##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION







FORM 10-K


Mark One




ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934


For the year ended December 31, 2000






TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934


Commission File No.: 0-22353

FLAGSTAR CAPITAL CORPORATION



|                                         |  |                    
|---------------------------------------- |  | -------------------
|                                        
|                                        
|                                        
|                                        
|Michigan                                 |  | 38-3386801         
|(State or other jurisdiction of          |  | (I.R.S. Employer   
|Incorporation or organization)           |  | Identification No.)
|                                        
|                                        
|                                        
|                                        
|                                        
|5151 Corporate Drive, Troy, Michigan     |  | 48098-2639         
|(Address of principal executive offices) |  | (Zip Code)         

Registrants telephone number, including area code:

(248) 312-2000


Securities registered pursuant to Section 12(b) of the Act:
None.

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

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for
the past ninety days.




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

As of March 22, 2001,
1,000,000 shares of the registrants Common Stock, $1.00
par value, were issued and outstanding and 2,300,000 shares of
the registrants Series A Preferred Shares, $25.00 par
value, were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

NONE.









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TABLE OF CONTENTS



|                                                                                              |  |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|ITEM 1: BUSINESS                                                                             
|ITEM 2: PROPERTIES                                                                           
|ITEM 3: LEGAL PROCEEDINGS                                                                    
|ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|ITEM 5: MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                
|ITEM 6: SELECTED FINANCIAL DATA                                                              
|ITEM 7: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|ITEM 7a:                                                                                     
|ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE CORPORATION                                 
|ITEM 11: EXECUTIVE COMPENSATION                                                              
|ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                     



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TABLE OF CONTENTS

|          |  |                                                                                        |  |   
|--------- |  | -------------------------------------------------------------------------------------- |  | --
|         
|         
|         
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|PART I    |  |                                                                                       
|         
|         
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|Item  1.  |  | Business                                                                               |  | 3 
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|Item  2.  |  | Properties                                                                             |  | 4 
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|Item  3.  |  | Legal Proceedings                                                                      |  | 4 
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|Item  4.  |  | Submission of Matters to a Vote of Security Holders                                    |  | 4 
|         
|         
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|PART II   |  |                                                                                       
|         
|         
|         
|         
|Item  5.  |  | Market for the Companys Common Stock and Related
	Stockholder Matters                 |  | 4 
|         
|         
|         
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|Item  6.  |  | Selected Financial Data                                                                |  | 6 
|         
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|         
|         
|Item  7.  |  | Managements Discussion and Analysis of Financial Condition
	and Results of Operations |  | 6 
|         
|         
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|Item  7a. |  | Market Risk                                                                            |  | 10
|         
|         
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|         
|Item  8.  |  | Financial Statements and Supplementary Data                                            |  | 11
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|Item  9.  |  | Changes in and Disagreements with Accountants on Accounting and
	Financial Disclosure  |  | 21
|         
|         
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|PART III  |  |                                                                                       
|         
|         
|         
|         
|Item  10. |  | Directors and Executive Officer of the Registrant                                      |  | 22
|         
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|         
|Item  11. |  | Executive Compensation                                                                 |  | 23
|         
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|         
|Item  12. |  | Security Ownership of Certain Beneficial Owners and Management                         |  | 23
|         
|         
|         
|         
|Item  13. |  | Certain Relationships and Related Transactions                                         |  | 24
|         
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|         
|         
|PART IV   |  |                                                                                       
|         
|         
|         
|         
|Item  14. |  | Exhibits, Financial Statements Schedules and Reports on
	Form 8-K                      |  | 25
|         
|         
|         
|         
|          |  | Signatures                                                                             |  | 26

When used in this Form 10-K or future filings by the
Company with the Securities and Exchange Commission, in the
Companys press releases or other public or stockholder
communications, or in oral statements made with the approval of
an authorized executive officer, the words or phrases
would be, will allow, intends
to, will likely result, are expected
to, will continue, is anticipated,
estimate, project, or similar
expressions are intended to identify forward looking
statement within the meaning of the Private Securities
Litigation Reform Act of 1996.

The Company wishes to caution readers not to place undue
reliance on any such forward-looking statements, which speak
only as of the date made, and to advise readers that various
factors, including regional and national economic conditions,
substantial changes in levels of market interest rates, credit
and other risks of lending and investment activities and
competitive and regulatory factors, could affect the
Companys financial performance and could cause the
Companys actual results for future periods to differ
materially from those anticipated or projected.

The Company does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect
occurrences or unanticipated events or circumstances after the
date of such statements.

2



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PART I






ITEM 1:  BUSINESS


General

Flagstar Capital Corporation (the Company) was
incorporated in Michigan in June 1995 and remained dormant
until reorganized in December 1997. The Company was formed
by Flagstar Bank (the Bank), a federally chartered
savings bank, to provide the Bank and its parent holding company
and sole stockholder, Flagstar Bancorp, Inc.
(Flagstar), with a means of raising capital for bank
regulatory purposes in a cost-effective manner.

The principal business of the Company is to acquire and hold
residential mortgage loans (Mortgage Loans) that
will generate net income for distribution to stockholders. The
Company intends to acquire all its Mortgage Loans from the Bank,
consisting of whole loans secured by first mortgages on
single-family residential real estate properties. The
residential mortgage loans consist of Adjustable Rate Mortgages
(ARMs) and Fixed Rate Mortgages
(FRMs).

On February 24, 1998, the Company offered to the public and
sold 2,000,000 shares of the Companys 8.50%,
noncumulative, Series A Preferred Shares, $25 par
value per share, providing gross proceeds totaling
$50.0 million (the Series A Preferred
Shares), and sold to the Bank, 499,900 shares of the
Companys common stock, $1.00 par value providing
proceeds totaling $65.5 million (the Common
Stock).

On May 24, 1998, in response to the underwriters exercising
their over-allotment option, the Company issued an additional
300,000 shares of its Series A Preferred Shares, to the
public and 500,000 shares of Common Stock to the Bank, providing
additional gross proceeds totaling $17.0 million. The Bank
owns all shares of common stock. The Series A Preferred
Shares are traded on the Nasdaq Stock Market, under the symbol
FLGSP.

The Company used the net proceeds raised from the initial public
offering of the Series A Preferred Shares and the sale of
the Common Stock to the Bank to purchase from the Bank the
Companys initial portfolio of $113.5 million of
Mortgage Loans (Initial Portfolio). The
Companys Initial Portfolio consisted of ARMs and
FRMs. Reinvestments made in Mortgage Loans have been and
will continue to be made with a composition of Mortgage Loans
that will allow the Company to maintain the original composition
of approximately 70% ARMs and 30% FRMs. Mortgage
Loans are purchased from the Bank on a fair value basis.

In order to preserve its status as a real estate investment
trust (REIT) under the Internal Revenue Service Code
(Code), the Company must distribute annually at
least 95% of its REIT taxable income (excluding
capital gains) to stockholders and meet certain capital
ownership and administrative tests as defined by the Code. The
Company must also annually satisfy three gross income
requirements. First, at least 75% of the Companys gross
income for each taxable year must be derived directly or
indirectly from investments relating to real property or
mortgages on real property or from certain types of temporary
investments. Second, at least 95% of the Companys gross
income for each taxable year must be derived from the above
described real property investments and from dividends,
interest, and gain from the sale or other disposition of stock
or securities and certain other types of gross income. Third,
short-term gains from the sale or other disposition of stock or
securities, and gains on the sale or other disposition of real
property held for less than four years (apart from involuntary
conversions and sales of foreclosure property) from the date of
acquisition must represent less than 30% of the Companys
gross income for each taxable year.

The Company must also satisfy three tests relating to the nature
of its assets at the close of each quarter of its taxable year.
First, real estate assets must represent at least 75% of the
value of the Companys total assets. Second, not more than
25% of the Companys total assets may be represented by
securities other than those in the 75% asset class. Third, of
the investments included in the 25% asset class, the value of
any one issuers securities owned by the Company may not
exceed 5% of the value of the Companys total assets and
the Company may not own more than 10% of any one issuers
outstanding voting securities.

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The Company does not anticipate that it will engage in the
business of originating Mortgage Loans and does not expect to
compete with mortgage conduit programs, investment banking
firms, savings and loan associations, banks, thrift and loan
associations, finance companies, mortgage bankers or insurance
companies in acquiring its Mortgage Loans. As noted above, the
Company has purchased all of its Mortgage Loans from the Bank
and intends on making all of its future purchases from the Bank.

The Company has entered into an Advisory Agreement (the
Advisory Agreement) with the Bank (the
Advisor) requiring an annual payment of $250,000.
The Bank provides advice to the Board of Directors and manages
the operations of the Company as defined in the Advisory
Agreement. The Advisory Agreement has an initial term of five
years which commenced on February 24, 1998 and will
automatically renew for additional five year periods, unless the
Company delivers prior notice to the Advisor as defined in the
Advisory Agreement.

The Company also entered into a Servicing Agreement (the
Servicing Agreement) with the Bank for the servicing
of the Mortgage Loans. Pursuant to the Servicing Agreement, the
Bank services the Mortgage Loans held by the Company, in
accordance with normal industry practice. The Servicing
Agreement can be terminated without cause upon a thirty-day
advance notice and payment of a termination fee equal to 2% of
the aggregate outstanding principal amount of the loans then
serviced under the Servicing Agreement. The servicing fee is
0.375% per annum of the outstanding principal balance of the
Mortgage Loans.

The Company operations are conducted in a manner that will not
subject it to regulation under the Investment Company Act of
1940. The Company may, under certain circumstances, purchase the
Series A Preferred Shares and other shares of its capital
stock in the open market or otherwise, provided, however, that
the Company will not redeem or repurchase any shares of its
Common Stock for so long as any Series A Preferred Shares
are outstanding without the approval of a majority of the
Independent Directors. The Company has no present intention of
repurchasing any shares of its capital stock, and any such
action would be taken only in conformity with applicable federal
and state laws and the regulations and the requirements for
qualifying as a REIT.

The Company has no foreign operations.






|        |           
|------- | ----------
|ITEM 2: | PROPERTIES

The principal executive offices of the Company are located at
5151 Corporate Drive, Troy, Michigan 48098 and its telephone
number is (248) 312-2000.






|        |                  
|------- | -----------------
|ITEM 3: | LEGAL PROCEEDINGS

The Company is not the subject to any litigation. The Company is
not currently involved in or, to the Companys knowledge,
currently threatened with any litigation with respect to the
Mortgage Loans included in the portfolio.






|        |                                                    
|------- | ---------------------------------------------------
|ITEM 4: | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

PART II






|        |                                                                       
|------- | ----------------------------------------------------------------------
|ITEM 5: | MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED
	STOCKHOLDER MATTERS

The Company is authorized to issue up to 1,000,000 shares
of Common Stock and 2,300,000 shares of Preferred Stock,
$25 par value per share (Preferred Stock). All
of the 1,000,000 shares of Common Stock and all of the
2,300,000 shares of Preferred Stock have been issued. The
Bank owns 100% of the Companys 1,000,000 shares of
Common Stock outstanding at December 31, 2000 and,
accordingly, there is no trading market for the Companys
Common Stock. In addition, the Bank intends that, as long as any
Series A Preferred Shares are outstanding, it will maintain
ownership of the outstanding Common Stock of the

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In the event of the liquidation, dissolution or winding up of
the Company, whether voluntary or involuntary, after there have
been set aside for the holders of Preferred Stock the full
preferential amounts to which such holders are entitled, the
holders of Common Stock will be entitled to any assets remaining
after the payment of all debts and liabilities.

Restrictions on Ownership and Transfer:

The Companys Certificate of Incorporation contains certain
restrictions on the number of shares of Common Stock and
Preferred Stock that individual stockholders may own. For the
Company to qualify as a REIT under the Code, no more than 50% in
number or value of its outstanding shares of capital stock may
be owned, directly or indirectly, by five or fewer individuals
during the last half of a taxable year or during a proportionate
part of a shorter taxable year (the Five or Fewer
Test). The capital stock of the Company must also be
beneficially owned by 100 or more persons during at least
335 days of a taxable year or during a proportionate part
of a shorter taxable year (the One Hundred Person
Test). The ownership by the Bank of 100% of the shares of
Common Stock of the REIT will not adversely affect the
Companys REIT qualification because each stockholder of
Flagstar Bancorp, Inc. (the sole stockholder of the Bank) counts
as a separate beneficial owner for purposes of the Five or Fewer
Test and the capital stock of Flagstar Bancorp, Inc. is widely
held. Further, the Certificate of Incorporation of the Company
contains restrictions on the acquisition of Preferred Stock
intended to ensure compliance with the One Hundred Persons Test.
Such provisions include a restriction that if any transfer of
shares of capital stock of the Company would cause the Company
to be beneficially owned by fewer than 100 persons, such
transfer shall be null and void and the intended transferee will
acquire no rights to the stock.

Common Stock

There is no established public trading market in the Common
Stock. As of March 22, 2001, there were
1,000,000 issued and outstanding shares of Common Stock
held by one stockholder, the Bank. The following table reflects
the distributions paid or payable by the Company on the Common
Stock for each quarter during the years ended December 31,
2000, December 31, 1999 and the period ended
December 31, 1998.

|                        |  |      |         |      |  |      |         |  |  |   |         | 
|----------------------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|For the Quarters ended: |  | 2000 |         | 1999 |  | 1998
|                       
|                       
|March 31                |  | $    | 438,526 |      |  | $    | 556,060 |  |  | $ | 199,538 | 
|                       
|                       
|                       
|                       
|June 30                 |  | $    | 535,188 |      |  | $    | 403,897 |  |  | $ | 527,914 | 
|                       
|                       
|                       
|                       
|September 30            |  | $    | 692,077 |      |  | $    | 657,978 |  |  | $ | 644,126 | 
|                       
|                       
|                       
|                       
|December 31             |  | $    | 629,915 |      |  | $    | 609,887 |  |  | $ | 722,232 | 

Preferred Stock

The Series A Preferred Shares are listed on the Nasdaq
Stock Market, under the trading symbol FLGSP. As of
March 22, 2001, there were 2,300,000 issued and
outstanding Series A Preferred Shares held by approximately
136 shareholders. The following table reflects the
respective high and low sales prices for the Series A
Preferred Shares for each quarter of 2000, 1999, and 1998, from
February 20, 1998, the date upon

5



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##### Table of Contents





|                   |  |            |        |           |  |               |        |              |  |   |        |  |  |   |           | 
|------------------ |  | ---------- | ------ | --------- |  | ------------- | ------ | ------------ |  | - | ------ |  |  | - | --------- | 
|Quarter ended      |  | High Price |        | Low Price |  | Closing Price |        | Distribution
|                  
|                  
|December 31, 2000  |  | $          | 22.625 |           |  | $             | 20.500 |              |  | $ | 22.125 |  |  | $ | 1,221,875 | 
|                  
|                  
|                  
|                  
|September 30, 2000 |  | $          | 22.250 |           |  | $             | 18.188 |              |  | $ | 22.250 |  |  | $ | 1,221,875 | 
|                  
|                  
|                  
|                  
|June 30, 2000      |  | $          | 19.375 |           |  | $             | 17.875 |              |  | $ | 18.250 |  |  | $ | 1,221,875 | 
|                  
|                  
|                  
|                  
|March 31, 2000     |  | $          | 20.125 |           |  | $             | 18.250 |              |  | $ | 19.000 |  |  | $ | 1,221,875 | 
|                  
|                  
|                  
|                  
|December 31, 1999  |  | $          | 23.500 |           |  | $             | 18.250 |              |  | $ | 18.750 |  |  | $ | 1,221,875 | 
|                  
|                  
|                  
|                  
|September 30, 1999 |  | $          | 24.875 |           |  | $             | 23.500 |              |  | $ | 23.500 |  |  | $ | 1,221,875 | 
|                  
|                  
|                  
|                  
|June 30, 1999      |  | $          | 25.000 |           |  | $             | 24.188 |              |  | $ | 24.688 |  |  | $ | 1,221,875 | 
|                  
|                  
|                  
|                  
|March 31, 1999     |  | $          | 24.500 |           |  | $             | 23.688 |              |  | $ | 24.125 |  |  | $ | 1,221,875 | 
|                  
|                  
|                  
|                  
|December 31, 1998  |  | $          | 25.250 |           |  | $             | 23.625 |              |  | $ | 24.000 |  |  | $ | 1,221,875 | 
|                  
|                  
|                  
|                  
|September 30, 1998 |  | $          | 25.125 |           |  | $             | 24.000 |              |  | $ | 24.000 |  |  | $ | 1,221,875 | 
|                  
|                  
|                  
|                  
|June 30, 1998      |  | $          | 25.313 |           |  | $             | 24.625 |              |  | $ | 24.938 |  |  | $ | 1,221,875 | 
|                  
|                  
|                  
|                  
|March 31, 1998     |  | $          | 25.500 |           |  | $             | 24.750 |              |  | $ | 25.125 |  |  | $ | 483,000   | 






ITEM 6:  SELECTED FINANCIAL DATA


Financial Data

|                                             |                                        |                   |   |                   |  |                   |   |         |  |  |   |         | 
|-------------------------------------------- | -------------------------------------- | ----------------- | - | ----------------- |  | ----------------- | - | ------- |  |  | - | ------- | 
|                                             |                                        |                   |   |                   |  | At or for the    
|                                             |                                        |                   |   |                   |  | period from      
|                                             |                                        |                   |   |                   |  | inception of     
|                                             |                                        |                   |   |                   |  | operations       
|                                             |                                        | At or for the     |   | At or for the     |  | (February 24,    
|                                             |                                        | year ended        |   | year ended        |  | 1998) through    
|                                             |                                        | December 31, 2000 |   | December 31, 1999 |  | December 31, 1998
|                                             |                                        |                   |   |                   |  |                  
|                                             |                                        |                  
|                                             |                                        | (In thousands)   
|                                            
|                                            
|                                            
|                                            
|Summary of Statement of Earnings:            |                                        |                   |   |                   |  |                   |   |         |  |  |   |        
|                                            
|                                            
|                                            
|                                            
|                                             | Net interest income                    |                   | $ | 7,572             |  |                   | $ | 7,258   |  |  | $ | 6,564   | 
|                                            
|                                            
|                                            
|                                            
|                                             | Net earnings                           |                   | $ | 7,183             |  |                   | $ | 6,865   |  |  | $ | 6,242   | 
|                                            
|                                            
|                                            
|                                            
|                                             | Net earnings available to Common stock |                   | $ | 2,296             |  |                   | $ | 1,978   |  |  | $ | 2,093   | 
|                                            
|                                            
|                                            
|                                            
|                                             | Net earnings per common share          |                   | $ | 2.29              |  |                   | $ | 1.98    |  |  | $ | 2.50    | 
|                                            
|                                            
|                                            
|                                            
|Summary of Statement of Financial Condition: |                                        |                   |   |                   |  |                   |   |         |  |  |   |        
|                                            
|                                            
|                                            
|                                            
|                                             | Mortgage loans, net                    |                   | $ | 123,012           |  |                   | $ | 118,255 |  |  | $ | 116,675 | 
|                                            
|                                            
|                                            
|                                            
|                                             | Total assets                           |                   | $ | 129,746           |  |                   | $ | 129,722 |  |  | $ | 130,074 | 
|                                            
|                                            
|                                            
|                                            
|                                             | Total stockholders equity             |                   | $ | 129,077           |  |                   | $ | 129,077 |  |  | $ | 129,327 | 
|                                            
|                                            
|                                            
|                                            
|Other data:                                  |                                        |                   |   |                   |  |                   |   |         |  |  |   |        
|                                            
|                                            
|                                            
|                                            
|                                             | Dividends paid on preferred stock      |                   | $ | 4,887             |  |                   | $ | 4,887   |  |  | $ | 4,149   | 
|                                            
|                                            
|                                            
|                                            
|                                             | Shares of preferred stock outstanding  |                   |   | 2,300             |  |                   |   | 2,300   |  |  |   | 2,300   | 
|                                            
|                                            
|                                            
|                                            
|                                             | Shares of common stock outstanding     |                   |   | 1,000             |  |                   |   | 1,000   |  |  |   | 1,000   | 
|                                            
|                                            
|                                            
|                                            
|                                             | Average yield on Mortgage Loans        |                   |   | 7.114%            |  |                   |   | 6.784%  |  |  |   | 6.815%  | 






|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|ITEM 7: | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
	CONDITION AND RESULTS OF OPERATIONS

Overview

Flagstar Capital Corporation was formed by Flagstar Bank, a
federally chartered savings bank, to provide the Bank and its
parent holding company and sole stockholder, Flagstar Bancorp,
Inc., with a means of raising capital for bank regulatory
purposes in a cost-effective manner.

The principal business of the Company is to acquire and hold
residential mortgage loans that will generate net income for
distribution to stockholders. The Company intends to acquire all
its Mortgage Loans from the Bank, consisting of whole loans
secured by first mortgages on single-family residential real
estate

6



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##### Table of Contents





On February 24, 1998, the Company sold in a public offering
2,000,000 shares of the Companys 8.50%, noncumulative,
Series A Preferred Shares, $25 par value per share,
providing gross proceeds totaling $50.0 million (the
Series A Preferred Shares), and sold to the
Bank, 499,900 shares of the Companys common stock,
$1.00 par value providing proceeds totaling
$65.5 million (the Common Stock).

On May 24, 1998, in response to the underwriters exercising
their over-allotment option, the Company issued an additional
300,000 shares of its Series A Preferred Shares, to the
public and 500,000 shares of Common Stock to the Bank, providing
additional gross proceeds totaling $17.0 million, gross.
The Bank owns all shares of common stock. The Series A
Preferred Shares are traded on the Nasdaq Stock Market, under
the symbol FLGSP.

Results of Operations

The Company reported net earnings for the year ended
December 31, 2000 of $7.2 million, compared to
$6.9 million and $6.2 million for the years ended
December 31, 1999 and 1998, respectively. For the year
ended December 31, 2000, interest income from loans was
$7.6 million, which was offset by $250,000 in advisory
fees, $6,000 in outside director fees and $133,000 in
administrative expenses. In comparison, interest income from
loans was $7.5 million for the year ended December 31,
1999, which was offset by $250,000 in provision for loan losses,
$250,000 in advisory fees, $3,000 in outside director fees and
$139,000 in other administrative expenses. For the year ended
December 31, 1998, interest income from loans was
$6.6 million, which was offset by $213,000 in advisory
fees, $6,000 in outside director fees and $104,000 in other
administrative expenses. The Company reported earnings per
common share of $2.29, $1.98 and $2.50 per share for the
years ended December 31, 2000, 1999, and 1998, respectively.

The Company declared and paid $4,887,000, $4,887,000, and
$4,149,000 in preferred stock dividends for the years ended
December 31, 2000 and December 31, 1999 and for the
period ended December 31, 1998, respectively.

The Company declared and paid or accrued common stock
distributions of $2,296,000, $2,228,000, and $2,093,000 for the
years ended December 31, 2000 and December 31, 1999
and for the period ended December 31, 1998, respectively.

Mortgage Loans

As of December 31, 2000, the Company owned Mortgage Loans
with a principal balance of $122,141,000. This amount represents
the principal amount of mortgage loans purchased with the
Initial Portfolio remaining plus the principal amount of
mortgage loans purchased during the period beginning at
February 24, 1998 to December 31, 1998 and for the
years ended December 31, 1999 and December 31, 2000.
Purchases were made to replace principal amortizations and
payoffs in the portfolio. All Mortgage Loans were purchased from
the Bank. In conjunction with the purchase of these Mortgage
Loans the Company paid a premium amount equal to $109,000 and
$277,000 for the years ended December 31, 2000 and
December 31, 1999, respectively. This premium amount is
recorded by the Company as an adjustment to the basis of the
Mortgage Loans.

7



---



##### Table of Contents



The following table reflects the composition of Mortgage Loans
at December 31, 2000:

|              |            |       |     |           |     |         |            |            |             |     |         |         |         |            |       |       |       |   |     |     |     |  |     |     |     |  |      |      |       |  
|------------- | ---------- | ----- | --- | --------- | --- | ------- | ---------- | ---------- | ----------- | --- | ------- | ------- | ------- | ---------- | ----- | ----- | ----- | - | --- | --- | --- |  | --- | --- | --- |  | ---- | ---- | ----- | -
|              |            |       |     | Principal |     | Average |            | Average    |             |     |         |         |         |           
|Product Type  |            | Loans |     | Balance   |     | Balance |            | Yield      |             | WAM |         | WARM    |         | % of Total
|             
|             
|              | 3 year ARM |       |     | 124       |     |         | $          | 31,501,000 |             |     | $       | 254,048 |         |            |       | 7.581 | %     |   |     | 360 |     |  |     | 332 |     |  |      | 25.8 | %    
|             
|             
|             
|             
|              | 5 year ARM |       |     | 107       |     |         |            | 28,619,000 |             |     |         | 267,464 |         |            |       | 7.093 |       |   |     | 360 |     |  |     | 333 |     |  |      | 23.4 |      
|             
|             
|             
|             
|              | 7 year ARM |       |     | 98        |     |         |            | 23,930,000 |             |     |         | 244,182 |         |            |       | 6.998 |       |   |     | 360 |     |  |     | 332 |     |  |      | 19.6 |      
|             
|             
|             
|             
|15 year Fixed |            |       | 156 |           |     |         | 13,615,000 |            |             |     | 87,274  |         |         |            | 6.523 |       |       |   | 180 |     |     |  | 153 |     |     |  | 11.2 |     
|             
|             
|             
|             
|30 year Fixed |            |       | 186 |           |     |         | 24,476,000 |            |             |     | 131,590 |         |         |            | 6.976 |       |       |   | 360 |     |     |  | 351 |     |     |  | 20.0 |     
|              |            |      
|              |            | Total |     |           | 671 |         |            | $          | 122,141,000 |     |         | $       | 182,028 |            |       |       | 7.114 | % |     |     | 340 |  |     |     | 314 |  |      |      | 100.0 | %
|              |            |      

The following table reflects the composition of Mortgage Loans
at December 31, 1999:

|              |            |       |     |           |     |         |            |            |             |     |         |         |         |            |       |       |       |   |     |     |     |  |     |     |     |  |      |      |       |  
|------------- | ---------- | ----- | --- | --------- | --- | ------- | ---------- | ---------- | ----------- | --- | ------- | ------- | ------- | ---------- | ----- | ----- | ----- | - | --- | --- | --- |  | --- | --- | --- |  | ---- | ---- | ----- | -
|              |            |       |     | Principal |     | Average |            | Average    |             |     |         |         |         |           
|Product Type  |            | Loans |     | Balance   |     | Balance |            | Yield      |             | WAM |         | WARM    |         | % of Total
|             
|             
|              | 3 year ARM |       |     | 136       |     |         | $          | 36,482,000 |             |     | $       | 268,254 |         |            |       | 6.685 | %     |   |     | 360 |     |  |     | 339 |     |  |      | 31.2 | %    
|             
|             
|             
|             
|              | 5 year ARM |       |     | 90        |     |         |            | 23,861,000 |             |     |         | 265,121 |         |            |       | 6.857 |       |   |     | 360 |     |  |     | 338 |     |  |      | 20.4 |      
|             
|             
|             
|             
|              | 7 year ARM |       |     | 86        |     |         |            | 21,293,000 |             |     |         | 247,590 |         |            |       | 6.892 |       |   |     | 360 |     |  |     | 340 |     |  |      | 18.2 |      
|             
|             
|             
|             
|15 year Fixed |            |       | 147 |           |     |         | 13,292,000 |            |             |     | 90,422  |         |         |            | 6.507 |       |       |   | 180 |     |     |  | 159 |     |     |  | 11.3 |     
|             
|             
|             
|             
|30 year Fixed |            |       | 173 |           |     |         | 22,057,000 |            |             |     | 127,495 |         |         |            | 6.932 |       |       |   | 360 |     |     |  | 338 |     |     |  | 18.9 |     
|              |            |      
|              |            | Total |     |           | 632 |         |            | $          | 116,985,000 |     |         | $       | 185,103 |            |       |       | 6.784 | % |     |     | 340 |  |     |     | 318 |  |      |      | 100.0 | %
|              |            |      

Allowance for Loan Losses

The Companys allowance for loan losses remained the same
at $250,000 at December 31, 2000. Management has based the
allowance on assessments of relevant factors including the types
and amount of delinquent loans, historical and anticipated loss
experience on such types of loans experienced by the Bank, and
current and projected economic conditions. Management is of the
opinion that the allowance for loan losses is adequate to meet
potential losses in the portfolio. The Companys
non-performing assets consisted of two mortgage loans totaling
$602,145, or 0.49% of the portfolio, at December 31, 2000.
The Company, in accordance with applicable disclosure
requirements, defines an asset as non-performing if it meets any
of the following criteria: 1) a loan more than 90 days
past due; 2) real estate acquired in a settlement of a
loan; or 3) a restructured loan whose terms have been
modified due to the borrowers inability to pay as
contractually specified including loans the Company has
classified as impaired. Loans are generally placed into
non-accrual status when they become 90 days delinquent.
Gross interest income of approximately $22,000 would have been
recorded in 2000 on non-accrual loans if the loans had performed
in accordance with their original terms.

The Company had a $250,000 allowance for loan losses at
December 31, 1999. The Companys non-performing loans
were limited to one mortgage loan, for $245,689, or 0.21% of the
portfolio, which was 30 days delinquent at
December 31, 1999. The Company has certain representations
and warranties from the Bank, which are related to the
performance of the Mortgage Loans.

The Bank, in its role as Advisor, has implemented comprehensive
internal asset review systems to provide for early detection of
problem assets. Although this system will not eliminate future
losses due to unanticipated declines in the real estate market
or economic downturns, it should provide for timely
identification of any losses created from problem loans.

|                                              |                                |          |  
|--------------------------------------------- | ------------------------------ | -------- | -
|                                             
|Activity within the Allowance for Loan Losses
|                                             
|                                              |                                |         
|                                             
|                                             
|                                             
|                                             
|Balance, January 1, 2000                      |                                | $250,000
|                                             
|                                             
|                                             
|                                             
|                                              | Provision for loan losses      |          | 
|                                             
|                                             
|                                             
|                                             
|                                              | Charge-offs, net of recoveries |          | 
|                                              |                                |         
|Balance, December 31, 2000                    |                                | $250,000
|                                              |                                |         

8



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##### Table of Contents



Interest Rate Risk

The Companys income consists primarily of interest
payments on Mortgage Loans. Currently, the Company does not use
any derivative products to manage interest rate risk. If there
is a decline in interest rates (as measured by the indices upon
which the interest rates of the Adjustable Rate Mortgage Loans
are based), then the Company will experience a decrease in
income available to be distributed to its shareholders. There
can be no assurance that an interest rate environment in which
there is a significant decline in interest rates, over an
extended period of time, would not adversely affect the
Companys ability to pay dividends on the Series A
Preferred Shares.

Significant Concentration of Credit Risk

Concentration of credit risk arises when a number of customers
engage in similar business activities, or activities in the same
geographical region, or have similar economic features that
would cause their ability to meet contractual obligations to be
similarly affected by changes in economic conditions.
Concentration of credit risk indicates the relative sensitivity
of the Companys performance to both positive and negative
developments affecting a particular industry. The geographic
concentrations within the Mortgage Loans directly affects the
overall credit risk of the Company.

The following table shows the Mortgage Loans by geographic area
as of December 31, 2000:

|           |       |           |            |             |  |  |      |       |  
|---------- | ----- | --------- | ---------- | ----------- |  |  | ---- | ----- | -
|           |       | Principal |            | Percent    
|Location   |       | Balance   |            | Of Total   
|          
|          
|Michigan   |       | $         | 31,766,000 |             |  |  | 26.0 | %    
|          
|          
|          
|          
|California |       |           | 21,049,000 |             |  |  | 17.2 |      
|          
|          
|          
|          
|Colorado   |       |           | 9,546,000  |             |  |  | 7.8  |      
|          
|          
|          
|          
|Washington |       |           | 8,335,000  |             |  |  | 6.8  |      
|          
|          
|          
|          
|Texas      |       |           | 5,085,000  |             |  |  | 4.2  |      
|          
|          
|          
|          
|New York   |       |           | 4,379,000  |             |  |  | 3.6  |      
|          
|          
|          
|          
|Other      |       |           | 41,981,000 |             |  |  | 34.4 | *    
|           |       |          
|           | Total |           | $          | 122,141,000 |  |  |      | 100.0 | %
|           |       |          




|  |                                                                      
|- | ---------------------------------------------------------------------
|* | No other state has more than 3% of the total Mortgage Loan
	portfolio

Approximately 43.2% of the Companys total Mortgage Loans
are secured by residential real estate properties located in
California and Michigan. Consequently, a high concentration of
residential mortgage loans in these two states, may subject the
Company to a greater risk of default in the event of adverse
economic, political or business developments and natural hazards
in California and Michigan that may affect the ability of
residential property owners in California and Michigan to make
payments of principal and interest on the underlying mortgages.

Liquidity Risk Management

The objective of liquidity management is to ensure the
availability of sufficient cash flows to meet all of the
Companys financial commitments. In managing liquidity, the
Company takes into account various legal limitations placed on a
REIT as discussed below in REIT Qualification.

The Companys principal liquidity needs are to maintain the
current portfolio size through the acquisition of additional
Mortgage Loans as Mortgage Loans currently in the portfolio
mature or prepay, and to pay dividends on the Series A Preferred
Shares and Common Shares issued. The Company does not have and
does not anticipate having any material capital expenditures.

To the extent that the Board of Directors determines that
additional funding is required, the Company may raise such funds
through additional equity offerings, debt financing or retention
of cash flow (after consideration of provisions of the Code
pertaining to a REIT), or a combination of these methods. The
Company, however, may not, without the approval of a majority of
the Independent Directors, incur debt in

9



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##### Table of Contents





The Company may also issue additional series of Preferred Stock.
However, the Company may not issue additional shares of
Preferred Stock senior to the Series A Preferred Shares without
the consent of holders of at least 66 2/3% of the shares of
Preferred Stock outstanding at that time. The Company also may
not issue additional shares of Preferred Stock on a parity with
the Series A Preferred Shares without the approval of a
majority of the Companys Independent Directors.

REIT Qualification

As of December 31, 2000, the Company believed that it was
in compliance with the REIT tax rules and that it will continue
to qualify as a REIT under the provisions of the Code. The
Company calculates:



| |   |                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | its Qualified REIT Assets, as defined in the Code, to be 100% of
	its total assets, as compared to the federal tax requirements
	that at least 75% of its total assets must be Qualified REIT
	assets.
|
| |  | that 100% of its revenues qualify for the 75% source of income
	test and 100% of its revenues qualify for the 95% source of
	income test under the REIT rules.                                        
|
| |  | none of the revenues were subject to the 30% income limitation
	under the REIT rules.                                                                                                                 

The Company also met all REIT requirements regarding the
ownership of its common and preferred stocks.






ITEM 7a:


Market Risk

The Company considers that its primary business objective is to
ensure the availability of sufficient cash flows to meet the
obligations mandated by the Series A Preferred Shares. In
managing its investments, the Company accepts a certain credit
risk posture and assumes some interest rate risk.

Interest rate risk generally refers to the potential volatility
in net interest income resulting from changes in interest rates.
The Companys risk occurs when it must replace amortized
loans with current production mortgages. These replacement loans
are chosen in a manner to maintain an interest rate risk posture
similar to the Initial Portfolio. The Company must monitor the
ratio of fixed costs (the Series A Preferred Shares
dividends, advisory fees, and servicing costs) to the interest
income potential of the Mortgage Loans. When, in
managements opinion, the coverage ratio is at risk of
being depleted, the Company must look to its parent company, the
Bank, for support or utilize the investment powers of the
Company.

The Company will record higher levels of interest income in a
rising interest rate environment and will experience declining
interest income during periods of falling interest rates. This
happens because the Companys assets reprice while the
Series A Preferred Shares have a fixed cost of 8.5%.

At December 31, 2000 the Company had a coverage ratio
(Projected interest income divided by REIT dividends plus
Advisory fees plus Servicing Fees) of 1.69 compared to 1.54 at
December 31, 1999 and 1.53 at December 31, 1998.

10



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##### Table of Contents








ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors



We have audited the accompanying balance sheets of Flagstar
Capital Corporation as of December 31, 2000 and 1999, and
the related statements of earnings, stockholders equity
and cash flows for the years ended December 31, 2000 and
1999 and for the period from the inception of operations
(February 24, 1998) through December 31, 1998. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Flagstar Capital Corporation as of December 31, 2000 and
December 31, 1999, and the results of its operations and
its cash flows for the years ended December 31, 2000 and
1999 and for the period from the inception of operations
(February 24, 1998) through December 31, 1998, in
conformity with auditing standards generally accepted in the
United States of America.

/s/ GRANT THORNTON LLP

Southfield, Michigan



11



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##### Table of Contents



FLAGSTAR CAPITAL CORPORATION

BALANCE SHEETS

(in thousands)


|                                                                                                                            |                                 |                                            |         |              |         |   |         |         |         | 
|--------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | ------------------------------------------ | ------- | ------------ | ------- | - | ------- | ------- | ------- | 
|                                                                                                                            |                                 | December 31,                               |         | December 31,
|                                                                                                                            |                                 | 2000                                       |         | 1999        
|                                                                                                                            |                                 |                                            |         |             
|ASSETS                                                                                                                      |                                 |                                            |         |              |         |   |         |        
|                                                                                                                           
|                                                                                                                           
|                                                                                                                           
|                                                                                                                           
|Cash                                                                                                                        |                                 | $                                          | 3,736   |              |         | $ | 7,456   |        
|                                                                                                                           
|                                                                                                                           
|                                                                                                                           
|                                                                                                                           
|                                                                                                                            | Mortgage loans                  |                                            |         | 123,262      |         |   |         | 118,505 |        
|                                                                                                                           
|                                                                                                                           
|                                                                                                                           
|                                                                                                                           
|                                                                                                                            | Less: allowance for loan losses |                                            |         | 250          |         |   |         | 250     |        
|                                                                                                                            |                                 |                                            |         |              |         |   |         |        
|Net mortgage loans                                                                                                          |                                 |                                            | 123,012 |              |         |   | 118,255 |        
|                                                                                                                           
|                                                                                                                           
|                                                                                                                           
|                                                                                                                           
|Accrued interest receivable                                                                                                 |                                 |                                            | 1,534   |              |         |   | 1,400   |        
|                                                                                                                           
|                                                                                                                           
|                                                                                                                           
|                                                                                                                           
|Loan payments in process  due from parent                                                                                  |                                 |                                            | 1,464   |              |         |   | 2,611   |        
|                                                                                                                            |                                 |                                            |         |              |         |   |         |        
|                                                                                                                            |                                 | Total assets                               |         | $            | 129,746 |   |         | $       | 129,722 | 
|                                                                                                                            |                                 |                                            |         |              |         |   |         |        
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                        |                                 |                                            |         |              |         |   |         |        
|                                                                                                                           
|                                                                                                                           
|                                                                                                                           
|                                                                                                                           
|Liabilities                                                                                                                 |                                 |                                            |         |              |         |   |         |        
|                                                                                                                           
|                                                                                                                           
|                                                                                                                           
|                                                                                                                           
|Due to parent                                                                                                               |                                 | $                                          | 630     |              |         | $ | 610     |        
|                                                                                                                           
|                                                                                                                           
|                                                                                                                           
|                                                                                                                           
|Other liabilities                                                                                                           |                                 |                                            | 39      |              |         |   | 35      |        
|                                                                                                                            |                                 |                                            |         |              |         |   |         |        
|                                                                                                                            |                                 | Total liabilities                          |         |              | 669     |   |         |         | 645     | 
|                                                                                                                           
|                                                                                                                           
|                                                                                                                           
|                                                                                                                           
|Stockholders equity                                                                                                        |                                 |                                            |         |              |         |   |         |        
|                                                                                                                           
|                                                                                                                           
|                                                                                                                           
|                                                                                                                           
|Series A preferred stock  $25.00 liquidation
	value, 2,300,000 shares authorized and issued at
	December 31, 2000 and 1999 |                                 |                                            | 57,500  |              |         |   | 57,500  |        
|                                                                                                                           
|                                                                                                                           
|                                                                                                                           
|                                                                                                                           
|Common stock  $1.00 par value, 1,000,000 shares
	authorized and issued at December 31, 2000 and 1999                       |                                 |                                            | 1,000   |              |         |   | 1,000   |        
|                                                                                                                           
|                                                                                                                           
|                                                                                                                           
|                                                                                                                           
|Additional paid in capital                                                                                                  |                                 |                                            | 70,577  |              |         |   | 70,577  |        
|                                                                                                                           
|                                                                                                                           
|                                                                                                                           
|                                                                                                                           
|Retained earnings                                                                                                           |                                 |                                            |        |              |         |   |        |        
|                                                                                                                            |                                 |                                            |         |              |         |   |         |        
|                                                                                                                            |                                 | Total stockholders equity                 |         |              | 129,077 |   |         |         | 129,077 | 
|                                                                                                                            |                                 |                                            |         |              |         |   |         |        
|                                                                                                                            |                                 | Total liabilities and stockholders equity |         | $            | 129,746 |   |         | $       | 129,722 | 
|                                                                                                                            |                                 |                                            |         |              |         |   |         |        

The accompanying notes are an integral part of these statements.

12



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##### Table of Contents



FLAGSTAR CAPITAL CORPORATION

STATEMENTS OF EARNINGS

(in thousands, except per share data)


|                                        |                                           |                                 |       |                    |   |                    |       |       |     |   |       |       |   | 
|--------------------------------------- | ----------------------------------------- | ------------------------------- | ----- | ------------------ | - | ------------------ | ----- | ----- | --- | - | ----- | ----- | - | 
|                                        |                                           |                                 |       |                    |   | For the period    
|                                        |                                           |                                 |       |                    |   | from the inception
|                                        |                                           |                                 |       |                    |   | of operations     
|                                        |                                           |                                 |       |                    |   | (February 24,     
|                                        |                                           | For the year ended              |       | For the year ended |   | 1998) through     
|                                        |                                           | December 31, 2000               |       | December 31, 1999  |   | December 31, 1998 
|                                        |                                           |                                 |       |                    |   |                   
|Interest income                         |                                           |                                 |       |                    |   |                    |       |       |     |   |       |      
|                                       
|                                       
|                                       
|                                       
|                                        | Interest on loans                         |                                 | $     | 7,572              |   |                    | $     | 7,508 |     |   | $     | 6,564 |  
|                                       
|                                       
|                                       
|                                       
|                                        |                                           | Less: provision for loan losses |       |                    |  |                    |       |       | 250 |   |       |       |  | 
|                                        |                                           |                                 |       |                    |   |                    |       |       |     |   |       |      
|                                        | Net interest income                       |                                 |       | 7,572              |   |                    |       | 7,258 |     |   |       | 6,564 |  
|                                       
|                                       
|                                       
|                                       
|Expenses                                |                                           |                                 |       |                    |   |                    |       |       |     |   |       |      
|                                       
|                                       
|                                       
|                                       
|                                        | Advisory fee expense  paid to parent     |                                 |       | 250                |   |                    |       | 250   |     |   |       | 213   |  
|                                       
|                                       
|                                       
|                                       
|                                        | Other general and administrative expenses |                                 |       | 139                |   |                    |       | 143   |     |   |       | 109   |  
|                                        |                                           |                                 |       |                    |   |                    |       |       |     |   |       |      
|                                        | Total expenses                            |                                 |       | 389                |   |                    |       | 393   |     |   |       | 322   |  
|                                        |                                           |                                 |       |                    |   |                    |       |       |     |   |       |      
|Net earnings                            |                                           | $                               | 7,183 |                    |   | $                  | 6,865 |       |     | $ | 6,242 |      
|                                       
|                                       
|                                       
|                                       
|Preferred stock dividends               |                                           |                                 | 4,887 |                    |   |                    | 4,887 |       |     |   | 4,149 |      
|                                        |                                           |                                 |       |                    |   |                    |       |       |     |   |       |      
|Net earnings available to common shares |                                           | $                               | 2,296 |                    |   | $                  | 1,978 |       |     | $ | 2,093 |      
|                                        |                                           |                                 |       |                    |   |                    |       |       |     |   |       |      
|Earnings per common share               |                                           | $                               | 2.29  |                    |   | $                  | 1.98  |       |     | $ | 2.50  |      
|                                        |                                           |                                 |       |                    |   |                    |       |       |     |   |       |      

The accompanying notes are an integral part of these statements.

13



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##### Table of Contents



FLAGSTAR CAPITAL CORPORATION

STATEMENT OF STOCKHOLDERS EQUITY

(in thousands, except per share data)


|                                                                       |  |           |        |        |  |            |       |          |  |               |        |   |  |   |        |   |  |   |         |  
|---------------------------------------------------------------------- |  | --------- | ------ | ------ |  | ---------- | ----- | -------- |  | ------------- | ------ | - |  | - | ------ | - |  | - | ------- | -
|                                                                       |  | Series A  |        |        |  | Additional |       |          |  | Total        
|                                                                       |  | Preferred |        | Common |  | Paid in    |       | Retained |  | Stockholders
|                                                                       |  | Stock     |        | Stock  |  | Capital    |       | Earnings |  | Equity       
|                                                                       |  |           |        |        |  |            |       |          |  |              
|Balance at inception of operations (February  24, 1998)                |  | $         |       |        |  | $          |      |          |  | $             |       |   |  | $ |       |   |  | $ |        |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Initial public offering of Series A Preferred Stock                    |  |           | 57,500 |        |  |            |       |          |  |               |        |   |  |   |        |   |  |   | 57,500  |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Issuance of Common Stock                                               |  |           |        |        |  |            | 1,000 |          |  |               | 70,827 |   |  |   |        |   |  |   | 71,827  |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Net earnings                                                           |  |           |        |        |  |            |       |          |  |               |        |   |  |   | 6,242  |   |  |   | 6,242   |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Dividends paid on the 8.50% Non Cumulative Series A Preferred
	Shares  |  |           |        |        |  |            |       |          |  |               |        |   |  |   | (4,149 | ) |  |   | (4,149  | )
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Distributions paid or payable to common stockholder ($2.50 per
	share) |  |           |        |        |  |            |       |          |  |               |        |   |  |   | (2,093 | ) |  |   | (2,093  | )
|                                                                       |  |           |        |        |  |            |       |          |  |               |        |   |  |   |        |   |  |   |         |  
|Balance at December 31, 1998                                           |  |           | 57,500 |        |  |            | 1,000 |          |  |               | 70,827 |   |  |   |       |   |  |   | 129,327 |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Net earnings                                                           |  |           |        |        |  |            |       |          |  |               |        |   |  |   | 6,865  |   |  |   | 6,865   |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Dividends paid on the 8.50% Non Cumulative Series A
	Preferred Shares  |  |           |        |        |  |            |       |          |  |               |        |   |  |   | (4,887 | ) |  |   | (4,887  | )
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Distributions paid or payable to common stockholder ($2.23 per
	share) |  |           |        |        |  |            |       |          |  |               | (250   | ) |  |   | (1,978 | ) |  |   | (2,228  | )
|                                                                       |  |           |        |        |  |            |       |          |  |               |        |   |  |   |        |   |  |   |         |  
|Balance at December 31, 1999                                           |  |           | 57,500 |        |  |            | 1,000 |          |  |               | 70,577 |   |  |   |       |   |  |   | 129,077 |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Net earnings                                                           |  |           |        |        |  |            |       |          |  |               |        |   |  |   | 7,183  |   |  |   | 7,183   |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Dividends paid on the 8.50% Non Cumulative Series A Preferred
	Shares  |  |           |        |        |  |            |       |          |  |               |        |   |  |   | (4,887 | ) |  |   | (4,887  | )
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Distributions paid or payable to common stockholder ($2.29 per
	share) |  |           |        |        |  |            |       |          |  |               |        |   |  |   | (2,296 | ) |  |   | (2,296  | )
|                                                                       |  |           |        |        |  |            |       |          |  |               |        |   |  |   |        |   |  |   |         |  
|Balance at December 31, 2000                                           |  | $         | 57,500 |        |  | $          | 1,000 |          |  | $             | 70,577 |   |  | $ |       |   |  | $ | 129,077 |  
|                                                                       |  |           |        |        |  |            |       |          |  |               |        |   |  |   |        |   |  |   |         |  

The accompanying notes are an integral part of these statements.

14



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##### Table of Contents



FLAGSTAR CAPITAL CORPORATION

STATEMENTS OF CASH FLOWS

(in thousands)


|                                                                                    |                                                 |                                                     |       |                    |        |                     |       |         |        |   |       |          |          |  
|----------------------------------------------------------------------------------- | ----------------------------------------------- | --------------------------------------------------- | ----- | ------------------ | ------ | ------------------- | ----- | ------- | ------ | - | ----- | -------- | -------- | -
|                                                                                    |                                                 |                                                     |       |                    |        | For the period from
|                                                                                    |                                                 |                                                     |       |                    |        | the inception      
|                                                                                    |                                                 |                                                     |       |                    |        | of operations      
|                                                                                    |                                                 |                                                     |       |                    |        | (February 24, 1998)
|                                                                                    |                                                 | For the year ended                                  |       | For the year ended |        | through            
|                                                                                    |                                                 | December 31, 2000                                   |       | December 31, 1999  |        | December 31, 1998  
|                                                                                    |                                                 |                                                     |       |                    |        |                    
|Operating activities                                                                |                                                 |                                                     |       |                    |        |                     |       |         |        |   |       |         
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Net earnings                                                                        |                                                 | $                                                   | 7,183 |                    |        | $                   | 6,865 |         |        | $ | 6,242 |         
|Adjustments to reconcile net earnings to net cash provided by
	operating activities |                                                 |                                                     |       |                    |        |                     |       |         |        |   |       |         
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Provision for loan losses                       |                                                     |       |                   |        |                     |       | 250     |        |   |       |         |         
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Increase in accrued interest receivable         |                                                     |       | (133               | )      |                     |       | (93     | )      |   |       | (1,307   | )       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Increase in other liabilities                   |                                                     |       | 4                  |        |                     |       | 10      |        |   |       | 25       |         
|                                                                                    |                                                 |                                                     |       |                    |        |                     |       |         |        |   |       |         
|                                                                                    |                                                 | Net cash provided by operating activities           |       |                    | 7,054  |                     |       |         | 7,032  |   |       |          | 4,960    |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Investing activities                                                                |                                                 |                                                     |       |                    |        |                     |       |         |        |   |       |         
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Purchase of mortgage loans                      |                                                     |       | (24,521            | )      |                     |       | (35,530 | )      |   |       | (147,233 | )       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Principal repayments received on mortgage loans |                                                     |       | 20,911             |        |                     |       | 36,192  |        |   |       | 25,455   |         
|                                                                                    |                                                 |                                                     |       |                    |        |                     |       |         |        |   |       |         
|                                                                                    |                                                 | Net cash (used in) provided by investing activities |       |                    | (3,610 | )                   |       |         | 662    |   |       |          | (121,778 | )
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Financing activities                                                                |                                                 |                                                     |       |                    |        |                     |       |         |        |   |       |         
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Sale of common stock                            |                                                     |       |                   |        |                     |       |        |        |   |       | 74,954   |         
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Sale of preferred stock                         |                                                     |       |                   |        |                     |       |        |        |   |       | 57,500   |         
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Stock issuance costs paid                       |                                                     |       |                   |        |                     |       |        |        |   |       | (3,127   | )       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Dividends paid to common stockholder            |                                                     |       | (2,277             | )      |                     |       | (2,340  | )      |   |       | (1,371   | )       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Dividends paid to preferred stockholders        |                                                     |       | (4,887             | )      |                     |       | (4,887  | )      |   |       | (4,149   | )       
|                                                                                    |                                                 |                                                     |       |                    |        |                     |       |         |        |   |       |         
|                                                                                    |                                                 | Net cash (used in) provided by financing activities |       |                    | (7,164 | )                   |       |         | (7,227 | ) |       |          | 123,807  |  
|                                                                                    |                                                 |                                                     |       |                    |        |                     |       |         |        |   |       |         
|                                                                                    |                                                 | Net (decrease) increase in cash                     |       |                    | (3,720 | )                   |       |         | 467    |   |       |          | 6,989    |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    |                                                 | Beginning cash                                      |       |                    | 7,456  |                     |       |         | 6,989  |   |       |          |         |  
|                                                                                    |                                                 |                                                     |       |                    |        |                     |       |         |        |   |       |         
|                                                                                    |                                                 | Ending cash                                         |       | $                  | 3,736  |                     |       | $       | 7,456  |   |       | $        | 6,989    |  
|                                                                                    |                                                 |                                                     |       |                    |        |                     |       |         |        |   |       |         

The accompanying notes are an integral part of these statements

15



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##### Table of Contents



FLAGSTAR CAPITAL CORPORATION

Notes to the Financial Statements

Note 1  Nature of Business

Flagstar Capital Corporation (the Company), is a
wholly-owned operating subsidiary of Flagstar Bank, FSB (the
Bank) a federally chartered stock savings bank,
which itself is a wholly-owned subsidiary of Flagstar Bancorp,
Inc (Flagstar) a financial services holding company.
The Company is a Michigan corporation, which commenced
operations on February 24, 1998. The Companys primary
business consists of acquiring, holding, and managing
residential mortgage loans.

On February 24, 1998, the Company offered to the public and
sold 2,000,000 shares of the Companys 8.50%
noncumulative Series A, $25 liquidation value per share,
preferred stock. The sale provided gross proceeds totaling
$50.0 million (the Series A Preferred
Shares). The Company also sold to the Bank,
499,900 shares of the Companys common stock (the
Common Stock), $1.00 par value, providing
proceeds totaling $65.5 million

On May 24, 1998, in response to the underwriters exercising
their over-allotment option, the Company issued an additional
300,000 shares of its Series A Preferred Shares, to
the public and 500,000 shares of Common Stock to the Bank,
providing additional gross proceeds of $17.0 million. The
Bank holds all of the Common Stock. The Series A Preferred
Shares are traded on the Nasdaq Stock Market, under the symbol
as FLGSP.

The Company used the net proceeds raised from the initial public
offering of the Series A Preferred Shares and the sale of
the Common Stock to the Bank to purchase, from the Bank, the
Companys Initial Portfolio of $113.5 million of
residential mortgage loans (Mortgage Loans), at
their estimated fair values.

Note 2  Summary of Significant Accounting
Policies

Mortgage loans:

Mortgage loans are carried at the principal amount outstanding,
net of any purchase discount and premium. The amortization of
premiums or discounts is recorded as an adjustment to interest
income using a method, which approximates the interest method.

Non-accrual loans are those loans on which the accrual of
interest has ceased. Loans are placed on non-accrual status
immediately if, in the opinion of management, principal or
interest is not likely to be paid in accordance with the terms
of the loan agreement, or when principal or interest is past due
90 days or more and collateral is insufficient to cover
principal and interest. Interest income on non-accrual loans is
recognized only to the extent of cash receipts. However, where
there is doubt regarding the ultimate collectibility of the loan
principal, cash receipts, whether designated as principal or
interest, are thereafter applied to reduce the carrying value of
the loan. Loans are restored to accrual status only when
interest and principal payments are brought current and future
payments are reasonably assured.

The Statement of Financial Accounting Standards No. 114,
entitled Accounting by Creditors for Impairment of a
Loan (SFAS 114), requires that the
carrying value of an impaired loan be based on the present value
of expected future cash flows, discounted at the loans
effective interest rate or, as a practical expedient, at the
loans observable market price, or the fair value or the
collateral, if the loan is collateral dependent. Under
SFAS 114, a loan is considered impaired when, based on
current information, it is probable that the borrower will be
unable to pay contractual interest or principal payments as
scheduled in the loan agreement. SFAS 114 applies to all
loans except smaller-balance homogeneous consumer loans, loans
carried at fair value or the lower of cost or fair value, debt
securities and leases. The Company will apply SFAS 114 to
non-accrual mortgage loans. In addition, SFAS 114 modifies
the accounting for in-substance foreclosures (ISF).
A collateralized loan is considered an ISF and is reclassified
to Assets Acquired as Loan Satisfactions only when the Company
has taken physical possession of the collateral regardless of
whether

16



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##### Table of Contents



FLAGSTAR CAPITAL CORPORATION


Notes to the Financial Statements  (Continued)

formal foreclosure proceedings have taken place. The Company did
not have any non-accrual loans classified as impaired.

The Statement of Financial Accounting Standards No. 118,
entitled Accounting by Creditors for Impairment of a
Loan  Income Recognition and Disclosure
(SFAS 118), permits a creditor to use existing
methods for recognizing interest revenue on impaired loans. The
Company recognizes interest income on impaired loans pursuant to
the discussion above for non-accrual loans.

Allowance for loan
losses:

An allowance for loan losses is provided when a risk of loss is
inherent in the credit extension process. An allowance is a
general allowance and is based on a periodic review and analysis
of the Mortgage Loans. The periodic analysis will include
consideration of such factors as the risk rating of individual
credits, the size and diversity of the portfolio, economic
conditions and market conditions, prior loss experience, results
of periodic credit reviews of the portfolio, and any guarantees
provided by the seller of the loans. The allowance for loan
losses is increased by, provisions for losses charged against
income and is reduced by charge-offs, net of recoveries.
Charge-offs are recorded when, in the judgment of management, an
extension of credit is deemed uncollectible, in whole or in
part. As of December 31, 2000 and 1999 the allowance for
loan losses totaled $250,000.

Cash:

The Company considers all short-term, highly liquid investments
that are both readily convertible to cash and have a maturity of
generally three months or less at the time of purchase to be
cash equivalents. At December 31, 2000 and 1999, the
Companys cash was held in the custody of the Bank.

Offering costs:

Costs incurred in connection with the raising of capital through
the sale of preferred stock were recorded as an adjustment to
the additional paid in capital of the Company.

Dividends:

Preferred stock

Dividends on the Series A Preferred Shares are
non-cumulative. The stock was issued on February 24, 1998.
Quarterly dividends are payable on the last day of March, June,
September and December at a rate of 8.50% per annum of the
initial liquidation preference ($25.00 per share).

Common stock

Stockholders are entitled to receive dividends when, and if
declared by the Board of Directors out of funds available after
the preferred dividends have been paid.

Earnings per common
share:

Earnings per share are computed by dividing net income after
preferred dividends by the weighted average number of common
shares outstanding. There are no dilutive securities, which
would require a diluted earnings per share computation. The
Company had weighted average shares outstanding of 1,000,000,
1,000,000 and 837,092 during 2000, 1999 and 1998, respectively.

17



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##### Table of Contents



FLAGSTAR CAPITAL CORPORATION


Notes to the Financial Statements  (Continued)

Income taxes:

The Company has elected for Federal income tax purposes, to be
treated as a Real Estate Investment Trust (REIT) and
intends to comply with the provisions of the Internal Revenue
Code of 1986 (the Code), as amended. Accordingly,
the Company will not be subject to federal income tax to the
extent it distributes its income to shareholders and as long as
certain asset, income and stock ownership tests are met in
accordance with the Code. As the Company expects to qualify as a
REIT for federal income tax purposes, no provision for income
taxes is included in the accompanying financial statements.

Use of estimates

The preparation of financial statements in conformity with
generally accepted accounting principles, requires management to
make estimates and assumptions that affect reported amounts of
assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.

Recently issued
accounting standards

In June 1998, the FASB issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities, as amended which requires that an entity
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at
fair value. The statement is effective January 1, 2001 for
the Company; however, management does not expect this
pronouncement to have an impact on the Companys financial
position.

In September 2000, the FASB issued SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities (SFAS
No. 140). SFAS No. 140 replaces SFAS
No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities
(SFAS No. 125), issued June 1996. It
revises the standards for accounting for securitizations and
other transfers of financial assets and collateral and requires
certain disclosures, but it carries over most of SFAS
No. 125s provisions without reconsideration. SFAS
No. 140 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring
after March 31, 2001 and is effective for recognition and
reclassification of collateral for fiscal years ending after
December 15, 2000. Disclosures about securitizations and
collateral accepted need not be reported for periods ending on
or before December 31, 2000, for which financial statements
are presented for comparative purposes. SFAS No. 140 is to
be applied prospectively with certain exceptions. Implementation
of SFAS No. 140 is not expected to have a material effect
on the Companys financial position or results of
operations.

18



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##### Table of Contents



FLAGSTAR CAPITAL CORPORATION


Notes to the Financial Statements  (Continued)

Note 3  Mortgage Loans

The following reflects the composition of Mortgage Loans at
December 31:

|              |            |                           |                      |            |            |             |      |            |      |       |            |            |            |             |      |      |      |       |  
|------------- | ---------- | ------------------------- | -------------------- | ---------- | ---------- | ----------- | ---- | ---------- | ---- | ----- | ---------- | ---------- | ---------- | ----------- | ---- | ---- | ---- | ----- | -
|              |            | 2000                      |                      | 2000       |            | 1999        |      | 1999      
|Product Type  |            | Balance                   |                      | % of Total |            | Balance     |      | % of Total
|              |            |                          
|              | 3 year ARM |                           | $                    | 31,501,000 |            |             |      | 31.2       | %    |       | $          | 36,482,000 |            |             |      | 31.2 | %   
|             
|             
|             
|             
|              | 5 year ARM |                           |                      | 28,619,000 |            |             |      | 20.4       |      |       |            | 23,861,000 |            |             |      | 20.4 |     
|             
|             
|             
|             
|              | 7 year ARM |                           |                      | 23,930,000 |            |             |      | 18.2       |      |       |            | 21,293,000 |            |             |      | 18.2 |     
|              |            |                           |                      |           
|              |            | Subtotal ARM              |                      |            | 84,050,000 |             |      |            | 69.8 |       |            |            | 81,636,000 |             |      |      | 69.8 |      
|              |            |                           |                      |           
|15 year Fixed |            |                           | 13,615,000           |            |            |             | 11.3 |            |      |       | 13,292,000 |            |            |             | 11.3 |     
|             
|             
|             
|             
|30 year Fixed |            |                           | 24,476,000           |            |            |             | 18.9 |            |      |       | 22,057,000 |            |            |             | 18.9 |     
|              |            |                           |                      |           
|              |            | Subtotal Fixed            |                      |            | 38,091,000 |             |      |            | 30.2 |       |            |            | 35,349,000 |             |      |      | 30.2 |      
|              |            |                           |                      |           
|              |            |                           | Total Mortgage Loans |            | $          | 122,141,000 |      |            |      | 100.0 | %          |            | $          | 116,985,000 |      |      |      | 100.0 | %
|              |            |                           |                      |            |            |             |      |            |      |       |            |            |            |             |      |     
|              |            | Unamortized premium       |                      |            | 1,121,000  |             |      |            |      |       |            |            | 1,520,000  |             |      |      |      |      
|             
|             
|             
|             
|              |            | Allowance for loan losses |                      |            | (250,000   | )           |      |            |      |       |            |            | (250,000   | )           |      |      |      |      
|              |            |                           |                      |            |            |             |      |            |      |       |            |            |            |             |      |     
|              |            |                           | Total                |            | $          | 123,012,000 |      |            |      |       |            |            | $          | 118,255,000 |      |      |      |       |  
|              |            |                           |                      |            |            |             |      |            |      |       |            |            |            |             |      |     

Properties collateralizing Mortgage Loans are geographically
disbursed throughout the United States. As of December 31,
2000, approximately 26.0% of these properties are located in
Michigan (measured by principal balance), and another 17.2% are
located in the state of California. No other state contains more
than 10% of the properties collateralizing these loans.

Note 4  Related Party Transactions

The Company has entered into an Advisory Agreement (the
Advisory Agreement) with the Bank (the
Advisor) requiring an annual payment of $250,000.
The Bank provides advice to the Board of Directors and manages
the operations of the Company as defined in the Agreement. The
Agreement has an initial term of five years commencing on
February 24, 1998 and automatically renews for additional
five year periods, unless the Company delivers a notice of
non-renewal to the Bank as defined in the Advisory Agreement.
Advisory fees incurred for the years ended December 31,
2000 and 1999 and the period ended December 31, 1998
totaled approximately $250,000, $250,000 and $213,000,
respectively.

The Company also entered into a servicing agreement with the
Bank for the servicing of the Mortgage Loans. Pursuant to the
servicing agreement, the Bank performs the servicing for the
Mortgage Loans, in accordance with normal industry practice. The
servicing agreement can be terminated without cause upon a
thirty-day advance notice given to the Bank. The servicing fee
is 0.375% of the outstanding principal balance of the Mortgage
Loans. The servicing fee is withheld by the Bank and netted from
interest income proceeds received on the Mortgage Loans.

Note 5  Fair Value of Financial Instruments

Statement of Financial Accounting Standards No. 107,
entitled Disclosures About Fair Value of Financial
Instruments (SFAS 107), requires the
Company to disclose fair value information about financial
instruments for which it is practicable to estimate the value,
whether or not such financial instruments are recognized on the
balance sheet. Fair value is defined as the amount at which a
financial instrument could be exchanged in a current transaction
between willing parties, other than in a forced sale or
liquidation, and is best evidenced by a quoted market price, if
one exists. The calculation of estimated fair value is based on
market conditions at a specific point in time and may not be
reflective of future fair values.

19



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##### Table of Contents



FLAGSTAR CAPITAL CORPORATION


Notes to the Financial Statements  (Continued)

Certain financial instruments and all non-financial instruments
are excluded from the scope of SFAS 107. Accordingly, the fair
value disclosures required by SFAS 107 provide only a
partial estimate of the fair value of the Company. Fair values
among REITs are not comparable due to the wide-range of limited
valuation techniques and numerous estimates, which must be made.
This lack of an objective valuation standard introduces a great
degree of subjectivity to these derived or estimated fair
values. Therefore, readers are cautioned in using this
information for purposes of evaluating the financial condition
of the Company compared with other REITs.

Mortgage loans

The fair value of the Companys residential mortgage loans
is estimated by comparing values for similar residential
mortgages sold in the secondary market.

At December 31, 2000 and 1999 the estimated fair value of
the Mortgage Loans was $121,486,000 and $115,700,000,
respectively. Both estimated fair values based on the valuation
technique described in the preceding paragraph.

Assets and liabilities in which fair value approximates carrying
value:

The fair values of certain financial assets and liabilities
carried at cost, including cash, accrued interest receivable,
loan payments in process-due from parent, due to parent, and
other liabilities are considered to approximate their respective
carrying value due to their short-term nature and negligible
credit losses.

Note 6  Quarterly Financial Data (Unaudited)

The following table represents summarized data for each of the
quarters in 2000 and 1999 (in thousands, except earnings per
share data, certain per share results have been adjusted to
conform the 2000 presentation):

|                                               |  |         |       |         |  |         |       |         |  |   |       |  |  |   |       | 
|---------------------------------------------- |  | ------- | ----- | ------- |  | ------- | ----- | ------- |  | - | ----- |  |  | - | ----- | 
|                                               |  |        
|                                               |  | 2000   
|                                               |  |        
|                                               |  | Fourth  |       | Third   |  | Second  |       | First  
|                                               |  | Quarter |       | Quarter |  | Quarter |       | Quarter
|                                               |  |         |       |         |  |         |       |        
|Interest income                                |  | $       | 1,945 |         |  | $       | 2,006 |         |  | $ | 1,857 |  |  | $ | 1,764 | 
|                                               |  |        
|Net interest income                            |  |         | 1,945 |         |  |         | 2,006 |         |  |   | 1,857 |  |  |   | 1,764 | 
|                                              
|                                              
|                                              
|                                              
|Provision for losses                           |  |         |      |         |  |         |      |         |  |   |      |  |  |   |      | 
|                                               |  |        
|Net interest income after provision for losses |  |         | 1,945 |         |  |         | 2,006 |         |  |   | 1,857 |  |  |   | 1,764 | 
|                                              
|                                              
|                                              
|                                              
|Outside director fees                          |  |         | 2     |         |  |         | 3     |         |  |   | 1     |  |  |   | 1     | 
|                                              
|                                              
|                                              
|                                              
|Management fees                                |  |         | 63    |         |  |         | 63    |         |  |   | 62    |  |  |   | 62    | 
|                                              
|                                              
|                                              
|                                              
|Non-interest expense                           |  |         | 28    |         |  |         | 27    |         |  |   | 37    |  |  |   | 40    | 
|                                               |  |        
|Earnings before income taxes                   |  |         | 1,852 |         |  |         | 1,914 |         |  |   | 1,757 |  |  |   | 1,660 | 
|                                              
|                                              
|                                              
|                                              
|Provision for federal income taxes             |  |         |      |         |  |         |      |         |  |   |      |  |  |   |      | 
|                                               |  |        
|Net earnings                                   |  | $       | 1,852 |         |  | $       | 1,914 |         |  | $ | 1,757 |  |  | $ | 1,660 | 
|                                               |  |        
|Basic earnings per share                       |  | $       | 0.63  |         |  | $       | 0.69  |         |  | $ | 0.53  |  |  | $ | 0.44  | 
|                                               |  |        

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FLAGSTAR CAPITAL CORPORATION


Notes to the Financial Statements  (Continued)

|                                               |  |         |       |         |  |         |       |         |  |   |       |  |  |   |       | 
|---------------------------------------------- |  | ------- | ----- | ------- |  | ------- | ----- | ------- |  | - | ----- |  |  | - | ----- | 
|                                               |  |        
|                                               |  | 1999   
|                                               |  |        
|                                               |  | Fourth  |       | Third   |  | Second  |       | First  
|                                               |  | Quarter |       | Quarter |  | Quarter |       | Quarter
|                                               |  |         |       |         |  |         |       |        
|Interest income                                |  | $       | 1,923 |         |  | $       | 1,974 |         |  | $ | 1,731 |  |  | $ | 1,880 | 
|                                               |  |        
|Net interest income                            |  |         | 1,923 |         |  |         | 1,974 |         |  |   | 1,731 |  |  |   | 1,880 | 
|                                              
|                                              
|                                              
|                                              
|Provision for losses                           |  |         | 250   |         |  |         |      |         |  |   |      |  |  |   |      | 
|                                               |  |        
|Net interest income after provision for losses |  |         | 1,673 |         |  |         | 1,974 |         |  |   | 1,731 |  |  |   | 1,880 | 
|                                              
|                                              
|                                              
|                                              
|Outside director fees                          |  |         |      |         |  |         | 3     |         |  |   |      |  |  |   |      | 
|                                              
|                                              
|                                              
|                                              
|Management fees                                |  |         | 63    |         |  |         | 63    |         |  |   | 62    |  |  |   | 62    | 
|                                              
|                                              
|                                              
|                                              
|Non-interest expense                           |  |         | 28    |         |  |         | 28    |         |  |   | 43    |  |  |   | 39    | 
|                                               |  |        
|Earnings before income taxes                   |  |         | 1,582 |         |  |         | 1,880 |         |  |   | 1,626 |  |  |   | 1,778 | 
|                                              
|                                              
|                                              
|                                              
|Provision for federal income taxes             |  |         |      |         |  |         |      |         |  |   |      |  |  |   |      | 
|                                               |  |        
|Net earnings                                   |  | $       | 1,582 |         |  | $       | 1,880 |         |  | $ | 1,626 |  |  | $ | 1,778 | 
|                                               |  |        
|Basic earnings per share                       |  | $       | 0.36  |         |  | $       | 0.66  |         |  | $ | 0.40  |  |  | $ | 0.56  | 
|                                               |  |        






|        |                                                                                      
|------- | -------------------------------------------------------------------------------------
|ITEM 9: | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
	AND FINANCIAL DISCLOSURE

None.

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##### Table of Contents



PART III






|         |                                                    
|-------- | ---------------------------------------------------
|ITEM 10: | DIRECTORS AND EXECUTIVE OFFICERS OF THE CORPORATION

The persons who are directors and executive officers of the
Company are as follows:

|                  |  |     |    |                               |  |                                                                |  |         |      |  |  |  |      | 
|----------------- |  | --- | -- | ----------------------------- |  | -------------------------------------------------------------- |  | ------- | ---- |  |  |  | ---- | 
|                  |  |     |    |                               |  | Director                                                       |  | Term   
|Name              |  | Age |    | Position(s) Held with Company |  | Since                                                          |  | Expires
|                 
|                 
|Thomas J. Hammond |  |     | 59 |                               |  | Chairman of the Board and Chief Executive Officer              |  |         | 1997 |  |  |  | 2002 | 
|                 
|                 
|                 
|                 
|Mark T. Hammond   |  |     | 35 |                               |  | Vice Chairman of the Board and President                       |  |         | 1997 |  |  |  | 2001 | 
|                 
|                 
|                 
|                 
|Michael W. Carrie |  |     | 46 |                               |  | Director, Executive Vice President and Chief Financial Officer |  |         | 1997 |  |  |  | 2003 | 
|                 
|                 
|                 
|                 
|Joan H. Anderson  |  |     | 50 |                               |  | Director and Executive Vice President                          |  |         | 1997 |  |  |  | 2002 | 
|                 
|                 
|                 
|                 
|Mary Kay McGuire  |  |     | 43 |                               |  | Director and Secretary                                         |  |         | 1997 |  |  |  | 2003 | 

The independent directors of the Company are as follows:

|                  |  |     |    |                                   |  |          |  |         |      |  |  |  |      | 
|----------------- |  | --- | -- | --------------------------------- |  | -------- |  | ------- | ---- |  |  |  | ---- | 
|                  |  |     |    |                                   |  |          |  |        
|                  |  |     |    |                                   |  | Director |  | Term   
|Name              |  | Age |    | Position(s) Held with the Company |  | Since    |  | Expires
|                 
|                 
|Jack Christenson  |  |     | 59 |                                   |  | Director |  |         | 1997 |  |  |  | 2001 | 
|                 
|                 
|                 
|                 
|Robert W. De Witt |  |     | 59 |                                   |  | Director |  |         | 1997 |  |  |  | 2002 | 

The following sets forth the business experience and other
information for each of the current directors of the Company:

Company Directors

Thomas J. Hammond has served as Chairman of the Board of
Directors and Chief Executive Officer of the Company since its
formation in 1997. Mr. Hammond serves as Chairman of the
Board of Directors and Chief Executive Officer of Flagstar
Bancorp, Inc, the parent company of Flagstar Bank.
Mr. Hammond also serves as the Chairman of the Board of
Directors and Chief Executive Officer for the Bank.
Mr. Hammond founded the Bank in 1987.

Mark T. Hammond has been Vice-Chairman of the Board of
Directors and President of the Company since its formation in
1997. Mr. Hammond serves as Vice-Chairman of the Board of
Directors and President of Flagstar Bancorp, Inc, the parent
company of Flagstar Bank. Mr. Hammond also serves as
Vice-Chairman of the Board of Directors and President of the
Bank. Mr. Hammond has been employed by the Bank since 1987.
Mr. Hammond is the son of Thomas J. Hammond.

Joan H. Anderson has been a Director and an Executive
Vice President since the Companys formation in 1997.
Ms. Anderson serves as a Director of Flagstar Bancorp, Inc,
the parent company of Flagstar Bank. She is also an Executive
Vice-President of the Bank and Flagstar. Mrs. Anderson has
been employed by the Bank since 1987.

Michael W. Carrie has served as Director, Executive
Vice-President, and Chief Financial Officer since the
Companys formation in 1997. Mr. Carrie serves as a
Director of Flagstar Bancorp, Inc, the parent company of
Flagstar Bank. Mr. Carrie also serves as the Executive
Vice-President and Chief Financial Officer of Flagstar and the
Bank. Mr. Carrie has been employed by the Bank since 1993.

Mary Kay McGuire has served as Director and Secretary of
the Company since its formation in 1997. Ms. McGuire also
serves as Director, Senior Vice President, and Secretary of the
Bank. She also serves as Senior Vice President and Secretary of
Flagstar. Ms. McGuire has been employed by the Bank since
1987.

Independent Directors

The Companys Certificate of Designation establishing the
Series A Preferred Shares requires that, so long as any
Series A Preferred Shares are outstanding, certain actions
by the Company be approved by a

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If at any time the Company fails to declare and pay a quarterly
dividend on the Series A Preferred Shares, the number of
directors constituting the Board of Directors of the Company
will be increased by two at the Companys next annual
meeting. The holders of Series A Preferred Shares, voting
together with the holders of any other outstanding series of
Preferred Stock as a single class, will be entitled to elect the
two additional directors to serve on the Companys Board of
Directors. Any member of the Board of Directors elected by
holders of the Companys Preferred Stock will be deemed to
be an Independent Director for purposes of the actions requiring
the approval of a majority of the Independent Directors.

The following sets forth the business experience and other
information for each of the Independent Directors of the Company.

Jack Christenson has served as a Director since 1997. He
is the President and owner of Jack Christenson, Inc., a
residential brokerage company that is based in Troy, Michigan.
Jack Christenson, Inc. was founded in 1982, and is one of the
largest brokerage companies in Michigan. Mr. Christenson
has over 22 years experience in the real estate brokerage
business and has been a member of various real estate
associations as well as a general partner of a former real
estate investment trust.

Robert W. DeWitt has served as a Director since 1997. He
is the President and owner of DeWitt Building Co., Inc., a
residential and commercial building company based in Lathrup
Village, Michigan founded in 1979. Mr. DeWitt has over
32 years experience in the construction business and has
held various positions on local and state boards of construction
associations. Mr. DeWitt was founder and served as a
director for four years of American Building Traders, Inc.,
which provides curriculum for job training utilizing adult
education programs. He has been the director, for the last five
years, of Contract Assistance Program, an entity co-funded by
the State of Michigan, which trains business contractors and
minority contractors.






ITEM 11:  EXECUTIVE COMPENSATION


The Company pays the Independent Directors of the Company fees
for their services as directors. The Independent Directors
receive a fee of $1,200 for attendance at each meeting of the
Board of Directors and $100 for each telephone meeting of the
Board of Directors. However, multiple fees are not paid for two
or more meetings attended on the same day. The Company does not
pay any compensation to its officers or employees of the Bank,
or to directors who are not Independent Directors.






ITEM 12:  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT


None.

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ITEM 13:  CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS


Set forth below are certain transactions between the Company and
its directors, affiliates, a related parties. Management
believes that the transactions with related parties described
herein have been conducted on substantially the same terms as
similar transactions with unrelated parties.

The Bank administers the day-to-day operations of the Company
and is entitled to receive fees in connection with the Advisory
Agreement. Advisory fees paid to parent for the years ended
December 31, 2000 and 1999 and for the period ended
December 31, 1998, totaled $250,000, $250,000 and $213,000,
respectively.

The Bank services the Mortgage Loans included in the
Companys portfolio and is entitled to receive fees in
connection with the Servicing Agreement.

The Companys cash balance of approximately
$3.7 million as of December 31, 2000 and
$7.5 million as of December 31, 1999 is held in a
demand deposit account with the Bank.

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##### Table of Contents



PART IV






|         |                                                                 
|-------- | ----------------------------------------------------------------
|ITEM 14: | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
	8-K



| |        |                                                                                          
| | ------ | -----------------------------------------------------------------------------------------
| | (a)(1) | The following financial statements of the Company are included
	in Item 8 of this report:

Report of Independent Certified Public Accountants



| |                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Statements of Earnings for the years ended December 31,
	2000 and 1999 and for the period from the inception of
	operations (February 24, 1998) through December 31,
	1998            
| | Statements of Stockholders Equity for the years ended
	December 31, 2000 and 1999 and for the period from the
	inception of operations (February 24, 1998) through
	December 31, 1998
| | Statements of Cash Flows for the years ended December 31,
	2000 and 1999 and for the period from the inception of
	operations (February 24, 1998) through December 31,
	1998          





| |        |                                                                                                                                                                                                                                          
| | ------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a)(2) | All other schedules for which provision is made in the
	applicable accounting regulations of the Securities and Exchange
	Commission are not required under the related instruction or are
	inapplicable and therefore have been omitted.
|
| | (a)(3) | Exhibits:                                                                                                                                                                                                                                
|
| | (b)    | No reports on Form 8-K were issued during the year ended
	December 31, 2000.                                                                                                                                                             






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SIGNATURES

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



| |                             
| | ----------------------------
| | FLAGSTAR CAPITAL CORPORATION

Date: March 22, 2001

| |                          
| | -------------------------
| | /s/ THOMAS J. HAMMOND    
| |                          
| | Thomas J. Hammond        
| | Chairman of the Board and
| | Chief Executive Officer  
| | (Duly Authorized Officer)

Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons
on behalf of the Registrant and in the capacities indicated on
March 22, 2001.

|                                           |  |                                                               
|------------------------------------------ |  | --------------------------------------------------------------
|Signature                                  |  | Title                                                         
|                                           |  |                                                               
|By: /s/ THOMAS J. HAMMONDThomas J. Hammond |  | Chairman of the Board and Chief Executive Officer             
|By: /s/ MARK T. HAMMONDMarks T. Hammond    |  | Vice Chairman of the Board and President                      
|By: /s/ MICHAEL W. CARRIEMichael W. Carrie |  | Director, Executive Vice President and Chief Financial Officer
|By: /s/ JOAN H. ANDERSONJoan H. Anderson   |  | Director, Executive Vice President                            
|By: /s/ MARY KAY MCGUIREMary Kay McGuire   |  | Director and Secretary                                        
|By: /s/ JACK CHRISTENSONJack Christenson   |  | Director                                                      
|By: /s/ ROBERT W. DEWITTRobert W. DeWitt   |  | Director                                                      

26