Form of Stock Appreciation Rights Agreement


    
      
        	
                 Exhibit
                  10.3

              
	 	 


      

    

     

    DYNEX
      CAPITAL, INC.

    2004
      STOCK INCENTIVE PLAN

    


    STOCK
      APPRECIATION RIGHTS AGREEMENT

    


    


    THIS
      AGREEMENT, dated this 2nd
      day of
      January, 2005 between DYNEX CAPITAL, INC. (the “Corporation”), and ___________
      (the “Recipient”).

    


    WHEREAS,
      pursuant to the DYNEX CAPITAL, INC. 2004 Stock Incentive Plan (the “Plan”), the
      Committee wishes to award the Recipient for contributions to the achievement
      of
      specified objectives and results for the Corporation during the year ended
      December 31, 2004, and also wishes to enable the Recipient to participate
      in its future success and to associate their interests with those of the
      Corporation and its shareholders; and

    


    WHEREAS,
      the Recipient desires to accept said award in accordance with the terms and
      provisions of the Plan and this Agreement.

    


    NOW
      THEREFORE, in consideration of the premises and of the mutual covenants and
      agreements hereinafter set forth, the Corporation and the Recipient agree as
      follows:

    


    
      	
              1.

            	
              Grant
                of SAR.

            


    

    


    Subject
      to the terms and conditions of the Plan and subject further to the terms and
      conditions set forth herein, the Corporation hereby awards to the Recipient
      on
      January 3, 2005 (“Date of Grant”) SARs with respect to ________ shares of Common
      Stock with an Initial Value of $7.81 per share which is the Fair Market Value
      of
      Common Stock on the Date of Grant. These SARs will be exercisable as hereafter
      provided. Capitalized terms not otherwise defined herein have the meanings
      given
      to them in the Plan.

    


    
      	
              2.

            	
              Exercise
                of SARs.

            


    

    


    (a) Except
      as
      provided in subsections (b), (c) and (d) below, the SARs awarded in this
      Agreement may be exercised in whole or in part in accordance with the following
      schedule:

    


    (i) The
      first
      installment for ________ SARs may be exercised in whole or in part beginning
      January 3, 2006;

    


    (ii) The
      second installment for ________ SARs may be exercised in whole or in part
      beginning January 3, 2007;

    


    (iii) The
      third
      installment for ________ SARs may be exercised in whole or in part beginning
      January 3, 2008; and

    


    (iv) The
      fourth installment for ________ SARs may be exercised in whole or in part
      beginning January 3, 2009.


    
      
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    To
      the
      extent not exercised, installments shall accumulate and be exercisable by the
      Recipient until termination under section 6 below.

    


    (b) The
      Compensation Committee may in its discretion accelerate the time at which the
      SARs may be exercised.

    


    (c) Notwithstanding
      the foregoing, the SARs awarded by this Agreement shall immediately be fully
      exercisable upon a Change of Control of the Corporation and the Corporation
      may
      make a cash payment in settlement of such SARs within ten (10) business days
      following the Control Change Date based on the Fair Market Value of the Common
      Stock on the Control Change Date.

    


    (d) In
      addition, upon Retirement (as defined in section 6 below), the Recipient will
      become vested in the SARs in accordance with the following schedule to the
      extent such SARs are not fully vested in accordance with (a) above.

    
      	
               

              Years
                of Service

              With
                the Corporation

            	
              Vesting

              Percentage

            
	
              5
                or more

            	
              100%

            
	
              4

            	
              80%

            
	
              3

            	
              60%

            
	
              2

            	
              40%

            
	
              1

            	
              20%

            


    

    
      	
              3.

            	
              Method
                of Exercising SARs.

            


    

    


    The
      SARs
      shall be exercised by delivery of a written Notice of Exercise stating the
      number of SARs the Recipient desires to exercise. The form of Notice of Exercise
      is attached to this Agreement as Exhibit A. The exercise date shall be the
      later
      of the date specified in the Notice of Exercise or the date such notice is
      received by the Corporation. Notices should be delivered to Dynex Capital,
      Inc.,
      at its Corporate headquarters, Attention: Chief Financial Officer.

    


    
      	
              4.

            	
              Payment
                to Recipient.

            


    

    The
      payment to Recipient upon the exercise of the SARs shall be made solely in
      cash.
      Upon the exercise of the SARs, the Recipient shall receive a cash payment from
      the Corporation which is equal to (i) the excess of the Fair Market Value of
      a
      share of Common Stock on the date of exercise over the Initial Value times
      (ii)
      the number of SARs exercised.

    
      	
              5.

            	
              Certain
                Tax Matters.

            


    

    Unless
      the Recipient pays to the Corporation in cash the withholding for any federal,
      state, or local taxes on the income realized from the exercise of the SAR prior
      to or at the time of exercise, the Corporation shall withhold from the cash
      payment the amount of taxes to be withheld by the Corporation.


    
      
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              6.

            	
              Termination.

            


    

    


    The
      SARs
      granted pursuant to this Agreement shall terminate upon the earliest of the
      following events:

    


    (a) December
      31, 2011.

    


    (b) The
      expiration of ninety (90) days after the date of termination of the Recipient’s
      employment, other than termination of employment on account of death, disability
      or Retirement. During this period, the Recipient shall have the right to
      exercise the SARs to the extent it is exercisable on the Recipient’s termination
      of employment.

    


    (c) The
      expiration of twelve (12) months after the date of death of the Recipient if
      death occurs while the Recipient is in the employ of the Corporation. During
      this period, the Recipient’s estate, personal representative or beneficiary
      shall have the right to exercise the SARs to the extent it is exercisable on
      the
      date of Recipient’s death.

    


    (d) The
      expiration of twelve (12) months after the date the Recipient’s employment is
      terminated due to disability. During this period, the Recipient shall have
      the
      right to exercise the SARs to the extent it is exercisable on the date of
      termination due to disability.

    


    (e) The
      expiration of twelve (12) months after the date of the Recipient’s Retirement.
      During this period, the Recipient shall have the right to exercise the SARs
      to
      the extent it is exercisable on the date of Retirement.

    


    For
      purposes of this Agreement, Retirement means termination of his employment
      with
      the Corporation on or after age 62. 

    


    The
      Board
      or the Committee shall have absolute discretion to determine whether any
      termination of Recipient’s employment or authorized leave of absence or absence
      due to military or government service is to be considered as Retirement for
      purposes of this Agreement and whether an authorized leave of absence or absence
      due to military or government service shall constitute a termination of
      employment for the purposes of this Agreement. Any determination made by the
      Board or the Committee with respect to any matter referred to in this paragraph
      6 shall be final and conclusive.

    


    
      	
              7.

            	
              Nontransferability.

            


    

    


    The
      SARs
      granted under this Agreement shall be nontransferable except by will or the
      laws
      of descent and distribution. The SARs are exercisable during the Recipient’s
      lifetime only by the Recipient.

    


    
      	
              8.

            	
              Rights
                as a Shareholder.

            


    


    
      
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    The
      Recipient shall have no rights as a shareholder with respect to any Common
      Stock
      covered by the SARs prior to the exercise of the SAR.

    


    
      	
              9.

            	
              Recapitalization.

            


    

    


    If
      the
      Corporation shall effect a subdivision or consolidation of shares of Common
      Stock, or other capital readjustment, or the payment of a stock dividend, or
      other increase or decrease in the number of shares of Common Stock outstanding,
      without receiving compensation therefore, then (a) in the event of any increase
      in the number of shares of Common Stock outstanding, the number of SARs on
      Common Stock then remaining hereunder shall be proportionately increased (except
      that any fractional share resulting from any such adjustment shall be excluded
      from the operation of this Agreement), and the cash consideration payable per
      share shall be proportionately reduced) but not below the par value of such
      share), and (b) in the event of a reduction in the number of shares of Common
      Stock outstanding, the number of SARs on Common Stock then remaining hereunder
      shall be proportionately reduced (except that any fractional share resulting
      from any such adjustments shall be excluded from the operation of this
      Agreement), and the cash consideration payable per share shall be
      proportionately increased.

    


    
      	
              10.

            	
               Merger,
                Consolidation or Share Exchange.

            


    

    


    After
      any
      merger, consolidation or share exchange in which the Corporation is the
      surviving or resulting corporation, the Recipient shall be entitled, upon the
      exercise of a SAR, to receive the consideration to which the Recipient would
      have been entitled, if, immediately prior to such merger, consolidation or
      share
      exchange, the Recipient had been the holder of record of a number of shares
      of
      Common Stock equal to the number of SARs exercised. If the Corporation is not
      the surviving or resulting corporation in any merger, consolidation or share
      exchange, the surviving or resulting corporation shall tender SARs on terms
      and
      conditions that substantially preserve the rights and benefits under this
      Agreement.

    


    
      	
              11.

            	
               Certain
                Restrictions.

            


    

    


    (a) It
      is
      understood and recognized by the Recipient and the Corporation that the vendors,
      customers, employees, consultants, and agents are an integral part of the
      Corporation’s business. The Recipient and the Corporation also recognize that an
      important part of the Recipient’s duties with the Corporation will be the
      Recipient’s dealings with customers, vendors and others (including other
      employees) having business relationships with the Corporation and its
      affiliates. It is therefore understood and agreed by the parties that because
      of
      the nature of the Corporation’s business it is necessary to afford maximum
      protection to the Corporation from the loss of any such entities or individuals.
      Consequently, as a material inducement to and as consideration for the
      Corporation’s grant of the SARs hereunder to the Recipient, the Recipient
      covenants and agrees that unless the Recipient’s employment is terminated
      without Cause as hereinafter defined, at all times during the Recipient’s
      employment with the Corporation or any of its affiliates (the “Employment
      Period”) and, in the case of actions specified in (ii), (iii), and (iv) below,
      for a period of one year after the termination of the Recipient’s employment for
      whatever reason, the Recipient shall not, in any capacity whatsoever, whether
      directly or


    
      
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    indirectly,
      through any entity, family member or otherwise, on his own behalf, or on behalf
      of any other person, firm, partnership, corporation, limited liability company,
      association or other entity (collectively, “Person”):

    


    (i) own,
      manage, invest, participate or engage in any activity which compromises or
      is
      similar to the Corporation’s business activities anywhere in the United States,
      unless (a) the ownership is less than 1% of a publicly traded entity with a
      market value in excess of $100 million, or (b) specifically approved in writing
      by the President or Chairman of the Board;

    


    (ii) suggest
      to, solicit, induce or persuade any vendor or customer of the Corporation or
      its
      affiliates to discontinue doing business with, or to change the terms or
      conditions of such relationship with the Corporation or its affiliates, or
      otherwise disparage, disrupt or disturb the relationship of the Corporation
      or
      its affiliates with such vendor or customer;

    


    (iii) suggest
      to, solicit, induce or persuade any vendor or customer of the Corporation or
      its
      affiliates to do business with any other Person which conducts or is planning
      to
      conduct a business that is in competition with or similar to the Corporation’s
      business activities; provided
      however, the
      foregoing will not apply after the Employment Period (a) to any customer that
      represents less than 2% of the Corporation’s volume in that particular line of
      business over the prior twelve month period, or (b) to any vendor whose products
      or services are already used widely in that particular business area by other
      Persons;

    


    (iv) suggest
      to, solicit, induce or persuade any employee or consultant of the Corporation
      or
      its affiliates to leave the employ or engagement of the Corporation or its
      affiliates or hire any employee of the Corporation or its affiliates;
      and

    


    (v) participate
      in planning for or consult with any business that is or would be in competition
      with or similar to any business of the Corporation or its
      affiliates.

    


    (b) The
      Recipient further covenants and agrees that for a period of one year after
      the
      Employment Period, the Recipient shall not seek employment with or be employed
      by any former employee of the Corporation who terminated employment with the
      Corporation within one year of the end of the Recipient’s Employment Period, in
      any capacity whatsoever, whether directly or indirectly, through any Person
      if
      the Recipient and the former employee of the Corporation are employed in the
      same business activity as they were when they were employees of the
      Corporation.

    


    (c) Reasonableness
      of Restrictions.
      Recipient has carefully read and considered the provisions of this Section
      11
      and having done so agrees that the restrictions set forth in this section are
      fair and reasonable and are reasonably required for the protection of the
      Corporation and its business. Notwithstanding anything to the contrary in this
      Section 11, the restrictions set forth in this section shall not apply after
      the
      Employment Period if the Corporation is not actively engaged in the business
      activity in which the Recipient was engaged by the Corporation.


    
      
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    (d) Invalidity,
      Etc.
      If any
      covenant or provision contained in any part of Section 11(a) and/or 11 (b)
      hereof is found by a court having jurisdiction to be unreasonable in duration,
      geographic scope or charter of restrictions, the covenant or provision shall
      not
      be rendered unenforceable thereby, but rather the duration, geographical scope
      or character of restriction, the covenant or provision shall be deemed reduced
      or modified with retroactive effect to render such covenant or provision
      reasonable and such covenant or provision shall be enforced as modified. lithe
      court having jurisdiction will not review the covenant or provision, the parties
      shall mutually agree to a revision having an effect as close as permitted by
      law
      to the provision declared unenforceable. The Recipient agrees that if a court
      having jurisdiction determines, despite the express intent of the Recipient,
      that any portion of the restrictive covenants contained in Section 11 (a) and/or
      11 (b) hereof are unenforceable, the remaining provisions shall be valid and
      enforceable.

    


    (e) Equitable
      Relief.
      The
      Recipient recognizes and acknowledges that if he breaches the provisions of
      Section 11 (a), damages to the Corporation would be difficult if not impossible
      to ascertain, and because of the immediate and irreparable damage and loss
      that
      may have been caused to the Corporation for which it would have no adequate
      remedy, it is therefore agreed that the Corporation, in addition to and without
      limiting any other remedy or right it may have, shall be entitled to have an
      injunction or other equitable relief in a court of competent jurisdiction,
      enjoining any such breach, and the Recipient hereby waives any and all defenses
      he may have on the grounds of competence of a court to grant such an injunction
      or other equitable relief. The existence of this right shall not preclude the
      applicability or exercise of any other rights and remedies at law or in equity
      which the Corporation may have.

    


    (f) Definition
      of “Cause”.
      When
      used in this Section 11, the word “Cause” shall mean any of the
      following:

    


    (i) the
      willful and continued failure of the Recipient to perform substantially the
      Recipient’s duties with the Corporation (other than any such failure resulting
      from incapacity due to physical or mental illness), if, within 30 days of
      receiving a written demand for substantial performance from the Board or the
      President of the Corporation which specifically identifies the manner in which
      the Recipient has not substantially performed his duties, the Recipient shall
      have failed to cure such performance or to take measures
      to cure the performance,
      or

    


    (ii) the
      willful engaging by the Recipient in illegal conduct or gross misconduct which
      is materially and demonstrably injurious to the Corporation.

    


    For
      purposes of this provision, no act or failure to act, on the part of the
      Recipient, shall be considered “willful” unless it is done, or omitted to be
      done, by the Recipient in bad faith or without reasonable belief that the
      Recipient’s action or omission was in the best interests of the Corporation. Any
      act, or failure to act, based upon authority given pursuant to a resolution
      duly
      adopted by the Board or a committee thereof, or based upon the advice of counsel
      for the Corporation shall be conclusively presumed to be done, or omitted to
      be
      done, by the Recipient in good faith and in the best interests of the
      Corporation. The cessation of employment of the


    
      
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    Recipient
      shall not be deemed to be for Cause unless and until there shall have been
      delivered to the Recipient a copy of a resolution duly adopted by the
      affirmative vote of not less than three-quarters of the entire membership of
      the
      Board at a meeting of the Board called and held for such purpose (after
      reasonable notice is provided to the Recipient and the Recipient is given an
      opportunity, together with counsel, to be heard before the Board), finding
      that,
      in the good faith opinion of the Board, the Recipient is guilty of the conduct
      described in subparagraph (i) or (ii) above, and specifying the particulars
      thereof in detail.

    


    
      	
              12.

            	
               No
                Rights to Continued Employment.

            


    

    


    Nothing
      in this Agreement or in the Plan shall confer any right to continued employment
      with the Corporation or its subsidiaries nor restrict the termination of the
      employment relationship with the Recipient at any time.

    


    
      	
              13.

            	
               Recipient’s
                Agreement.

            


    

    


    Notwithstanding
      any other provision of this Agreement, Recipient agrees that Recipient will
      not
      exercise any SAR and the Corporation shall not be obligated to make any payment
      in the form of Common Stock, if counsel to the Corporation determines such
      exercise or payment would violate any law or regulation of any governmental
      authority or agreement between the Corporation and any securities exchange
      upon
      which the Common Stock is listed.

    


    
      	
              14.

            	
               Other.

            


    

    


    This
      Agreement does not amend or supersede the provisions of any other written
      employment agreement between the Corporation, including its affiliates, and
      the
      Recipient. In the event that any term or provision of this Agreement conflicts
      with such other employment contract, the terms and provisions of the employment
      contract shall control, as long as such employment contract is in
      effect.

    


    
      	
              15.

            	
               Resolution
                of Disputes.

            


    

    


    Any
      dispute or disagreement which shall arise under, or as a result of, or pursuant
      to, this Agreement other than for any dispute or disagreement relating to
      Section 11 shall be determined by the Board or the Committee in its absolute
      discretion, and any determination by the Board or the Committee under or
      pursuant to this Agreement and any interpretation by the Board of Directors
      or
      the Committee of the terms of this Agreement shall be final, binding and
      conclusive on all persons affected thereby.

    


    
      	
              16.

            	
               Amendments.

            


    

    


    The
      Committee shall have the right, in its absolute discretion, to alter or amend
      this Agreement in any manner, and any alteration or amendment of the Agreement
      by the Committee shall, upon adoption thereof by the Committee, become and
      be
      binding and conclusive on all persons affected thereby without written notice
      to
      the Recipient of any alteration or amendment of this Agreement by the Committee
      as promptly as practical after the adoption thereof.


    
      
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    Notwithstanding
      the foregoing provisions of this paragraph 16, no alteration or amendment of
      this Agreement shall be made that would adversely affect the rights of the
      Recipient without the Recipient’s consent.

    


    
      	
              17.

            	
               Construction.

            


    

    


    This
      Agreement has been entered into in accordance with the terms of the Plan, and
      wherever a conflict may arise between the terms of this Agreement and the terms
      of the Plan, the terms of the Plan shall control.

    


    
      	
              18.

            	
               Governing
                Law.

            


    

    This
      Agreement shall be governed by and construed and enforced in accordance with
      the
      laws of the Commonwealth of Virginia.

    


    IN
      WITNESS WHEREOF,
      the
      Corporation has caused this Agreement to be executed by its duly authorized
      officer, and the Recipient has hereunto set his hand and seal, all on the day
      and year first above written.

    


    DYNEX
      CAPITAL, INC.

    


    


    By:
      

    THE
      RECIPIENT

    


    


    Date:
      

    



    
      
        
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    DYNEX
      CAPITAL, INC.

    2004
      Stock Incentive Plan

    


    STOCK
      APPRECIATION RIGHTS

    NOTICE
      OF EXERCISE

    


    


    


    


    


    


    Chief
      Financial Officer

    Dynex
      Capital, Inc.

    4551
      Cox
      Road

    Suite
      300

    Glen
      Allen, Virginia 23060

    Phone:
      (804) 217-5800

    Telecopy:
      (804) 217-5860

    


    I
      hereby
      exercise ________ vested SARs pursuant to the SAR Agreement dated _____, ____,
      at an exercise price of $____ per share.

    


    Dated:
      

    Recipient’s
      Signature

    


    


    


    Recipient’s
      Name