DYNEX CAPITAL INC
DEF 14A, 1998-04-01
REAL ESTATE INVESTMENT TRUSTS
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                                             Dynex Capital, Inc.

                                     Notice of Annual Meeting of Stockholders
                                                        and
                                                  Proxy Statement






                                          Annual Meeting of Stockholders
                                                   May 19, 1998


<PAGE>

                                                         1

                                                 DYNEX CAPITAL, INC.




                                                 March 26, 1998






To Our Stockholders:

     You are cordially invited to attend the 1998 Annual Meeting of Stockholders
of Dynex Capital,  Inc. to be held at the AmeriSuites Hotel located at Innsbrook
Corporate Center, 4100 Cox Road, Glen Allen,  Virginia on Tuesday, May 19, 1998,
at 2:00 p.m. Eastern time.

     The business of the meeting is to (i) elect the  Directors and (ii) approve
an amendment to the Company's Articles of Incorporation. Information relating to
these proposals is set forth in the Proxy Statement attached.

     While stockholders may exercise their right to vote their shares in person,
we  recognize  that  many  stockholders  may not be able to  attend  the  Annual
Meeting.  Accordingly,  we have  enclosed a proxy  which will enable you to vote
your shares on the issues to be considered at the Annual Meeting even if you are
unable to attend.  All you need to do is mark the proxy to  indicate  your vote,
date and sign the proxy, and return it in the enclosed  postage-paid envelope as
soon  as  conveniently  possible.  If you  desire  to vote  in  accordance  with
management's recommendations, you need not mark your votes on the proxy but need
only sign,  date and return the proxy in the enclosed  postage-paid  envelope in
order to record your vote.

                                                            Sincerely,



                                                            Thomas H. Potts
                                                            President


<PAGE>

                                                         1

                                                 DYNEX CAPITAL, INC.

                                                10900 Nuckols Road
                                            Glen Allen, Virginia 23060
                                                  (804) 217-5800
                                           ____________________________

                                     NOTICE OF ANNUAL MEETING OF STOCKHOLDERS



To Our Stockholders:

     The Annual Meeting of Dynex Capital,  Inc. will be held at the  AmeriSuites
Hotel located at Innsbrook Corporate Center, 4100 Cox Road, Glen Allen, Virginia
on Tuesday,  May 19, 1998,  at 2:00 p.m.  Eastern time, to consider and act upon
the following matters:

     1. The election of five Directors, each for a one-year term; 2. Approval of
an amendment to the Company's  Articles of  Incorporation to comply with certain
requirements  of the New York Stock  Exchange  ("NYSE")  regarding  transactions
entered into or through  facilities of the NYSE which  involve  excess shares of
the  Company's  common  stock;  and 3. Such other  business as may properly come
before the Annual Meeting.
 
     Only stockholders of record at the close of business on March 25, 1998, the
record date, will be entitled to vote at the Annual Meeting.
 
     Management desires to have maximum representation at the Annual Meeting and
respectfully  requests  that you date,  execute and  promptly  mail the enclosed
proxy in the  accompanying  postage-paid  envelope.  A proxy may be revoked by a
stockholder  by notice in writing to the  Secretary  of the  Company at any time
prior to its use, by  presentation  of a later-dated  proxy, or by attending the
Annual Meeting and voting in person.

                                            By order of the Board of Directors



                                            Lynn K. Geurin
                                            Secretary




Dated:  March 26, 1998

<PAGE>

                                                                 1
                                                      [GRAPHIC OMITTED]

     Directions  from the  North on  Interstate  95:  Take  the  Interstate  295
West-Charlottesville exit. Travel approximately 8.5 miles on Interstate 295 West
towards Charlottesville.  Take the Nuckols Road-South Exit. Travel approximately
1.0 mile to the first  stop  light,  which is  located  at the corner of Cox and
Nuckols Road. Turn right on Cox Road.  Travel  approximately  1.5 miles and turn
right at the AmeriSuites Hotel entrance.

     Directions  from the airport:  (In regards to the map above - Interstate 64
should  be used as a  reference  point  only) As you leave  the  airport  on 156
North-Airport  Drive  follow  the  "to  295-North"  signs.  You  will  pass  the
Interstate 64 East and West exits and the Interstate 295 South exit. After these
exits,  continue on 156  North-Airport  Drive  approximately 2.5 miles. Take the
"295 North to 95-North  and  64-West" exit North  towards  Washington.  Stay on
Interstate 295 North for approximately  19.5 miles. Take the Nuckols  Road-South
Exit. Travel approximately 1.0 mile to the first stop light, which is located at
the corner of Cox and Nuckols Road. Turn right on Cox Road. Travel approximately
1.5 miles and turn right at the AmeriSuites Hotel entrance.

     Directions  from  the  South  or  Downtown:  Take  Interstate  64  West  to
Interstate  295 towards  Washington.  Take the first exit - Nuckols  Road South.
Travel  approximately 1.0 mile to the first stop light,  which is located at the
corner of Cox and Nuckols Road. Turn right on Cox Road. Travel approximately 1.5
miles and turn right at the AmeriSuites Hotel entrance.


<PAGE>

12

                                                            1

                                                    DYNEX CAPITAL, INC.
                                                    10900 Nuckols Road
                                                Glen Allen, Virginia 23060
                                                      (804) 217-5800
                                               ____________________________

                                                     PROXY STATEMENT
                                              ANNUAL MEETING OF STOCKHOLDERS
                                                       May 19, 1998

To Our Stockholders:

     This Proxy  Statement is furnished  with the  solicitation  by the Board of
Directors of Dynex  Capital,  Inc. (the  "Company") of proxies to be used at the
Annual  Meeting of  Stockholders  of the  Company to be held at the  AmeriSuites
Hotel located at Innsbrook Corporate Center, 4100 Cox Road, Glen Allen, Virginia
on Tuesday, May 19, 1998, at 2:00 p.m. Eastern time. The Annual Meeting is being
held for the purposes set forth in the accompanying  notice of Annual Meeting of
Stockholders.  This Proxy Statement,  the accompanying proxy card and the notice
of Annual Meeting are being provided to stockholders beginning on or about March
26, 1998.

                                                 GENERAL INFORMATION

Solicitation

     The  enclosed  proxy is solicited by the Board of Directors of the Company.
The costs of this solicitation will be borne by the Company. Proxy solicitations
will be made by mail, and also may be made by personal interview,  telephone and
telegram by Directors and officers of the Company. Brokerage houses and nominees
will be requested  to forward the proxy  soliciting  material to the  beneficial
owners  of the  Company'  common  stock  and to  obtain  authorization  for the
execution of proxies. The Company will, upon request, reimburse such parties for
their  reasonable  expenses in  forwarding  proxy  materials to such  beneficial
owners.  Additionally,  the Company has engaged the firm of MacKenzie  Partners,
Inc., New York, New York, to conduct proxy solicitations on its behalf at a cost
estimated to be $5,000, plus reasonable out-of-pocket expenses.

Voting Rights

     Holders of shares of the Company's common stock at the close of business on
March 25, 1998,  the record date, are entitled to notice of, and to vote at, the
Annual Meeting. On that date 45,548,182 shares of common stock were outstanding.
Each share of common  stock  outstanding  on the record  date is entitled to one
vote on each matter presented at the Annual Meeting. The presence,  in person or
by proxy, of stockholders  entitled to cast a majority of all the votes entitled
to be cast  constitutes a quorum for the  transaction  of business at the Annual
Meeting.

Voting of Proxies

     Shares  of  common  stock  represented  by all  properly  executed  proxies
received in time for the Annual  Meeting  will be voted in  accordance  with the
choices  specified in the proxy.  Unless contrary  instructions are indicated on
the proxy,  the shares will be voted FOR the election of the  nominees  named in
this Proxy  Statement  as  Directors,  and FOR the  amendment  to the  Company's
Articles of  Incorporation  to comply with certain  requirements of the New York
Stock Exchange  relating to transactions  involving excess shares,  as set forth
herein.

     The management and the Board of Directors of the Company know of no matters
to be brought  before  the Annual  Meeting  other than as set forth  herein;  no
stockholder  proposals  were  received by the  Company on or before  November 1,
1997, the deadline for inclusion of such proposals in this Proxy Statement.



Revocability of Proxy

     The giving of the  enclosed  proxy does not  preclude  the right to vote in
person should the stockholder giving the proxy so desire. A proxy may be revoked
at any time prior to its  exercise  by  delivering  a written  statement  to the
Secretary of the Company that the proxy is revoked, by presenting to the Company
a later-dated  proxy  executed by the person  executing  the prior proxy,  or by
attending the Annual Meeting and voting in person.

Annual Report on Form 10-K

     The Annual Report on Form 10-K, including financial statements for the year
ended December 31, 1997,  which are being mailed to  stockholders  together with
this  Proxy  Statement,  contains  financial  and  other  information  about the
activities of the Company, but is not incorporated into this Proxy Statement and
is not to be considered a part of these proxy soliciting materials.

                                                  ELECTION OF DIRECTORS

     Five Directors of the Company,  constituting the entire Board of Directors,
are to be elected at the 1998  Annual  Meeting  to serve  until the next  annual
meeting and until their successors are elected and duly qualified. Mr. J. Sidney
Davenport,  Mr. Richard C. Leone,  Mr. Thomas H. Potts, Mr. Paul S. Reid and Mr.
Donald B. Vaden have been nominated by the Board of Directors for re-election to
the Board of Directors at the Annual Meeting.  Unless authorization is withheld,
the persons  named as proxies  will vote FOR the election of the nominees of the
Board of Directors named above. Each nominee has agreed to serve if elected.  In
the event any nominee shall unexpectedly be unable to serve, the proxies will be
voted for such other person as the Board of Directors  may  designate.  Selected
biographical information regarding each nominee is set forth below:

     J.  Sidney  Davenport,  56, has been a Director  of the  Company  since its
organization  in December  1987.  He was a Vice  President of The Ryland  Group,
Inc., a publicly-owned  corporation engaged in residential housing  construction
and  mortgage-related  financial services,  from March 1981 to January 1998. Mr.
Davenport was Executive  Vice  President of Ryland  Mortgage  Company from April
1992 to January 1998. Mr.  Davenport served as a Director of Mentor Income Fund,
Inc., a publicly-traded closed-end mutual fund, from June 1992 to August 1993.

     Richard C.  Leone,  57, has been a Director of the  Company  since  January
1988. He currently is the President of The Twentieth  Century Fund, a tax-exempt
research  foundation  engaged in economic,  political and social policy studies.
Mr. Leone is also a Director of seven Dreyfus mutual funds.

     Thomas H. Potts, 48, has been President and a Director of the Company since
its  organization  in December 1987.  Prior to that, Mr. Potts served in various
positions on behalf of The Ryland  Group,  Inc. Mr. Potts served as Treasurer of
The Ryland Group, Inc. from May 1987 until April 1992,  Executive Vice President
of Ryland Acceptance  Corporation ("Ryland Acceptance") from November 1987 until
April 1992, and Executive Vice President,  and previously  Senior Vice President
of Ryland  Mortgage  Company  from April 1991 until April 1992.  Mr.  Potts also
served as President and Director of Mentor Income Fund,  Inc. from its inception
in December 1988 until June 1992.

     Paul S. Reid,  49, has been a Director of the Company  since  January 1988.
Mr. Reid is currently  the  Executive  Vice  President  of the Mortgage  Bankers
Association  of America.  From 1989 until 1997, Mr. Reid served as the President
and Chief Executive Officer of American Home Funding,  Inc., then a wholly-owned
subsidiary of Rochester Community Savings Bank, an FDIC insured institution.

     Donald B. Vaden, 63, has been a Director of the Company since January 1988.
In March 1995, Mr. Vaden resumed  practicing law  specializing  in mediation and
arbitration,  and is certified  for general and family  mediation by the Supreme
Court of Virginia.  He serves as a director of the Virginia  Mediation  Network,
Inc. He is the retired past  Chairman of  Residential  Home Funding  Corporation
where he served from December 1992 until February 1995.


Information Concerning the Board of Directors

     The members of the Audit Committee during 1997 were Mr. Davenport, Mr. Reid
and Mr. Vaden. The Audit Committee  reviews and approves the scope of the annual
audit undertaken by the Company's  independent  certified public accountants and
meets with them on a regular  basis to review the  progress and results of their
work as well as any  recommendations  they may make.  The Audit  Committee  held
three regular  meetings and one special  meeting in 1997. The Board of Directors
also had a  Compensation  Committee  during  1997  with the  members  being  Mr.
Davenport, Mr. Leone, Mr. Reid and Mr. Vaden. The Compensation Committee met two
times in 1997.  The Company  has no other  standing  committees  of the Board of
Directors.

     The Board of Directors held four regular  meetings and one special  meeting
in 1997.  During this  period,  each of the  Directors  attended at least 75% of
these meetings of the Board of Directors and the committees on which he served.

     The Directors who are not employed by the Company (the "Outside Directors")
receive  an annual fee of $25,000  per year,  plus $500 for each  meeting of the
Board of Directors,  or a committee  thereof,  they attend.  In addition,  these
Directors are  reimbursed for expenses  related to their  attendance at Board of
Directors and committee meetings.

     In 1995, the Company  adopted the 1995 Directors  Stock Incentive Plan (the
"Directors  Plan") pursuant to which Directors of the Company as of May 1, 1995,
who were not  employees  of the  Company or its  affiliates,  each  received  an
initial grant of 7,000 Stock Appreciation  Rights ("SARs").  Under the Directors
Plan, new Directors receive an initial grant of 5,000 SARs.  Subsequent to these
initial grants,  eligible  Directors are granted 1,000 SARs annually through May
1, 1998.  The  exercise  price of the SARs is equal to the  market  value of the
Company's  common stock on the date of each grant.  The SARs may be settled only
in cash.  As authorized  by the  Directors  Plan, on May 1, 1997,  each eligible
Director received a grant of 1,000 SARs.

                                                OWNERSHIP OF COMMON STOCK

     The table below sets forth,  as of December 31, 1997,  the number of shares
of common  stock  beneficially  owned by owners of more than five percent of the
Company's common stock outstanding, each Director of the Company, the President,
each of the other four  executive  officers  named in the  Summary  Compensation
Table under "Management of the Company",  and the number of shares  beneficially
owned  by all  of the  Company's  Directors  and  officers  as a  group.  To the
Company's  knowledge,  no other  person  beneficially  owns  more than 5% of the
outstanding  shares of common stock.  Unless  otherwise  indicated,  all persons
named as  beneficial  owners of common  stock  have sole  voting  power and sole
investment power with respect to the shares beneficially owned.
<TABLE>
<CAPTION>

            Name of                                            Amount and Nature of         Percent of
      Beneficial Owner                                          Beneficial Ownership     Common Stock
<S>                                                              <C>                      <C>    

      J. Sidney Davenport                                             106,894                    *
      Richard C. Leone                                                  3,200 (1)                *
      Thomas H. Potts                                               1,503,009 (2)               3.33%
      Paul S. Reid                                                      5,682                    *
      Donald B. Vaden                                                  28,853 (3)                *
      Lynn K. Geurin                                                   35,845 (4)                *
      William J. Moore                                                  2,000                    *
      William Robertson                                                 4,460 (5)                *
      William H. West, Jr.                                              4,250                    *
      Legg Mason (6)                                                2,514,817                   5.65%
 
      All Directors and executive officers as a group               1,694,193                   3.75%

- - --------------------------------------------------------------------------------------------------------------------------
<FN>
*     Less than 1% of the outstanding shares of common stock.

(1)  Includes 600 shares of common stock owned of record by such person's children.
(2)  Includes 25,314 shares of common stock owned of record by such person's children and spouse.
(3)   Includes 2,330 shares of common stock of record by such person's spouse.
(4)   Includes 2,000 shares of common stock of record by such person's spouse.
(5)   Includes 3,460 shares of common stock of record by such person's children and spouse.
(6)   Address:  100 Light Street,  Baltimore,  Maryland  21202.  Shares are held by Legg Mason Special  Investment  Trust,
     Inc. and Legg Mason Total Return Trust,  Inc., with Legg Mason Fund Adviser,  Inc.  having power to dispose  thereof;
     and by various clients of Legg Mason Capital  Management,  Inc., Legg Mason Trust Company and Legg Mason Wood Walker,
     Inc., each having power to dispose thereof.
- - --------------------------------------------------------------------------------------------------------------------------
</FN>
</TABLE>

<PAGE>


                                                MANAGEMENT OF THE COMPANY

     The executive officers of the Company and their positions are as follows:
         Name                    Age        Position(s) Held
         Thomas H. Potts          48        Director and President
         Lynn K. Geurin           41        Executive Vice President,
                                            Chief Financial Officer, Secretary
         William J. Moore         61        Executive Vice President
         William Robertson        53        Executive Vice President
         William H. West, Jr.     34        Executive Vice President

     The executive  officers serve at the  discretion of the Company's  Board of
Directors.  Biographical  information  regarding  Mr.  Potts is provided  above.
Information  regarding the other executive  officers of the Company is set forth
below:

     Lynn K. Geurin has served as Executive Vice  President and Chief  Financial
Officer of the Company since April 1992 and Secretary  since February 1995. From
December 1987 until April 1992,  Ms. Geurin served as Secretary and Treasurer of
the Company.  From September 1987 until June 1992, she also served as Controller
of Ryland  Acceptance and its  subsidiaries.  Ms. Geurin served as Secretary and
Treasurer of Mentor Income Fund, Inc. from December 1988 until June 1992.

     William J. Moore has served as Executive Vice  President,  Commercial  Real
Estate  Lending,  since September 1996. From January 1992 until August 1996, Mr.
Moore served as Chief Executive Officer for Multi-Family  Capital Markets,  Inc.
In  connection  with the  acquisition  by the  Company of  Multi-Family  Capital
Markets, Inc., in August 1996, Mr. Moore was elected an officer of the Company.

     William  Robertson  has served as Executive  Vice  President,  Manufactured
Housing  Lending,  since November  1995.  From 1993 until joining the Company in
1995,  Mr.  Robertson  served as Senior Vice  President for Household  Financial
Services.  From 1992 until 1993, Mr.  Robertson  served as Vice President of ITT
Consumer  Financial  Corporation.  From  1989  until  1992,  he  served  as Vice
President of Residential Mortgage Operations for Chemical Bank.

     William H. West,  Jr. has served as  Executive  Vice  President,  Portfolio
Management,  since July 1996. From October 1995 until June 1996, Mr. West served
as Managing Director and Co-Head of the Fixed Asset Income Investment department
at Mentor  Investment Group, a unit of Wheat First Union. From August 1993 until
October 1995, he served as Vice President/Portfolio Manager at Mentor Investment
Group.   From   December   1990   until   August   1993,   he   served  as  Vice
President/Portfolio Manager for Ryland Capital Management.

     In July 1995, the Securities and Exchange  Commission  ("SEC") approved the
settlement of its investigation with respect to a 1992 purchase of the Company's
common stock by the Company's  President,  Thomas H. Potts.  In connection  with
such  settlement,  the SEC filed a complaint in the United States District Court
for the District of Maryland, and Mr. Potts agreed to (i) entry of an injunction
permanently  enjoining him from  violating  Section 10(b) of the Act, (ii) pay a
civil  penalty,  and (iii)  disgorge  the implied  profit on the  purchase  plus
interest. The Company concurs with Mr. Potts' decision to settle this matter and
has full confidence in Mr. Potts.  Mr. Potts has been a consistent  purchaser of
the  Company's  stock  throughout  his tenure with the  Company,  has never sold
shares of the Company's  stock and made the April 1992  purchases as a long-term
investor.  The Company does not expect this settlement to have any impact on the
Company or the fulfillment of Mr. Potts' responsibilities as President.



Executive Compensation

     The Summary  Compensation  Table on the following page includes  individual
compensation  information  on the  President  and the  four  other  most  highly
compensated executive officers ("Named Officers") during 1997, 1996 and 1995.


<PAGE>

<TABLE>
<CAPTION>
                                               
                                         Summary Compensation Table
                                                                                   Long-Term
                                                                               Compensation Awards              All Other
                                                                        ----------------------------------
Name and                                  Annual Compensation (1)        Restricted Stock        SARs         Compensation
                                       -------------------------------
                                       -------------------------------
    Principal Position        Year      Salary ($)       Bonus ($)        Award (#) (2)         (#) (3)          ($) (4)
- - --------------------------   --------  --------------  ---------------  -------------------  -------------- ------------------
<S>                            <C>            <C>            <C>             <C>               <C>                 <C>


Thomas H. Potts              1997        $299,000         $228,000              -             58,040            $46,447
    President and            1996         293,333          220,000              -             58,036            257,648
Director
                             1995         270,003          182,700              -            100,000             33,894

Lynn K. Geurin               1997         156,667          104,810              -             19,340             30,500
    Executive Vice           1996         143,333          104,275           10,440           18,136             54,271
President
                             1995         126,667           85,118              -             29,020             20,521

William J. Moore (5)         1997         154,667          100,000              -             11,390             19,838
    Executive Vice           1996          50,000           33,333              -               -                 5,320
President

William Robertson (5)        1997         156,667           79,900              -             11,610             15,611
    Executive Vice           1996         145,000           71,688              -             10,882               -
President
                             1995          21,029           10,913              -               -                  -

William H. West, Jr. (5)     1997         141,667           58,269              -             10,520              7,340
    Executive Vice           1996          67,500           31,725              -              5,600               -
President

- - ----------------------------------------------------------------------------------------------------------------------------------
<FN>

1)       Does not include  perquisites  and other personal  benefits,  securities or property  where the aggregate  amount of such
compensation to an executive officer is the lesser of either $50,000 or 10% of annual salary and bonus.
2)       As of December 31, 1997, Ms. Geurin holds 10,440 shares of restricted stock valued at $138,330,  which have been adjusted
for the 2-for-1 stock split, effective May 1997.   As of December 31, 1997, two-thirds of the shares remain to be vested.
3)       Stock Appreciation Rights ("SARs").  Amounts for 1996 and 1995 have been adjusted for the 2-for-1 stock split,  effective
May 1997.
4)       Amounts for 1997 for Mr. Potts and Ms.  Geurin  consist of matching and profit  sharing  contributions  to the  Company's
Executive  Deferred  Compensation  Plan  ("EDC  Plan")  and the  Company's  401(k)  Plan in the  amount of  $45,548  and  $30,229,
respectively.  Amounts for 1997 for Mr. Potts and Ms.  Geurin also consist of Group Term Life  Insurance in the amount of $899 and
$271,  respectively.  Amounts  for 1997 for Mr.  Moore,  Mr.  Robertson  and Mr.  West  consist of  matching  and  profit  sharing
contributions  to the 401(k) Plan in the amount of $18,368,  $14,996 and  $7,237,  respectively.  Amounts for 1997 for Mr.  Moore,
Mr. Robertson and Mr. West also consist of Group Term Life Insurance in the amount of $1,470, $615 and $103, respectively.
5)       Compensation  for Mr. Moore,  Mr.  Robertson and Mr. West reflects salary from their dates of hire, which were August 31,
1996, November 6, 1995 and July 1, 1996, respectively.
</FN>
</TABLE>

                                  -------------------------------------------
                              Aggregated SAR Exercises In Last Fiscal Year
                                     And Year-End SAR Value Table

     The table below  presents the total  number of SARs (and  related  Dividend
Equivalent Rights ("DERs")  exercised by the Named Officers in 1997 and held by
the Named  Officers at December 31, 1997  (distinguishing  between SARs that are
exercisable as of December 31, 1997 and those that had not become exercisable as
of that date) and includes the aggregate amount by which the market value of the
SARs  (including  related DERs) exceeds the exercise price at December 31, 1997.
<TABLE>
<CAPTION>
                                                                                           Value of Unexercised
                                 SARs Exercised              Number of Unexercised                 in-the-money
                                   in 1997(1)                  SARs at  12-31-97              SARs at 12-31-97(1)(2) 
                        ----------------------------      -------------------------          --------------------- 
                        Number             Value
                       of SARs           Realized         Exercisable    Unexercisable     Exercisable   Unexercisable
                    --------------     --------------  --------------   ----------------  -------------  --------------
<S>                       <C>             <C>               <C>                <C>                <C>          <C>


Thomas H. Potts           90,000         $1,569,372         93,279           183,427         $554,959        $849,562

Lynn K. Geurin            15,000            479,221         48,185            57,061          421,512         253,828

William J. Moore               -               -              -               11,390             -              6,232

William Robertson              -               -             2,176            20,316           10,221          47,239

William H. West,               -               -             1,120            15,000            3,234          18,692
Jr.

<FN>

- - ----------------------------------------------------------------------------------------------------------------------------------
1)  Includes related DERs.
2)  Based on the closing price ($13.25) on the New York Stock Exchange ("NYSE") of the Company's common stock on that date.
- - ----------------------------------------------------------------------------------------------------------------------------------
</FN>
</TABLE>


<PAGE>

                                  SAR Grants In Last Fiscal Year

     The following  table  provides  information  related to SARs granted to the
Named Officers during fiscal 1997.

<TABLE>
<CAPTION>

                                             Individual Grants
                      -----------------------------------------------------------------
                                       Percentage of                                        Potential Realizable Value
                                        Total SARs                                           at Assumed Annual Rates
                       Number of        Granted to          Exercise                           of Stock Appreciation
                          SARs         Employees in          Price         Expiration            for SAR Term (1)
                                                                                           ------------------------------
Name                  Granted (2)       Fiscal 1997      ($ per share)        Date            5% ($)         10% ($)
- - ------------------    -------------   ----------------   ---------------   ------------    -------------  ---------------
<S>                         <C>              <C>                 <C>             <C>            <C>             <C>

Thomas H. Potts             58,040          29.71%           $13.750          2/2003         $315,803         $733,109

Lynn K. Geurin              19,340           9.90%            13.750          2/2003          105,232          244,285

William J. Moore            11,390           5.83%            13.750          2/2003           61,975          143,868

William Robertson           11,610           5.94%            13.750          2/2003           63,172          146,647
                       
William H. West,            10,520           5.39%            13.750          2/2003           57,241          132,879
Jr.

<FN>

1)       Excludes any value relative to the DERs  associated  with the SARs,  except for DERs accrued as of December 31, 1997.
However,  the SARs will continue to accrue DERs over the period until exercise or  expiration.  The number of DERs that accrue
on an SAR is based on the amount by which the  dividends  paid on common  stock during the accrual  period  exceed a benchmark
established  by the  Compensation  Committee  for such  period.  Each DER is  equivalent  to an  additional  SAR with the same
exercise  price as the SAR to which it is related.  As of December  31,  1997,  there were 41.30 DERs  accrued per 1,000 SARs.
Each such DER is  convertible  into one  additional SAR and had a value of $0.55 at December 31, 1997, and assuming 5% and 10%
annual  rates of stock  appreciation  for the SAR term from the SAR grant date,  each such DER would have a value of $5.44 and
$12.63, respectively.
2)       The SARs,  which were granted  under the  Company's  Incentive  Plan and have an exercise  price equal to the closing
price of the Company's  common stock on the NYSE on the date of grant,  become  exercisable in annual 20% increments  from the
date of  grant.

</FN>
</TABLE>



Employment Agreements

     Mr.  Potts has  entered  into an  employment  agreement  with the  Company,
effective  September  30, 1994.  The  employment  agreement  has a term of seven
years. Pursuant to his employment agreement, Mr. Potts agreed to devote his full
business  time and efforts to the business of the Company.  Mr. Potts  currently
receives a base  salary of  $300,000  per annum;  such base salary is subject to
normal periodic review at least annually by the Compensation  Committee based on
the salary policies of the Company and Mr. Potts'  contributions to the Company.
Mr. Potts is also entitled to receive incentive  compensation as approved by the
Compensation Committee.

     The employment agreement will terminate in the event of Mr. Potts' death or
total  disability,  may be  terminated  by the Company  with "cause" (as defined
therein)  or for any  reason  other than  cause,  and may be  terminated  by the
resignation  of Mr.  Potts.  If the  employment  agreement is  terminated by the
Company for any reason other than cause,  total  disability  or death,  then the
Company  shall pay to Mr. Potts his salary and benefits  through the  expiration
date. The employment  agreement contains certain covenants,  among other things,
by Mr.  Potts  requiring  him to maintain  the  confidentiality  of  information
relating to the Company and restricting his ability to compete with the Company.

     Mr. Moore entered into an employment agreement with the Company,  effective
as of August  31,  1996.  The  employment  agreement  has a term of five  years.
Pursuant  to his  employment  agreement,  Mr.  Moore  agreed to devote  his full
business  time and efforts to the business of the Company.  Mr. Moore  currently
receives a base  salary of  $157,000  per annum;  such base salary is subject to
normal periodic review at least annually by the Compensation  Committee based on
the salary policies of the Company and Mr. Moore's contributions to the Company.
Mr. Moore is also entitled to receive incentive  compensation as approved by the
Compensation Committee.

     The  employment  agreement will terminate in the event of Mr. Moore's death
or total  disability,  may be terminated by the Company with "cause" (as defined
therein)  or for any  reason  other than  cause,  and may be  terminated  by the
resignation  of Mr.  Moore.  If the  employment  agreement is  terminated by the
Company for any reason other than cause,  total  disability  or death,  then the
Company  shall pay to Mr.  Moore his salary  through the  expiration  date.  The
employment  agreement  contains certain  covenants,  among other things,  by Mr.
Moore requiring him to maintain the  confidentiality of information  relating to
the Company and restricting his ability to compete with the Company.

     The Company has no other employment agreements with its executive officers.

Compensation Committee Report

     The  Compensation  Committee of the Company's Board of Directors,  which is
comprised  exclusively  of  directors  who are  not  employees  of the  Company,
administers the Company's executive  compensation program. All issues pertaining
to  executive  compensation  are  reviewed  and  approved  by  the  Compensation
Committee.

     The  Compensation  Committee  believes that executive  compensation  should
reward  long-term  value  created for  stockholders  and  reflect  the  business
strategies  and  long-range  plans of the  Company.  The guiding  principles  in
regards  to  compensation  are  (i) to  attract  and  retain  key  high  caliber
executives,  (ii) to  provide  levels of  compensation  competitive  with  those
offered by the Company's  competitors,  (iii) to motivate  executives to enhance
long-term  stockholder  value by linking  stock  performance  (on a total return
basis) with  long-term  incentive  compensation,  and (iv) to design a long-term
compensation program that leads to management retention.

     Executive officer compensation is based on three principal components: base
salary,  annual  bonus,  and SARs (and related DERs) granted under the Company's
Incentive  Plan. The base salaries of executive  officers,  including Mr. Potts,
are determined annually by the Compensation  Committee.  Base salary is intended
to be set at a level  competitive  with the amounts  paid to the  management  of
companies with similar  business  structure,  size and marketplace  orientation,
with additional emphasis on professional experience.

     In accordance with the Company's  philosophy that the compensation  package
of the  executive  officers  be  directly  and  materially  linked to  operating
performance  and the  total  return of the  Company's  common  stock,  the bonus
component  of  annual  compensation  is  directly  tied  to the  achievement  of
pre-established  target earnings per share goals established by the Compensation
Committee.  In  addition,  the payment of a portion of the annual bonus for each
executive  officer,  except Mr.  Potts,  depends upon the  attainment of planned
objectives  established  at the  beginning  of the  year  specifically  for that
executive.  Whether  or not an  executive  officer  earns a bonus in any year is
determined  based upon the  achievement  of these  earnings  goals and  specific
objectives.  Partial  bonuses may be awarded for partial  completion  of planned
objectives and the  achievement of earnings above a minimum level but lower than
the  target.  For  executive  officers,  the maximum  percentage  of base salary
payable as bonus ranges from 50% to 75%. Mr.  Potts'  maximum  potential  bonus,
which is based  solely on  earnings  per share  targets  pre-established  by the
Compensation  Committee,  is 75% of base  salary.  Mr.  Potts'  compensation  is
heavily weighted toward attainment of long-term value through the Incentive Plan
awards.  Each year the President  establishes  bonus  programs for all executive
officers (other than himself) in the first quarter.  The Compensation  Committee
reviews and approves the plans at their annual  Compensation  Committee meeting.
In 1997,  partial  bonuses were paid in respect of  achievement  of earnings per
share goals above the minimum level but below the target and for full or partial
attainment of planned objectives.

     The  Company  also  uses  SARs and  related  DERs to align  the  long-range
interest of its  executive  officers  with the  interests of  stockholders.  The
amount of SARs that are  granted to  executive  officers  is  determined  by the
Compensation  Committee,  taking into  consideration the officer's position with
the Company,  overall individual  performance,  and an estimate of the long-term
value of the SARs and  related  DERs in  light  of the  officer's  current  base
salary. The Compensation  Committee applies its collective judgment to determine
the grants  appropriate  under the Incentive  Plan,  with emphasis placed on the
anticipated  long-term value of the award  considering  current base salary.  As
noted above, a larger percentage of Mr. Potts' overall  compensation  package is
comprised  of  grants  of SARs and  related  DERs  reflecting  the  Compensation
Committee's  view that  compensation  for the President should depend heavily on
the long-term total return performance of the Company's common stock.

     Section 162(m) of the Internal  Revenue Code ("Code") limits  deductibility
of  compensation  for  the  Chief  Executive  Officer  and the  additional  four
executive  officers  who are the most highly paid and employed at year end to $1
million per year per  individual,  effective for tax years beginning on or after
January 1,  1994.  If  certain  conditions  are met,  some  compensation  may be
excluded  from  consideration  in computing  the $1 million  limit.  One of such
conditions is that a committee composed solely of "outside" directors as defined
in the Code be  appointed  to  consider  and  approve  compensation  intended to
qualify for exclusion from the $1 million  limit.  Therefore,  the  Compensation
Committee has  established a subcommittee  satisfying  these  requirements.  The
Compensation  Committee will review and may ratify the  recommendations  of such
subcommittee.  Mr. Potts received  compensation in excess of $1 million in 1997,
which was fully deductible by the Company.  To date, no other executive  officer
has received  compensation  in excess of $1 million per year.  The policy of the
Compensation  Committee  relative to this  provision of the Code is to establish
and maintain a  compensation  program which  maximizes the creation of long-term
stockholder value.

     The  Company's  Incentive  Plan and the  Company's  Bonus Plan  provide for
certain  executive  officers and key employees to meet the conditions  necessary
for compensation paid pursuant to those plans to be excluded from  consideration
in  computing  the $1  million  limit.  It  must be  noted,  however,  that  the
Compensation   Committee  is  obligated  to  the  Board  of  Directors  and  the
stockholders of the Company to recognize and reward  performance which increases
the value of the Company.  Accordingly, the Compensation Committee will continue
to exercise  discretion  in those  instances  where the  mechanistic  approaches
necessary  under  tax law  considerations  would  compromise  the  interests  of
stockholders.

                                                Richard C. Leone, Chairman
                                                J. Sidney Davenport
                                                Paul S. Reid
                                                Donald B. Vaden

Compensation Committee Interlocks and Insider Participation

     The members of the Compensation  Committee during 1997 were Mr.  Davenport,
Mr. Leone, Mr. Reid, and Mr. Vaden.

     Mr.  Davenport  served as an executive  officer of Ryland Mortgage  Company
("Ryland")  until January 1998.  During 1997,  the Company  acquired model homes
from Ryland for an aggregate purchase price of $11,350,125.

     Mr. Reid served as an  executive  officer of American  Home  Funding,  Inc.
("AHF") until October 1997.  During 1997, the Company  acquired  mortgage-backed
pass-through   securities   from  AHF  for  an  aggregate   purchase   price  of
approximately  $12,982,177,  the estimated fair value of such  securities at the
date of purchase.  The Company may continue to purchase similar  securities from
AHF in the future.


16(a)  Beneficial Ownership Reporting Compliance

     Form 4s involving two  transactions for the purchase of 2,000 shares of the
Company's  common  stock by Ms.  Geurin's  spouse  during 1994 and 1995 and, one
transaction  for the purchase of 1,600 shares of the  Company's  common stock by
Ms. Geurin during 1993, were inadvertently not filed.

     Form 4s involving two  transactions for the purchase of 2,000 shares of the
Company's common stock by Mr. Moore during 1997 were inadvertently not filed.


<PAGE>

Total Return Comparison

     The following graph demonstrates a five year comparison of cumulative total
returns for Dynex Capital,  Inc.  ("DX"),  the Standard & Poor's 500 Stock Index
("S&P 500"),  and the Value Line, Inc. Real Estate  Investment  Trust Index (the
"Peer Group"). The table below assumes $100 was invested at the close of trading
on December 31, 1997 in DX common stock, S&P 500, and Peer Group.


                         Comparative Five-Year Total Returns *
                               DX, S&P 500, Peer Group
                    (Performance Results through December 31, 1997)


                                                     [OBJECT OMITTED]

<TABLE>
<CAPTION>

 
                       1992           1993           1994          1995           1996           1997
 ----------------- ------------- -------------- ------------- -------------- -------------- --------------
<S>                       <C>            <C>            <C>          <C>         <C>            <C>
      
DX                  $ 100.00         157.05         66.60         137.07         221.10         224.66
- - ----------------- ------------- -------------- ------------- -------------- -------------- --------------
  
S&P 500             $ 100.00         110.09         111.85        153.80         189.56         252.82
- - ----------------- ------------- -------------- ------------- -------------- -------------- --------------
  
Peer Group          $ 100.00         108.55         117.95        136.48         186.65         219.11
- - ----------------- ------------- -------------- ------------- -------------- -------------- --------------

<FN>

* Cumulative  total return assumes  reinvestment  of dividends.  The source of this  information  is Value Line,  Inc. The
factual  material is obtained  from  sources  believed to be reliable,  but Value Line,  Inc. is not  responsible  for any
errors or omissions contained herein.

</FN>
</TABLE>


                   AMENDMENT TO ARTICLES OF INCORPORATION

     The Board of Directors,  at a special meeting,  has advised and approved an
amendment to the Company's  Articles of Incorporation in substantially  the form
set forth below.

    "Resolved,  that the  Company's  Articles  of  Incorporation  be amended by
deleting paragraph (7) of Article VI in its entirety and substituting  therefor:
"(7) Application of Article.  Nothing  contained in this Article or in any other
provision hereof shall limit the authority of the Board of Directors to take any
and all other action as it in its sole  discretion  deems necessary or advisable
to protect the Corporation and the interests of its  shareholders by maintaining
the Corporation's eligibility to be, and preserving the Corporation's status as,
a qualified real estate investment trust under the Code; provided, however, that
nothing  in this  Article  VI or  elsewhere  in these  Articles  shall  preclude
settlement of any transaction  entered into or through the facilities of the New
York Stock  Exchange  or any other  exchange on which the  Corporation's  common
shares may be listed from time to time."

     The Board  unanimously  recommends to the stockholders that the Articles of
Incorporation  be amended,  as set forth above.  The New York Stock Exchange has
requested  that the  Company  amend its  Articles of  Incorporation  as provided
herein.

     If the amendment to the Company's  Articles of Incorporation is approved by
the  stockholders,  the cost to the  Company  to effect  this  amendment  is not
expected to be significant.

     The  Board  recommends  a vote  FOR the  proposal  to amend  the  Company's
Articles of Incorporation.


                      APPOINTMENT OF AUDITORS

     For the year  ending  December  31,  1997,  KPMG Peat  Marwick  LLP  ("Peat
Marwick"),  independent  certified  public  accountants,  examined the financial
statements of the Company.  The Company's Audit Committee and Board of Directors
have  determined  that  sound  business  practice  suggests  that  it  would  be
appropriate to consider periodically whether the Company would be able to reduce
its overall  accounting costs, while maintaining or enhancing the efficiency and
effectiveness  of the audit  process,  by seeking  competitive  proposals on its
accounting  work. After reviewing any proposals  received,  including a proposal
from Peat Marwick,  the Audit Committee will make a recommendation  to the Board
of Directors,  on the  appointment of an independent  public  accountant for the
year ending December 31, 1998.

     During  1997,  there were no  disagreements  between  the  Company and Peat
Marwick on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures. A representative of Peat Marwick is
expected  to be present  at the  Annual  Meeting  and will be  provided  with an
opportunity  to make a statement and to respond to  appropriate  questions  from
stockholders.

 
                  VOTES REQUIRED TO ADOPT RESOLUTIONS

     The  election  of  Directors  requires  a  plurality  of votes  cast at the
meeting.  The  approval  of the  proposal  to amend the  Company's  Articles  of
Incorporation  requires the affirmative vote of the holders of a majority of the
outstanding shares of common stock of the Company.

     The  following  principles of Virginia law apply to the voting of shares of
common stock at the meeting.  The presence in person or by proxy of stockholders
entitled  to vote a  majority  of the  outstanding  shares of common  stock will
constitute a quorum.  Shares  represented  by proxy or in person at the meeting,
including  shares  represented  by proxies  that  reflect  abstentions,  will be
counted as present in the  determination  of a quorum.  An  abstention as to any
particular matter,  however,  does not constitute a vote "for" or "against" such
matter except that an abstention  will have the same effect as a vote  "against"
the  proposal  to  amend  the  Company's  Articles  of  Incorporation.   "Broker
non-votes"  (i.e.,  where a  broker  or  nominee  submits  a proxy  specifically
indicating  the lack of  discretionary  authority  to vote on a matter)  will be
treated in the same manner as abstentions.

                              OTHER MATTERS

     The  management  and the Board of Directors of the Company know of no other
matters to come before the Annual  Meeting other than those stated in the notice
of the meeting.  However,  if any other  matters are  properly  presented to the
stockholders  for action,  it is the intention of the proxy holders named in the
enclosed  proxy to vote in their  discretion  on all matters on which the shares
represented by such proxy are entitled to vote.

                           STOCKHOLDER PROPOSALS

     Any proposal  which a stockholder  may desire to present to the 1999 Annual
Meeting of  Stockholders  must be  received in writing by the  Secretary  of the
Company prior to November 15, 1998.
 
                               By the order of the Board of Directors



                               Thomas H. Potts
                               President

March 26, 1998



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