Form: DEF 14A

Definitive proxy statements

April 1, 1998

DEF 14A: Definitive proxy statements

Published on April 1, 1998



Dynex Capital, Inc.

Notice of Annual Meeting of Stockholders
and
Proxy Statement






Annual Meeting of Stockholders
May 19, 1998



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



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


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.



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.




Name of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership Common Stock


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%

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

* 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.
- - --------------------------------------------------------------------------------------------------------------------------





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.






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)
- - -------------------------- -------- -------------- --------------- ------------------- -------------- ------------------



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

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


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.



-------------------------------------------
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.


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



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.



- - ----------------------------------------------------------------------------------------------------------------------------------
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.
- - ----------------------------------------------------------------------------------------------------------------------------------





SAR Grants In Last Fiscal Year

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




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% ($) 10% ($)
- - ------------------ ------------- ---------------- --------------- ------------ ------------- ---------------


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.



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.






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.



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]





1992 1993 1994 1995 1996 1997
----------------- ------------- -------------- ------------- -------------- -------------- --------------


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



* 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.





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