
Target  and its  Subsidiaries  will (A)  grant any  stock  appreciation  rights,
dividend  equivalent  right,  options,  warrants,  or other  rights to purchase,
exchange or obtain, or otherwise acquire in respect of any of its capital stock,
(B) issue, sell, pledge or otherwise dispose of any of its capital stock (except
upon the  conversion  or exercise of the Target  Options as otherwise  permitted
herein) or (C)  accelerate any right to exchange or acquire any capital stock of
the Target or its  Subsidiaries;  (iii) none of the Target and its  Subsidiaries
will (A) declare, set aside, or pay any dividend or distribution with respect to
its  capital  stock  (whether in cash or in kind),  or  directly  or  indirectly
redeem, repurchase, or otherwise acquire any of its capital stock or the capital
stock of its Subsidiaries,  provided,  however, the Target may declare and pay a
dividend  on its  Target  Series A Shares,  its  Target  Series B Shares and its
Target Series C Shares in an aggregate amount not to exceed $10,000,000, as long
as the payment of any such  dividends  are  necessary in order for the Target to
maintain its status as a REIT or to avoid liability for any excise taxes imposed
under  Section 4981 of the Code and as long as such  declaration  and payment do
not conflict with, result in a breach of, constitute a default under,  result in
the  acceleration  of, create in any party the right to  accelerate,  terminate,
modify, or cancel, or require any notice under any agreement,  contract,  lease,
license,  instrument,  bond,  note,  mortgage,  indenture,  franchise  or  other
arrangement  (with or  without  notice or any lapse of time) to which any of the
Target and its  Subsidiaries  is a party or by which it is bound or to which any
of its assets is  subject  (or result in the  imposition  of any lien,  claim or
encumbrance  upon any of its  assets),  except  where the  violation,  conflict,
breach, default, acceleration, termination, modification,  cancellation, failure
to give notice,  or lien, claim or encumbrance  would not have, or reasonably be
expected to have,  a Target  Material  Adverse  Effect,  or (B) effect any stock
split,   reverse   stock  split,   subdivision,   reclassification   or  similar
transaction,  or otherwise  change its  capitalization  as it exists on the date
hereof;  (iv) none of the Target and its Subsidiaries will issue any note, bond,
or other debt security or create,  incur,  assume, or guarantee any indebtedness
for  borrowed  money  or  capitalized   lease  obligation  or  otherwise  become
responsible  (whether directly,  indirectly or otherwise) for the obligations of
any other Person;  (v) none of the Target and its  Subsidiaries  will (A) impose
any  Security  Interest  upon any of its  assets  or (B)  sell,  lease,  assign,
transfer or otherwise  dispose of (by merger or otherwise)  any of its property,
business or assets except for (i) the disposition of assets to the Buyer-REIT as
contemplated  by Section 2(h), (ii) the sale of assets related to the tax-exempt
bond  position at a price to be approved by the Buyer,  such  approval not to be
unreasonably  withheld  or  delayed,  (iii)  the  sale of the  Target's  pool of
property tax receivables secured by real property in Cuyahoga County, Ohio, at a
price to be approved by the Buyer, such approval not to be unreasonably withheld
or delayed, (iv) the sale of any of Target's multifamily loans or participations
at a  yield  not in  excess  of 3% over  the  yield  on the 10 year US  Treasury
security,  (v) the sale by the Target of approximately $65 million of automobile
installment  contracts,  subject  to the  related  debt,  to  Greenwich  Capital
Financial  Products,  Inc.,  and (vi)  other  asset  sales for fair value in the
ordinary course of business provided that the proceeds of such other asset sales
do not exceed $500,000 in any single  transaction or $2,000,000 in the aggregate
prior to the Effective Time;

     (vi) except for funding  obligations on existing  construction  loans in an
aggregate  amount not to exceed  $6,000,000  and except for the  purchase by the
Target pursuant to that certain Tax Certificate  Sale/Purchase  Agreement by and
between Cuyahoga County,  Ohio Treasurer,  as Seller, and GLS  Capital-Cuyahoga,
Inc.,  as  Purchaser,  Dated as of  September  1, 1998 of certain  property  tax
receivables  located  in and  around  Cuyahoga  County,  Ohio  for an  aggregate
purchase price not to exceed $6,000,000, none of the Target and its Subsidiaries
will (A) make any loan to any other Person other than  Target,  Subsidiaries  or
DHI, (B) make any capital investment in, or acquire the securities or assets of,
any other Person other than Target,  Subsidiaries,  DHI, or Subsidiaries of DHI,
provided that in connection  with any such  investment in or  acquisition of any
Subsidiary of DHI (including in connection  with any  liquidation of DHI) (x) no
more than $200,000 shall be distributed  to  shareholders  of DHI other than the
Target and (y) such  Subsidiary of DHI shall become,  directly or indirectly,  a
wholly-owned  Subsidiary of the Target whose capital stock or assets are not and
will not then become,  directly or indirectly,  subject to any collateral pledge
to any of the lenders of the Target or any of its Subsidiaries,  or (C) make any
capital  expenditures  in the aggregate for the Target and its  Subsidiaries  in
excess of $100,000;  (vii) none of the Target and its Subsidiaries will make any
change in employment  terms for any of its  directors,  officers and  employees,
other than (A)  extension  through the Effective  Time of  employment  retention
agreements  which  are in effect as of the date of this  Agreement,  (B)  salary
increases  made in the  Ordinary  Course of  Business,  not to exceed 10% in the
aggregate or 20% for any particular  individual (or such greater amount which is
approved in advance by the Buyer, such approval not to be unreasonably  withheld
or delayed),  and (C) amending that certain Employment  Agreement between Thomas
H. Potts and the Target dated as of September 30, 1994 to delete the  provisions
of Sections  3(a)(iv) and 3(a)(v),  provided that Thomas H. Potts shall not have
previously entered into an employment  agreement with the Buyer;  (viii) none of
the Target or its  Subsidiaries  will enter into or adopt or amend any severance
plan or other  contract or commitment  relating to  severance,  or enter into or
adopt or amend any  commitment  with any  employee or any Target  Employee  Plan
(including, without limitation, the plans, programs, agreements and arrangements
referred to in Section 3(i)) other than any  employment  agreement  entered into
with any employee of the Target who is hired to replace an existing  employee of
the Target as of the date of this  Agreement,  which agreement shall be approved
by the Buyer (such approval not to be  unreasonably  withheld or delayed);  (ix)
none of the Target or its Subsidiaries  will settle or compromise any pending or
threatened  litigation  without the Buyer's  consent  (which consent will not be
unreasonably withheld, delayed or conditioned); (x) none of the Target or any of
its   Subsidiaries   shall  waive  or  amend  any  term  or   condition  of  any
confidentiality or "standstill"  agreement to which the Target or any Subsidiary
is a party;  (xi) none of the Target or any of its Subsidiaries  shall (A) enter
into any agreements  that are material to the continued  operation of the Target
or such  Subsidiary,  and which (x) could  materially  and adversely  effect the
Target or such  Subsidiary  or (y) which could  reasonably be expected to have a
material  adverse  effect  in the  ability  of the  Parties  to  consummate  the
transaction  contemplated by this  Agreement,  or (B) amend any of the foregoing
agreements  as exist on the date hereof;  (xii) none of the Target or any of its
Subsidiaries  shall  make any  material  changes  in the type or amount of their
insurance coverages; (xiii) none of the Target or any of its Subsidiaries shall,
except as may be required by law or GAAP or the rules and regulations of the SEC
and with prior  written  notice to the Buyer,  change  any  material  accounting
principals or practices  used by the Target or its  Subsidiaries;  (xiv) none of
the Target or any of its Subsidiaries  shall enter into any contracts  involving
any rate swap transaction, basis swap, forward rate transaction, commodity swap,
commodity  option,  equity or equity index swap,  equity or equity index option,
bond  option,   interest  rate  option,   foreign  exchange   transaction,   cap
transaction, floor transaction,  collar transaction,  currency swap transaction,
cross-currency  rate swap  transaction,  currency  option  or any other  similar
transaction (including any option with respect to any of these transactions), or
any combination of these  transactions  (each a "Derivative"  and  collectively,
"Derivatives"),  except for contracts approved by the Buyer (such consent not to
be unreasonably  withheld);  (xv) none of the Target or any of its  Subsidiaries
shall  waive,  relinquish,  release or terminate  any  material  right or claim,
including any such right or claim under any material contract; (xvi) none of the
Target or any of its Subsidiaries  shall apply for, consent to, or acquiesce in,
the appointment of a trustee, receiver,  sequestrator or other custodian for any
substantial  part of the  property  of the Target or any  Subsidiary,  or make a
general  assignment  for the benefit of creditors,  or permit or suffer to exist
the  commencement of any bankruptcy,  reorganization,  debt arrangement or other
case or proceeding  under any bankruptcy or insolvency law, or any  dissolution,
winding  up  or  liquidation  proceeding,  in  respect  of  the  Target  or  any
Subsidiary;  (xvii) none of the Target or any of its Subsidiaries shall take any
action  that would  reasonably  be  expected  to cause any  Target  Shares to be
delisted from NASDAQ or the New York Stock Exchange, as applicable, prior to the
completion of the Merger;  (xviii) none of the Target or its  Subsidiaries  will
enter into a "non-compete"  or similar  agreement;  (xix) the Target and each of
its  Subsidiaries  shall  conduct its business in all  material  respects in the
Ordinary  Course of Business  consistent  with this Agreement and use reasonable
best  efforts  to  (x) preserve  intact  its  business  organization,   (y) keep
available  the services of its  officers  and  employees  and  (z) maintain  its
existing relations and goodwill with customers, suppliers, regulators, creditors
and all others having business  dealings with it; (xx) except as may be required
by law,  none of the Target or any of its  Subsidiaries  shall make any material
tax  election,  make or change any method of  accounting  with respect to taxes,
file any amended  tax  returns or settle or  compromise  any  material  federal,
state,  local or foreign  tax  liability;  (xxi) the Target  intends to and will
continue to maintain  its  qualification  as a REIT  through the Closing Date by
making all necessary undertakings that are consistent with the Code; (xxii) none
of the Target and its Subsidiaries will commit to any of the foregoing.

     (h) Full Access.  The Target will (and will cause each of its  Subsidiaries
to) permit  representatives  of the Buyer to have full access at all  reasonable
times, upon reasonable prior notice, and in a manner so as not to interfere with
the  normal  business  operations  of the Target  and its  Subsidiaries,  to all
premises,  properties,   personnel,  books,  records  (including  tax  records),
contracts,  and  documents  of or  pertaining  to  each  of the  Target  and its
Subsidiaries.  Each of the Buyer and the  Transitory  Subsidiary  will treat and
hold as such any Confidential Information it receives from any of the Target and
its Subsidiaries in the course of the reviews contemplated by this Section 5(h),
will not use any of the Confidential  Information except in connection with this
Agreement,  and, if this  Agreement  is  terminated  for any reason  whatsoever,
agrees to return to the Target all tangible embodiments (and all copies) thereof
which are in its possession.

     (i) Notice of  Developments.  Each Party will give prompt written notice to
the others of (i) any material  adverse  development  causing a breach of any of
its own  representations,  warranties and covenants contained herein or (ii) any
event  which  could  reasonably  be expected to cause such party to be unable to
consummate  the  Merger  or to  preclude  the  Closing  of  this  Agreement.  No
disclosure by any Party pursuant to this Section 5(i), however,  shall be deemed
to amend or supplement  such Party's  disclosure  schedule or to prevent or cure
any misrepresentation, breach of warranty, or breach of covenant.

     (j)  Insurance  and  Indemnification.  (i)  The  Buyer  will  provide  each
individual  who  served as a  director  or  officer  of the Target or any of its
Subsidiaries  at any time prior to the Effective Time with  liability  insurance
with respect to acts or failures to act prior to the Effective Time for a period
of six years after the Effective Time which liability insurance shall be no less
favorable  in  coverage  and  amount  than any  applicable  insurance  in effect
immediately  prior to the Effective Time (other than to the extent the available
limit of any such insurance  policy may be reduced or exhausted by reason of the
payment of claims thereunder relating to such directors or officers of Target or
any of its  Subsidiaries);  provided,  however,  that in  order to  maintain  or
procure  such  coverage,  neither the Buyer nor the  Surviving  Corporation,  as
applicable,  shall be required to pay, in the  aggregate,  an annual  premium in
excess of 300% of the current annual premium paid by the Target for its existing
coverage  (the  "Insurance  Premium  Cap");  and  provided,   further,  that  if
equivalent  coverage  cannot be obtained,  or can be obtained  only by paying an
annual  premium  in  excess  of the  Insurance  Premium  Cap,  the Buyer and the
Surviving  Corporation  shall only be required to obtain as much coverage as can
be  obtained  by  paying,  in the  aggregate,  an  annual  premium  equal to the
Insurance  Premium Cap.  (ii) Except as  permitted  under  Section  2(d)(ii) and
(iii),  for a period of six years after the Effective  Time,  the Buyer will not
take any action to alter or impair any exculpatory or indemnification provisions
existing in the articles of incorporation or bylaws of the Surviving Corporation
(except as required by Virginia  Corporation  Law or federal  law) to the extent
that such  modifications are less advantageous to any individual who served as a
director or officer of the Target or any of its  Subsidiaries,  or of DHI or any
of  its  Subsidiaries,  at any  time  prior  to  the  Effective  Time  than  the
exculpatory  or  indemnification   provisions   contained  in  the  articles  of
incorporation or bylaws of the Target as of the date hereof. (iii) If the Merger
is  consummated,  the  Buyer  and  Surviving  Corporation  will  indemnify  each
individual  who  served as a  director  or  officer  of the Target or any of its
Subsidiaries,  or of DHI or any of its  Subsidiaries,  at any time  prior to the
Effective  Time  from  and  against  any and all  actions,  suits,  proceedings,
hearings,  investigations,  charges, complaints,  claims, demands,  injunctions,
judgments,  orders, decrees,  rulings,  damages, dues, penalties,  fines, costs,
amounts paid in settlement,  liabilities,  obligations,  taxes,  liens,  losses,
expenses, and fees, including all court costs and reasonable attorneys' fees and
expenses,  resulting from, arising out of, or caused by this Agreement or any of
the transactions contemplated herein.

     (k) Non-Interference. The Buyer and the Transitory Subsidiary will not (and
will not cause or permit any of their respective Affiliates to) solicit,  entice
or otherwise induce any employee of the Target or any of its Affiliates to leave
the  employ  of the  Target  for any  reason  whatsoever,  and not to  otherwise
interfere with any contractual or business  relationship  between the Target and
any of its employees or between a Target's Affiliate and any of such Affiliate's
employees; provided, however, that the Buyer and the Transitory Subsidiary shall
not be prohibited from employing any such person who first solicits the Buyer or
Transitory Subsidiary on his or her own initiative, and, provided, further, this
Agreement  shall not  prohibit any  advertisement  or general  solicitation  (or
employment  as a  result  thereof)  that is not  specifically  targeted  at such
persons.

     (l) Target  Stockholder  Approval.  The Target  shall (i) call the  Special
Meeting in accordance with applicable law and its Articles of Incorporation  and
its Bylaws for the purpose of voting upon the Merger and obtaining the Requisite
Stockholder  Approval (provided that the Shareholder Mail Date shall in no event
shall be earlier  than 33 days  after the date  hereof),  (ii) hold the  Special
Meeting as soon as practicable  following the date of this Agreement,  and (iii)
subject to the next sentence,  recommend to its stockholders the approval of the
Merger  and use its  reasonable  best  efforts to obtain  the  approvals  by its
stockholders  of the Merger,  this Agreement and the  transactions  contemplated
hereby. Nothing contained in this Section 5(l) or Section 5(m) shall require the
board of directors of the Target to make any  recommendation  or to refrain from
making any recommendation  with respect to a Superior Proposal,  which the board
of  directors,  after  considering  such matters as it deems  relevant and after
consulting  with  its  outside  counsel,  determines  in  good  faith  would  be
reasonably  likely to result in a breach of its fiduciary duties to stockholders
under applicable law as long as the Target has complied with its obligations set
forth in Section 5(m) in all material respects.  For purposes of this Agreement,
a  "Superior  Proposal"  means any bona fide  written  Takeover  Proposal if the
proposal is on terms which the board of  directors of the Target  determines  in
its good faith judgment (after consulting with a financial advisor of nationally
recognized  reputation  and such other  matters as the board of directors of the
Target deems  relevant) is reasonably  likely to be  consummated  and to be more
favorable  to the  Target's  stockholders  than the  Merger.  The  Target  shall
promptly inform the Buyer of the Target's receipt of any Superior Proposal.

     (m)  Non-Solicitation.  (i) The Target shall not, and, shall not permit its
Subsidiaries to, or authorize any of its officers, directors, employees, agents,
accountants,   counsel,   investment  bankers,   financial  advisors  and  other
representatives  ("Representatives")  to, (A) directly or indirectly,  initiate,
solicit  or  encourage,  or take any  action  to  facilitate  the  making of any
Takeover  Proposal (as defined below),  or (B) directly or indirectly  engage in
negotiations  or  provide  any  Confidential  Information  or data to any person
making a Takeover Proposal.  Notwithstanding the foregoing, prior to the date of
approval of the Merger and this Agreement by the stockholders of the Target, the
Target  shall be  permitted  to respond to a Takeover  Proposal  (by  furnishing
information and access to a third party or by  participating  in discussions and
negotiations  with a third party) if, and only if, (x) the board of directors of
the Target  determines in good faith,  after consulting with a financial advisor
of  nationally  recognized  standing,  that the Takeover  Proposal is reasonably
likely to result  in a  Superior  Proposal,  (y) the board of  directors  of the
Target determines, after consulting with its outside counsel, that failure to so
respond would be reasonably  likely to result in a breach of fiduciary duties to
stockholders under applicable law and (z) the party making the Takeover Proposal
executes a confidentiality  agreement. (ii) The Target shall promptly advise the
Buyer orally and in writing of any Takeover Proposal or any inquiry with respect
to or that could  reasonably be expected to lead to any Takeover  Proposal,  the
identity  of the Person  making any such  Takeover  Proposal  or inquiry and the
material terms of any such Takeover Proposal or inquiry.  (iii) The Target shall
immediately  cease and  cause to be  terminated  all  existing  discussions  and
negotiations,  if any, with any other Persons conducted  heretofore with respect
to any Takeover Proposal.

     For purposes of this Agreement,  a "Takeover  Proposal" with respect to the
Target,  as  applicable,  means any  inquiry,  proposal or offer from any Person
relating  to (A) any  direct or indirect  acquisition  or purchase of a business
that  constitutes  20% or more of the net revenues,  net income or net assets of
the Target and its  Subsidiaries,  taken as a whole, or 20% or more of any class
of equity  securities of the Target or any of its  Subsidiaries,  (B) any tender
offer  or  exchange  offer  that  if  consummated  would  result  in any  Person
beneficially  owning 20% or more of any class of equity securities of the Target
or  any  of  its  Subsidiaries,  or  (C) any  merger,  consolidation,   business
combination,  recapitalization,  liquidation, dissolution or similar transaction
involving the Target or any of its Subsidiaries  that constitutes 20% or more of
the  net  revenues,  net  income  or  net  assets  of the  Target  or any of its
Subsidiaries, as applicable, and its Subsidiaries taken as a whole, in each case
other  than  the  transactions  contemplated  by  this  Agreement.  Each  of the
transactions  referred to in  clauses (A) - (C)  of the foregoing  definition of
Takeover  Proposal,  other than the transactions  contemplated by this Agreement
and  transactions  permitted  under  Section 5(g),  is  referred to herein as an
"Acquisition Transaction."

     (n) Benefit Plans.  As soon as practicable  following the date hereof,  the
Target shall file, or shall cause to be filed,  any and all required reports and
other documents required to be filed with the IRS and/or the Department of Labor
for any and all welfare benefit plans listed on Target Disclosure  Schedule 3(h)
with respect to 1996-1999 reporting years (and for such prior reporting years to
the extent the failure to do so would have a Target  Material  Adverse  Effect),
and shall  take,  or cause to be  taken,  all such  action  as may be  necessary
pursuant  to  the  Department  of  Labor's  Voluntary   Compliance  Program  for
Delinquent  Plan Filers to comply with its annual  reporting  obligations  under
Title I of ERISA with respect to such plans for 1996-1999  reporting  years (and
for such prior  reporting  years to the extent the failure to do so would have a
Target Material Adverse Effect).


SECTION 6.    CONDITIONS TO OBLIGATION TO CLOSE.

     (a)  Conditions to Obligation of the Buyer and the  Transitory  Subsidiary.
The obligation of each of the Buyer and the Transitory  Subsidiary to consummate
the transactions to be performed by it in connection with the Closing is subject
to satisfaction of the following  conditions:  (i) this Agreement and the Merger
shall have received the Requisite Stockholder  Approval;  (ii) Target shall have
transferred  the  Excluded  Target REIT Assets to the  Buyer-REIT;  (iii) to the
extent DHI has not been  liquidated  prior to the Closing in accordance with the
terms of Section 5(g)(vi)  hereof,  the purchase by the Buyer or an Affiliate of
the Buyer of all of the  outstanding  common  stock of DHI at a  purchase  price
equal to the book value of DHI less  amounts  due from its common  shareholders,
which purchase price approximates $120,000 as of the date of this Agreement (and
shall not be materially different at Closing),  on terms and conditions mutually
satisfactory to the Parties to such transaction; but under all circumstances for
a price not greater than $200,000;  (iv) the  representations  and warranties of
the Target in this  Agreement  not  qualified by  materiality  shall be true and
correct in all material  respects and if qualified by materiality  shall be true
and correct in all  respects,  in each case as though made on the Closing  Date;
(v) the Target  shall have  performed  and  complied  with all of its  covenants
hereunder in all material respects through the Closing;  (vi) no statute,  rule,
regulation or other law and no order, decree, stipulation,  injunction or charge
shall  have  been  enacted,  issued,  promulgated,  entered  or  issued  by  any
Governmental  Entity  which  is in  effect  and has the  effect  of  making  the
consummation of the Merger illegal, materially restricts,  prevents or prohibits
consummation of any of the transactions  contemplated hereby or would materially
impair the ability of the Buyer to own the  outstanding  shares of the Surviving
Corporation  or operate its or the businesses of the Surviving  Corporation,  or
any of the Surviving  Corporation's  Subsidiaries  following the Effective Time,
nor shall any proceeding by any Governmental Entity seeking any of the foregoing
be pending or threatened; (vii) the Target shall have purchased,  terminated, or
otherwise satisfied all outstanding Target SARs and Target Options by payment to
the  holders  thereof of an  aggregate  purchase  price not to exceed  $265,000;
(viii)  the  Target  shall  have  delivered  to the  Buyer  and  the  Transitory
Subsidiary a  certificate  to the effect that each of the  conditions  specified
above in Section 6(a)(i)-(vii) is satisfied in all respects; (ix) all applicable
waiting  periods (and any extensions  thereof) under the  Hart-Scott-Rodino  Act
shall have  expired or  otherwise  been  terminated  and the Parties  shall have
received all other  authorizations,  consents,  and  approvals  of  Governmental
Entities necessary for the consummation of the transactions  contemplated hereby
(including, without limitation, those set forth in Sections 3(d) and 4(d) above)
without the  imposition  of any  material  terms,  conditions,  restrictions  or
limitations;  (x) the Buyer, the Transitory  Subsidiary and the Buyer-REIT shall
have obtained the financing  they will require in order to consummate the Merger
on terms and conditions reasonably acceptable to the Buyer; (xi) the Buyer shall
have  received an opinion  dated as of the Closing Date of Venable,  Baetjer and
Howard,  LLP in  form  and  substance  reasonably  satisfactory  to  the  Buyer,
regarding the  qualification of the Target as a REIT under the Code; (xii) on or
prior to the date  thirty (30) days from the date of this  Agreement  (or on the
first  business day  following  such 30th day if such 30th day is not a business
day),  the Buyer shall have  received  from the  holders of ninety  (90%) of the
outstanding  principal  amount of the  Target  Senior  Notes any  consent to the
Merger or this  Agreement,  or any waiver of any terms of the Target Senior Note
Indenture  or the Target  Senior  Notes,  as the Buyer shall deem  necessary  or
advisable,  which  consent or waiver shall be in form and  substance  reasonably
satisfactory to the Buyer;  (xiii) the Preferred  Stock Charter  Amendment shall
have been properly filed and be in full force and effect; and (xiv) no condition
shall exist which  constitutes  a default in, or which but for the lapse of time
or the waiver by or forbearance of any Party or Parties thereto would constitute
a default in, the performance or observance of any term,  covenant (financial or
otherwise), representation, warranty or agreement in any agreement of the Target
relating to indebtedness for borrowed money (including,  without limitation, the
Target Senior Notes Indenture or any Target Senior Notes).

     The Buyer and the Transitory  Subsidiary may waive any condition  specified
in this Section 6

         (a) if they execute a writing so stating at or prior to the Closing.

     (b) Conditions to Obligation of the Target. The obligation of the Target to
consummate the transactions to be performed by it in connection with the Closing
is subject to satisfaction of the following conditions: (i) the Buyer shall have
accepted the transfer of the Excluded Target REIT Assets to the Buyer-REIT; (ii)
the  representations and warranties of the Buyer if not qualified by materiality
shall  be  true  and  correct  in all  material  respects  and if  qualified  by
materiality  shall be true and correct in all  respects,  in each case as though
made on the Closing Date; (iii) each of the Buyer and the Transitory  Subsidiary
shall have  performed and complied  with all of its  covenants  hereunder in all
material  respects  through the Closing;  (iv) no statute,  rule,  regulation or
other law and no order,  decree,  stipulation,  injunction  or charge shall have
been enacted, issued, promulgated,  entered or issued by any Governmental Entity
which is in effect and has the effect of making the  consummation  of the Merger
illegal, materially restricts,  prevents or prohibits consummation of any of the
transactions  contemplated  hereby, nor shall any proceeding by any Governmental
Entity seeking any of the foregoing be pending or threatened;  (v) to the extent
DHI has not been liquidated prior to the Closing in accordance with the terms of
Section  5(g)(vi)  hereof,  the Buyer or an  Affiliate  of the Buyer  shall have
accepted  the  purchase by the Buyer or an  Affiliate of the Buyer of all of the
outstanding  common stock of DHI at a purchase  price equal to the book value of
DHI  less  amounts  due from  its  common  shareholders,  which  purchase  price
approximates  $120,000  as of the  date  of this  Agreement  (and  shall  not be
materially different at Closing),  on terms and conditions mutually satisfactory
to the Parties to such transaction;  but under all circumstances for a price not
greater  than  $200,000,  such  purchase  agreement  to  include  insurance  and
indemnification  provisions  similar to Section 5(j) above;  (vi) this Agreement
and the Merger shall have received the Requisite Stockholder Approval; and (vii)
all  applicable   waiting  periods  (and  any  extensions   thereof)  under  the
Hart-Scott-Rodino  Act shall have expired or otherwise  been  terminated and the
Parties shall have received all other authorizations, consents, and approvals of
Governmental  Entities  necessary  for  the  consummation  of  the  transactions
contemplated hereby (including,  without limitation, those set forth in Sections
3(d)  and  4(d)  above)  without  the  imposition  of  any  terms,   conditions,
restrictions or limitations.

     The Target may waive any  condition  specified  in this  Section 6(b) if it
executes a writing so stating at or prior to the Closing.

SECTION 7     TERMINATION.

     (a)  Termination  of Agreement.  This  Agreement may be terminated  and the
Merger may be abandoned at any time prior to the Effective Time (notwithstanding
the  obtaining of the Requisite  Stockholder  Approval):  (i) by mutual  written
consent of the Target and the Buyer; (ii) by either the Target or the Buyer; (A)
if the Merger has not been  consummated  by (1) January 31, 2001 if the Target's
preliminary  proxy  materials  are not  reviewed by the SEC, or (2) February 28,
2001 if the Target's  preliminary  proxy materials are reviewed by the SEC (such
date as described in clauses (1) and (2),  the "End Date");  provided,  however,
that the right to terminate this Agreement under this Section  7(a)(ii)(A) shall
not be available to any Party whose  failure to fulfill in any material  respect
any obligation under this Agreement has caused or resulted in the failure of the
Effective Time to occur on or before the End Date; further,  provided,  however,
if the Target's Proxy Materials are not filed with the SEC by November 30, 2000,
(the "Target SEC Filing Date"), the End Date shall be extended by a day for each
day  subsequent to the Target SEC Filing Date as to which it takes the Target to
file  its  preliminary  proxy  materials;  or (B) if the  Requisite  Stockholder
Approval  shall not have been  obtained  by reason of the  failure to obtain the
required vote at a duly held meeting of stockholders or any adjournment thereof;
(iii) by either the Target or the Buyer,  if there  shall be any  statute,  law,
rule or regulation  that makes  consummation  of the Merger illegal or otherwise
prohibited or if any judgment,  injunction,  order or decree enjoining the Buyer
or the  Target  from  consummating  the  Merger is  entered  and such  judgment,
injunction,  order or decree shall become final and non-appealable;  (iv) by the
Buyer, if the board of directors of the Target shall have failed to recommend or
withdrawn  or modified or changed in a manner  adverse to Buyer its  approval or
recommendation of this Agreement or the Merger,  whether or not permitted by the
terms  hereof,  or shall  have  failed to call and hold the  Special  Meeting in
accordance with Section 5(1), or shall have recommended a Superior  Proposal (or
the board of  directors  of the  Target  shall  have  resolved  to do any of the
foregoing);  (v) by the Buyer,  if the Closing shall not have occurred by reason
of the failure of the condition precedent under Section 6(a)(x)  hereof; (vi) by
the Buyer,  on or before the date that is thirty (30) days from the date of this
Agreement (or on the first business day following such 30th day if such 30th day
is not a business  day),  if the  condition  precedent  under  Section 6(a)(xii)
hereof shall not have been  satisfied;  (vii) by either the Buyer or the Target,
if there  shall  have been a breach by the other of any of its  representations,
warranties,  covenants or obligations contained in this Agreement,  which breach
would result in the failure to satisfy one or more of the  conditions  set forth
in Section  6(a) (iv) or (v) (in the case of a breach by the  Target) or Section
6(b)  (ii) or (iii) (in the case of a breach by the  Buyer,  including,  without
limitation,  breach of the  covenants  set  forth in  Section  5(e)).  The Party
desiring to terminate this Agreement  pursuant to clause (ii), (iii), (iv), (v),
(vi) or (vii) of this Section 7(a) shall give written notice of such termination
to the other Party in  accordance  with Section 8(h),  specifying  the provision
hereof pursuant to which such termination is effected.

     (b)  Termination  Fee.  If: (i) The Buyer shall  terminate  this  Agreement
pursuant to Section  7(a)(iv);  or (ii) (x) either the Target or the Buyer shall
terminate  this  Agreement  pursuant  to Section  7(a)(ii)(B),  (y) prior to the
Special Meeting a Superior  Proposal relating to the Target has been made to the
Target or to the  stockholders  of the  Target by any  Person  and (z)  within 6
months  after the  termination  of this  Agreement,  the  Target  consummates  a
transaction  relating  to any  Superior  Proposal  or enters  into a  definitive
agreement  with  respect  to any  Superior  Proposal  (provided  that the Target
ultimately  consummates a transaction  relating to such Superior  Proposal);  or
(iii) the Buyer shall  terminate this Agreement  pursuant to Section  7(a)(vii),
then in any case as described in clause (i),  (ii),  or (iii),  the Target shall
pay to the Buyer (by wire  transfer of  immediately  available  funds) an amount
equal to  $2,000,000  (not later than three (3) business  days after the date of
termination  of this Agreement in the case of clauses (i) or (iii) and not later
than the date of consummation  of such  transaction in the case of clause (ii));
provided,  however,  that the amount payable to the Buyer under Section 7(b)(ii)
resulting from a termination of this Agreement  pursuant to Section  7(a)(ii)(B)
shall be reduced to $1,500,000 if the Superior  Proposal  referred to in Section
7(b)(ii)(y)  has been made  prior to the  earlier  of (x) the date the Buyer has
obtained the consent or waiver (as applicable) described in Section 6(a)(xii) or
(y) the date that is  thirty  days  from the date of this  Agreement  (or on the
first  business day  following  such 30th day if such 30th day is not a business
day); and provided  further,  that no amount shall be payable to the Buyer under
Section  7(b)(iii)  if (A) this  Agreement  has  been  terminated  by the  Buyer
pursuant to Section 7(a)(vii), (B) such termination is based on a failure of any
representation  or warranty at Section 3(d), 3(k) or 3(s) to continue to be true
and correct,  or true and correct in all material  respects (as applicable),  as
though such  representations  and warranties  were made on the Closing Date, and
(C) such failure results solely from any breach  occurring after the date hereof
relating to any  maturity or  termination  date under that  certain  5/98 Senior
Secured Credit  Agreement dated as of May 29, 1998 by and between the Target and
Chase  Bank of Texas  as Agent  and  Lender,  and  other  Lenders,  as  amended,
restated,  or  supplemented  prior to the date  hereof  or that  certain  Master
Repurchase  Agreement dated as of April 7, 2000 between Lehman  Brothers,  Inc.,
Lehman  Commercial  Paper,  Inc.  and  the  Target,  as  amended,  restated,  or
supplemented  prior to the date hereof;  and provided further that except as set
forth in this Section 7(b), the Target shall have no liability for any breach of
its representations,  warranties,  covenants,  or obligations  contained in this
Agreement.

     (c) Forfeiture. (i) If the Buyer shall terminate this Agreement pursuant to
Section  7(a)(v),  or if the Target shall  terminate this Agreement  pursuant to
Section  7(a)(vii),  the  Escrow  Amount  shall be  transferred,  assigned,  and
delivered  to the  Target  as  liquidated  damages  (and  not as a  penalty)  in
accordance with the terms, and subject to the limitations and  restrictions,  of
the Escrow  Agreement,  without payment of consideration by the Target,  and the
Buyer and the  Transitory  Subsidiary  shall have no further  liability  for any
breach  of any of its  representations,  warranties,  covenants  or  obligations
contained in this Agreement,  including without  limitation breach of any of the
covenants set forth in Section 5(e). Until any forfeiture of the Escrowed Shares
by the Buyer to the Target  pursuant to the Escrow  Agreement as a result of the
termination of this Agreement by the Buyer  pursuant to Section  7(a)(v),  or by
the Target pursuant to Section 7(a)(vii), the Buyer shall have the right to vote
the  Escrowed  Shares  and  shall be  entitled  to  receive  all  dividends  and
distributions payable in respect of the Escrowed Shares.

     (ii)  If  the  Buyer   shall   terminate   this   Agreement   pursuant   to
Section 7(a)(vi),  then (A) within three business days thereof,  the Target will
select  any  or all  loans  or  participations  described  on  Schedule 7(c)(ii)
attached hereto and "put" those loans or participations by written notice to the
Buyer and Buyer agrees to purchase such loans or participations  for cash within
10 business days following such notice,  or (B) if the Buyer so elects,  in lieu
of Buyer's obligations under clause (A), Buyer shall forfeit the Escrowed Shares
to the Target as liquidated  damages (and not as a penalty) in  accordance  with
the  terms,  and  subject to the  limitations  and  restrictions  of, the Escrow
Agreement, without payment of consideration by the Target, and the Buyer and the
Transitory  Subsidiary  shall  have no further  liability  for any breach of its
representations,   warranties,  covenants,  or  obligations  contained  in  this
Agreement,  including, without limitation, the breach of the covenants set forth
in Section 5(e).  The purchase price for such loans or  participations  shall be
equal to an amount determined by discounting each principal and interest payment
due on each such loan or participation  each month over the life of such loan or
participation  at a rate equal to 2.50% plus the rate of interest  applicable to
the 10 year US  Treasury  security  (determined  at the close of business on the
business day immediately  preceding the date of the "put" notice from the Target
to the  Buyer),  divided  by  12.  Such  purchase  shall  be  made  without  any
representations   or  warranties  by  the  Target  relating  to  such  loans  or
participations,  other than that Target has all the right, title and interest in
such loans or  participations  and that such loans or  participations  are being
sold free and clear of any liens.



     (c) Effect of  Termination.  If this  Agreement is  terminated  pursuant to
Section  7(a),  this  Agreement  shall  become  void  and of no  effect  with no
liability  on the part of any  Party  hereto,  except  that  (i) the  agreements
contained in Section 7(b), in Section 7(c),  and this Section 7(d) hereof and in
the Confidentiality Agreement, shall survive the termination hereof. The parties
hereto  expressly  acknowledge  and agree that,  in light of the  difficulty  of
accurately determining actual damages in circumstances where the termination fee
is payable in accordance  with Section 7(b) or the Escrow Amount is forfeited in
accordance  with Section 7(c), the right to receive such  termination fee or the
Escrow  Amount  constitutes  a  reasonable  estimate of the damages that will be
suffered by reason of any such  termination  of this  Agreement  and shall be in
full and complete satisfaction of any and all damages arising as a result of the
foregoing.

     SECTION  8.  MISCELLANEOUS.  (a)  Survival.  None  of the  representations,
warranties, and covenants of the Parties (other than the provisions in Section 2
above concerning payment of the Merger Consideration,  the provisions of Section
5(j) above concerning insurance and  indemnification,  the provisions of Section
5(k) concerning  non-interference,  the provisions of Sections 7(b), (c) and (d)
and this Section 8(a)) will survive the  Effective  Time or the  termination  of
this   Agreement   pursuant  to  Section  7.  (b)  Press   Releases  and  Public
Announcements.  No Party  shall  issue  any  press  release  or make any  public
announcement  relating to the subject matter of this Agreement without the prior
written  approval of the other Parties;  provided,  however,  that any Party may
make any public  disclosure  it believes in good faith is required by applicable
law  or  any  listing  or  trading  agreement   concerning  its  publicly-traded
securities (in which case the disclosing Party will use commercially  reasonable
efforts  to advise  the other  Party  prior to making  the  disclosure).  (c) No
Third-Party  Beneficiaries.  This  Agreement  shall  not  confer  any  rights or
remedies upon any Person other than the Parties and their respective  successors
and permitted assigns;  provided,  however, that (i) the provisions in Section 2
above  concerning  payment  of the Merger  Consideration  are  intended  for the
benefit of the Target Stockholders and (ii) the provisions in Section 5(j) above
concerning  insurance  and  indemnification  are intended for the benefit of the
individuals  specified therein and their respective legal  representatives.  (d)
Entire Agreement.  This Agreement  (including the documents referred to herein),
together with the  Confidentiality  Agreement,  constitutes the entire agreement
among the  Parties  and  supersedes  any prior  understandings,  agreements,  or
representations  by or among the  Parties,  written or oral,  to the extent they
related in any way to the subject matter hereof.  (e) Succession and Assignment.
This  Agreement  shall be binding  upon and inure to the  benefit of the Parties
named herein and their respective successors and permitted assigns. No Party may
assign either this  Agreement or any of its rights,  interests,  or  obligations
hereunder  without  the  prior  written  approval  of  the  other  Parties.  (f)
Counterparts.  This Agreement may be executed in one or more counterparts,  each
of which shall be deemed an original but all of which  together will  constitute
one and the same instrument.  (g) Headings.  The section  headings  contained in
this Agreement are inserted for convenience only and shall not affect in any way
the meaning or  interpretation  of this  Agreement.  (h)  Notices.  All notices,
requests,  demands,  claims,  and  other  communications  hereunder  will  be in
writing. Any notice,  request,  demand, claim, or other communication  hereunder
shall be deemed duly given if (and then two  business  days after) it is sent by
registered or certified mail,  return receipt  requested,  postage prepaid,  and
addressed to the intended recipient as set forth below:

If to the Target:                           Copy to:

Dynex Capital, Inc.                   Elizabeth R. Hughes, Esq.
Attn:    Thomas H. Potts              Venable, Baetjer and Howard, LLP
         President                    1800 Mercantile Bank & Trust Building
4551 Cox Road, Suite 300              Two Hopkins Plaza
Glen Allen, Virginia 23060            Baltimore, Maryland 21201
Facsimile No. (804) 217-5860          Facsimile No. (410) 244-7742

If to the Buyer:                      Copy to:

California Investment Fund, LLC       Stephen Fraidin, Esq.
Attn:    Michael R. Kelly             Fried, Frank, Harris, Shriver & Jacobson
         Managing Member              One New York Plaza
550 West C Street                     New York, New York 10004
10th Floor                            Facsimile No. (212) 859-4000
San Diego, California 92101
Facsimile No. (619) 687-5010

If to the Transitory Subsidiary:       Copy to:

DCI Acquisition Corporation            Stephen Fraidin, Esq.
c/o California Investment Fund, LLC    Fried, Frank, Harris, Shriver & Jacobson
Attn:    Michael R. Kelly              One New York Plaza
         Managing Member               New York, New York 10004
550 West C Street                      Facsimile No. (212) 859-4000
10th Floor
San Diego, California 92101
Facsimile No. (619) 687-5010

     Any  Party  may  send  any  notice,   request,   demand,  claim,  or  other
communication hereunder to the intended recipient at the address set forth above
using any other means (including personal delivery, overnight courier, messenger
service,  telecopy,  telex,  ordinary  mail,  or electronic  mail),  but no such
notice,  request,  demand, claim, or other communication shall be deemed to have
been duly  given  unless  and until it  actually  is  received  by the  intended
recipient. Any Party may change the address to which notices, requests, demands,
claims,  and other  communications  hereunder  are to be delivered by giving the
other  Parties  notice in the  manner  herein  set  forth.  (i)  Governing  Law;
Jurisdiction.  This  Agreement  shall be governed by and construed in accordance
with the domestic laws of the  Commonwealth of Virginia without giving effect to
any choice or conflict of law provision or rule (whether of the  Commonwealth of
Virginia or any other jurisdiction) that would cause the application of the laws
of any jurisdiction other than the Commonwealth of Virginia.  Each Party to this
Agreement hereby  irrevocably agrees that any legal action or proceeding arising
out  of or  relating  to  this  Agreement  or  any  agreements  or  transactions
contemplated  hereby may be brought in the state or federal  courts of  Virginia
and hereby expressly submits to the exclusive personal jurisdiction and venue of
such courts for the purposes  thereof and expressly waives any claim of improper
venue and any claim that such courts are an inconvenient  forum.  (j) Amendments
and  Waivers.  No amendment of any  provision of this  Agreement  shall be valid
unless the same shall be in writing and signed by all of the Parties;  provided,
however,  that any amendment effected subsequent to shareholder approval will be
subject to the restrictions contained in the Virginia Corporation Law. No waiver
by any  Party of any  default,  misrepresentation,  or  breach  of  warranty  or
covenant hereunder, whether intentional or not, shall be deemed to extend to any
prior or  subsequent  default,  misrepresentation,  or  breach  of  warranty  or
covenant  hereunder  or affect in any way any  rights  arising  by virtue of any
prior or subsequent such occurrence. (k) Severability.  Any term or provision of
this  Agreement  that  is  invalid  or  unenforceable  in any  situation  in any
jurisdiction  shall not affect the validity or  enforceability  of the remaining
terms and provisions  hereof or the validity or  enforceability of the offending
term or  provision  in any other  situation  or in any other  jurisdiction.  (l)
Expenses. Subject to Section 7(b), 7(c) and 7(d) above, each of the Parties will
bear its own costs and expenses  (including legal fees and expenses) incurred in
connection with this Agreement and the  transactions  contemplated  hereby.  (m)
Construction.  The Parties  have  participated  jointly in the  negotiation  and
drafting of this  Agreement.  In the event an ambiguity or question of intent or
interpretation  arises,  this Agreement shall be construed as if drafted jointly
by the Parties  and no  presumption  or burden of proof shall arise  favoring or
disfavoring  any Party by virtue of the  authorship of any of the  provisions of
this Agreement.  Any reference to any federal,  state, local, or foreign statute
or law shall be deemed  also to refer to all rules and  regulations  promulgated
thereunder,  unless the context otherwise  requires.  The word "including" shall
mean including without limitation.  (n) Incorporation of Exhibits and Schedules.
The Exhibits and Schedules  identified in this Agreement are incorporated herein
by reference and made a part hereof.

[SIGNATURE PAGE TO FOLLOW]




     IN WITNESS  WHEREOF,  the Parties hereto have executed this Agreement as of
the date first above written.


        BUYER:

        CALIFORNIA INVESTMENT FUND, LLC, a California limited liability company

        By:      /s/ Michael R. Kelly
        Its:     Managing Member


        TRANSITORY SUBSIDIARY:

        DCI ACQUISITION CORPORATION,
        a Virginia corporation

        By:      /s/ Michael R. Kelly
        Its:     President


        TARGET:

        DYNEX CAPITAL, INC.,
        a Virginia corporation


        By:      /s/ Thomas H. Potts
        Its:     President



MC1.75588.12




                                                                    66016
                                                             Exhibit 99.2

                                                           ESCROW AGREEMENT


     This ESCROW AGREEMENT (the  "Agreement"),  dated as of November 7, 2000, by
and among  California  Investment  Fund,  LLC, a  California  limited  liability
Company  (the  "Buyer"),  Dynex  Capital,  Inc.,  a  Virginia  corporation  (the
"Target") and U.S. Trust Company, National Association, (the "Escrow Agent").

     WHEREAS,  concurrently  with the execution of this  Agreement,  the parties
hereto are  entering  into that  certain  Agreement  and Plan of  Merger,  dated
November  7,  2000  (the  "Merger  Agreement"),  by and  among  the  Buyer,  DCI
Acquisition Corporation,  a Virginia corporation (the "Transitory  Subsidiary"),
and the Target;

     WHEREAS  pursuant  to Section  2(g) of the Merger  Agreement,  the Buyer is
required to deposit  572,178  shares of common  stock of the Target (the "Escrow
Shares") and, subject to certain  conditions set forth in the Merger  Agreement,
the Buyer may deposit  $1,000,000 in  immediately  available  funds (the "Escrow
Fund," and together  with the Escrow  Shares,  the "Escrow  Deposit") in escrow,
solely to satisfy  obligations  arising  pursuant to Section  7(c) of the Merger
Agreement;

     WHEREAS the Target, the Buyer and the Escrow Agent desire to evidence their
agreement with respect to the Escrow Fund, if any, and the Escrow Shares.

     NOW, THEREFORE, in consideration of the covenants hereinafter set forth and
other good and valuable  consideration,  the receipt and sufficiency of which is
hereby acknowledged, the parties hereto hereby agree as follows:

         Section 1.        Appointment.

     The Buyer and the Target hereby  appoint and designate  U.S. Trust Company,
National Association, to act as Escrow Agent hereunder, on the terms and subject
to the  conditions  set forth in this  Agreement,  and the Escrow  Agent  hereby
accepts  such  appointment.  The  fees to be paid to the  Escrow  Agent  for its
services hereunder are set forth in Exhibit A hereto.

         Section 2.        Establishment of Escrow.

     (a) Simultaneously with the execution and delivery of this Agreement, or as
promptly thereafter as is reasonably  practicable,  the Buyer shall transfer the
Escrow Shares,  together with one or more stock powers executed in blank, to the
Escrow  Agent as provided in  Section 2(g)  of the Merger  Agreement;  provided,
however,  that the Buyer  shall  remain the record  owner of the Escrow  Shares.
Additionally, on or prior to the date which is thirty days after the date of the
Merger  Agreement (or on the next succeeding  business day if such thirtieth day
is not a business day), the Buyer may elect, in accordance  with, and subject to
the restrictions of, Section 2(g) of the Merger Agreement, to deposit the Escrow
Fund with the Escrow Agent.

     (b) Escrow  Shares.  (i) The  parties  hereto agree that dividends or other
distributions  with respect to the Escrow Shares shall become part of the Escrow
Deposit.

     (ii) As long as the Escrow Shares  remain  subject to this  Agreement,  all
voting rights with respect to the Escrow Shares shall be exercised by the Buyer.

     (c) Escrow  Agent.  The Escrow Agent  hereby  agrees to act as escrow agent
hereunder,  accepts the Escrow  Shares and agrees to accept the Escrow Fund,  if
any, and to hold and disburse the Escrow Fund,  if any, and the Escrow Shares in
accordance  with the terms and  conditions  of this  Agreement  for the uses and
purposes stated therein and herein.

     Section 3. (a)  Investment of Escrow Fund.  The Buyer and the Target hereby
authorize  and direct the Escrow Agent to invest the Escrow Fund, if any, if and
when deposited with the Escrow Agent, in any of the following investments (as so
invested,  hereinafter referred to as the "Escrow Account") as instructed by the
Buyer in writing (an "Investment  Instruction") to the Escrow Agent from time to
time:

     (i) marketable direct obligations  issued or unconditionally  guaranteed by
the  government of the United  States of America or issued by an agency  thereof
and backed by the full faith and credit of the United States of America;

     (ii) marketable direct obligations issued by any State of the United States
of  America  or any  political  subdivision  of any  such  State  or any  public
instrumentality  thereof  which,  at the time of  acquisition,  have the highest
rating  obtainable from either the Standard & Poor's division of the McGraw-Hill
Companies, Inc. ("S&P") or Moody's Investors Service, Inc. ("Moody's");

     (iii) commercial  paper which, at the time of acquisition,  has the highest
rating obtainable from either S&P or Moody's;

     (iv)   certificates  of  deposit,   repurchase   agreements,   or  bankers'
acceptances  issued by any bank organized under the laws of the United States of
America or any State  thereof or the  District  of Columbia  which has  combined
capital and surplus of not less than One Hundred Million Dollars ($100,000,000);

     (v) money market  funds  organized  under the laws of the United  States of
America or any State  thereof  that  invest not less than  seventy-five  percent
(75%) of their funds in any of the investments  permitted under (i), (ii), (iii)
and (iv) above,  including  funds for which the Escrow  Agent or an affiliate of
the Escrow Agent acts as an investment provider or provides other services; and

     (vi) such other  investments as the Buyer,  the Target and the Escrow Agent
may mutually agree upon.

     Any  investment  in which the Escrow Fund,  if any, is invested must have a
maturity of less than ninety (90) days.  The Buyer will promptly  deliver to the
Target  a copy of each  Investment  Instruction  delivered  by the  Buyer to the
Escrow Agent hereunder. All interest or other return earned by the investment of
the Escrow Fund, if any, and received by the Escrow Agent (the "Interest") shall
become part of the Escrow  Fund.  Monies  held  hereunder  which are  uninvested
pending  disbursement  or  receipt  of  proper  Investment  Instructions  may be
invested in investments described in clause (v) above.

 Section 4.        Use of Escrow Deposit.

 (a)      In the event, and only in the event, that:

     (i) the Buyer terminates the Merger Agreement pursuant to, solely,  Section
7(a)(v)  of the Merger  Agreement  as a result of the  failure  to  satisfy  the
closing  condition  set forth in Section  6(a)(x) of the Merger  Agreement  (the
"Financing  Condition"),  the Target  shall  deliver to the Escrow Agent and the
Buyer a request  (an "Escrow  Deposit  Request")  executed  by the Target  which
represents and warrants that the Target is asserting a claim (a "Claim") for the
Escrow Shares and the full amount of the Escrow Fund,  if any,  pursuant to this
Section 4(a)(i) as a result of the failure of the Buyer to satisfy the Financing
Condition;

     (ii) the  Target  terminates  the  Merger  Agreement  pursuant  to  Section
7(a)(vii)  of the Merger  Agreement  as a result of the  failure to satisfy  the
closing  condition  set forth in Sections  6(b)(ii) or  6(b)(iii)  of the Merger
Agreement (a "Material  Breach"),  the Target shall  deliver to the Escrow Agent
and the  Buyer an  Escrow  Deposit  Request  executed  by the  Target  which (A)
describes  the  Material  Breach and the basis for  asserting  the Claim for the
Escrow Shares and the Escrow Fund, if any,  pursuant to this Section 4(a)(ii) in
reasonable detail and (B) represents and warrants that the Target is asserting a
Claim  pursuant  to this  Section  4(a)(ii)  for the Escrow  Shares and the full
amount of the Escrow Fund, if any, as a result of the Material Breach; or

     (iii) the  Buyer  terminates  the  Merger  Agreement  pursuant  to  Section
7(a)(vi)  of the Merger  Agreement  as a result of the  failure  to satisfy  the
closing  condition set forth in Section  6(a)(xii) of the Merger  Agreement (the
"Bondholder Condition"), and provided that the Buyer has not elected to purchase
the  Target  loans  or  participations  put to the  Buyer  pursuant  to  Section
7(c)(ii)(A)  of the Merger  Agreement,  the Target  shall  deliver to the Escrow
Agent and the Buyer an Escrow  Deposit  Request  executed  by the  Target  which
represents  and  warrants  that the Target is  asserting  a Claim for the Escrow
Shares  (but not,  in any event,  the Escrow  Fund),  pursuant  to this  Section
4(a)(iii) as a result of the failure to satisfy the Bondholder Condition.

     (b) The Target  acknowledges  and  agrees  that if the Buyer has a right to
terminate  the Merger  Agreement  both as a result of a failure  to satisfy  the
Financing  Condition and as a result of a failure to obtain Bondholder  Consent,
the Buyer shall be deemed to have terminated the Merger Agreement as a result of
failure to obtain  Bondholder  Consent.  In such  case,  the Target may assert a
claim for the Escrow  Shares but the Buyer may not assert a claim for the Escrow
Fund, if any.

     (c) If the Buyer  objects to any such Claim,  the Buyer  shall  provide the
Escrow Agent and the Target with a written  objection  thereto  setting forth in
reasonable  detail  the  reasons  for such  objection  within (i)  fifteen  (15)
calendar days following  receipt by the Buyer of said Escrow Deposit  Request in
the case of Sections  4(a)(i) or 4(a)(iii)  hereof or (ii) thirty (30)  calendar
days following  receipt by the Buyer of said Escrow Deposit  Request in the case
of Section  4(a)(ii)  hereof.  If the Buyer shall object to any such Claim,  the
provisions of Section 6(e) shall apply and no disbursements shall be made except
in accordance with Section 6(e). If the Buyer shall not object to any such Claim
asserted pursuant to clauses (i) or (ii) of Section 4(a) above, the Escrow Agent
shall disburse the Escrow Fund (including any Interest thereon), if any, and the
Escrow Shares (including any dividends or distributions with respect thereto) to
the Target. If the Buyer shall not object to any such Claim asserted pursuant to
clause  (iii) of Section  4(a) above,  the Escrow  Agent shall (1)  disburse the
Escrow Shares (including any dividends or distributions with respect thereto) to
the Target and (2) disburse the Escrow Fund (including any Interest thereon), if
any, to the Buyer.

     Section  5.  Escrow  Date.  Subject  to the  terms and  provisions  of this
Section 5 and upon written  notice to the Escrow Agent of the  occurrence of the
Escrow Deposit Release Date (as defined below),  the Escrow Agent shall disburse
the Escrow Fund  (together  with any Interest  thereon),  if any, and the Escrow
Shares (together with any dividends or other distributions with respect thereto)
to the Buyer on the date which is the earlier to occur of (i) the  Closing  Date
(as  defined in the Merger  Agreement)  or  (ii) the  date upon which the Merger
Agreement is  terminated  (unless such  termination  results from the failure to
satisfy the Financing Condition, the failure to satisfy the Bondholder Condition
or a  Material  Breach)  (the  "Escrow  Deposit  Release  Date").  In the event,
however,  that the Escrow Agent has received,  on or before such Escrow  Deposit
Release  Date,  an Escrow  Deposit  Request  for which the  Escrow  Agent may be
required to disburse the Escrow Deposit or the Escrow Shares, as applicable,  to
the Target  pursuant to Section 4 above or Section 6(e) below,  the Escrow Agent
shall  disburse  the Escrow  Deposit or the Escrow  Shares,  as  applicable,  in
accordance with such sections.

     Section 6.  Escrow  Agent.  In order to induce  the  Escrow  Agent to hold,
invest, and disburse the Escrow Deposit as required by this Agreement, the Buyer
and the Target do hereby agree that:

     (a)  The  functions  and  duties  of  the  Escrow  Agent  with  respect  to
disbursements  hereunder are those of an independent contractor and include only
those set forth in this  Agreement.  The Escrow  Agent is not entitled to act in
any manner whatsoever except in accordance with the terms and conditions of this
Agreement or pursuant to written  instructions  or demands  given in  accordance
with such terms and conditions.

     (b) Any checks or drafts  deposited  in the Escrow Fund,  if any,  with the
Escrow Agent under this  Agreement  will be  processed  in the normal  course of
business.  The  Escrow  Agent  shall  not be liable  for any loss  caused by the
failure,  suspension,  bankruptcy or  dissolution of any Escrow Account in which
the Escrow Fund, if any, is deposited.

     (c)  The  Escrow  Agent,  in  the  absence  of  gross  negligence,  willful
misconduct  or a breach of this  Agreement,  shall not be liable for any loss or
damage resulting from the following:

     (i) Any default, error, action or omission of any other party.

                  (ii)     The expiration of any time limit or other delay.

     (iii) Lack of authenticity,  sufficiency and effectiveness of any documents
delivered  to it and lack of  genuineness  of any  signature or authority of any
person to sign any such document.

     (iv) Any loss or impairment of funds  deposited in the course of collection
or while on deposit in a federally or state insured account with a trust company
(other  than the Escrow  Agent),  bank,  savings  bank,  or savings  association
resulting from the failure, insolvency or suspension of such institution.

     (v) Compliance by the Escrow Agent with any and all legal  process,  writs,
orders,  judgments  and  decrees  of any court  whether  issued  with or without
jurisdiction and whether or not  subsequently  vacated,  modified,  set aside or
reversed.

     (vi) The Escrow Agent's  assertion or failure to assert any cause of action
or defense in any judicial, administrative or other proceeding either in its own
interest or in the  interest of any other party or parties,  provided the Escrow
Agent shall have  furnished  timely  written  notice of such  proceeding  to the
parties hereto.

     (d) The  Escrow  Agent  shall not be liable,  absent  gross  negligence  or
willful  misconduct,  for its failure to inquire  into the  authenticity  of any
written  instructions  or other  documents  delivered  to it as required by this
Agreement or its failure to inquire as to the  genuineness  of any  signature or
authority  of any  person to issue  such  instructions  or  execute  such  other
documents.

     (e) If  there  is any  dispute  regarding  the  disbursement  of all or any
portion  of the  Escrow  Shares or the Escrow  Fund,  if any,  that has not been
finally resolved, the parties shall promptly commence binding arbitration in New
York,  New York in  accordance  with  the  commercial  arbitration  rules of the
American Arbitration  Association.  Judgment upon the decision of the arbitrator
may be entered in any court having jurisdiction. The Escrow Agent shall continue
to hold all of the  Escrow  Shares  or Escrow  Fund,  if any,  as to which  such
dispute  relates,  in its  possession  until  directed to  disburse  the same in
accordance with (i) the joint instructions of the Target and the Buyer or (ii) a
final unappealable judgment of a court of competent jurisdiction. In lieu of the
foregoing,  the Escrow Agent may deposit the disputed  amount of Escrow  Deposit
with a court of competent  jurisdiction  and commence an action of  interpleader
between the parties in dispute.  The Buyer and the Target agree to indemnify the
Escrow  Agent  against  all  court  costs  and  reasonable  attorney's  fees  in
connection  with any litigation  regarding  this  Agreement  other than any such
litigation  arising from the gross negligence,  willful  misconduct or breach of
this  Agreement  by the Escrow  Agent.  The Escrow  Agent  agrees to: (i) first,
collect such indemnity  amount from the Escrow Deposit and (ii)  thereafter,  to
use reasonable  efforts to collect the balance of such indemnity amount, if any,
50% from the Buyer and 50% from the Target.

     (f) The Escrow  Agent may resign for any reason,  upon not less than thirty
(30) days prior written  notice to the parties to this  Agreement,  which notice
shall  specify  the  date and time as of which  such  resignation  shall  become
effective.  Upon the effectiveness of such  resignation,  the Escrow Agent shall
deliver all cash, if any, or property in its possession  under this Agreement to
any  successor  escrow agent  appointed in writing by the Buyer  (subject to the
reasonable  approval of the Target), as directed in written directions signed by
the Buyer, or if no successor  escrow agent has been appointed,  to any court of
competent  jurisdiction  in New York, New York.  Upon such delivery,  the Escrow
Agent shall be released from any and all further liability under this Agreement.

     Section 7. Tax Identification Number. The Buyer's tax identification number
for reporting  purposes under this  Agreement is 33-0688954.  All Interest shall
initially  be  chargeable  to the Buyer for tax  purposes.  If any  Interest  is
released to the Target,  such Interest shall be chargeable to the Target for tax
purposes.  The Target's tax  identification  number for reporting purposes under
this Agreement is 52-1549373.

     Section  8.  Escrow  Fee.  All  fees and  charges  of the  Escrow  Agent in
connection  with the initiation and  administration  of this Agreement  shall be
paid 50% by the Target and 50% by Buyer.

     Section 9. Governing  Law. This Agreement  shall be construed in accordance
with and governed by the laws of New York.

     Section 10. Successors and Assigns.  Except as otherwise expressly provided
herein,  the terms and provisions of this  Agreement  shall inure to the benefit
of,  and  be  binding  upon,  the  successors,  assigns,  heirs,  executors  and
administrators  of the parties  hereto.  Nothing in this  Agreement,  express or
implied, is intended to, or shall,  confer on any person,  other than any of the
parties hereto, any rights,  benefits or remedies of any nature whatsoever under
or by reason of this Agreement.

     Section 11.  Counterparts.  This Agreement may be executed in counterparts,
each of which  shall for all  purposes  be deemed to be an  original  and all of
which shall constitute the same instrument.

     Section  12.  Construction.  The  headings  of the  Articles,  Sections and
paragraphs of this Agreement are inserted for convenience  only and shall not be
deemed  to  constitute  part of this  Agreement  or to affect  the  construction
hereof.  All  section  and  article  references  are to this  Agreement,  unless
otherwise  expressly  provided.  As  used  in  this  Agreement,   (a)  "hereof",
"hereunder",  "herein" and words of like import shall be deemed to refer to this
Agreement in its entirety and not just a particular  section of this  Agreement,
and (b) unless the context otherwise  requires,  words in the singular number or
in the  plural  number  shall each  include  the  singular  number or the plural
number,  words of the  masculine  gender shall  include the feminine and neuter,
and, when the sense so indicates,  words of the neuter gender shall refer to any
gender.

     Section  13.  Modification  and  Waiver.  No  amendment,   modification  or
alteration of the terms or provisions of this Agreement  shall be binding unless
the same shall be in writing and duly executed by the parties hereto. Any of the
terms or  provisions  of this  Agreement may be waived in writing at any time by
the party which is entitled to the benefits of such waived terms or  provisions.
No waiver of any of the provisions of this Agreement shall be deemed to or shall
constitute a waiver of any other provision  hereof (whether or not similar).  No
delay on the part of any  party in  exercising  any  right,  power or  privilege
hereunder shall operate as a waiver thereof.

     Section 14. Severability.  Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction,  be
ineffective  to the  extent  of  such  invalidity  or  unenforceability  without
rendering  invalid or  unenforceable  the remaining terms and provisions of this
Agreement or affecting  the  validity or  enforceability  of any of the terms or
provisions of this Agreement in any other jurisdiction.

     Section 15. Notices. Any notice, request,  instruction or other document to
be given  hereunder (a "Notice") by any party hereto to any other party shall be
in  writing  and  delivered  personally,  sent  by  a  recognized  worldwide  or
nationwide  (whichever is applicable)  overnight  delivery  service with charges
prepaid,  sent by registered or certified mail with postage prepaid,  or sent by
facsimile transmission:

                  if to the Buyer, to:

                  California Investment Fund, LLC
                  550 West C Street, 10th Floor
                  San Diego, California  92101
                  Facsimile:        (619) 687-5010
                  Confirmation:     (619) 687-5000
                  Attention:        Michael Kelly

                           with a copy to:

                           Fried, Frank, Harris, Shriver & Jacobson
                  One New York Plaza
                  New York, NY  10004-1980
                  Facsimile:        (212) 859-4000
                  Confirmation:     (212) 859-8000
                  Attention:        Stephen Fraidin, Esq.

                  if to the Target, to:

                  Dynex Capital, Inc.
                  4551 Cox Road, Suite 300
                  Glen Allen, Virginia  23060
                  Facsimile:        (804) 217-5860
                  Confirmation:     (804) 217-5861
                  Attention:        Thomas H. Potts

                  with a copy to:

                  Venable, Baetjer and Howard, LLP
                  2010 Corporate Ridge, Suite 400
                  McLean, Virginia  22102-7847
                  Facsimile:        (703) 821-8949
                  Confirmation:     (703) 760-1920
                  Attention:        Elizabeth R. Hughes, Esquire

                  if to the Escrow Agent, to:

                  U.S. Trust Company, National Association
                  515 South Flower Street, Suite 2700
                  Los Angeles, CA  90071
                  Facsimile:        (213) 488-1370
                  Confirmation:     (213) 861-5000
                  Attention:        Corporate Trust Division

     or at such other  address for a party as shall be specified by like Notice.
Any Notice which is sent in the manner  provided  herein shall be deemed to have
been duly given to and received by the party to whom it is directed  upon actual
receipt by such party,  except that any Notice  sent by  facsimile  transmission
shall  be  deemed  to  have  been  given  and  received  upon   confirmation  of
transmission;  provided  that Notice so sent is promptly  followed by  duplicate
Notice to that same party sent by registered or certified mail, postage prepaid,
or sent by recognized  worldwide or nationwide courier (whichever is applicable)
delivery overnight service with charges prepaid.  All communications to be given
or made herewith shall be in the English language.



     IN WITNESS  WHEREOF,  the parties  hereto have caused this  Agreement to be
executed as of the date and year first above written.




              DYNEX CAPITAL, INC.


              By:/s/ Thomas H. Potts
                  Name: Thomas H. Potts
                  Title: President



              CALIFORNIA INVESTMENT FUND, LLC.


              By:/s/ Michael Kelly
              Name: Michael Kelly
              Title: Managing Member



              U.S. TRUST COMPANY, NATIONAL ASSOCIATION


              By: /s/
                  Name:
                  Title:
[{"type": "8-K", "sequence": "1", "filename": "0001.txt", "description": "DYNEX CAPITAL, INC.", "secsgml_size_bytes": 161737}]
{"company-data": {"conformed-name": "DYNEX CAPITAL INC", "cik": "0000826675", "assigned-sic": "6798", "irs-number": "521549373", "state-of-incorporation": "VA", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "8-K", "act": "34", "file-number": "001-09819", "film-number": "755121"}, "business-address": {"street1": "4551 COX RD", "street2": "STE 300", "city": "GLEN ALLEN", "state": "VA", "zip": "23060", "phone": "8049675800"}, "mail-address": {"street1": "4551 COX RD", "street2": "STE 300", "city": "GLEN ALLEN", "state": "VA", "zip": "23060"}, "former-company": [{"former-conformed-name": "RESOURCE MORTGAGE CAPITAL INC/VA", "date-changed": "19930722"}, {"former-conformed-name": "RESOURCE MORTGAGE INVESTMENT CORP", "date-changed": "19930505"}, {"former-conformed-name": "RAC MORTGAGE INVESTMENT CORP /VA/", "date-changed": "19930505"}]}
UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC 20549

                                 ____________

                                   FORM 8-K

                                CURRENT REPORT

    Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

                       Date of Report: November 8, 2000

                              DYNEX CAPITAL, INC.
              (Exact Name of Registrant as Specified in Charter)

      Virginia                      1-9819                    52-1549373
 (State or Other            (Commission File Number)        IRS Employer
 Jurisdiction of                                            Identification No.)
  Incorporation)

 4551 Cox Road, Suite 300, Glen Allen, Virginia                    23060
 (Address of Principal Executive Offices)                          (Zip Code)

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

Item 5.       OTHER EVENTS.

     On November 7, 2000, the Company and CIF entered into an Agreement and Plan
of Merger, dated as of November 7, 2000 (the "Merger Agreement"),  by and among,
the Company, CIF and DCI Acquisition Corporation,  a newly created subsidiary of
CIF. The Merger Agreement  provides for CIF to acquire 100% of the equity of the
Company for a purchase price of $90 million in cash. CIF will acquire the common
stock of the  Company  for a price of $2.00 per share,  the  Series A  Preferred
Stock of the  Company  for a price of $12.07 per share,  the Series B  Preferred
Stock of the  Company for a price of $12.32 per share and the Series C Preferred
Stock of the Company for a price of $15.08 per share.

     The transaction is expected to close in the first quarter of 2001,  subject
to the approval of the Company's  shareholders and customary closing conditions.
The transaction is also  conditioned upon CIF securing  necessary  financing and
the consent of the holders of the Company's  senior notes.  Regarding the senior
notes,  CIF has thirty days from the date of the Merger  Agreement to obtain any
necessary  consents.  In addition,  CIF must confirm its  financing  commitments
prior to the Company  filing with the  Securities  and Exchange  Commission  the
preliminary proxy statement relating to the transaction and prior to the mailing
of the proxy to the Company's shareholders.

     The  foregoing  is  qualified  in its entirety by reference to the complete
text of the Merger Agreement, which is filed as Exhibit 99.1 hereto.

     Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.

(c)      Exhibits

     99.1  Agreement  and Plan of Merger,  dated as of November 7, 2000,  by and
among  the  Company,   California  Investment  Fund,  LLC  and  DCI  Acquisition
Corporation.

     99.2 Escrow  Agreement,  dated as of November  7, 2000,  by and among,  the
Company,  California  Investment  Fund,  LLC and U.S.  Trust  Company,  National
Association.

                                                              SIGNATURES

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

     Date: November 8, 2000 DYNEX CAPITAL, INC.

                                                  By:      /s/ Thomas H. Potts
                                                           Thomas H. Potts
                                                           President
EXHIBIT INDEX                             Method of Filing

Number        Description
                                                        Filed herewith
99.1          Agreement and Plan of Merger, dated as of
              November 7, 2000, by and among the Company,
              California Investment Fund, LLC and DCI Acquisition
              Corporation.

                                                        Filed herewith
99.2          Escrow Agreement, dated as of November 7, 2000,
              by and among the Company, California Investment
              Fund LLC and U.S. Trust Company, National
              Association.

                                        Exhibit 99.1
                              AGREEMENT AND PLAN OF MERGER

     THIS AGREEMENT AND PLAN OF MERGER (this  "Agreement") is entered into as of
November 7, 2000, by and among  CALIFORNIA  INVESTMENT  FUND,  LLC, a California
limited liability company (the "Buyer"), DCI ACQUISITION CORPORATION, a Virginia
corporation  and  a  wholly-owned  Subsidiary  of  the  Buyer  (the  "Transitory
Subsidiary"),  and DYNEX CAPITAL,  INC., a Virginia  corporation (the "Target").
The Buyer, the Transitory Subsidiary, and the Target are each referred to herein
as a "Party" and are referred to collectively herein as the "Parties."

     This  Agreement  contemplates a transaction in which the Buyer will acquire
all of the  outstanding  capital  stock of the Target for cash through a reverse
subsidiary merger of the Transitory Subsidiary with and into the Target.

     NOW,  THEREFORE,  in  consideration of the premises and the mutual promises
herein  made,  and in  consideration  of the  representations,  warranties,  and
covenants  herein   contained,   the  Parties  agree  as  follows:   SECTION  1.
DEFINITIONS.

     "Affiliate"  has the  meaning  set forth in Rule  12b-2 of the  regulations
promulgated under the Securities Exchange Act.

 "Acquisition Transaction" has the meaning set forth in Section 5(m) below.

 "Articles of Merger" has the meaning set forth in Section 2(c) below.

 "Buyer" has the meaning set forth in the preface above.

 "Buyer Disclosure Schedule" has the meaning set forth in Section 4 below.

 "Buyer Material Adverse Effect" has the meaning setforth in Section 4(d) below.

 "Buyer-owned Shares" means the 572,178 Target Common Shares owned by the Buyer.

     "Buyer-REIT"  means the REIT  Subsidiary or REIT  Affiliate to be formed by
the Buyer for the purpose of acquiring the Excluded Target REIT Assets.

   "Certificate of Merger" has the meaning set forth in Section 2(d) below.

   "Certificates" has the meaning set forth in Section 2(e)(i) below.

   "Closing" has the meaning set forth in Section 2(b) below.

   "Closing Date" has the meaning set forth in Section 2(b) below.

   "Code" means the Internal Revenue Code of 1986, as amended.

     "Confidential  Information" means any information concerning the businesses
and affairs of the Target and its  Subsidiaries  other than information that (i)
is already generally  available to the public,  (ii) was available to the Buyer,
Transitory  Subsidiary or their  respective  Representatives  or Affiliates on a
non-confidential   basis  prior  to  its   disclosure   by  the  Target  or  its
Subsidiaries,  or (iii) becomes available to the Buyer, Transitory Subsidiary or
their respective  Representatives or Affiliates on a non-confidential basis from
a source other than the Target or its Subsidiaries,  provided,  that such source
is not known by such Person to be prohibited from  transmitting  the information
to such Person by a contractual,  legal, fiduciary or other obligation,  or (iv)
was or is independently  developed by the Buyer,  Transitory Subsidiary or their
respective  Representatives  or  Affiliates  without  the  use  of  Confidential
Information of the Target or its Subsidiaries.

     "Confidentiality  Agreement" means that certain  Confidentiality  Agreement
dated April 6, 2000 between the Buyer and the Target.

     "Confirmation"  means a  confirmation  from each lender or equity  provider
under a  Financing  Commitment  that such  commitment  remains in full force and
effect  and  without  material  modification.  A  Confirmation  may  be  from  a
replacement  lender  or equity  provider  as long as the  replacement  lender or
equity provider is capable of financing the transactions contemplated hereby.

     "Definitive Financing Agreements" has the meaning set forth in Section 5(e)
below.

     "Definitive  Proxy  Materials"  means the proxy  materials  relating to the
Special Meeting which are mailed to the holders of Target Shares.

     "DHI" means Dynex Holding, Inc., a Virginia corporation and an Affiliate of
the Target.

     "DOJ" means the  Antitrust  Division  of the United  States  Department  of
Justice.

     "Effective Time" has the meaning set forth in Section 2(d)(i) below.

     "Employee" shall mean each current,  former, or retired employee,  officer,
consultant,  advisor, independent contractor, agent or director of the Target or
any of its Subsidiaries.

     "End Date" has the meaning set forth in Section 7(a)(ii)(A) below.

     "ERISA" shall mean the Employee  Retirement Income Security Act of 1974, as
amended from time to time, and all applicable rules and regulations thereunder.

     "ERISA Affiliate" shall mean each business or entity which is a member of a
"controlled  group of  corporations,"  under "common  control" or a member of an
"affiliated  service  group"  with the  Target  within the  meaning of  Sections
414(b),  (c) or (m) of the Code,  or required to be  aggregated  with the Target
under Section 414(o) of the Code, or is under "common  control" with the Target,
within the meaning of Section 4001(a)(14) of ERISA.

"Escrow Agent" has the meaning set forth in Section 2(g) below.

"Escrow Agreement" has the meaning set forth in Section 2(g) below.

"Escrow Amount" has the meaning set forth in Section 2(g) below.

"Escrowed Shares" has the meaning set forth in Section 2(g) below.

"Excluded Target REIT Assets" has the meaning set forth in Section 2(h) below.

"Financing Commitments" has the meaning set forth in Section 4(b) below.

     "GAAP" means United States generally accepted  accounting  principles as in
effect from time to time.

     "Governmental  Entity"  means any  governmental  or  regulatory  authority,
court,  agency,  commission  or  other  governmental  entity  or any  securities
exchange or other self-regulatory body, domestic or foreign.

     "Hart-Scott-Rodino Act" means the Hart-Scott-Rodino  Antitrust Improvements
Act of 1976, as amended.

 "Insurance Premium Cap" has the meaning set forth in Section 5(j)(i) below.

 "IRS" means the United States Internal Revenue Service.

 "Knowledge" means actual knowledge of a Person.

 "Merger" has the meaning set forth in Section 2(a) below.

     "Merger  Consideration"  means collectively the Target Common Shares Merger
Consideration, the Target Series A Share Merger Consideration, the Target Series
B  Share   Merger   Consideration,   and  the  Target   Series  C  Share  Merger
Consideration.

     "Ordinary  Course of  Business"  means  the  ordinary  course  of  business
consistent with past custom and practice (including with respect to quantity and
frequency), but in any event shall exclude any extraordinary transaction.

"Party" has the meaning set forth in the preface above.

"Paying Agent" has the meaning set forth in Section 2(e) below.

"Payment Fund" has the meaning set forth in Section 2(e) below.

"PBGC" shall mean the Pension Benefit Guaranty Corporation.

     "Person" means an  individual,  a  partnership,  a  corporation,  a limited
liability  company,  an  association,  a joint stock  company,  a trust, a joint
venture, an unincorporated  organization,  a group (as defined in the Securities
Exchange Act), an entity, or a Governmental  Entity (or any department,  agency,
or political subdivision thereof).

     "Preferred  Stock  Charter  Amendment"  has the  meaning  set  forth in the
definition of Requisite Stockholder Approval.

"Public Reports" has the meaning set forth in Section 3(e) below.

"Regulatory Law" has the meaning set forth in Section 5(c)(ii)(B) below.

"REIT" has the meaning set forth in Section 3(p)(ix) below.

"Representatives" has the meaning set forth in Section 5(m)(i) below.

     "Requisite Stockholder Approval" means the affirmative vote in favor of the
Merger and the transactions contemplated hereby of the holders of (i) two-thirds
of the Target Common  Shares and (ii)  two-thirds of the Target Series A Shares,
the  Target  Series B Shares and the Target  Series C Shares,  each  voting as a
separate class.  Requisite Stockholder Approval shall require that two-thirds of
the Target  Series A Shares,  the Target Series B Shares and the Target Series C
Shares,  each  voting as a separate  class,  approve an  amendment  to  Target's
charter documents,  satisfactory to Buyer,  providing for the conversion of each
such series of  preferred  stock into the right to receive  the Target  Series A
Merger  Consideration,  the Target Series B Merger  Consideration  or the Target
Series C Merger  Consideration,  as  applicable  (the  "Preferred  Stock Charter
Amendment")

  "SEC" means the Securities and Exchange Commission.

     "Securities Act" means the Securities Act of 1933, as amended and the rules
and regulations thereunder.

     "Securities  Exchange  Act" means the  Securities  Exchange Act of 1934, as
amended and the rules and regulations thereunder.

 "SEC Mail Date" has the meaning set forth in Section 5(c)(i) below.

     "Security Interest" means any mortgage, pledge, lien, encumbrance,  charge,
or other  security  interest,  other  than (a)  mechanic's,  materialman's,  and
similar liens,  or (b) liens for taxes not yet due and payable or for taxes that
the taxpayer is contesting in good faith through appropriate proceedings.

 "Shareholder Mail Date" has the meaning set forth in Section 5(c)(i) below.

 "Special Meeting" has the meaning set forth in Section 5(c)(i) below.

     "Subsidiary"  of a  Person  means  any  corporation,  limited  partnership,
general  partnership,  joint venture,  limited  liability company or other legal
entity of which such Person  (either alone or through or together with any other
Subsidiary  or  Subsidiaries)  is the general  partner or managing  entity or of
which 50% or more of the capital stock or other equity  interests the holders of
which are generally  entitled to vote for the election of the board of directors
or others performing similar functions of such corporation or other legal entity
is directly or indirectly  owned or  controlled by such Person  (either alone or
through or together with any other Subsidiary or Subsidiaries).

"Superior Proposal" has the meaning set forth in Section 5(l) below.

"Surviving Corporation" has the meaning set forth in Section 2(a) below.

"Takeover Proposal" has the meaning set forth in Section 5(m) below.

"Target" has the meaning set forth in the preface above.

     "Target Common Shares" means the Common Stock, $.01 par value per share, of
the Target.

     "Target  Common  Share Merger  Consideration"  has the meaning set forth in
Section 2(d)(v) below.

"Target Disclosure Schedule" has the meaning set forth in Section 3 below.

"Target Employee Plans" has the meaning set forth in Section 3(h) below.

    "Target  Equity  Equivalent  Security"  means any  subscriptions,  options,
warrants, calls, commitments,  agreements,  conversion rights or other rights of
any  character  (contingent  or  otherwise)  entitling any Person to purchase or
otherwise  acquire from the Target or any of its  Subsidiaries  at any time,  or
upon the happening of any stated  event,  any shares of the capital stock of the
Target.

     "Target  Material Adverse Effect" has the meaning set forth in Section 3(a)
below.

    "Target Option" means any option,  warrant or other instrument  convertible
into Target Shares that is outstanding  immediately prior to the Effective Time,
whether  or not then  exercisable,  including  without  limitation  an option to
purchase  Target Common Shares  granted under the Target's 1992 Stock  Incentive
Plan.

 "Target Permits" has the meaning set forth in Section 3(m) below.

 "Target REIT" means collectively the Target and its REIT Subsidiaries.

     "Target SAR" means a stock appreciation right,  phantom stock unit or other
similar right of the Target.

     "Target  Senior  Notes" means the 7.875% Senior Notes due July 15, 2002, of
the Target.

     "Target Senior Notes  Indenture"  means that certain  Indenture dated as of
July 14, 1997, as supplemented by that certain  Officers'  Certificate of Thomas
H. Potts and Lynn K. Geurin,  dated July 14, 1997 and by that certain Instrument
of Resignation,  Appointment and Acceptance  dated as of June 12, 2000,  between
the  Target,  Chase  Bank of Texas,  NA,  and HSBC Bank USA,  providing  for the
issuance of the Target Senior Notes.

     "Target  Series A Shares" means the Series A 9.75%  Cumulative  Convertible
Preferred Stock, $.01 par value per share, of the Target.

     "Target Series A Share Merger  Consideration"  has the meaning set forth in
Section 2(d)(v) below.

     "Target  Series B Shares" means the Series B 9.55%  Cumulative  Convertible
Preferred Stock, $.01 par value per share, of the Target.

     "Target Series B Share Merger  Consideration"  has the meaning set forth in
Section 2(d)(v) below.

     "Target  Series C Shares" means the Series C 9.73%  Cumulative  Convertible
Preferred Stock, $.01 par value per share, of the Target.

     "Target Series C Share Merger  Consideration"  has the meaning set forth in
Section 2(d)(v) below.

    "Target  Shares" means  collectively  the Target Common Shares,  the Target
Series A Shares, the Target Series B Shares, and the Target Series C Shares.

"Target Stockholder" means any Person who or which holds any Target Shares.

    "Target's  Knowledge"  means the  Knowledge  of Thomas  H.Potts  or Stephen
J.Benedetti.

"Tax" has the meaning set forth in Section 3(p)(xi) below.

"Tax Return" has the meaning set forth in Section 3(p)(xi) below.

"Transitory Subsidiary" has the meaning set forth in the preface above.

"Virginia Corporation Law" means the Virginia Stock Corporation Act, as amended.

SECTION 2.    BASIC TRANSACTION.

     (a)  The  Merger.  On and  subject  to the  terms  and  conditions  of this
Agreement,  the Transitory  Subsidiary  will merge with and into the Target (the
"Merger") at the Effective Time. The Target shall be the  corporation  surviving
the Merger (the "Surviving Corporation").

     (b) The  Closing.  The  closing of the  transactions  contemplated  by this
Agreement (the  "Closing")  shall take place at the offices of Venable,  Baetjer
and Howard,  LLP, 2010  Corporate  Ridge,  Suite 400,  McLean,  Virginia  22102,
commencing  at 10:00 a.m.  local time on the second  business day  following the
satisfaction  or waiver of all  conditions to the  obligations of the Parties to
consummate the  transactions  contemplated  hereby (other than  conditions  with
respect to actions the  respective  Parties will take at the Closing  itself) or
such other date as the Parties may mutually determine (the "Closing Date").

     (c) Actions at the Closing. At the Closing,  (i) the Target will deliver to
the Buyer and the Transitory Subsidiary the various  certificates,  instruments,
and  documents  referred  to in  Section-6(a)  below,  (ii)  the  Buyer  and the
Transitory  Subsidiary  will  deliver to the Target  the  various  certificates,
instruments,  and documents  referred to in Section 6(b) below, (iii) the Target
and  the  Transitory   Subsidiary  will  file  Articles  of  Merger   reasonably
satisfactory  to each of the Parties and  meeting the  requirements  of Sections
13.1-604 and 13.1-720, and any other relevant provisions of Virginia Corporation
Law (the "Articles of Merger") with the Virginia State  Corporation  Commission,
and all other filings or recordings  required  under Virginia  Corporation  Law,
including  any  plan  of  merger,  (iv)  the  Buyer  will  cause  the  Surviving
Corporation  to  deliver  the  Payment  Fund to the  Paying  Agent in the manner
provided  below in Section 2(e),  and (v) the Parties will comply with all other
covenants and obligations imposed upon it under the terms of the Agreement.

(d)      Effect of Merger.

     (i)  General.  The  Merger  shall  become  effective  at the time  that the
Virginia State  Corporation  Commissioner  shall have issued a  "Certificate  of
Merger"  pursuant  to Section  13.1-720  of the  Virginia  Corporation  Law (the
"Effective  Time").  The  Merger  shall  have the  effect  set forth in  Section
13.1-721 of the Virginia Corporation Law. The Surviving  Corporation may, at any
time  after  the  Effective  Time,  take any  action  (including  executing  and
delivering  any  document) in the name and on behalf of either the Target or the
Transitory  Subsidiary  in order to carry out and  effectuate  the  transactions
contemplated by this Agreement. (ii) Articles of Incorporation.  The Articles of
Incorporation  of the Surviving  Corporation  shall,  at and as of the Effective
Time,  read as did the Articles of  Incorporation  of the Transitory  Subsidiary
immediately  prior to the  Effective  Time.  (iii)  Bylaws.  The  Bylaws  of the
Surviving  Corporation  shall,  at and as of the Effective Time, read as did the
Bylaws of the Transitory  Subsidiary  immediately  prior to the Effective  Time.
(iv)  Directors  and  Officers.  The  directors  and officers of the  Transitory
Subsidiary shall become the directors and officers of the Surviving  Corporation
at and as of the Effective Time (retaining their respective  positions and terms
of office).  (v) Conversion of Target Shares.  At and as of the Effective  Time,
without any action on the part of the holders of Target Shares,  (A) each Target
Common Share (other than any  Buyer-owned  Shares)  shall be converted  into the
right to receive an amount (the  "Target  Common  Share  Merger  Consideration")
equal to $2.00 in cash (without interest),  (B) each Target Series A Share shall
be  converted  into the right to receive an amount (the  "Target  Series A Share
Merger  Consideration")  equal to $12.07 in cash  (without  interest),  less any
dividend declared or paid on such shares subsequent to the date hereof, (C) each
Target  Series B Share  shall be  converted  into the right to receive an amount
(the  "Target  Series B Share  Merger  Consideration")  equal to  $12.32 in cash
(without interest), less any dividend declared or paid on such shares subsequent
to the date hereof (D) each Target  Series C Share shall be  converted  into the
right to receive an amount (the"Target  Series C Share  Merger  Consideration")
equal to $15.08 in cash (without  interest),  less any dividend declared or paid
on such  shares  subsequent  to the date hereof and (E) each  Buyer-owned  Share
shall be cancelled and all rights with respect  thereto shall cease to exist and
no consideration  shall be delivered in exchange  therefor;  provided,  however,
that the Merger Consideration shall be subject to proportional adjustment in the
event of any stock split,  stock dividend,  reverse stock split, or other change
in the number of Target Shares outstanding occurring between the date hereof and
the date of filing of the Articles of Merger. No Target Share shall be deemed to
be  outstanding or to have any rights  (monetary or otherwise)  other than those
set forth above in this Section  2(d)(v) after the Effective  Time.  All accrued
dividends on the Target  Shares shall be canceled at the  Effective  Time.  (vi)
Conversion  of  Capital  Stock of the  Transitory  Subsidiary.  At and as of the
Effective  Time,  each share of Common Stock,  $.01 par value per share,  of the
Transitory  Subsidiary  shall be converted into one share of Common Stock,  $.01
par value per share, of the Surviving Corporation. (vii) Termination of Dividend
Reinvestment and Stock Purchase Plan,  Directors Stock Appreciation  Rights Plan
and 1992 Stock Incentive  Plan.  Except as may otherwise be agreed to in writing
by the Buyer, the Transitory  Subsidiary,  and the Target,  the Target covenants
that (A) its Dividend  Reinvestment  and Stock  Purchase Plan,  Directors  Stock
Appreciation  Rights Plan and its 1992 Stock Incentive  Plan,  together with any
similar plan,  shall  terminate as of the Effective Time, (B) all Target Options
and Target SARs shall be  cancelled  as of the  Effective  Time for an aggregate
amount  not to  exceed  $265,000  in cash and (C) it shall use best  efforts  to
obtain all  necessary  consents of the holders of the Target  Options and Target
SARs to the  cancellation  of the Target Options and Target SARs as set forth in
this Section 2(d)(vii).

     (e) Procedure for Payment.  (i) Promptly after the Effective  Time, (A) the
Buyer will cause the  Surviving  Corporation  to furnish a bank or trust company
designated  by the Buyer and  reasonably  acceptable  to the Target (the "Paying
Agent") with cash  sufficient for the Paying Agent to make prompt payment of the
Merger Consideration to all holders of outstanding Target Shares (other than any
Buyer-owned  Shares),  upon the  surrender  of the  Target  Shares by the holder
thereof to the Paying Agent along with a properly executed letter of transmittal
(the  "Payment  Fund") and (B) the Buyer  will cause the Paying  Agent to mail a
letter of transmittal  (with  instructions  for its use) in a form and substance
reasonably  satisfactory  to  each  of the  Parties  to each  record  holder  of
outstanding Target Shares for the holder to use in surrendering the certificates
which represented his, her or its Target Shares ("Certificates") against payment
of the Merger Consideration. Upon surrender of a Certificate to the Paying Agent
together  with such  letter of  transmittal,  duly  executed  and  completed  in
accordance  with the  instructions  thereto,  and such  other  documents  as may
reasonably be required by the Paying Agent, the holder of such Certificate shall
be entitled to receive in exchange  therefor  the amount of cash payable for the
Target Shares  represented by such Certificate  pursuant to Section 2(d)(v).  In
the event of a transfer of ownership of Target Shares which is not registered in
the  transfer  records of the Target,  payment may be made with  respect to such
Target Shares to such a transferee if the Certificate  representing  such Target
Shares is presented to the Paying Agent,  accompanied by all documents  required
to evidence and effect such transfer and to evidence that any  applicable  stock
transfer  taxes have been paid. No interest will accrue or be paid to the holder
of any outstanding  Target Shares.  (ii) The Buyer may cause the Paying Agent to
invest the cash  included  in the Payment  Fund in one or more of the  permitted
investments set forth in the agreement  between the Payment Agent and the Buyer,
which agreement shall be in form and substance  reasonably  satisfactory to each
of the  Parties;  provided,  however,  that  the  terms  and  conditions  of the
investments  shall be such as to permit the Paying Agent to make prompt  payment
of the Merger  Consideration as necessary.  The Buyer may cause the Paying Agent
to pay over to the  Surviving  Corporation  any net earnings with respect to the
investments,  and the Buyer  will  cause the  Surviving  Corporation  to replace
promptly any portion of the Payment  Fund which the Paying  Agent loses  through
investments.  (iii) The Buyer  may  cause  the  Paying  Agent to pay over to the
Surviving  Corporation  any portion of the Payment Fund  (including any earnings
thereon) in excess of $100,000  remaining 60 days after the Effective  Time, and
any or all of the Payment Fund  (including any earnings  thereon)  remaining 180
days  after the  Effective  Time,  and after  such  180-day  period  all  former
shareholders shall be entitled to look to the Surviving  Corporation (subject to
abandoned  property,  escheat,  and other  similar  laws) as  general  creditors
thereof with respect to the cash payable upon  surrender of their  certificates.
(iv) The Buyer  shall  cause the  Surviving  Corporation  to pay all charges and
expenses of the Paying Agent.

     (f) Closing of Transfer Records. After the close of business on the Closing
Date,  transfers of Target Shares  outstanding prior to the Effective Time shall
not be made on the stock transfer books of the Surviving Corporation.  If, after
the Effective  Time,  Certificates  are presented to the Surviving  Corporation,
they shall be exchanged as provided in Section 2(e).

     (g) Escrow.  Immediately  following  the execution of this  Agreement,  the
Buyer shall  deliver to U.S.  Trust  Company (the "Escrow  Agent")  certificates
representing the Buyer-owned Shares (the "Escrowed Shares"),  together with duly
executed  instruments  of transfer or assignment in blank.  Additionally,  on or
prior to the date that is thirty (30) days from the date hereof (or on the first
business day  following  such 30th day if such 30th day is not a business  day),
and provided the Buyer has not earlier  terminated  this  Agreement  pursuant to
Section 7(a)(vi) hereof,  the Buyer shall deliver to the Escrow Agent $1,000,000
in immediately  available funds (such funds,  together with any and all interest
earned thereon,  together with the Escrowed Shares,  the "Escrow  Amount").  The
Escrow Amount shall be held and distributed as provided in the Escrow  Agreement
in the form attached hereto as Exhibit A (the "Escrow Agreement") and subject to
terms and conditions of this Agreement.

     (h) Transfer of Excluded Target REIT Assets to Buyer-REIT.  Buyer agrees to
create,  establish or enter into an arrangement with the Buyer-REIT to which the
Target  will  transfer  the  assets and  associated  liabilities  identified  in
Schedule 2(h)  accompanying  this Agreement (the "Excluded  Target REIT Assets")
simultaneously  with  or,  at the  Buyer's  election,  immediately  prior to the
Closing (but in any event,  after satisfaction of all Closing  conditions).  The
Target's  obligation to transfer such assets and the Buyer's obligation to cause
the  Buyer-REIT  to assume  such  liabilities  will  terminate  in the event the
Closing does not occur.

     (i) Subsequent Actions.  Without limiting the terms of Section 2(d)(i), if,
at any time after the Effective Time, the Surviving  Corporation  shall consider
or be advised  that any deeds,  bills of sale,  assignments,  assurances  or any
other actions or things are necessary or desirable to continue in, vest, perfect
or confirm of record or otherwise the Surviving  Corporation's  right,  title or
interest in, to or under any of the rights, properties,  privileges,  franchises
or assets of either of its constituent  corporations  acquired or to be acquired
by the Surviving  Corporation as a result of, or in connection with, the Merger,
or  otherwise  to carry  out the  intent of this  Agreement,  the  officers  and
directors  of the  Surviving  Corporation  shall be  authorized  to execute  and
deliver, in the name and on behalf of either of the constituent  corporations of
the Merger,  all such deeds,  bills of sale,  assignments  and assurances and to
take  and do,  in the  name  and on  behalf  of each  of  such  corporations  or
otherwise, all such other actions and things as may be necessary or desirable to
vest,  perfect or confirm any and all right, title and interest in, to and under
such  rights,  properties,  privileges,  franchises  or assets in the  Surviving
Corporation or otherwise to carry out the intent of this Agreement.  (j) Further
Assurances.  Each Party hereto  shall  execute and cause to be delivered to each
other Party hereto such  instruments  and other  documents,  and shall take such
other actions, as such other Party may reasonably request (prior to, at or after
the  Closing)  for  the  purpose  of  carrying  out  or  evidencing  any  of the
transactions contemplated by this Agreement.

     SECTION 3.  REPRESENTATIONS AND WARRANTIES OF TARGET. The Target represents
and  warrants to the Buyer and the  Transitory  Subsidiary  that the  statements
contained  in this  Section 3 are  correct  and  complete as of the date of this
Agreement and will be correct and complete as of the Closing Date, except as set
forth in the Target disclosure schedule accompanying this Agreement (the "Target
Disclosure  Schedule").  The Target  Disclosure  Schedule  will be  arranged  in
paragraphs  corresponding to the lettered and numbered  paragraphs  contained in
this Section 3.

     (a)  Organization,  Qualification,  and Corporate Power. Each of the Target
and its Subsidiaries is a corporation duly organized,  validly existing,  and in
good standing under the laws of the jurisdiction of its  incorporation.  Each of
the Target and its Subsidiaries is duly authorized to conduct business and is in
good standing under the laws of each  jurisdiction  where such  qualification is
required,  except  where  the  lack  of such  qualification  would  not  have or
reasonably  be  expected  to result in any  changes  in or  effects  that in the
aggregate together with all other changes and effects (x) are materially adverse
to the  business,  assets,  liabilities,  results  of  operations  or  condition
(financial or otherwise)  of the Target and its  Subsidiaries  taken as a whole,
except,  to the extent  resulting from (1) any  changes in general United States
economic  conditions,  or (2) any  changes  affecting  the mortgage  industry in
general  (including  changes in interest rates),  but not to the extent that the
changes  disproportionately  affect the Target, or (y) will prevent the Target's
consummating  the  transactions  contemplated  hereby  or  materially  delay the
Target's  ability to  consummate  the  transactions  contemplated  hereby  (such
changes and effects described in clauses (x) and (y), a "Target Material Adverse
Effect").  Each of the Target and its  Subsidiaries has full corporate power and
authority to carry on the  businesses  in which it is engaged and to own and use
the properties owned and used by it.

         (b)      Capitalization.

     (i) The authorized  capital stock of Target consists of 100,000,000  shares
of Target Common Stock, par value $.01 per share,  1,552,000 shares of Preferred
Series A Stock, par value $.01 per share, 4,760,000 shares of Preferred Series B
Stock,  par value $.01 per share,  and  1,840,000  shares of Preferred  Series C
Stock, par value $.01 per share. At the close of business on September 30, 2000,
the issued and outstanding capital stock of the Target consists of:

(A)      11,446,206 Target Common Shares;
(B)      1,309,061 Target Series A Shares;
(C)      1,912,434 Target Series B Shares; and
(D)      1,840,000 Target Series C Shares.

     No shares of capital  stock of the  Target are held by any of the  Target's
Subsidiaries.

     (ii) All of the  issued  and  outstanding  Target  Shares  have  been  duly
authorized  and are  validly  issued,  fully  paid,  non-assessable  and free of
preemptive  rights.  All of the  outstanding  shares of capital  stock and other
equity  securities  of  the  Subsidiaries  of  Target  are  owned,  directly  or
indirectly,  by the  Target  free and  clear  of all  liens,  pledges,  security
interests, or other encumbrances.

     (iii) Except for the right of the Target  Series A Shares,  Target Series B
Shares and Target Series C Shares to convert into Target Common Shares under the
Target's  charter,  there are no  outstanding or authorized  options,  warrants,
purchase rights,  subscription  rights,  calls,  agreements,  conversion rights,
exchange  rights,  or other  contracts or commitments  (contingent or otherwise)
that could  require the Target to issue,  sell,  transfer or otherwise  cause to
become  outstanding any of its capital stock or otherwise  entitle any Person to
purchase or otherwise  acquire from the Target or any of its Subsidiaries at any
time,  or upon the happening of any stated events any shares of capital stock or
other  equity stock of the Target and its  Subsidiaries.  As of the date of this
Agreement, there are no outstanding obligations, contingent or otherwise, of the
Target or any of its Subsidiaries to repurchase, redeem or otherwise acquire any
Target Shares or any Target Equity Equivalent  Securities  (except in connection
with  the  exercise,   conversion  or  exchange  of  outstanding  Target  Equity
Equivalent Securities).

     (iv) There are no outstanding  or authorized  stock  appreciation,  phantom
stock units, profit participation,  or similar rights with respect to the Target
or its Subsidiaries.

     (v) The Target Disclosure  Schedule sets forth the name and jurisdiction of
incorporation  or  organization  of each  Subsidiary of the Target.  Neither the
Target nor any of its  Subsidiaries  owns directly or indirectly any interest or
investment  (whether equity or debt) in any Person.  (vi) As of the date of this
Agreement,  there are no bonds,  debentures,  notes or other indebtedness issued
and outstanding having the right to vote together with Target's  stockholders on
any matter in respect of which the Target's stockholders are entitled to vote.

     (c)  Authorization of Transaction.  The Target has full corporate power and
authority to execute and deliver this  Agreement and to perform its  obligations
hereunder;  provided,  however,  that the Target  cannot  consummate  the Merger
unless and until it receives the Requisite Stockholder Approval.  This Agreement
constitutes the valid and legally binding obligation of the Target,  enforceable
in accordance with its terms and conditions.

(d)      Noncontravention.

     (i) Neither the  execution  and the  delivery  of this  Agreement,  nor the
consummation of the transactions  contemplated  hereby, will (A) (1) violate any
constitution,  statute, regulation,  rule, injunction,  judgment, order, decree,
ruling,  charge,  or other  restriction of any Governmental  Entity, or court to
which any of the Target and its Subsidiaries is subject, (2) violate or conflict
with  any  provision  of the  charter  or  bylaws  of any of the  Target  or its
Subsidiaries or (3) conflict with,  result in a breach of,  constitute a default
under,  result  in the  acceleration  of,  create  in any  party  the  right  to
accelerate,  terminate,  modify,  or  cancel,  or require  any notice  under any
agreement,   contract,  lease,  license,   instrument,   bond,  note,  mortgage,
indenture,  franchise or other  arrangement (with or without notice or any lapse
of time) to which any of the Target and its  Subsidiaries is a party or by which
it is  bound  or to  which  any of its  assets  is  subject  (or  result  in the
imposition of any lien, claim or encumbrance upon any of its assets), except, in
the case of  clauses  (A) (1) and  (A) (3)  above  only,  where  the  violation,
conflict,   breach,   default,    acceleration,    termination,    modification,
cancellation,  failure to give notice,  or lien, claim or encumbrance  would not
have, or reasonably be expected to have, a Target Material  Adverse  Effect,  or
(B)  result  in  any  obligation  on  the  part  of  the  Target  or  any of its
Subsidiaries  (with or  without  notice or any lapse of time) to  repurchase  or
repay  any  debenture,  bond,  note or other  indebtedness  for  borrowed  money
(including, without limitation, the Target Senior Notes).

     (ii) To the  Target's  Knowledge,  and other  than in  connection  with the
provisions  of the  Hart-Scott-Rodino  Act,  the Virginia  Corporation  Law, the
Securities Exchange Act, the Securities Act, and any applicable federal or state
securities laws, none of the Target or any of its Subsidiaries needs to give any
notice  to,  make any filing  with,  or obtain any  authorization,  consent,  or
approval of any  Governmental  Entity in order for the Parties to consummate the
transactions  contemplated by this  Agreement,  except where the failure to give
notice, to file, or to obtain any authorization,  consent, or approval would not
have, or reasonably be expected to have, a Target Material Adverse Effect.

     (e) Filings with the SEC.  The Target has timely filed all forms,  reports,
statements,  schedules and other  documents  (including  all annexes,  exhibits,
schedules,  amendments and supplements  thereto) required to be filed by it with
the SEC since  December 31, 1996,  has delivered or made  available to the Buyer
upon  written  request  all  forms,  reports,  statements,  schedules  and other
documents (except for preliminary  materials) (including all annexes,  exhibits,
schedules,  amendments and  supplements  thereto) filed by it with the SEC since
December 31, 1996 (such forms,  reports,  statements,  schedules  and  documents
filed by the Target with the SEC, including any such forms, reports, statements,
schedules and other documents filed by the Target with the SEC after the date of
this  Agreement  and  prior  to  the  Closing  Date,  are  referred  to  herein,
collectively,  as the 'Public  Reports,' and with respect to the Public  Reports
filed by the Target  after the date of this  Agreement  and prior to the Closing
Date,  will deliver or make available to the Buyer upon Buyer's  written request
all of such  Public  Reports  in the  form  filed  with  the  SEC.  As of  their
respective   filing  dates,  the  Public  Reports   (including  all  information
incorporated  therein  by  reference)  (i) complied  as to form in all  material
respects with the requirements of the Securities Act or the Securities  Exchange
Act, as applicable,  and (ii) did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.  Each 'material contract'(as such term is
defined in Item 601 (b)(10) of  Regulation  S-K of the SEC) of the Target or any
of its Subsidiaries and each non-competition agreement or any other agreement or
obligation  of the Target or any of its  Subsidiaries  that purports to limit in
any  respect  the  manner  in  which  or the  localities  in  which,  all or any
substantial  portion of the  business  of the Target or any of its  Subsidiaries
would be conducted is  disclosed in the Public  Reports  filed prior to the date
hereof.

     (f)  Brokers'  Fees.  Except for  PaineWebber  Incorporated  pursuant to an
engagement  letter,  a true and  complete  copy of  which  has  previously  been
delivered to the Buyer,  none of the Target or any of its  Subsidiaries  has any
liability or obligation to pay any fees or  commissions  to any broker,  finder,
agent, investment banker,  financial advisor or other person with respect to the
transactions contemplated by this Agreement.

     (g) Disclosure.  The Definitive Proxy Materials will comply as to form with
the requirements of the Securities  Exchange Act in all material  respects.  The
Definitive  Proxy Materials will not contain any untrue  statement of a material
fact or omit to state a material fact  necessary in order to make the statements
made therein,  in the light of the circumstances  under which they will be made,
not misleading;  provided,  however,  that the Target makes no representation or
warranty  with  respect  to any  information  that the  Buyer or the  Transitory
Subsidiary will supply specifically for use in the Definitive Proxy Materials.

     (h) Employee Benefits.  Target Disclosure Schedule 3(h) contains a true and
complete list of each written bonus, vacation,  deferred compensation,  pension,
retirement,  profit-sharing,  thrift, savings,  employee stock ownership,  stock
bonus,  stock purchase,  restricted stock and stock option plans, all employment
or  severance  contracts,  all  medical,  dental,  disability,  health  and life
insurance plans, all other employee benefit and fringe benefit plans,  contracts
or arrangements and any applicable  'change of control' or similar provisions in
any plan, contract or arrangement  maintained or contributed to by the Target or
any of its Subsidiaries for the benefit of Employees or the beneficiaries of any
Employee (collectively,  'Target Employee Plans'). Neither the Target nor any of
its  Subsidiaries  has any plan or commitment to establish or enter into any new
Target Employee Plan, or to modify or, except as contemplated by this Agreement,
to terminate any Target  Employee  Plan. The Target has made  available,  or has
caused to be made available, to the Buyer current,  accurate and complete copies
of all documents  embodying or relating to each Target Employee Plan. (i) To the
Target's  Knowledge,  each of the Target and its  Subsidiaries has performed all
obligations required to be performed by it under each Target Employee Plan. Each
Target  Employee  Plan  has  been  established  and  maintained  in  substantial
accordance  with its terms and in  substantial  compliance  with all  applicable
laws.  Each Target Employee Plan which is intended to be qualified under Section
401(a)  of the Code has  received  a  favorable  determination  letter  from the
Internal Revenue Service,  and it is not aware of any  circumstances  reasonably
likely to result in the revocation or denial of any such favorable determination
letter.  There is no  litigation  pending  or, to the  Knowledge  of the Target,
threatened or anticipated  (other than routine claims for benefits) with respect
to any Target Employee Plan or by any Employee with respect to the Target or any
of its Subsidiaries.  No Target Employee Plan is under audit or investigation by
the  Internal  Revenue  Service,  the  Department  of  Labor,  the PBGC or other
Governmental  Entity,  and to the  Knowledge  of the  Target,  no such  audit or
investigation is threatened.

     (ii) Neither the Target,  any of its Subsidiaries,  nor any ERISA Affiliate
presently  sponsors,  maintains,  contributes to, nor is the Target,  any of its
Subsidiaries  or any ERISA  Affiliate  required  to  contribute  to, nor has the
Target,  any of  its  Subsidiaries  nor  any  ERISA  Affiliate  ever  sponsored,
maintained,  contributed  to, or been  required  to  contribute  to, a "employee
pension  benefit  plan"  (within the meaning of Section  3(2) of ERISA) which is
subject to Title IV of ERISA.

     (iii)  Neither  the  Target  nor  any  of  its  Subsidiaries  maintains  or
contributes to any Target Employee Plan which provides,  or has any liability to
provide, life insurance,  medical,  severance or other employee welfare benefits
to any Employee upon his retirement or termination of employment,  except as may
be required by Section  4980B of the Code and Sections 601 through 609 of ERISA.
(iv) The execution of, and performance of the transactions  contemplated by this
Agreement will not (either individually, in the aggregate or upon the occurrence
of any additional or subsequent events) (A) constitute an event that will or may
result in any payment  (whether of severance pay or otherwise),  acceleration of
benefits,  forgiveness of  indebtedness,  vesting or  distribution  of benefits,
increase  in  benefits  or  obligation  to fund  benefits  with  respect  to any
Employee,  or (B) result in the triggering or imposition of any  restrictions or
limitations on the right of the Buyer,  the Target or any of its Subsidiaries to
amend or terminate any Target Employee Plan. No payment or benefit which will or
may be made by the Buyer, the Target, or any of its Subsidiaries or any of their
respective  Affiliates with respect to any Employee may be  characterized  as an
"excess parachute  payment" within the meaning of Section 280G(b)(1) of the Code
which is contingent on the change in ownership of the Target  resulting from the
Merger.  No  officer,  director  or  Employee  of  the  Target  or  any  of  its
Subsidiaries  is entitled to any "sale bonus payment,"  "retention  payment," or
any other  payment  or  benefit  in  connection  with,  or as a result  of,  the
transactions contemplated by this Agreement.

     (v)  To  the  Target's  Knowledge,  each  of  the  Target  and  any  of its
Subsidiaries is in compliance in all material  respects with all applicable laws
(domestic and foreign) respecting employment, employment practices, labor, terms
and conditions of employment,  wages and hours, withholding taxes,  unemployment
compensation  and Social  Security.  (i) Labor and Employment  Matters.  No work
stoppage  or labor  strike  against  the  Target or any of its  Subsidiaries  by
Employees is pending or, to the Knowledge of the Target, threatened. Each of the
Target and its  Subsidiaries  (i) is not involved in or, to the Knowledge of the
Target, threatened with any labor dispute,  grievance, or litigation relating to
labor matters and (ii) is not presently, nor has it been in the past a party to,
or bound by, any collective bargaining,  union or similar agreement,  nor is any
such  agreement  currently  being  negotiated  by  the  Target  or  any  of  its
Subsidiaries.  No Employees are currently or while employed by the Target or any
of its  Subsidiaries  have ever been represented by any labor union with respect
to their  employment by Target or its  Subsidiaries  and to the Knowledge of the
Target, no activities the purpose of which is to achieve such  representation of
all or some of such  Employees  are  threatened  or  ongoing.  (j)  Articles  of
Incorporation  and Bylaws of the Target.  The Target has  furnished or otherwise
made available to the Buyer a complete and correct copy of the Target's Articles
of  Incorporation  and  Bylaws,  in each  case as  amended  to the  date of this
Agreement.  Such  Articles  of  Incorporation  and  Bylaws of the Target and all
similar organizational documents of Subsidiaries of the Target are in full force
and effect.  The Target is not in violation of its Articles of  Incorporation or
Bylaws and,  except as would not,  in the  aggregate,  have,  or  reasonably  be
expected to have, a Target Material Adverse Effect,  none of the Subsidiaries of
the Target is in violation of any similar organizational documents.

     (k) Absence of Certain  Changes.  Except as disclosed in the Public Reports
filed prior to the date of this  Agreement  or as  otherwise  permitted  hereby,
since June 30,  2000,  (i) the Target and its Subsidiaries  have conducted their
respective  businesses  in all  material  respects  in the  Ordinary  Course  of
Businesses and there have not been any changes,  or any other  developments with
respect to the Target or any of its Subsidiaries, in each case whether or not in
the Ordinary  Course of Business,  that, in the aggregate with all other changes
and  developments,  have had, or would  reasonably be expected to have, a Target
Material  Adverse Effect  (excepting any ratings decline or similar action taken
with  respect  to  the  Target  by  any  rating  agency   following  the  public
announcement  of the execution of this  Agreement),  and (ii) there has not been
(A) any  declaration,  setting  aside  or  payment  of  any  dividend  or  other
distribution  (whether  in cash,  stock or  property)  in  respect of any Target
Shares or other equity  securities,  Target Equity Equivalent  Securities or any
other securities convertible,  exercisable or exchangeable for or into shares of
capital  stock  or  other  equity  securities,  of  the  Target  or  any  of its
Subsidiaries,   other  than   dividends  and   distributions   by  wholly  owned
Subsidiaries  of the  Target;  (B)any  change by the  Target to its  accounting
policies,  practices or methods; (C)other than in connection with the exercise,
exchange or conversion of Target Equity Equivalent  Securities,  any repurchase,
redemption or other  acquisition  of any shares of capital stock or other equity
securities or any securities  convertible,  exchangeable  or exercisable  for or
into shares of capital stock or other equity securities, of the Target or any of
its  Subsidiaries;  (D) except  as  required  by  applicable  law or pursuant to
contractual  obligations  existing  as  of  June30,  2000,  (w)any  execution,
establishment,  adoption or amendment of, or  acceleration of rights or benefits
under,  any  agreement  relating to severance,  any Target  Employee  Plan,  any
employment  or  consulting  agreement or any  collective  bargaining  agreement,
(x)any  increase  in the  compensation  payable  or to  become  payable  to any
officer,  director or employee of the Target or any of its Subsidiaries  (except
increases  permitted  hereunder),  (y)any grant of any severance or termination
paid to any officer or director  of the  Target,  or (z)any  grant of any stock
options  or other  equity  related  awards  other  than in the  ordinary  course
consistent  with past  practice;  (E) any default (with or without notice or any
lapse  of time) in the due  performance  or  observance  of any  term,  covenant
(financial or otherwise), representation, warranty or agreement of the Target or
its Subsidiaries under any agreement relating to indebtedness for borrowed money
(including,  without limitation,  the Target Senior Notes Indenture); or (F) any
agreement or commitment entered into with respect to the foregoing.

     (l) Litigation; Liabilities. (i)Except as disclosed in the Public Reports
filed  prior to the date of this  Agreement,  there  are no civil,  criminal  or
administrative  actions, suits, claims,  proceedings,  or investigations pending
or, to the Knowledge of the Target, threatened, against the Target or any of its
Subsidiaries or any of their respective properties,  except as would not, in the
aggregate,  have, or reasonably be expected to have, a Target  Material  Adverse
Effect.

     (ii) Except as set forth in the Public  Reports  filed prior to the date of
this Agreement, neither the Target nor any of its Subsidiaries has or is subject
to  any  liabilities  (absolute,   accrued,  contingent  or  otherwise),  except
liabilities (A)adequately reflected on the unaudited consolidated balance sheet
of the Target and its  Subsidiaries  (including any related notes thereto) as of
June 30, 2000  included in the Target's  Quarterly  Report on Form 10-Q  for the
quarter ended June 30, 2000, or (B) which, in the aggregate,  would not have, or
reasonably be expected to have, a Target Material  Adverse Effect.  (m) Permits.
Except  as  disclosed  in the  Public  Reports  filed  prior to the date of this
Agreement,  the  Target  and  its  Subsidiaries  hold  all  permits,   licenses,
easements, rights-of-way,  variances, exemptions, consents, certificates, orders
and  approvals  which are  material to the  operation of the  businesses  of the
Target and its Subsidiaries  (collectively,  the "Target Permits"), except where
the failure to hold such Target  Permits,  in the aggregate,  would not have, or
reasonably be expected to have, a Target Material Adverse Effect. The Target and
its Subsidiaries are in compliance with the terms of the Target Permits,  except
as described in the Public  Reports  filed prior to the date hereof or where the
failure  to so  comply,  in the  aggregate,  would not have,  or  reasonably  be
expected to have, a Target Material Adverse Effect.

         (n) Board Action; Statutory Rights; Vote Required.

     (i) Not  less  than a  majority  of the  Target's  board of  directors  has
approved this Agreement and the  transactions  contemplated  hereby and thereby,
has determined that each of the transactions  contemplated hereby is in the best
interests of the Target and has resolved to recommend to its  stockholders  that
they vote in favor of the Merger. (ii) Neither the Virginia  Corporation Law nor
any  other  state  takeover   statute  or  regulation  under  the  laws  of  the
Commonwealth  of  Virginia  or any  other  state  applies  to the  Merger,  this
Agreement,  or any of the transactions  contemplated hereby or thereby. No "fair
price," "moratorium," "control share acquisition" or other similar anti-takeover
statute   applicable  to  the  Target  will  prevent  or  otherwise   delay  the
consummation of the transaction as contemplated hereby.

     (iii)  Neither  the  Virginia  Corporation  Law nor any  other  statute  or
regulation  under the law of the  Commonwealth of Virginia  (including,  without
limitation,  Sections  13.1-730 and 13.1-737 of the  Virginia  Corporation  Law)
provides any right of dissent or appraisal to any holder of any Target Shares or
any Target Equity Equivalent Security which are issued and outstanding. (iv) The
Requisite  Stockholder  Approval  is the only  approval of  stockholders  of the
Target necessary to approve the Merger as provided in this Agreement.  (iv) Upon
receipt of the Requisite Stockholder  Approval,  pursuant to Section 13.1 721 of
the Virginia Corporation Law, and as set forth in the Articles of Merger, all of
the Target  Series A Shares,  Target  Series B Shares and Target Series C Shares
(including all unpaid  dividends with respect  thereto) shall be canceled at the
Effective  Time by operation of law without any further action by the holders of
such shares.

     (o) Opinion of Financial Advisor.  The board of directors of the Target has
received the written opinion of PaineWebber  Incorporated,  dated as of or prior
to the date of this Agreement, to the effect that, subject to the qualifications
and limitations  contained therein,  as of the date of such opinion,  the Merger
Consideration  is fair to the  holders  of each  class of Target  Shares  from a
financial point of view.

     (p) Taxes. (i) Each of the Target and its Subsidiaries has timely filed all
Tax Returns  required to be filed by any of them and paid (or  established  full
and  adequate  reserves  or accruals on the  financial  statements  filed in the
Public  Records for) all Taxes  required to be paid by any of them in respect of
periods covered by such Tax Returns (whether or not shown as due on any such Tax
Returns) or which are  otherwise  due and payable,  and all such Tax Returns are
true,  correct  and  complete,  except for  failures  to timely  file,  pay,  or
omissions or inaccuracies which would not have a Target Material Adverse Effect.
(ii) No deficiencies  for any Taxes have been proposed,  asserted or assessed in
writing or, to the Knowledge of the executive officers of the Target, orally, by
any Taxing  authority  against  the Target or any of its  Subsidiaries  which if
adversely  determined would have a Target Material Adverse Effect,  and no audit
of any Tax Return of the Target or any of its  Subsidiaries  is currently  being
conducted by any Taxing  authority.  (iii) Except with respect to any claims for
refunds,  the  federal  income  Tax  returns  of  the  Target  and  each  of its
Subsidiaries for all such periods ended on or before December 31, 1993 have been
examined by and settled with the IRS, or the  applicable  statute of limitations
with respect to such years, including extensions thereof, has expired. As of the
date of this Agreement,  none of the Target or any of its  Subsidiaries  (A) has
requested any extension of time within which to file any material federal income
Tax return,  which Tax return has not since been filed and (B) has in effect any
extension,  outstanding  waivers  or  comparable  consents  with  respect to any
federal income Taxes or federal  income Tax Returns.  (iv) Copies of all federal
Tax  returns  required  to be filed  by the  Target  or any of its  Subsidiaries
(including any predecessors) for each of the last three years, together with all
schedules and attachments thereto,  have been delivered or made available by the
Target  to the  Buyer.  (v)  None  of  the  Target  or  any of its  Subsidiaries
(including any  predecessors)  is a party to, is bound by, or has any obligation
under any Tax  sharing or similar  agreement.  (vi) None of the Target or any of
its Subsidiaries (A) has received a Tax ruling from any federal Taxing authority
or entered into a closing agreement with any federal Taxing authority that would
have a continuing  material effect after the Closing Date, (B) would be required
to  include  in income  for any period  after the  Closing  Date any  adjustment
pursuant  to  Section  481(a)  of the Code by reason  of a  voluntary  change in
accounting method initiated by it for any tax year, and, to the Knowledge of the
executive  officers of the Target,  the IRS has not proposed any such adjustment
or change  in  accounting  method  for any tax year for  which  the  statute  of
limitations  remains  open or (C) would be  required  to  include  any amount in
income after the Closing Date  pursuant to Section 453 of the Code as the result
of sales of assets before the Closing Date under the installment  method.  (vii)
None of the Target or any of its  Subsidiaries  has constituted a "distributing
corporation" in a distribution of stock qualifying for tax-free treatment under
Section 355 of the Code in the past 24 month period or in a  distribution  which
could  otherwise  constitute  part  of a  "plan"  or  a  series  of  "related
transactions"  within the meaning of Section  355(e) of the Code.  (viii) Since
December 31, 1999,  the Target has incurred no liability for any material  Taxes
under  Sections  857(b),  860(c)  or 4981 of the  Code or IRS  Notice  88-19  or
Treasury  Temporary   Regulation   Section   1.337(d)-5T,   including,   without
limitation,  any material Tax arising from a prohibited transaction described in
Section  857(b)(6)  of  the  Code,  and  neither  the  Target  nor  any  of  its
Subsidiaries  has incurred any  material  liability  for Taxes other than in the
Ordinary  Course of  Business.  To the  Knowledge  of the  Target,  no event has
occurred,  and no condition or circumstance  exists,  which presents a risk that
any material  Tax  described in the  preceding  sentence  will be imposed on the
Target or any Target Subsidiary prior to the Effective Time. (ix) The Target (A)
for each  taxable year  beginning  with the taxable year ended on, and ending at
the  Effective  Time,  has been and will be subject to taxation as a real estate
investment trust (a "REIT") within the meaning of the Code and has satisfied the
requirements to qualify as a REIT for such years, (B) has operated,  and intends
to continue to operate,  consistent with the requirements for  qualification and
taxation  as  a  REIT  through  the  Effective   Time,  (C)  will  maintain  its
qualification  as a REIT  through  the date of closing  by making all  necessary
undertakings that are consistent with the Code; and (D) has not taken or omitted
to take any action which could  reasonably  be expected to result in a challenge
to its status as a REIT,  and no such  challenge is pending,  or to the Target's
Knowledge,  threatened.  (x)  Each  Subsidiary  of the  Target  (A)  which  is a
partnership or limited  liability  company or files Tax Returns as a partnership
for federal  income tax purposes (i) has since its formation or its  acquisition
by Target been, and continues to be,  classified for federal income tax purposes
as a partnership  or disregarded  entity and not as an association  taxable as a
corporation, or a "publicly traded partnership" that is treated as a corporation
for federal  income tax  purposes;  and (ii) has not since its  formation or its
acquisition  by the Target  owned any  assets  (including,  without  limitation,
securities)  that would  cause the Target to violate  Section  856(c)(4)  of the
Code; or (B) which is a corporation  or treated as an  association  taxable as a
corporation has been since the date of its formation or acquisition by Target, a
qualified REIT subsidiary under Section 856(i) of the Code. (xi) For the purpose
of this Agreement,  the term "Tax" (including,  with correlative  meaning, the
terms "Taxes",  "Taxing", and "Taxable") shall include all federal, state,
local and foreign income, profits,  franchise,  gross receipts,  payroll, sales,
employment,  use, property, gains, transfer,  recording,  license,  value-added,
withholding,  excise  and other  taxes,  duties  or  assessments  of any  nature
whatsoever  (whether payable directly or by withholding),  together with any and
all estimated Tax interest,  penalties and additions to Tax imposed with respect
to such amounts and any  obligations  in respect  thereof under any Tax sharing,
Tax  allocation,  Tax indemnity or similar  agreement as well as any obligations
arising pursuant to Regulation 1.1502-6 promulgated under the Code or comparable
state, local or foreign provision.  The term "Tax Return" shall mean any return,
declaration,  report,  claim for  refund,  or  information  return or  statement
relating to Taxes,  including any schedule or attachment thereto,  and including
any amendment thereof.

     (q) Financial  Statements;  Accounting.  Each of the  consolidated  balance
sheets of the Target and its Subsidiaries (including all related notes) included
in the financial  statements  contained in the Public  Reports (or  incorporated
therein by reference) present fairly, in all material respects, the consolidated
financial position of the Target and its Subsidiaries as of the respective dates
indicated,  and each of the  consolidated  statements  of  income,  consolidated
statements of cash flows and consolidated statements of changes in stockholders'
equity  of the  Target  and  its  Subsidiaries  (including  all  related  notes)
contained in such financial statements present fairly, in all material respects,
the consolidated results of operations,  cash flows and changes in stockholders'
equity of the Target and its Subsidiaries for the respective  periods indicated,
in each case in conformity  with GAAP applied on a consistent  basis  throughout
the periods involved (except for changes in accounting  principles  disclosed in
the notes  thereto)  and the  rules  and  regulations  of the SEC,  except  that
un-audited  interim  financial  statements  are subject to normal and  recurring
year-end  adjustments  and any other  adjustments  described  therein and do not
include  certain notes and other  information  which may be required by GAAP but
which  are not  required  under  the  Securities  Exchange  Act.  The  financial
statements  included  in the Public  Reports  are in all  material  respects  in
accordance with the books and records of the Target and its Subsidiaries.  There
has been no change in the accounting  policies,  practices or methods the Target
and its Subsidiaries since June 30, 2000.

     (r) Intellectual  Property.  The Target and its Subsidiaries own the entire
right,  title and interest in and to or have the right to use (pursuant to valid
and defensible license arrangements), all intellectual property used or held for
use  in,  or  otherwise   necessary  for,  the  operation  of  their  respective
businesses,  except  as would  not,  in the  aggregate,  have or  reasonably  be
expected to have a Target Material Adverse Effect.  There are no pending,  or to
the  Knowledge of the Target,  threatened  proceedings  or  litigation  or other
adverse claims affecting or relating to any such intellectual property,  nor, to
the  Knowledge  of the Target,  any  reasonable  basis upon which a claim may be
asserted  by or against  the Target for  infringement  of any such  intellectual
property that, in the aggregate,  would  reasonably be expected to have a Target
Material Adverse Effect.

     (s) Indebtedness for Borrowed Money.  The Target  Disclosure  Schedule sets
forth  a  true  and  correct  list  of all  agreements  of the  Target  and  its
Subsidiaries   relating  to  indebtedness   for  borrowed  money  in  excess  of
$1,000,000.  The Target is not, and at Closing will not be (and, in either case,
would not be upon the passage of time or but for the waiver by or forbearance of
any other Person),  in default in the due performance or observance of any term,
covenant (financial or otherwise), representation,  warranty or agreement in any
such  agreement  (including,   without  limitation,   the  Target  Senior  Notes
Indenture).

     (t)  Properties.  Except as  disclosed in the Public  Reports,  each of the
Target and its Subsidiaries

     (i) has  good  and  marketable  title  to all  the  properties  and  assets
reflected in the latest audited  balance sheet included in the Public Reports as
being owned by the Target or one of its  Subsidiaries or acquired after the date
thereof which are, alone or in the aggregate,  material to the Target's business
on a consolidated  basis (except  properties sold or otherwise disposed of since
the date thereof in the Ordinary Course of Business),  free and clear of (A) all
Security Interests except such imperfections or irregularities of title or other
Security  Interests (other than real property mortgages or deeds of trust) as do
not materially  affect the use of the  properties or assets  subject  thereto or
affected  thereby  or  otherwise   materially  impair  the  business  operations
presently conducted at such properties,  and (B) all real property mortgages and
deeds of trust, and (ii) is the lessee of all leasehold estates reflected in the
latest audited financial  statements  included in the Public Reports or acquired
after the date thereof  which are,  alone or in the  aggregate,  material to its
business  on a  consolidated  basis  and  is in  possession  of  the  properties
purported to be leased thereunder,  and each such lease is valid without default
thereunder by the lessee, or, to the Target's Knowledge, the lessor.

     SECTION  4.   REPRESENTATIONS   AND  WARRANTIES  OF  BUYER  AND  TRANSITORY
SUBSIDIARY.  Each of the  Buyer and the  Transitory  Subsidiary  represents  and
warrants  to the Target  that the  statements  contained  in this  Section 4 are
correct and  complete as of the date of this  Agreement  and will be correct and
complete as of the  Closing  Date (as though made then and as though the Closing
Date were substituted for the date of this Agreement throughout this Section 4),
except as set forth in the Buyer disclosure schedule accompanying this Agreement
(the  "Buyer  Disclosure  Schedule").  The  Buyer  Disclosure  Schedule  will be
arranged in  paragraphs  corresponding  to the numbered and lettered  paragraphs
contained in this Section 4. (a) Organization.  The Buyer is a limited liability
company duly organized, validly existing, and in good standing under the laws of
the  State of  California.  The  Transitory  Subsidiary  is a  corporation  duly
organized,  validly  existing,  and in  good  standing  under  the  laws  of the
Commonwealth of Virginia.  (b) Financing.  The Buyer has furnished to the Target
correct and complete copies of written  commitments  from a third party or third
parties (the  "Financing  Commitments")  committing to provide the Buyer and the
Transitory  Subsidiary  with  sufficient  financing  to  consummate  the  Merger
according  to  the  terms  (and  subject  to the  conditions)  of  such  written
commitments.  (c)  Authorization  of  Transaction.  Each  of the  Buyer  and the
Transitory  Subsidiary has requisite  power and authority to execute and deliver
this  Agreement  and  to  perform  its  obligations  hereunder.  This  Agreement
constitutes  the valid and legally  binding  obligation of each of the Buyer and
the  Transitory  Subsidiary,  enforceable  in  accordance  with  its  terms  and
conditions.  (d)  Non-contravention.  Neither the  execution and the delivery of
this Agreement,  nor the consummation of the transactions  contemplated  hereby,
will (i)  violate  any  constitution,  statute,  regulation,  rule,  injunction,
judgment,   order,  decree,   ruling,   charge,  or  other  restriction  of  any
Governmental  Entity,  or court  to which  either  the  Buyer or the  Transitory
Subsidiary  is subject,  (ii)  violate or  conflict  with any  provision  of the
charter or bylaws of either the Buyer or the  Transitory  Subsidiary  or;  (iii)
conflict with,  result in breach of,  constitute a default under,  result in the
acceleration of, create in any party the right to accelerate, terminate, modify,
or cancel, or require any notice under any agreement,  contract, lease, license,
instrument, bond, note mortgage indenture,  franchise or other arrangement (with
or  without  any  notice  or lapse of time)  to which  either  the  Buyer or the
Transitory  Subsidiary is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any lien, claim or encumbrance
upon any of its assets), except in the case of clauses (i) and (iii) above only,
where the  violation,  conflict,  breach,  default,  acceleration,  termination,
modification,   cancellation,   failure  to  give  notice,  or  lien,  claim  or
encumbrance  would not have,  or reasonably be expected to result in any changes
in or effects that in the aggregate  together with all other changes and effects
(x) will  prevent the Buyer or the Transitory  Subsidiary from  consummating the
transactions  contemplated  hereby or  materially  delay the Buyer's  ability to
consummate the  transactions  contemplated  hereby or (y) materially  impair the
Buyer's ability to perform its obligations under Sections 2(c)(iv) or 2(e) (such
changes and effects  described in clauses (x) and (y), a "Buyer Material Adverse
Effect").  To the  Knowledge of any director or officer of the Buyer,  and other
than in  connection  with  the  provisions  of the  Hart-Scott-Rodino  Act,  the
Virginia  Corporation Law, the Securities  Exchange Act, the Securities Act, and
any  applicable  state  securities  laws,  neither the Buyer nor the  Transitory
Subsidiary  needs to give any notice to,  make any  filing  with,  or obtain any
authorization,  consent, or approval of any government or governmental agency in
order for the  Parties  to  consummate  the  transactions  contemplated  by this
Agreement,  except where the failure to give notice,  to file,  or to obtain any
authorization,  consent,  or approval  would not have a Buyer  Material  Adverse
Effect.

     (e) Brokers' Fees. Neither the Buyer nor the Transitory  Subsidiary has any
liability or obligation to pay any fees or  commissions  to any broker,  finder,
agent, investment banker,  financial advisor or other person with respect to the
transactions  contemplated  by this Agreement for which any of the Target or its
Subsidiaries could become liable or obligated.

     (f) Escrowed  Shares.  The Buyer is the full legal and beneficial  owner of
all of the Escrowed Shares and such shares are owned by the Buyer free and clear
of any lien, charge, security interest, restriction or encumbrance whatsoever on
such shares.

     (g) Disclosure.  None of the  information  that the Buyer or the Transitory
Subsidiary will supply  specifically  for use in the Definitive  Proxy Materials
will contain any untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements made therein, in the light of the
circumstances under which they will be made, not misleading.

     (h) Funds.  At Closing,  Buyer will have  adequate  funds to pay the Merger
Consideration.

     SECTION 5.  COVENANTS.  The Parties  agree as follows  with  respect to the
period from and after the execution of this Agreement.

     (a) General.  Each of the Parties will use commercially  reasonable efforts
to take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this Agreement
(including satisfaction,  but not waiver, of the closing conditions set forth in
Section 6 below) as soon as practicable after the date hereof.

     (b) Notices and Consents.  The Target will give any notices (and will cause
each of its  Subsidiaries  to give any notices) to third  parties,  and will use
commercially   reasonable  efforts  to  obtain  (and  will  cause  each  of  its
Subsidiaries to use commercially  reasonable  efforts to obtain) any third party
consents,  waivers  or  licenses  that  the  Buyer  reasonably  may  request  in
connection with the matters referred to herein.

     (c)  Regulatory  Matters and  Approvals.  Each of the Parties will (and the
Target  will cause each of its  Subsidiaries  to) give any  notices to, make any
filings  with,   and  use   commercially   reasonable   efforts  to  obtain  any
authorizations,  consents, permits, orders, requisitions,  tax rulings, waivers,
licenses and approvals of  Governmental  Entities in connection with the matters
referred to in Sections 3(d) and 4(d) above.  Without limiting the generality of
the  foregoing:  (i)  Securities  Exchange  Act.  The  Target  will,  as soon as
practicable following the date of this Agreement,  prepare and file with the SEC
preliminary  proxy materials  under the Securities  Exchange Act relating to the
special  meeting  of its  shareholders  (the  "Special  Meeting")  to be  called
pursuant to Section 5(l) below in order that the  shareholders  may consider and
vote upon the adoption of this  Agreement  and the  approval of the Merger.  The
Target will use  commercially  reasonable  efforts to respond to the comments of
the SEC thereon  and will make any further  filings  (including  amendments  and
supplements)  in  connection  therewith  that  may  be  necessary,   proper,  or
advisable.  The Buyer will  provide the Target  with  whatever  information  and
assistance in connection  with the foregoing  filing that the Target  reasonably
may request and will supply the Buyer with copies of all correspondence  between
the Target or any of its  representatives,  on the one hand,  and the SEC or its
staff, on the other hand, with respect to the proxy statement or the Merger. The
Target  shall give the Buyer and its counsel  (who shall  provide  any  comments
thereon as soon as reasonably  practicable)  the opportunity to review the proxy
statement prior to its being filed with the SEC and shall give the Buyer and its
counsel  (who  shall  provide  any  comments   thereon  as  soon  as  reasonably
practicable)  the  opportunity to review all  amendments and  supplements to the
proxy  statement and all responses to requests for  additional  information  and
replies to comments  prior to their being filed with,  or sent to, the SEC.  The
Target will provide to the Buyer at least five days' prior notice of the date of
mailing (the "SEC Mail Date") of the preliminary  proxy materials to the SEC and
at least five days' prior notice of the date of mailing (the  "Shareholder  Mail
Date") of the Definitive  Proxy  Materials to the Target's  shareholders,  which
Shareholder Mail Date shall be as soon as practicable  after  preliminary  proxy
materials  have been cleared by the SEC but in no event shall be earlier than 33
days after the date hereof.

                  (ii)     Hart-Scott-Rodino Act.

     (A) Each of the  Parties  will file (and the Target  will cause each of its
Subsidiaries  to file) any  Notification  and Report Forms and related  material
that it may be required to file with the Federal Trade Commission and the DOJ or
any  other  Governmental  Entity  under  the  Hart-Scott-Rodino  Act,  will  use
commercially  reasonable  best efforts to obtain (and the Target will cause each
of its Subsidiaries to use commercially  reasonable  efforts to obtain) an early
termination of the applicable waiting period, and will make (and the Target will
cause each of its  Subsidiaries  to make) any further filings  pursuant  thereto
that may be necessary, proper, or advisable.

     (B) In connection with the foregoing Section 5(c)(ii)(A), the Buyer and the
Target and each of their respective  Subsidiaries  shall use their  commercially
reasonable  efforts  to (i)  cooperate  in  all  respects  with  each  other  in
connection   with  any  filing  or  submission   and  in  connection   with  any
investigation or other inquiry,  including any proceeding  initiated by a Party,
(ii) promptly inform the other Party of any communication received by such Party
from, or given by such Party to, the DOJ or any other Governmental Entity and of
any material  communication  received or given in connection with any proceeding
by a private party, in each case regarding any of the transactions  contemplated
hereby, and (iii) permit the other Party to review any communication given by it
to, and consult  with each other in advance of any meeting or  conference  with,
the DOJ or any  such  other  Governmental  Entity  or,  in  connection  with any
proceeding  by a  private  party,  with  any  other  Person,  and to the  extent
permitted  by the DOJ or such  other  applicable  Governmental  Entity  or other
Person,  give the other Party the  opportunity to attend and participate in such
meetings and conferences. For purposes of this Agreement, "Regulatory Law" means
the Sherman Act, as amended, the Clayton Act, as amended, the  Hart-Scott-Rodino
Act, the Federal Trade Commission Act, as amended, and all other federal,  state
and foreign statutes,  rules, regulations,  orders, decrees,  administrative and
judicial  doctrines  and other laws that are  designed or intended to  prohibit,
restrict or regulate actions having the purpose or effect of  monopolization  or
restraint of trade or lessening of the competition.

     (C) Subject to the terms and conditions of this  Agreement,  in furtherance
and not in  limitation  of the  covenants  of the Parties  contained in Sections
5(c)(ii)(A)  and (B), if any  administrative  or judicial  action or proceeding,
including any proceeding by a private party,  is instituted (or threatened to be
instituted)  challenging  any  transaction  contemplated  by this  Agreement  as
violative  of any  Regulatory  Law,  each  of the  Target  and the  Buyer  shall
cooperate in all respects  with each other and use its  respective  commercially
reasonable  efforts to contest and resist any such action or  proceeding  and to
have vacated, lifted, reversed or overturned any decree, judgment, injunction or
other order, whether temporary,  preliminary or permanent, that is in effect and
that  prohibits,   prevents  or  restricts   consummation  of  the  transactions
contemplated  by this  Agreement.  Notwithstanding  the  foregoing  or any other
provision  of this  Agreement,  nothing in this Section  5(c)(ii)  shall limit a
Party's right to terminate this Agreement pursuant to Section 7.

     (D) If  any  objections  are  asserted  with  respect  to the  transactions
contemplated hereby under any Regulatory Law or if any suit is instituted by any
Governmental  Entity or any private party  challenging  any of the  transactions
contemplated  hereby as violative of any Regulatory  Law, each of the Target and
the  Buyer  shall  use  commercially  reasonable  efforts  to  resolve  any such
objections or challenge as such Governmental Entity or private party may have to
such transactions under such Regulatory Law so as to permit  consummation of the
transactions contemplated by this Agreement.

     (E) Nothing in this Section  5(c)(ii) shall require the Buyer or any of its
Subsidiaries  (including the Surviving  Corporation  after the Closing) to sell,
hold separate or otherwise  dispose of or conduct their  business in a specified
manner, or agree to sell, hold separate or otherwise dispose of or conduct their
business in a specified  manner,  or permit the sale,  holding separate or other
disposition  of,  any  assets of the Buyer or its  Subsidiaries  (including  the
Surviving  Corporation  after the Closing) or the conduct of their business in a
specified  manner,  whether as a condition  to  obtaining  any  approval  from a
Governmental Entity or any other Person or for any other reason.

     (d) No Poison Pill. The Target shall not adopt any shareholder rights plan,
"poison  pill"  or  other  plan  or  agreement  prohibiting   shareholders  from
purchasing  additional securities of the Target unless the Buyer, the Transitory
Subsidiary and their  respective  Subsidiaries  and Affiliates are exempted from
such plan, pill or arrangement.

     (e)  Financing.  The Buyer  shall  provide to the Target (i) at least three
days prior to the SEC Mail Date, a Confirmation dated as of a then current date,
if the SEC Mail Date is later than thirty days from the date of this  Agreement,
and (ii) at least  three days  prior to the  Shareholder  Mail Date,  either (x)
copies  of  written  binding  commitments  from a third  party or third  parties
committing to provide the Buyer and the Transitory  Subsidiary  with  sufficient
financing  to  consummate  the Merger  according  to the terms (and  without any
conditions  other than those  conditions  customarily  contained in such written
binding  commitments  by such  third  party or third  parties)  of such  written
commitments, or (y) definitive agreements for sufficient financing to consummate
the Merger (such commitments or agreements described in clauses (x) and (y), the
"Definitive  Financing  Agreements").  On or prior  to the  date of the  Special
Meeting,  the Buyer will have  sufficient  financing in place to consummate  the
Merger.

     (f) Target SARs and Target Options.  Target shall take all necessary action
to cause  all  outstanding  Target  SARs and  Target  Options  to be  purchased,
terminated,  cancelled or otherwise  satisfied by payment to the holders thereof
of not more than $265,000 in the aggregate.

     (g)  Operation  of  Business.  The  Target  will not (and will not cause or
permit any of its Subsidiaries to) engage in any practice,  take any action,  or
enter into any  transaction  outside the Ordinary  Course of  Business.  Without
limiting the generality of the foregoing,  except as expressly  contemplated  by
this Agreement:  (i) none of the Target and its  Subsidiaries  will authorize or
effect any change in its charter or bylaws,  other than amendments of the bylaws
as  needed  for the  holders  of the  Target's  preferred  stock  to  elect  two
additional  directors as permitted  by the  Target's  charter;  (ii) none of the
Target  and its  Subsidiaries  will (A)  grant any  stock  appreciation  rights,
dividend  equivalent  right,  options,  warrants,  or other  rights to purchase,
exchange or obtain, or otherwise acquire in respect of any of its capital stock,
(B) issue, sell, pledge or otherwise dispose of any of its capital stock (except
upon the  conversion  or exercise of the Target  Options as otherwise  permitted
herein) or (C)  accelerate any right to exchange or acquire any capital stock of
the Target or its  Subsidiaries;  (iii) none of the Target and its  Subsidiaries
will (A) declare, set aside, or pay any dividend or distribution with respect to
its  capital  stock  (whether in cash or in kind),  or  directly  or  indirectly
redeem, repurchase, or otherwise acquire any of its capital stock or the capital
stock of its Subsidiaries,  provided,  however, the Target may declare and pay a
dividend  on its  Target  Series A Shares,  its  Target  Series B Shares and its
Target Series C Shares in an aggregate amount not to exceed $10,000,000, as long
as the payment of any such  dividends  are  necessary in order for the Target to
maintain its status as a REIT or to avoid liability for any excise taxes imposed
under  Section 4981 of the Code and as long as such  declaration  and payment do
not conflict with, result in a breach of, constitute a default under,  result in
the  acceleration  of, create in any party the right to  accelerate,  terminate,
modify, or cancel, or require any notice under any agreement,  contract,  lease,
license,  instrument,  bond,  note,  mortgage,  indenture,  franchise  or  other
arrangement  (with or  without  notice or any lapse of time) to which any of the
Target and its  Subsidiaries  is a party or by which it is bound or to which any
of its assets is  subject  (or result in the  imposition  of any lien,  claim or
encumbrance  upon any of its  assets),  except  where the  violation,  conflict,
breach, default, acceleration, termination, modification,  cancellation, failure
to give notice,  or lien, claim or encumbrance  would not have, or reasonably be
expected to have,  a Target  Material  Adverse  Effect,  or (B) effect any stock
split,   reverse   stock  split,   subdivision,   reclassification   or  similar
transaction,  or otherwise  change its  capitalization  as it exists on the date
hereof;  (iv) none of the Target and its Subsidiaries will issue any note, bond,
or other debt security or create,  incur,  assume, or guarantee any indebtedness
for  borrowed  money  or  capitalized   lease  obligation  or  otherwise  become
responsible  (whether directly,  indirectly or otherwise) for the obligations of
any other Person;  (v) none of the Target and its  Subsidiaries  will (A) impose
any  Security  Interest  upon any of its  assets  or (B)  sell,  lease,  assign,
transfer or otherwise  dispose of (by merger or otherwise)  any of its property,
business or assets except for (i) the disposition of assets to the Buyer-REIT as
contemplated  by Section 2(h), (ii) the sale of assets related to the tax-exempt
bond  position at a price to be approved by the Buyer,  such  approval not to be
unreasonably  withheld  or  delayed,  (iii)  the  sale of the  Target's  pool of
property tax receivables secured by real property in Cuyahoga County, Ohio, at a
price to be approved by the Buyer, such approval not to be unreasonably withheld
or delayed, (iv) the sale of any of Target's multifamily loans or participations
at a  yield  not in  excess  of 3% over  the  yield  on the 10 year US  Treasury
security,  (v) the sale by the Target of approximately $65 million of automobile
installment  contracts,  subject  to the  related  debt,  to  Greenwich  Capital
Financial  Products,  Inc.,  and (vi)  other  asset  sales for fair value in the
ordinary course of business provided that the proceeds of such other asset sales
do not exceed $500,000 in any single  transaction or $2,000,000 in the aggregate
prior to the Effective Time;

     (vi) except for funding  obligations on existing  construction  loans in an
aggregate  amount not to exceed  $6,000,000  and except for the  purchase by the
Target pursuant to that certain Tax Certificate  Sale/Purchase  Agreement by and
between Cuyahoga County,  Ohio Treasurer,  as Seller, and GLS  Capital-Cuyahoga,
Inc.,  as  Purchaser,  Dated as of  September  1, 1998 of certain  property  tax
receivables  located  in and  around  Cuyahoga  County,  Ohio  for an  aggregate
purchase price not to exceed $6,000,000, none of the Target and its Subsidiaries
will (A) make any loan to any other Person other than  Target,  Subsidiaries  or
DHI, (B) make any capital investment in, or acquire the securities or assets of,
any other Person other than Target,  Subsidiaries,  DHI, or Subsidiaries of DHI,
provided that in connection  with any such  investment in or  acquisition of any
Subsidiary of DHI (including in connection  with any  liquidation of DHI) (x) no
more than $200,000 shall be distributed  to  shareholders  of DHI other than the
Target and (y) such  Subsidiary of DHI shall become,  directly or indirectly,  a
wholly-owned  Subsidiary of the Target whose capital stock or assets are not and
will not then become,  directly or indirectly,  subject to any collateral pledge
to any of the lenders of the Target or any of its Subsidiaries,  or (C) make any
capital  expenditures  in the aggregate for the Target and its  Subsidiaries  in
excess of $100,000;  (vii) none of the Target and its Subsidiaries will make any
change in employment  terms for any of its  directors,  officers and  employees,
other than (A)  extension  through the Effective  Time of  employment  retention
agreements  which  are in effect as of the date of this  Agreement,  (B)  salary
increases  made in the  Ordinary  Course of  Business,  not to exceed 10% in the
aggregate or 20% for any particular  individual (or such greater amount which is
approved in advance by the Buyer, such approval not to be unreasonably  withheld
or delayed),  and (C) amending that certain Employment  Agreement between Thomas
H. Potts and the Target dated as of September 30, 1994 to delete the  provisions
of Sections  3(a)(iv) and 3(a)(v),  provided that Thomas H. Potts shall not have
previously entered into an employment  agreement with the Buyer;  (viii) none of
the Target or its  Subsidiaries  will enter into or adopt or amend any severance
plan or other  contract or commitment  relating to  severance,  or enter into or
adopt or amend any  commitment  with any  employee or any Target  Employee  Plan
(including, without limitation, the plans, programs, agreements and arrangements
referred to in Section 3(i)) other than any  employment  agreement  entered into
with any employee of the Target who is hired to replace an existing  employee of
the Target as of the date of this  Agreement,  which agreement shall be approved
by the Buyer (such approval not to be  unreasonably  withheld or delayed);  (ix)
none of the Target or its Subsidiaries  will settle or compromise any pending or
threatened  litigation  without the Buyer's  consent  (which consent will not be
unreasonably withheld, delayed or conditioned); (x) none of the Target or any of
its   Subsidiaries   shall  waive  or  amend  any  term  or   condition  of  any
confidentiality or "standstill"  agreement to which the Target or any Subsidiary
is a party;  (xi) none of the Target or any of its Subsidiaries  shall (A) enter
into any agreements  that are material to the continued  operation of the Target
or such  Subsidiary,  and which (x) could  materially  and adversely  effect the
Target or such  Subsidiary  or (y) which could  reasonably be expected to have a
material  adverse  effect  in the  ability  of the  Parties  to  consummate  the
transaction  contemplated by this  Agreement,  or (B) amend any of the foregoing
agreements  as exist on the date hereof;  (xii) none of the Target or any of its
Subsidiaries  shall  make any  material  changes  in the type or amount of their
insurance coverages; (xiii) none of the Target or any of its Subsidiaries shall,
except as may be required by law or GAAP or the rules and regulations of the SEC
and with prior  written  notice to the Buyer,  change  any  material  accounting
principals or practices  used by the Target or its  Subsidiaries;  (xiv) none of
the Target or any of its Subsidiaries  shall enter into any contracts  involving
any rate swap transaction, basis swap, forward rate transaction, commodity swap,
commodity  option,  equity or equity index swap,  equity or equity index option,
bond  option,   interest  rate  option,   foreign  exchange   transaction,   cap
transaction, floor transaction,  collar transaction,  currency swap transaction,
cross-currency  rate swap  transaction,  currency  option  or any other  similar
transaction (including any option with respect to any of these transactions), or
any combination of these  transactions  (each a "Derivative"  and  collectively,
"Derivatives"),  except for contracts approved by the Buyer (such consent not to
be unreasonably  withheld);  (xv) none of the Target or any of its  Subsidiaries
shall  waive,  relinquish,  release or terminate  any  material  right or claim,
including any such right or claim under any material contract; (xvi) none of the
Target or any of its Subsidiaries  shall apply for, consent to, or acquiesce in,
the appointment of a trustee, receiver,  sequestrator or other custodian for any
substantial  part of the  property  of the Target or any  Subsidiary,  or make a
general  assignment  for the benefit of creditors,  or permit or suffer to exist
the  commencement of any bankruptcy,  reorganization,  debt arrangement or other
case or proceeding  under any bankruptcy or insolvency law, or any  dissolution,
winding  up  or  liquidation  proceeding,  in  respect  of  the  Target  or  any
Subsidiary;  (xvii) none of the Target or any of its Subsidiaries shall take any
action  that would  reasonably  be  expected  to cause any  Target  Shares to be
delisted from NASDAQ or the New York Stock Exchange, as applicable, prior to the
completion of the Merger;  (xviii) none of the Target or its  Subsidiaries  will
enter into a "non-compete"  or similar  agreement;  (xix) the Target and each of
its  Subsidiaries  shall  conduct its business in all  material  respects in the
Ordinary  Course of Business  consistent  with this Agreement and use reasonable
best  efforts  to  (x) preserve  intact  its  business  organization,   (y) keep
available  the services of its  officers  and  employees  and  (z) maintain  its
existing relations and goodwill with customers, suppliers, regulators, creditors
and all others having business  dealings with it; (xx) except as may be required
by law,  none of the Target or any of its  Subsidiaries  shall make any material
tax  election,  make or change any method of  accounting  with respect to taxes,
file any amended  tax  returns or settle or  compromise  any  material  federal,
state,  local or foreign  tax  liability;  (xxi) the Target  intends to and will
continue to maintain  its  qualification  as a REIT  through the Closing Date by
making all necessary undertakings that are consistent with the Code; (xxii) none
of the Target and its Subsidiaries will commit to any of the foregoing.

     (h) Full Access.  The Target will (and will cause each of its  Subsidiaries
to) permit  representatives  of the Buyer to have full access at all  reasonable
times, upon reasonable prior notice, and in a manner so as not to interfere with
the  normal  business  operations  of the Target  and its  Subsidiaries,  to all
premises,  properties,   personnel,  books,  records  (including  tax  records),
contracts,  and  documents  of or  pertaining  to  each  of the  Target  and its
Subsidiaries.  Each of the Buyer and the  Transitory  Subsidiary  will treat and
hold as such any Confidential Information it receives from any of the Target and
its Subsidiaries in the course of the reviews contemplated by this Section 5(h),
will not use any of the Confidential  Information except in connection with this
Agreement,  and, if this  Agreement  is  terminated  for any reason  whatsoever,
agrees to return to the Target all tangible embodiments (and all copies) thereof
which are in its possession.

     (i) Notice of  Developments.  Each Party will give prompt written notice to
the others of (i) any material  adverse  development  causing a breach of any of
its own  representations,  warranties and covenants contained herein or (ii) any
event  which  could  reasonably  be expected to cause such party to be unable to
consummate  the  Merger  or to  preclude  the  Closing  of  this  Agreement.  No
disclosure by any Party pursuant to this Section 5(i), however,  shall be deemed
to amend or supplement  such Party's  disclosure  schedule or to prevent or cure
any misrepresentation, breach of warranty, or breach of covenant.

     (j)  Insurance  and  Indemnification.  (i)  The  Buyer  will  provide  each
individual  who  served as a  director  or  officer  of the Target or any of its
Subsidiaries  at any time prior to the Effective Time with  liability  insurance
with respect to acts or failures to act prior to the Effective Time for a period
of six years after the Effective Time which liability insurance shall be no less
favorable  in  coverage  and  amount  than any  applicable  insurance  in effect
immediately  prior to the Effective Time (other than to the extent the available
limit of any such insurance  policy may be reduced or exhausted by reason of the
payment of claims thereunder relating to such directors or officers of Target or
any of its  Subsidiaries);  provided,  however,  that in  order to  maintain  or
procure  such  coverage,  neither the Buyer nor the  Surviving  Corporation,  as
applicable,  shall be required to pay, in the  aggregate,  an annual  premium in
excess of 300% of the current annual premium paid by the Target for its existing
coverage  (the  "Insurance  Premium  Cap");  and  provided,   further,  that  if
equivalent  coverage  cannot be obtained,  or can be obtained  only by paying an
annual  premium  in  excess  of the  Insurance  Premium  Cap,  the Buyer and the
Surviving  Corporation  shall only be required to obtain as much coverage as can
be  obtained  by  paying,  in the  aggregate,  an  annual  premium  equal to the
Insurance  Premium Cap.  (ii) Except as  permitted  under  Section  2(d)(ii) and
(iii),  for a period of six years after the Effective  Time,  the Buyer will not
take any action to alter or impair any exculpatory or indemnification provisions
existing in the articles of incorporation or bylaws of the Surviving Corporation
(except as required by Virginia  Corporation  Law or federal  law) to the extent
that such  modifications are less advantageous to any individual who served as a
director or officer of the Target or any of its  Subsidiaries,  or of DHI or any
of  its  Subsidiaries,  at any  time  prior  to  the  Effective  Time  than  the
exculpatory  or  indemnification   provisions   contained  in  the  articles  of
incorporation or bylaws of the Target as of the date hereof. (iii) If the Merger
is  consummated,  the  Buyer  and  Surviving  Corporation  will  indemnify  each
individual  who  served as a  director  or  officer  of the Target or any of its
Subsidiaries,  or of DHI or any of its  Subsidiaries,  at any time  prior to the
Effective  Time  from  and  against  any and all  actions,  suits,  proceedings,
hearings,  investigations,  charges, complaints,  claims, demands,  injunctions,
judgments,  orders, decrees,  rulings,  damages, dues, penalties,  fines, costs,
amounts paid in settlement,  liabilities,  obligations,  taxes,  liens,  losses,
expenses, and fees, including all court costs and reasonable attorneys' fees and
expenses,  resulting from, arising out of, or caused by this Agreement or any of
the transactions contemplated herein.

     (k) Non-Interference. The Buyer and the Transitory Subsidiary will not (and
will not cause or permit any of their respective Affiliates to) solicit,  entice
or otherwise induce any employee of the Target or any of its Affiliates to leave
the  employ  of the  Target  for any  reason  whatsoever,  and not to  otherwise
interfere with any contractual or business  relationship  between the Target and
any of its employees or between a Target's Affiliate and any of such Affiliate's
employees; provided, however, that the Buyer and the Transitory Subsidiary shall
not be prohibited from employing any such person who first solicits the Buyer or
Transitory Subsidiary on his or her own initiative, and, provided, further, this
Agreement  shall not  prohibit any  advertisement  or general  solicitation  (or
employment  as a  result  thereof)  that is not  specifically  targeted  at such
persons.

     (l) Target  Stockholder  Approval.  The Target  shall (i) call the  Special
Meeting in accordance with applicable law and its Articles of Incorporation  and
its Bylaws for the purpose of voting upon the Merger and obtaining the Requisite
Stockholder  Approval (provided that the Shareholder Mail Date shall in no event
shall be earlier  than 33 days  after the date  hereof),  (ii) hold the  Special
Meeting as soon as practicable  following the date of this Agreement,  and (iii)
subject to the next sentence,  recommend to its stockholders the approval of the
Merger  and use its  reasonable  best  efforts to obtain  the  approvals  by its
stockholders  of the Merger,  this Agreement and the  transactions  contemplated
hereby. Nothing contained in this Section 5(l) or Section 5(m) shall require the
board of directors of the Target to make any  recommendation  or to refrain from
making any recommendation  with respect to a Superior Proposal,  which the board
of  directors,  after  considering  such matters as it deems  relevant and after
consulting  with  its  outside  counsel,  determines  in  good  faith  would  be
reasonably  likely to result in a breach of its fiduciary duties to stockholders
under applicable law as long as the Target has complied with its obligations set
forth in Section 5(m) in all material respects.  For purposes of this Agreement,
a  "Superior  Proposal"  means any bona fide  written  Takeover  Proposal if the
proposal is on terms which the board of  directors of the Target  determines  in
its good faith judgment (after consulting with a financial advisor of nationally
recognized  reputation  and such other  matters as the board of directors of the
Target deems  relevant) is reasonably  likely to be  consummated  and to be more
favorable  to the  Target's  stockholders  than the  Merger.  The  Target  shall
promptly inform the Buyer of the Target's receipt of any Superior Proposal.

     (m)  Non-Solicitation.  (i) The Target shall not, and, shall not permit its
Subsidiaries to, or authorize any of its officers, directors, employees, agents,
accountants,   counsel,   investment  bankers,   financial  advisors  and  other
representatives  ("Representatives")  to, (A) directly or indirectly,  initiate,
solicit  or  encourage,  or take any  action  to  facilitate  the  making of any
Takeover  Proposal (as defined below),  or (B) directly or indirectly  engage in
negotiations  or  provide  any  Confidential  Information  or data to any person
making a Takeover Proposal.  Notwithstanding the foregoing, prior to the date of
approval of the Merger and this Agreement by the stockholders of the Target, the
Target  shall be  permitted  to respond to a Takeover  Proposal  (by  furnishing
information and access to a third party or by  participating  in discussions and
negotiations  with a third party) if, and only if, (x) the board of directors of
the Target  determines in good faith,  after consulting with a financial advisor
of  nationally  recognized  standing,  that the Takeover  Proposal is reasonably
likely to result  in a  Superior  Proposal,  (y) the board of  directors  of the
Target determines, after consulting with its outside counsel, that failure to so
respond would be reasonably  likely to result in a breach of fiduciary duties to
stockholders under applicable law and (z) the party making the Takeover Proposal
executes a confidentiality  agreement. (ii) The Target shall promptly advise the
Buyer orally and in writing of any Takeover Proposal or any inquiry with respect
to or that could  reasonably be expected to lead to any Takeover  Proposal,  the
identity  of the Person  making any such  Takeover  Proposal  or inquiry and the
material terms of any such Takeover Proposal or inquiry.  (iii) The Target shall
immediately  cease and  cause to be  terminated  all  existing  discussions  and
negotiations,  if any, with any other Persons conducted  heretofore with respect
to any Takeover Proposal.

     For purposes of this Agreement,  a "Takeover  Proposal" with respect to the
Target,  as  applicable,  means any  inquiry,  proposal or offer from any Person
relating  to (A) any  direct or indirect  acquisition  or purchase of a business
that  constitutes  20% or more of the net revenues,  net income or net assets of
the Target and its  Subsidiaries,  taken as a whole, or 20% or more of any class
of equity  securities of the Target or any of its  Subsidiaries,  (B) any tender
offer  or  exchange  offer  that  if  consummated  would  result  in any  Person
beneficially  owning 20% or more of any class of equity securities of the Target
or  any  of  its  Subsidiaries,  or  (C) any  merger,  consolidation,   business
combination,  recapitalization,  liquidation, dissolution or similar transaction
involving the Target or any of its Subsidiaries  that constitutes 20% or more of
the  net  revenues,  net  income  or  net  assets  of the  Target  or any of its
Subsidiaries, as applicable, and its Subsidiaries taken as a whole, in each case
other  than  the  transactions  contemplated  by  this  Agreement.  Each  of the
transactions  referred to in  clauses (A) - (C)  of the foregoing  definition of
Takeover  Proposal,  other than the transactions  contemplated by this Agreement
and  transactions  permitted  under  Section 5(g),  is  referred to herein as an
"Acquisition Transaction."

     (n) Benefit Plans.  As soon as practicable  following the date hereof,  the
Target shall file, or shall cause to be filed,  any and all required reports and
other documents required to be filed with the IRS and/or the Department of Labor
for any and all welfare benefit plans listed on Target Disclosure  Schedule 3(h)
with respect to 1996-1999 reporting years (and for such prior reporting years to
the extent the failure to do so would have a Target  Material  Adverse  Effect),
and shall  take,  or cause to be  taken,  all such  action  as may be  necessary
pursuant  to  the  Department  of  Labor's  Voluntary   Compliance  Program  for
Delinquent  Plan Filers to comply with its annual  reporting  obligations  under
Title I of ERISA with respect to such plans for 1996-1999  reporting  years (and
for such prior  reporting  years to the extent the failure to do so would have a
Target Material Adverse Effect).

SECTION 6.    CONDITIONS TO OBLIGATION TO CLOSE.

     (a)  Conditions to Obligation of the Buyer and the  Transitory  Subsidiary.
The obligation of each of the Buyer and the Transitory  Subsidiary to consummate
the transactions to be performed by it in connection with the Closing is subject
to satisfaction of the following  conditions:  (i) this Agreement and the Merger
shall have received the Requisite Stockholder  Approval;  (ii) Target shall have
transferred  the  Excluded  Target REIT Assets to the  Buyer-REIT;  (iii) to the
extent DHI has not been  liquidated  prior to the Closing in accordance with the
terms of Section 5(g)(vi)  hereof,  the purchase by the Buyer or an Affiliate of
the Buyer of all of the  outstanding  common  stock of DHI at a  purchase  price
equal to the book value of DHI less  amounts  due from its common  shareholders,
which purchase price approximates $120,000 as of the date of this Agreement (and
shall not be materially different at Closing),  on terms and conditions mutually
satisfactory to the Parties to such transaction; but under all circumstances for
a price not greater than $200,000;  (iv) the  representations  and warranties of
the Target in this  Agreement  not  qualified by  materiality  shall be true and
correct in all material  respects and if qualified by materiality  shall be true
and correct in all  respects,  in each case as though made on the Closing  Date;
(v) the Target  shall have  performed  and  complied  with all of its  covenants
hereunder in all material respects through the Closing;  (vi) no statute,  rule,
regulation or other law and no order, decree, stipulation,  injunction or charge
shall  have  been  enacted,  issued,  promulgated,  entered  or  issued  by  any
Governmental  Entity  which  is in  effect  and has the  effect  of  making  the
consummation of the Merger illegal, materially restricts,  prevents or prohibits
consummation of any of the transactions  contemplated hereby or would materially
impair the ability of the Buyer to own the  outstanding  shares of the Surviving
Corporation  or operate its or the businesses of the Surviving  Corporation,  or
any of the Surviving  Corporation's  Subsidiaries  following the Effective Time,
nor shall any proceeding by any Governmental Entity seeking any of the foregoing
be pending or threatened; (vii) the Target shall have purchased,  terminated, or
otherwise satisfied all outstanding Target SARs and Target Options by payment to
the  holders  thereof of an  aggregate  purchase  price not to exceed  $265,000;
(viii)  the  Target  shall  have  delivered  to the  Buyer  and  the  Transitory
Subsidiary a  certificate  to the effect that each of the  conditions  specified
above in Section 6(a)(i)-(vii) is satisfied in all respects; (ix) all applicable
waiting  periods (and any extensions  thereof) under the  Hart-Scott-Rodino  Act
shall have  expired or  otherwise  been  terminated  and the Parties  shall have
received all other  authorizations,  consents,  and  approvals  of  Governmental
Entities necessary for the consummation of the transactions  contemplated hereby
(including, without limitation, those set forth in Sections 3(d) and 4(d) above)
without the  imposition  of any  material  terms,  conditions,  restrictions  or
limitations;  (x) the Buyer, the Transitory  Subsidiary and the Buyer-REIT shall
have obtained the financing  they will require in order to consummate the Merger
on terms and conditions reasonably acceptable to the Buyer; (xi) the Buyer shall
have  received an opinion  dated as of the Closing Date of Venable,  Baetjer and
Howard,  LLP in  form  and  substance  reasonably  satisfactory  to  the  Buyer,
regarding the  qualification of the Target as a REIT under the Code; (xii) on or
prior to the date  thirty (30) days from the date of this  Agreement  (or on the
first  business day  following  such 30th day if such 30th day is not a business
day),  the Buyer shall have  received  from the  holders of ninety  (90%) of the
outstanding  principal  amount of the  Target  Senior  Notes any  consent to the
Merger or this  Agreement,  or any waiver of any terms of the Target Senior Note
Indenture  or the Target  Senior  Notes,  as the Buyer shall deem  necessary  or
advisable,  which  consent or waiver shall be in form and  substance  reasonably
satisfactory to the Buyer;  (xiii) the Preferred  Stock Charter  Amendment shall
have been properly filed and be in full force and effect; and (xiv) no condition
shall exist which  constitutes  a default in, or which but for the lapse of time
or the waiver by or forbearance of any Party or Parties thereto would constitute
a default in, the performance or observance of any term,  covenant (financial or
otherwise), representation, warranty or agreement in any agreement of the Target
relating to indebtedness for borrowed money (including,  without limitation, the
Target Senior Notes Indenture or any Target Senior Notes).

     The Buyer and the Transitory  Subsidiary may waive any condition  specified
in this Section 6

         (a) if they execute a writing so stating at or prior to the Closing.

     (b) Conditions to Obligation of the Target. The obligation of the Target to
consummate the transactions to be performed by it in connection with the Closing
is subject to satisfaction of the following conditions: (i) the Buyer shall have
accepted the transfer of the Excluded Target REIT Assets to the Buyer-REIT; (ii)
the  representations and warranties of the Buyer if not qualified by materiality
shall  be  true  and  correct  in all  material  respects  and if  qualified  by
materiality  shall be true and correct in all  respects,  in each case as though
made on the Closing Date; (iii) each of the Buyer and the Transitory  Subsidiary
shall have  performed and complied  with all of its  covenants  hereunder in all
material  respects  through the Closing;  (iv) no statute,  rule,  regulation or
other law and no order,  decree,  stipulation,  injunction  or charge shall have
been enacted, issued, promulgated,  entered or issued by any Governmental Entity
which is in effect and has the effect of making the  consummation  of the Merger
illegal, materially restricts,  prevents or prohibits consummation of any of the
transactions  contemplated  hereby, nor shall any proceeding by any Governmental
Entity seeking any of the foregoing be pending or threatened;  (v) to the extent
DHI has not been liquidated prior to the Closing in accordance with the terms of
Section  5(g)(vi)  hereof,  the Buyer or an  Affiliate  of the Buyer  shall have
accepted  the  purchase by the Buyer or an  Affiliate of the Buyer of all of the
outstanding  common stock of DHI at a purchase  price equal to the book value of
DHI  less  amounts  due from  its  common  shareholders,  which  purchase  price
approximates  $120,000  as of the  date  of this  Agreement  (and  shall  not be
materially different at Closing),  on terms and conditions mutually satisfactory
to the Parties to such transaction;  but under all circumstances for a price not
greater  than  $200,000,  such  purchase  agreement  to  include  insurance  and
indemnification  provisions  similar to Section 5(j) above;  (vi) this Agreement
and the Merger shall have received the Requisite Stockholder Approval; and (vii)
all  applicable   waiting  periods  (and  any  extensions   thereof)  under  the
Hart-Scott-Rodino  Act shall have expired or otherwise  been  terminated and the
Parties shall have received all other authorizations, consents, and approvals of
Governmental  Entities  necessary  for  the  consummation  of  the  transactions
contemplated hereby (including,  without limitation, those set forth in Sections
3(d)  and  4(d)  above)  without  the  imposition  of  any  terms,   conditions,
restrictions or limitations.

     The Target may waive any  condition  specified  in this  Section 6(b) if it
executes a writing so stating at or prior to the Closing.

SECTION 7     TERMINATION.

     (a)  Termination  of Agreement.  This  Agreement may be terminated  and the
Merger may be abandoned at any time prior to the Effective Time (notwithstanding
the  obtaining of the Requisite  Stockholder  Approval):  (i) by mutual  written
consent of the Target and the Buyer; (ii) by either the Target or the Buyer; (A)
if the Merger has not been  consummated  by (1) January 31, 2001 if the Target's
preliminary  proxy  materials  are not  reviewed by the SEC, or (2) February 28,
2001 if the Target's  preliminary  proxy materials are reviewed by the SEC (such
date as described in clauses (1) and (2),  the "End Date");  provided,  however,
that the right to terminate this Agreement under this Section  7(a)(ii)(A) shall
not be available to any Party whose  failure to fulfill in any material  respect
any obligation under this Agreement has caused or resulted in the failure of the
Effective Time to occur on or before the End Date; further,  provided,  however,
if the Target's Proxy Materials are not filed with the SEC by November 30, 2000,
(the "Target SEC Filing Date"), the End Date shall be extended by a day for each
day  subsequent to the Target SEC Filing Date as to which it takes the Target to
file  its  preliminary  proxy  materials;  or (B) if the  Requisite  Stockholder
Approval  shall not have been  obtained  by reason of the  failure to obtain the
required vote at a duly held meeting of stockholders or any adjournment thereof;
(iii) by either the Target or the Buyer,  if there  shall be any  statute,  law,
rule or regulation  that makes  consummation  of the Merger illegal or otherwise
prohibited or if any judgment,  injunction,  order or decree enjoining the Buyer
or the  Target  from  consummating  the  Merger is  entered  and such  judgment,
injunction,  order or decree shall become final and non-appealable;  (iv) by the
Buyer, if the board of directors of the Target shall have failed to recommend or
withdrawn  or modified or changed in a manner  adverse to Buyer its  approval or
recommendation of this Agreement or the Merger,  whether or not permitted by the
terms  hereof,  or shall  have  failed to call and hold the  Special  Meeting in
accordance with Section 5(1), or shall have recommended a Superior  Proposal (or
the board of  directors  of the  Target  shall  have  resolved  to do any of the
foregoing);  (v) by the Buyer,  if the Closing shall not have occurred by reason
of the failure of the condition precedent under Section 6(a)(x)  hereof; (vi) by
the Buyer,  on or before the date that is thirty (30) days from the date of this
Agreement (or on the first business day following such 30th day if such 30th day
is not a business  day),  if the  condition  precedent  under  Section 6(a)(xii)
hereof shall not have been  satisfied;  (vii) by either the Buyer or the Target,
if there  shall  have been a breach by the other of any of its  representations,
warranties,  covenants or obligations contained in this Agreement,  which breach
would result in the failure to satisfy one or more of the  conditions  set forth
in Section  6(a) (iv) or (v) (in the case of a breach by the  Target) or Section
6(b)  (ii) or (iii) (in the case of a breach by the  Buyer,  including,  without
limitation,  breach of the  covenants  set  forth in  Section  5(e)).  The Party
desiring to terminate this Agreement  pursuant to clause (ii), (iii), (iv), (v),
(vi) or (vii) of this Section 7(a) shall give written notice of such termination
to the other Party in  accordance  with Section 8(h),  specifying  the provision
hereof pursuant to which such termination is effected.

     (b)  Termination  Fee.  If: (i) The Buyer shall  terminate  this  Agreement
pursuant to Section  7(a)(iv);  or (ii) (x) either the Target or the Buyer shall
terminate  this  Agreement  pursuant  to Section  7(a)(ii)(B),  (y) prior to the
Special Meeting a Superior  Proposal relating to the Target has been made to the
Target or to the  stockholders  of the  Target by any  Person  and (z)  within 6
months  after the  termination  of this  Agreement,  the  Target  consummates  a
transaction  relating  to any  Superior  Proposal  or enters  into a  definitive
agreement  with  respect  to any  Superior  Proposal  (provided  that the Target
ultimately  consummates a transaction  relating to such Superior  Proposal);  or
(iii) the Buyer shall  terminate this Agreement  pursuant to Section  7(a)(vii),
then in any case as described in clause (i),  (ii),  or (iii),  the Target shall
pay to the Buyer (by wire  transfer of  immediately  available  funds) an amount
equal to  $2,000,000  (not later than three (3) business  days after the date of
termination  of this Agreement in the case of clauses (i) or (iii) and not later
than the date of consummation  of such  transaction in the case of clause (ii));
provided,  however,  that the amount payable to the Buyer under Section 7(b)(ii)
resulting from a termination of this Agreement  pursuant to Section  7(a)(ii)(B)
shall be reduced to $1,500,000 if the Superior  Proposal  referred to in Section
7(b)(ii)(y)  has been made  prior to the  earlier  of (x) the date the Buyer has
obtained the consent or waiver (as applicable) described in Section 6(a)(xii) or
(y) the date that is  thirty  days  from the date of this  Agreement  (or on the
first  business day  following  such 30th day if such 30th day is not a business
day); and provided  further,  that no amount shall be payable to the Buyer under
Section  7(b)(iii)  if (A) this  Agreement  has  been  terminated  by the  Buyer
pursuant to Section 7(a)(vii), (B) such termination is based on a failure of any
representation  or warranty at Section 3(d), 3(k) or 3(s) to continue to be true
and correct,  or true and correct in all material  respects (as applicable),  as
though such  representations  and warranties  were made on the Closing Date, and
(C) such failure results solely from any breach  occurring after the date hereof
relating to any  maturity or  termination  date under that  certain  5/98 Senior
Secured Credit  Agreement dated as of May 29, 1998 by and between the Target and
Chase  Bank of Texas  as Agent  and  Lender,  and  other  Lenders,  as  amended,
restated,  or  supplemented  prior to the date  hereof  or that  certain  Master
Repurchase  Agreement dated as of April 7, 2000 between Lehman  Brothers,  Inc.,
Lehman  Commercial  Paper,  Inc.  and  the  Target,  as  amended,  restated,  or
supplemented  prior to the date hereof;  and provided further that except as set
forth in this Section 7(b), the Target shall have no liability for any breach of
its representations,  warranties,  covenants,  or obligations  contained in this
Agreement.

     (c) Forfeiture. (i) If the Buyer shall terminate this Agreement pursuant to
Section  7(a)(v),  or if the Target shall  terminate this Agreement  pursuant to
Section  7(a)(vii),  the  Escrow  Amount  shall be  transferred,  assigned,  and
delivered  to the  Target  as  liquidated  damages  (and  not as a  penalty)  in
accordance with the terms, and subject to the limitations and  restrictions,  of
the Escrow  Agreement,  without payment of consideration by the Target,  and the
Buyer and the  Transitory  Subsidiary  shall have no further  liability  for any
breach  of any of its  representations,  warranties,  covenants  or  obligations
contained in this Agreement,  including without  limitation breach of any of the
covenants set forth in Section 5(e). Until any forfeiture of the Escrowed Shares
by the Buyer to the Target  pursuant to the Escrow  Agreement as a result of the
termination of this Agreement by the Buyer  pursuant to Section  7(a)(v),  or by
the Target pursuant to Section 7(a)(vii), the Buyer shall have the right to vote
the  Escrowed  Shares  and  shall be  entitled  to  receive  all  dividends  and
distributions payable in respect of the Escrowed Shares.

     (ii)  If  the  Buyer   shall   terminate   this   Agreement   pursuant   to
Section 7(a)(vi),  then (A) within three business days thereof,  the Target will
select  any  or all  loans  or  participations  described  on  Schedule 7(c)(ii)
attached hereto and "put" those loans or participations by written notice to the
Buyer and Buyer agrees to purchase such loans or participations  for cash within
10 business days following such notice,  or (B) if the Buyer so elects,  in lieu
of Buyer's obligations under clause (A), Buyer shall forfeit the Escrowed Shares
to the Target as liquidated  damages (and not as a penalty) in  accordance  with
the  terms,  and  subject to the  limitations  and  restrictions  of, the Escrow
Agreement, without payment of consideration by the Target, and the Buyer and the
Transitory  Subsidiary  shall  have no further  liability  for any breach of its
representations,   warranties,  covenants,  or  obligations  contained  in  this
Agreement,  including, without limitation, the breach of the covenants set forth
in Section 5(e).  The purchase price for such loans or  participations  shall be
equal to an amount determined by discounting each principal and interest payment
due on each such loan or participation  each month over the life of such loan or
participation  at a rate equal to 2.50% plus the rate of interest  applicable to
the 10 year US  Treasury  security  (determined  at the close of business on the
business day immediately  preceding the date of the "put" notice from the Target
to the  Buyer),  divided  by  12.  Such  purchase  shall  be  made  without  any
representations   or  warranties  by  the  Target  relating  to  such  loans  or
participations,  other than that Target has all the right, title and interest in
such loans or  participations  and that such loans or  participations  are being
sold free and clear of any liens.

     (c) Effect of  Termination.  If this  Agreement is  terminated  pursuant to
Section  7(a),  this  Agreement  shall  become  void  and of no  effect  with no
liability  on the part of any  Party  hereto,  except  that  (i) the  agreements
contained in Section 7(b), in Section 7(c),  and this Section 7(d) hereof and in
the Confidentiality Agreement, shall survive the termination hereof. The parties
hereto  expressly  acknowledge  and agree that,  in light of the  difficulty  of
accurately determining actual damages in circumstances where the termination fee
is payable in accordance  with Section 7(b) or the Escrow Amount is forfeited in
accordance  with Section 7(c), the right to receive such  termination fee or the
Escrow  Amount  constitutes  a  reasonable  estimate of the damages that will be
suffered by reason of any such  termination  of this  Agreement  and shall be in
full and complete satisfaction of any and all damages arising as a result of the
foregoing.

     SECTION  8.  MISCELLANEOUS.  (a)  Survival.  None  of the  representations,
warranties, and covenants of the Parties (other than the provisions in Section 2
above concerning payment of the Merger Consideration,  the provisions of Section
5(j) above concerning insurance and  indemnification,  the provisions of Section
5(k) concerning  non-interference,  the provisions of Sections 7(b), (c) and (d)
and this Section 8(a)) will survive the  Effective  Time or the  termination  of
this   Agreement   pursuant  to  Section  7.  (b)  Press   Releases  and  Public
Announcements.  No Party  shall  issue  any  press  release  or make any  public
announcement  relating to the subject matter of this Agreement without the prior
written  approval of the other Parties;  provided,  however,  that any Party may
make any public  disclosure  it believes in good faith is required by applicable
law  or  any  listing  or  trading  agreement   concerning  its  publicly-traded
securities (in which case the disclosing Party will use commercially  reasonable
efforts  to advise  the other  Party  prior to making  the  disclosure).  (c) No
Third-Party  Beneficiaries.  This  Agreement  shall  not  confer  any  rights or
remedies upon any Person other than the Parties and their respective  successors
and permitted assigns;  provided,  however, that (i) the provisions in Section 2
above  concerning  payment  of the Merger  Consideration  are  intended  for the
benefit of the Target Stockholders and (ii) the provisions in Section 5(j) above
concerning  insurance  and  indemnification  are intended for the benefit of the
individuals  specified therein and their respective legal  representatives.  (d)
Entire Agreement.  This Agreement  (including the documents referred to herein),
together with the  Confidentiality  Agreement,  constitutes the entire agreement
among the  Parties  and  supersedes  any prior  understandings,  agreements,  or
representations  by or among the  Parties,  written or oral,  to the extent they
related in any way to the subject matter hereof.  (e) Succession and Assignment.
This  Agreement  shall be binding  upon and inure to the  benefit of the Parties
named herein and their respective successors and permitted assigns. No Party may
assign either this  Agreement or any of its rights,  interests,  or  obligations
hereunder  without  the  prior  written  approval  of  the  other  Parties.  (f)
Counterparts.  This Agreement may be executed in one or more counterparts,  each
of which shall be deemed an original but all of which  together will  constitute
one and the same instrument.  (g) Headings.  The section  headings  contained in
this Agreement are inserted for convenience only and shall not affect in any way
the meaning or  interpretation  of this  Agreement.  (h)  Notices.  All notices,
requests,  demands,  claims,  and  other  communications  hereunder  will  be in
writing. Any notice,  request,  demand, claim, or other communication  hereunder
shall be deemed duly given if (and then two  business  days after) it is sent by
registered or certified mail,  return receipt  requested,  postage prepaid,  and
addressed to the intended recipient as set forth below:

If to the Target:                           Copy to:

Dynex Capital, Inc.                   Elizabeth R. Hughes, Esq.
Attn:    Thomas H. Potts              Venable, Baetjer and Howard, LLP
         President                    1800 Mercantile Bank & Trust Building
4551 Cox Road, Suite 300              Two Hopkins Plaza
Glen Allen, Virginia 23060            Baltimore, Maryland 21201
Facsimile No. (804) 217-5860          Facsimile No. (410) 244-7742

If to the Buyer:                      Copy to:

California Investment Fund, LLC       Stephen Fraidin, Esq.
Attn:    Michael R. Kelly             Fried, Frank, Harris, Shriver & Jacobson
         Managing Member              One New York Plaza
550 West C Street                     New York, New York 10004
10th Floor                            Facsimile No. (212) 859-4000
San Diego, California 92101
Facsimile No. (619) 687-5010

If to the Transitory Subsidiary:       Copy to:

DCI Acquisition Corporation            Stephen Fraidin, Esq.
c/o California Investment Fund, LLC    Fried, Frank, Harris, Shriver & Jacobson
Attn:    Michael R. Kelly              One New York Plaza
         Managing Member               New York, New York 10004
550 West C Street                      Facsimile No. (212) 859-4000
10th Floor
San Diego, California 92101
Facsimile No. (619) 687-5010

     Any  Party  may  send  any  notice,   request,   demand,  claim,  or  other
communication hereunder to the intended recipient at the address set forth above
using any other means (including personal delivery, overnight courier, messenger
service,  telecopy,  telex,  ordinary  mail,  or electronic  mail),  but no such
notice,  request,  demand, claim, or other communication shall be deemed to have
been duly  given  unless  and until it  actually  is  received  by the  intended
recipient. Any Party may change the address to which notices, requests, demands,
claims,  and other  communications  hereunder  are to be delivered by giving the
other  Parties  notice in the  manner  herein  set  forth.  (i)  Governing  Law;
Jurisdiction.  This  Agreement  shall be governed by and construed in accordance
with the domestic laws of the  Commonwealth of Virginia without giving effect to
any choice or conflict of law provision or rule (whether of the  Commonwealth of
Virginia or any other jurisdiction) that would cause the application of the laws
of any jurisdiction other than the Commonwealth of Virginia.  Each Party to this
Agreement hereby  irrevocably agrees that any legal action or proceeding arising
out  of or  relating  to  this  Agreement  or  any  agreements  or  transactions
contemplated  hereby may be brought in the state or federal  courts of  Virginia
and hereby expressly submits to the exclusive personal jurisdiction and venue of
such courts for the purposes  thereof and expressly waives any claim of improper
venue and any claim that such courts are an inconvenient  forum.  (j) Amendments
and  Waivers.  No amendment of any  provision of this  Agreement  shall be valid
unless the same shall be in writing and signed by all of the Parties;  provided,
however,  that any amendment effected subsequent to shareholder approval will be
subject to the restrictions contained in the Virginia Corporation Law. No waiver
by any  Party of any  default,  misrepresentation,  or  breach  of  warranty  or
covenant hereunder, whether intentional or not, shall be deemed to extend to any
prior or  subsequent  default,  misrepresentation,  or  breach  of  warranty  or
covenant  hereunder  or affect in any way any  rights  arising  by virtue of any
prior or subsequent such occurrence. (k) Severability.  Any term or provision of
this  Agreement  that  is  invalid  or  unenforceable  in any  situation  in any
jurisdiction  shall not affect the validity or  enforceability  of the remaining
terms and provisions  hereof or the validity or  enforceability of the offending
term or  provision  in any other  situation  or in any other  jurisdiction.  (l)
Expenses. Subject to Section 7(b), 7(c) and 7(d) above, each of the Parties will
bear its own costs and expenses  (including legal fees and expenses) incurred in
connection with this Agreement and the  transactions  contemplated  hereby.  (m)
Construction.  The Parties  have  participated  jointly in the  negotiation  and
drafting of this  Agreement.  In the event an ambiguity or question of intent or
interpretation  arises,  this Agreement shall be construed as if drafted jointly
by the Parties  and no  presumption  or burden of proof shall arise  favoring or
disfavoring  any Party by virtue of the  authorship of any of the  provisions of
this Agreement.  Any reference to any federal,  state, local, or foreign statute
or law shall be deemed  also to refer to all rules and  regulations  promulgated
thereunder,  unless the context otherwise  requires.  The word "including" shall
mean including without limitation.  (n) Incorporation of Exhibits and Schedules.
The Exhibits and Schedules  identified in this Agreement are incorporated herein
by reference and made a part hereof.

[SIGNATURE PAGE TO FOLLOW]

     IN WITNESS  WHEREOF,  the Parties hereto have executed this Agreement as of
the date first above written.

        BUYER:

        CALIFORNIA INVESTMENT FUND, LLC, a California limited liability company

        By:      /s/ Michael R. Kelly
        Its:     Managing Member

        TRANSITORY SUBSIDIARY:

        DCI ACQUISITION CORPORATION,
        a Virginia corporation

        By:      /s/ Michael R. Kelly
        Its:     President

        TARGET:

        DYNEX CAPITAL, INC.,
        a Virginia corporation

        By:      /s/ Thomas H. Potts
        Its:     President

MC1.75588.12

                                                                    66016
                                                             Exhibit 99.2

                                                           ESCROW AGREEMENT

     This ESCROW AGREEMENT (the  "Agreement"),  dated as of November 7, 2000, by
and among  California  Investment  Fund,  LLC, a  California  limited  liability
Company  (the  "Buyer"),  Dynex  Capital,  Inc.,  a  Virginia  corporation  (the
"Target") and U.S. Trust Company, National Association, (the "Escrow Agent").

     WHEREAS,  concurrently  with the execution of this  Agreement,  the parties
hereto are  entering  into that  certain  Agreement  and Plan of  Merger,  dated
November  7,  2000  (the  "Merger  Agreement"),  by and  among  the  Buyer,  DCI
Acquisition Corporation,  a Virginia corporation (the "Transitory  Subsidiary"),
and the Target;

     WHEREAS  pursuant  to Section  2(g) of the Merger  Agreement,  the Buyer is
required to deposit  572,178  shares of common  stock of the Target (the "Escrow
Shares") and, subject to certain  conditions set forth in the Merger  Agreement,
the Buyer may deposit  $1,000,000 in  immediately  available  funds (the "Escrow
Fund," and together  with the Escrow  Shares,  the "Escrow  Deposit") in escrow,
solely to satisfy  obligations  arising  pursuant to Section  7(c) of the Merger
Agreement;

     WHEREAS the Target, the Buyer and the Escrow Agent desire to evidence their
agreement with respect to the Escrow Fund, if any, and the Escrow Shares.

     NOW, THEREFORE, in consideration of the covenants hereinafter set forth and
other good and valuable  consideration,  the receipt and sufficiency of which is
hereby acknowledged, the parties hereto hereby agree as follows:

         Section 1.        Appointment.

     The Buyer and the Target hereby  appoint and designate  U.S. Trust Company,
National Association, to act as Escrow Agent hereunder, on the terms and subject
to the  conditions  set forth in this  Agreement,  and the Escrow  Agent  hereby
accepts  such  appointment.  The  fees to be paid to the  Escrow  Agent  for its
services hereunder are set forth in Exhibit A hereto.

         Section 2.        Establishment of Escrow.

     (a) Simultaneously with the execution and delivery of this Agreement, or as
promptly thereafter as is reasonably  practicable,  the Buyer shall transfer the
Escrow Shares,  together with one or more stock powers executed in blank, to the
Escrow  Agent as provided in  Section 2(g)  of the Merger  Agreement;  provided,
however,  that the Buyer  shall  remain the record  owner of the Escrow  Shares.
Additionally, on or prior to the date which is thirty days after the date of the
Merger  Agreement (or on the next succeeding  business day if such thirtieth day
is not a business day), the Buyer may elect, in accordance  with, and subject to
the restrictions of, Section 2(g) of the Merger Agreement, to deposit the Escrow
Fund with the Escrow Agent.

     (b) Escrow  Shares.  (i) The  parties  hereto agree that dividends or other
distributions  with respect to the Escrow Shares shall become part of the Escrow
Deposit.

     (ii) As long as the Escrow Shares  remain  subject to this  Agreement,  all
voting rights with respect to the Escrow Shares shall be exercised by the Buyer.

     (c) Escrow  Agent.  The Escrow Agent  hereby  agrees to act as escrow agent
hereunder,  accepts the Escrow  Shares and agrees to accept the Escrow Fund,  if
any, and to hold and disburse the Escrow Fund,  if any, and the Escrow Shares in
accordance  with the terms and  conditions  of this  Agreement  for the uses and
purposes stated therein and herein.

     Section 3. (a)  Investment of Escrow Fund.  The Buyer and the Target hereby
authorize  and direct the Escrow Agent to invest the Escrow Fund, if any, if and
when deposited with the Escrow Agent, in any of the following investments (as so
invested,  hereinafter referred to as the "Escrow Account") as instructed by the
Buyer in writing (an "Investment  Instruction") to the Escrow Agent from time to
time:

     (i) marketable direct obligations  issued or unconditionally  guaranteed by
the  government of the United  States of America or issued by an agency  thereof
and backed by the full faith and credit of the United States of America;

     (ii) marketable direct obligations issued by any State of the United States
of  America  or any  political  subdivision  of any  such  State  or any  public
instrumentality  thereof  which,  at the time of  acquisition,  have the highest
rating  obtainable from either the Standard & Poor's division of the McGraw-Hill
Companies, Inc. ("S&P") or Moody's Investors Service, Inc. ("Moody's");

     (iii) commercial  paper which, at the time of acquisition,  has the highest
rating obtainable from either S&P or Moody's;

     (iv)   certificates  of  deposit,   repurchase   agreements,   or  bankers'
acceptances  issued by any bank organized under the laws of the United States of
America or any State  thereof or the  District  of Columbia  which has  combined
capital and surplus of not less than One Hundred Million Dollars ($100,000,000);

     (v) money market  funds  organized  under the laws of the United  States of
America or any State  thereof  that  invest not less than  seventy-five  percent
(75%) of their funds in any of the investments  permitted under (i), (ii), (iii)
and (iv) above,  including  funds for which the Escrow  Agent or an affiliate of
the Escrow Agent acts as an investment provider or provides other services; and

     (vi) such other  investments as the Buyer,  the Target and the Escrow Agent
may mutually agree upon.

     Any  investment  in which the Escrow Fund,  if any, is invested must have a
maturity of less than ninety (90) days.  The Buyer will promptly  deliver to the
Target  a copy of each  Investment  Instruction  delivered  by the  Buyer to the
Escrow Agent hereunder. All interest or other return earned by the investment of
the Escrow Fund, if any, and received by the Escrow Agent (the "Interest") shall
become part of the Escrow  Fund.  Monies  held  hereunder  which are  uninvested
pending  disbursement  or  receipt  of  proper  Investment  Instructions  may be
invested in investments described in clause (v) above.

 Section 4.        Use of Escrow Deposit.

 (a)      In the event, and only in the event, that:

     (i) the Buyer terminates the Merger Agreement pursuant to, solely,  Section
7(a)(v)  of the Merger  Agreement  as a result of the  failure  to  satisfy  the
closing  condition  set forth in Section  6(a)(x) of the Merger  Agreement  (the
"Financing  Condition"),  the Target  shall  deliver to the Escrow Agent and the
Buyer a request  (an "Escrow  Deposit  Request")  executed  by the Target  which
represents and warrants that the Target is asserting a claim (a "Claim") for the
Escrow Shares and the full amount of the Escrow Fund,  if any,  pursuant to this
Section 4(a)(i) as a result of the failure of the Buyer to satisfy the Financing
Condition;

     (ii) the  Target  terminates  the  Merger  Agreement  pursuant  to  Section
7(a)(vii)  of the Merger  Agreement  as a result of the  failure to satisfy  the
closing  condition  set forth in Sections  6(b)(ii) or  6(b)(iii)  of the Merger
Agreement (a "Material  Breach"),  the Target shall  deliver to the Escrow Agent
and the  Buyer an  Escrow  Deposit  Request  executed  by the  Target  which (A)
describes  the  Material  Breach and the basis for  asserting  the Claim for the
Escrow Shares and the Escrow Fund, if any,  pursuant to this Section 4(a)(ii) in
reasonable detail and (B) represents and warrants that the Target is asserting a
Claim  pursuant  to this  Section  4(a)(ii)  for the Escrow  Shares and the full
amount of the Escrow Fund, if any, as a result of the Material Breach; or

     (iii) the  Buyer  terminates  the  Merger  Agreement  pursuant  to  Section
7(a)(vi)  of the Merger  Agreement  as a result of the  failure  to satisfy  the
closing  condition set forth in Section  6(a)(xii) of the Merger  Agreement (the
"Bondholder Condition"), and provided that the Buyer has not elected to purchase
the  Target  loans  or  participations  put to the  Buyer  pursuant  to  Section
7(c)(ii)(A)  of the Merger  Agreement,  the Target  shall  deliver to the Escrow
Agent and the Buyer an Escrow  Deposit  Request  executed  by the  Target  which
represents  and  warrants  that the Target is  asserting  a Claim for the Escrow
Shares  (but not,  in any event,  the Escrow  Fund),  pursuant  to this  Section
4(a)(iii) as a result of the failure to satisfy the Bondholder Condition.

     (b) The Target  acknowledges  and  agrees  that if the Buyer has a right to
terminate  the Merger  Agreement  both as a result of a failure  to satisfy  the
Financing  Condition and as a result of a failure to obtain Bondholder  Consent,
the Buyer shall be deemed to have terminated the Merger Agreement as a result of
failure to obtain  Bondholder  Consent.  In such  case,  the Target may assert a
claim for the Escrow  Shares but the Buyer may not assert a claim for the Escrow
Fund, if any.

     (c) If the Buyer  objects to any such Claim,  the Buyer  shall  provide the
Escrow Agent and the Target with a written  objection  thereto  setting forth in
reasonable  detail  the  reasons  for such  objection  within (i)  fifteen  (15)
calendar days following  receipt by the Buyer of said Escrow Deposit  Request in
the case of Sections  4(a)(i) or 4(a)(iii)  hereof or (ii) thirty (30)  calendar
days following  receipt by the Buyer of said Escrow Deposit  Request in the case
of Section  4(a)(ii)  hereof.  If the Buyer shall object to any such Claim,  the
provisions of Section 6(e) shall apply and no disbursements shall be made except
in accordance with Section 6(e). If the Buyer shall not object to any such Claim
asserted pursuant to clauses (i) or (ii) of Section 4(a) above, the Escrow Agent
shall disburse the Escrow Fund (including any Interest thereon), if any, and the
Escrow Shares (including any dividends or distributions with respect thereto) to
the Target. If the Buyer shall not object to any such Claim asserted pursuant to
clause  (iii) of Section  4(a) above,  the Escrow  Agent shall (1)  disburse the
Escrow Shares (including any dividends or distributions with respect thereto) to
the Target and (2) disburse the Escrow Fund (including any Interest thereon), if
any, to the Buyer.

     Section  5.  Escrow  Date.  Subject  to the  terms and  provisions  of this
Section 5 and upon written  notice to the Escrow Agent of the  occurrence of the
Escrow Deposit Release Date (as defined below),  the Escrow Agent shall disburse
the Escrow Fund  (together  with any Interest  thereon),  if any, and the Escrow
Shares (together with any dividends or other distributions with respect thereto)
to the Buyer on the date which is the earlier to occur of (i) the  Closing  Date
(as  defined in the Merger  Agreement)  or  (ii) the  date upon which the Merger
Agreement is  terminated  (unless such  termination  results from the failure to
satisfy the Financing Condition, the failure to satisfy the Bondholder Condition
or a  Material  Breach)  (the  "Escrow  Deposit  Release  Date").  In the event,
however,  that the Escrow Agent has received,  on or before such Escrow  Deposit
Release  Date,  an Escrow  Deposit  Request  for which the  Escrow  Agent may be
required to disburse the Escrow Deposit or the Escrow Shares, as applicable,  to
the Target  pursuant to Section 4 above or Section 6(e) below,  the Escrow Agent
shall  disburse  the Escrow  Deposit or the Escrow  Shares,  as  applicable,  in
accordance with such sections.

     Section 6.  Escrow  Agent.  In order to induce  the  Escrow  Agent to hold,
invest, and disburse the Escrow Deposit as required by this Agreement, the Buyer
and the Target do hereby agree that:

     (a)  The  functions  and  duties  of  the  Escrow  Agent  with  respect  to
disbursements  hereunder are those of an independent contractor and include only
those set forth in this  Agreement.  The Escrow  Agent is not entitled to act in
any manner whatsoever except in accordance with the terms and conditions of this
Agreement or pursuant to written  instructions  or demands  given in  accordance
with such terms and conditions.

     (b) Any checks or drafts  deposited  in the Escrow Fund,  if any,  with the
Escrow Agent under this  Agreement  will be  processed  in the normal  course of
business.  The  Escrow  Agent  shall  not be liable  for any loss  caused by the
failure,  suspension,  bankruptcy or  dissolution of any Escrow Account in which
the Escrow Fund, if any, is deposited.

     (c)  The  Escrow  Agent,  in  the  absence  of  gross  negligence,  willful
misconduct  or a breach of this  Agreement,  shall not be liable for any loss or
damage resulting from the following:

     (i) Any default, error, action or omission of any other party.

                  (ii)     The expiration of any time limit or other delay.

     (iii) Lack of authenticity,  sufficiency and effectiveness of any documents
delivered  to it and lack of  genuineness  of any  signature or authority of any
person to sign any such document.

     (iv) Any loss or impairment of funds  deposited in the course of collection
or while on deposit in a federally or state insured account with a trust company
(other  than the Escrow  Agent),  bank,  savings  bank,  or savings  association
resulting from the failure, insolvency or suspension of such institution.

     (v) Compliance by the Escrow Agent with any and all legal  process,  writs,
orders,  judgments  and  decrees  of any court  whether  issued  with or without
jurisdiction and whether or not  subsequently  vacated,  modified,  set aside or
reversed.

     (vi) The Escrow Agent's  assertion or failure to assert any cause of action
or defense in any judicial, administrative or other proceeding either in its own
interest or in the  interest of any other party or parties,  provided the Escrow
Agent shall have  furnished  timely  written  notice of such  proceeding  to the
parties hereto.

     (d) The  Escrow  Agent  shall not be liable,  absent  gross  negligence  or
willful  misconduct,  for its failure to inquire  into the  authenticity  of any
written  instructions  or other  documents  delivered  to it as required by this
Agreement or its failure to inquire as to the  genuineness  of any  signature or
authority  of any  person to issue  such  instructions  or  execute  such  other
documents.

     (e) If  there  is any  dispute  regarding  the  disbursement  of all or any
portion  of the  Escrow  Shares or the Escrow  Fund,  if any,  that has not been
finally resolved, the parties shall promptly commence binding arbitration in New
York,  New York in  accordance  with  the  commercial  arbitration  rules of the
American Arbitration  Association.  Judgment upon the decision of the arbitrator
may be entered in any court having jurisdiction. The Escrow Agent shall continue
to hold all of the  Escrow  Shares  or Escrow  Fund,  if any,  as to which  such
dispute  relates,  in its  possession  until  directed to  disburse  the same in
accordance with (i) the joint instructions of the Target and the Buyer or (ii) a
final unappealable judgment of a court of competent jurisdiction. In lieu of the
foregoing,  the Escrow Agent may deposit the disputed  amount of Escrow  Deposit
with a court of competent  jurisdiction  and commence an action of  interpleader
between the parties in dispute.  The Buyer and the Target agree to indemnify the
Escrow  Agent  against  all  court  costs  and  reasonable  attorney's  fees  in
connection  with any litigation  regarding  this  Agreement  other than any such
litigation  arising from the gross negligence,  willful  misconduct or breach of
this  Agreement  by the Escrow  Agent.  The Escrow  Agent  agrees to: (i) first,
collect such indemnity  amount from the Escrow Deposit and (ii)  thereafter,  to
use reasonable  efforts to collect the balance of such indemnity amount, if any,
50% from the Buyer and 50% from the Target.

     (f) The Escrow  Agent may resign for any reason,  upon not less than thirty
(30) days prior written  notice to the parties to this  Agreement,  which notice
shall  specify  the  date and time as of which  such  resignation  shall  become
effective.  Upon the effectiveness of such  resignation,  the Escrow Agent shall
deliver all cash, if any, or property in its possession  under this Agreement to
any  successor  escrow agent  appointed in writing by the Buyer  (subject to the
reasonable  approval of the Target), as directed in written directions signed by
the Buyer, or if no successor  escrow agent has been appointed,  to any court of
competent  jurisdiction  in New York, New York.  Upon such delivery,  the Escrow
Agent shall be released from any and all further liability under this Agreement.

     Section 7. Tax Identification Number. The Buyer's tax identification number
for reporting  purposes under this  Agreement is 33-0688954.  All Interest shall
initially  be  chargeable  to the Buyer for tax  purposes.  If any  Interest  is
released to the Target,  such Interest shall be chargeable to the Target for tax
purposes.  The Target's tax  identification  number for reporting purposes under
this Agreement is 52-1549373.

     Section  8.  Escrow  Fee.  All  fees and  charges  of the  Escrow  Agent in
connection  with the initiation and  administration  of this Agreement  shall be
paid 50% by the Target and 50% by Buyer.

     Section 9. Governing  Law. This Agreement  shall be construed in accordance
with and governed by the laws of New York.

     Section 10. Successors and Assigns.  Except as otherwise expressly provided
herein,  the terms and provisions of this  Agreement  shall inure to the benefit
of,  and  be  binding  upon,  the  successors,  assigns,  heirs,  executors  and
administrators  of the parties  hereto.  Nothing in this  Agreement,  express or
implied, is intended to, or shall,  confer on any person,  other than any of the
parties hereto, any rights,  benefits or remedies of any nature whatsoever under
or by reason of this Agreement.

     Section 11.  Counterparts.  This Agreement may be executed in counterparts,
each of which  shall for all  purposes  be deemed to be an  original  and all of
which shall constitute the same instrument.

     Section  12.  Construction.  The  headings  of the  Articles,  Sections and
paragraphs of this Agreement are inserted for convenience  only and shall not be
deemed  to  constitute  part of this  Agreement  or to affect  the  construction
hereof.  All  section  and  article  references  are to this  Agreement,  unless
otherwise  expressly  provided.  As  used  in  this  Agreement,   (a)  "hereof",
"hereunder",  "herein" and words of like import shall be deemed to refer to this
Agreement in its entirety and not just a particular  section of this  Agreement,
and (b) unless the context otherwise  requires,  words in the singular number or
in the  plural  number  shall each  include  the  singular  number or the plural
number,  words of the  masculine  gender shall  include the feminine and neuter,
and, when the sense so indicates,  words of the neuter gender shall refer to any
gender.

     Section  13.  Modification  and  Waiver.  No  amendment,   modification  or
alteration of the terms or provisions of this Agreement  shall be binding unless
the same shall be in writing and duly executed by the parties hereto. Any of the
terms or  provisions  of this  Agreement may be waived in writing at any time by
the party which is entitled to the benefits of such waived terms or  provisions.
No waiver of any of the provisions of this Agreement shall be deemed to or shall
constitute a waiver of any other provision  hereof (whether or not similar).  No
delay on the part of any  party in  exercising  any  right,  power or  privilege
hereunder shall operate as a waiver thereof.

     Section 14. Severability.  Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction,  be
ineffective  to the  extent  of  such  invalidity  or  unenforceability  without
rendering  invalid or  unenforceable  the remaining terms and provisions of this
Agreement or affecting  the  validity or  enforceability  of any of the terms or
provisions of this Agreement in any other jurisdiction.

     Section 15. Notices. Any notice, request,  instruction or other document to
be given  hereunder (a "Notice") by any party hereto to any other party shall be
in  writing  and  delivered  personally,  sent  by  a  recognized  worldwide  or
nationwide  (whichever is applicable)  overnight  delivery  service with charges
prepaid,  sent by registered or certified mail with postage prepaid,  or sent by
facsimile transmission:

                  if to the Buyer, to:

                  California Investment Fund, LLC
                  550 West C Street, 10th Floor
                  San Diego, California  92101
                  Facsimile:        (619) 687-5010
                  Confirmation:     (619) 687-5000
                  Attention:        Michael Kelly

                           with a copy to:

                           Fried, Frank, Harris, Shriver & Jacobson
                  One New York Plaza
                  New York, NY  10004-1980
                  Facsimile:        (212) 859-4000
                  Confirmation:     (212) 859-8000
                  Attention:        Stephen Fraidin, Esq.

                  if to the Target, to:

                  Dynex Capital, Inc.
                  4551 Cox Road, Suite 300
                  Glen Allen, Virginia  23060
                  Facsimile:        (804) 217-5860
                  Confirmation:     (804) 217-5861
                  Attention:        Thomas H. Potts

                  with a copy to:

                  Venable, Baetjer and Howard, LLP
                  2010 Corporate Ridge, Suite 400
                  McLean, Virginia  22102-7847
                  Facsimile:        (703) 821-8949
                  Confirmation:     (703) 760-1920
                  Attention:        Elizabeth R. Hughes, Esquire

                  if to the Escrow Agent, to:

                  U.S. Trust Company, National Association
                  515 South Flower Street, Suite 2700
                  Los Angeles, CA  90071
                  Facsimile:        (213) 488-1370
                  Confirmation:     (213) 861-5000
                  Attention:        Corporate Trust Division

     or at such other  address for a party as shall be specified by like Notice.
Any Notice which is sent in the manner  provided  herein shall be deemed to have
been duly given to and received by the party to whom it is directed  upon actual
receipt by such party,  except that any Notice  sent by  facsimile  transmission
shall  be  deemed  to  have  been  given  and  received  upon   confirmation  of
transmission;  provided  that Notice so sent is promptly  followed by  duplicate
Notice to that same party sent by registered or certified mail, postage prepaid,
or sent by recognized  worldwide or nationwide courier (whichever is applicable)
delivery overnight service with charges prepaid.  All communications to be given
or made herewith shall be in the English language.

     IN WITNESS  WHEREOF,  the parties  hereto have caused this  Agreement to be
executed as of the date and year first above written.

              DYNEX CAPITAL, INC.

              By:/s/ Thomas H. Potts
                  Name: Thomas H. Potts
                  Title: President

              CALIFORNIA INVESTMENT FUND, LLC.

              By:/s/ Michael Kelly
              Name: Michael Kelly
              Title: Managing Member

              U.S. TRUST COMPANY, NATIONAL ASSOCIATION

              By: /s/
                  Name:
                  Title: