================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

         |X|      Quarterly Report Pursuant to Section 13 or 15(d) of
                  the Securities Exchange Act of 1934

                      For the quarter ended March 31, 1999

         |_|      Transition Report Pursuant to Section 13 or 15(d) of
                  the Securities Exchange Act of 1934

                         Commission file number 33-83524


                          MERIT SECURITIES CORPORATION
             (Exact name of registrant as specified in its charter)

          Virginia                                        54-1736551
(State or other jurisdiction                            (I.R.S. Employer 
      of incorporation)                                Identification No.)
 
10900 Nuckols Road, 3rd Floor, Glen Allen, Virginia               23060
    (Address of principal executive offices)                   (Zip Code)

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

Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past ninety days. |X| Yes |_| No

As of April 30, 1999, the latest  practicable date, there were 1,000 shares
of Merit Securities Corporation common stock outstanding.

The  registrant  meets the  conditions  set forth in  General  Instructions
H(1)(a)  and (b) of Form 10-Q and is  therefore  filing  this Form 10-Q with the
reduced disclosure format.

===============================================================================
<PAGE>


                          MERIT SECURITIES CORPORATION
                                    FORM 10-Q
                                      INDEX


<TABLE>
<CAPTION>
                                                                                     Page Number
PART I.           FINANCIAL INFORMATION
<S>                       <C>                                                          <C>  
 
Item 1.           Financial Statements
                      Balance Sheets at March 31, 1999 and
                      December 31, 1998                                                  3

                      Statements of Operations for the three months
                      ended March 31, 1999 and 1998                                      4

                      Statement of Shareholder's Equity for the three months
                      ended March 31, 1999                                               5

                      Statements of Cash Flows for the three months ended
                      March 31, 1999 and 1998                                            6

                      Notes to Unaudited Financial Statements                            7

Item 2.           Management's Discussion and Analysis of
                      Financial Condition and Results of Operations                      9

Item 3.           Quantitative and Qualitative Disclosures about Market Risk             13

PART II.          OTHER INFORMATION

Item 1.           Legal Proceedings                                                      15

Item 5.           Other Information                                                      15

Item 6.           Exhibits and Reports on Form 8-K                                       15

SIGNATURES                                                                               18
</TABLE>

<PAGE>

PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements

MERIT SECURITIES CORPORATION
Balance Sheets
(amounts in thousands except share data)
<TABLE>
<CAPTION>

                                                                     March 31,           December 31,
                                                                      1999                   1998
                                                                ------------------     ------------------
<S>                                                                    <C>                    <C>

ASSETS:
   Collateral for collateralized bonds                           $    3,277,519         $    3,350,344
   Due from affiliates, net                                              16,207                  5,611
   Prepaid shelf registration fees                                          313                    406
   Cash                                                                      10                     10
                                                                ==================     ==================
                                                                 $    3,294,049         $    3,356,371
                                                                ==================     ==================

LIABILITIES AND SHAREHOLDER'S EQUITY

LIABILITIES:
   Non-recourse debt - collateralized bonds                      $    3,049,988         $    3,153,060

SHAREHOLDER'S EQUITY:
   Common stock, no par value, $1 stated value
      10,000 shares authorized,
      1,000 shares issued and outstanding                                    10                     10
   Additional paid-in capital                                           193,411                190,156
   Accumulated other comprehensive income                                40,186                 33,575
   Retained earnings (accumulated deficit)                               10,454                (20,430)
                                                                                          ---------------
                                                                ------------------     ---
                                                                        244,061                203,311
                                                                ==================     ==================
                                                                 $    3,294,049         $    3,356,371
                                                                ==================     ==================
<FN>

See notes to unaudited financial statements.
</FN>
</TABLE>


<PAGE>

MERIT SECURITIES CORPORATION
Statements of Operations
(amounts in thousands except share data)
<TABLE>
<CAPTION>


                                                                       Three Months Ended
                                                                           March 31,
                                                                ---------------------------------
                                                                    1999               1998       
                                                                --------------    ---------------
<S>                                                                   <C>              <C>

Interest Income:
    Collateral for collateralized bonds                          $    52,315       $     58,145
                                                               ---------------    ---------------

Interest and related expense:
    Interest expense on collateralized bonds                          47,034             61,190
    Other collateralized bond expense                                    506              1,041
                                                               ---------------    ---------------
                                                                      47,540             62,231
                                                               ---------------    ---------------

Net interest margin before provision for losses                        4,775            (4,086)
Provision for losses                                                 (1,962)            (1,178)
                                                               ---------------    ---------------
Net interest margin                                                    2,813            (5,264)

Gain on sale of securities                                               397                  -
Interest on due to affiliates, net                                     (168)              (654)
                                                               ---------------    ---------------
Income (loss) before extraordinary item                                3,042            (5,918)
Extraordinary item-gain on extinguishment of debt                     27,842                  -
                                                               ---------------    ---------------
Net income (loss)                                                $    30,884      $     (5,918)
                                                               ===============    ===============



<FN>

See notes to unaudited financial statements.
</FN>
</TABLE>

<PAGE>

MERIT SECURITIES CORPORATION
Statement of Shareholder's Equity
(amounts in thousands except share data)
<TABLE>
<CAPTION>


                                                                Accumulated other      Retained
                                                   Additional     comprehensive        earnings
                                    Common stock     paid-in          income         (accumulated
                                                     capital                           deficit)         Total
                                    ------------- --------------------------------- --------------- -------------
<CAPTION>
<S>                                      <C>            <C>             <C>                <C>            <C>

Balance at December 31, 1998          $    10    $      190,156 $           33,575   $     (20,43) $     203,311

Comprehensive income:
   Net income                               -                 -                  -          30,884        30,884

   Change in net unrealized gain on               
      investments available-for-sale        -                 -              6,611               -         6,611
                                    ------------ -------------- ------------------  -------------- --------------
Total comprehensive income                  -                 -              6,611          30,884        37,495

Contributed capital                         -             3,255                  -               -         3,255
                                    ------------ -------------- ------------------  -------------- --------------

Balance at March 31, 1999             $    10    $      193,411 $           40,186   $      10,454 $     244,061
                                    ============ ============== ==================  ============== ==============




<FN>

See notes to unaudited financial statements.
</FN>
</TABLE>


<PAGE>


MERIT SECURITIES CORPORATION
Statements of Cash Flows
(amounts in thousands)
<TABLE>
<CAPTION>

                                                                            Three Months Ended
                                                                                 March 31,
                                                                        1999                   1998
                                                                 -------------------     ------------------
<S>                                                                      <C>                    <C> 

Operating activities:
  Net income (loss)                                              $         30,884        $         (5,918)
  Adjustments to reconcile net income (loss) to net cash
   provided by operating activities:
    Gain on sale of securities                                               (397)                      -
    Provision for losses                                                    1,962                   1,178
    Gain on extinguishment of debt                                        (27,842)                      -
    Amortization, net                                                       5,099                  11,212
    Net change in prepaid shelf registration fees                              93                       -
    Other                                                                     120                     104
                                                                 -------------------     ------------------
      Net cash provided by operating activities                             9,919                   6,576
                                                                 -------------------     ------------------

Investing activities:
  Collateral for collateralized bonds:
    Purchase of loans subsequently securitized                           (321,645)                      -
    Principal payments on collateral                                      387,198                 523,891
    Proceeds from sale of collateralized bonds                              5,250                       -
    Net decrease in accrued interest receivable and
      funds held by trustee                                                 1,790                   3,562
                                                                 -------------------     ------------------
      Net cash provided by investing activities                            72,593                 527,453
                                                                 -------------------     ------------------

Financing activities:
  Collateralized bonds:
    Proceeds from issuance of collateralized bonds                        309,456                       -
    Principal payments on collateralized bonds                           (383,928)               (524,287)
    Decrease in accrued interest payable                                     (699)                 (1,536)
    Increase in due from affiliates                                       (10,596)                 (8,206)
    Proceeds from capital contributions                                     3,255                       -
                                                                 -------------------     ------------------
    Net cash used for financing activities                                (82,512)               (534,029)
                                                                 -------------------     ------------------

Cash at beginning of period                                                    10                      10
                                                                 -------------------     ------------------

Cash at end of period                                            $             10        $             10
                                                                 ===================     ==================

Supplemental disclosure of cash flow information:
  Cash paid for interest                                         $         48,011        $         61,375
                                                                 ===================     ==================

  Collateral for collateralized bonds subsequently 
    securitized                                                  $      1,121,584        $              -
                                                                 ===================     ==================


<FN>

See notes to unaudited financial statements.
</FN>
</TABLE>

<PAGE>

MERIT SECURITIES CORPORATION
Notes to Unaudited Financial Statements
March 31, 1999
(amounts in thousands except share data)

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The accompanying  consolidated  financial  statements have been prepared in
accordance  with the  instructions  to Form 10-Q and do not  include  all of the
information and notes required by generally accepted  accounting  principles for
complete financial statements.  The financial statements include the accounts of
Merit Securities  Corporation  (the  "Company").  The Company is a wholly-owned,
limited-purpose  finance subsidiary of Issuer Holding Corporation  ("IHC").  IHC
was formed on September 4, 1996 to acquire all of the  outstanding  stock of the
Company and certain other affiliates of Dynex Capital, Inc. ("Dynex").  IHC is a
wholly-owned  subsidiary of Dynex.  The Company was organized to facilitate  the
securitization  of loans through the issuance and sale of  collateralized  bonds
(the "Bonds").

     In the opinion of  management,  all  material  adjustments,  consisting  of
normal recurring  adjustments,  considered  necessary for a fair presentation of
the  financial  statements  have been  included.  The Balance Sheet at March 31,
1999, the Statements of Operations for the three months ended March 31, 1999 and
1998, the Statement of Shareholder's Equity for the three months ended March 31,
1999, the Statements of Cash Flows for the three months ended March 31, 1999 and
1998, and the related notes to financial  statements  are  unaudited.  Operating
results for the three months ended March 31, 1999 are not necessarily indicative
of the results that may be expected for the year ending  December 31, 1999.  For
further  information,  refer to the audited  financial  statements and footnotes
included in the Company's Form 10-K for the year ended December 31, 1998.

     Certain  amounts  for 1998  have  been  reclassified  to  conform  with the
presentation for 1999.

NOTE 2-COLLATERAL FOR COLLATERALIZED BONDS

     Pursuant to the requirements of Statement of Financial Accounting Standards
No. 115, Accounting for Certain  Investments in Debt and Equity Securities,  the
Company   has    classified    collateral    for    collateralized    bonds   as
available-for-sale.  The following table summarizes the Company's amortized cost
basis and fair value of collateral  for  collateralized  bonds at March 31, 1999
and  December  31,  1998,  and the  related  average  effective  interest  rates
(calculated  for the month ended  March 31,  1999 and  December  31,  1998,  and
excluding unrealized gains and losses):
<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------------
                                                     March 31, 1999                     December 31, 1998
-------------------------------------------------------------------------------------------------------------------

                                                                 Effective                           Effective
                                              Fair Value       Interest Rate       Fair Value      Interest Rate
-------------------------------------------------------------------------------------------------------------------
<S>                                               <C>               <C>                <C>              <C>

Collateral for collateralized bonds:
   Amortized cost                        $       3,252,436          6.8%       $     3,333,362          7.3%
   Allowance for losses                           (15,103)                            (16,593)
-------------------------------------------------------------------------------------------------------------------
      Amortized cost, net                        3,237,333                           3,316,769
   Gross unrealized gains                           45,986                              47,244
   Gross unrealized losses                         (5,800)                            (13,669)
-------------------------------------------------------------------------------------------------------------------
                                         $       3,277,519                     $     3,350,344
-------------------------------------------------------------------------------------------------------------------
</TABLE>

     Collateral  for  collateralized  bonds consists of debt  securities  backed
primarily by  adjustable-rate  and  fixed-rate  mortgage  loans secured by first
liens on single family residential  housing,  manufactured  housing  installment
loans  secured by either a UCC filing or a motor  vehicle title and property tax
receivables.  All  collateral  for  collateralized  bonds is  pledged  to secure
repayment of the related  collateralized bonds. All principal and interest (less
servicing-related  fees) on the  collateral  is  remitted  to a  trustee  and is
available for payment on the  collateralized  bonds.  The Company's  exposure to
loss on collateral for  collateralized  bonds is generally limited to the amount
of collateral pledged in excess of the related  collateralized  bonds issued, as
the collateralized  bonds issued are non-recourse to the Company. The collateral
for  collateralized  bonds can be sold by the  Company,  but only subject to the
lien of the collateralized bond indenture.

     During the three months ended March 31, 1999, the Company  securitized $1.4
billion of  collateral,  through the  issuance  of one series of  collateralized
bonds. The collateral securitized was primarily single-family mortgage loans and
manufactured housing loans. The securitization was accounted for as financing of
the underlying collateral pursuant to Statement of Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and  Extinguishments
of Liabilities" ("FAS No. 125") as the Company retained call rights on the bonds
which are substantially in excess of a clean-up call.


<PAGE>

Item 2.  Management's Discussion and Analysis of Financial Condition and 
         Results of Operations

     The Company was organized to facilitate the securitization of loans through
the issuance and sale of collateralized  bonds (the "Bonds").  The Bonds will be
secured  primarily  by: (i) mortgage  loans  secured by first or second liens on
residential property, (ii) Federal National Mortgage Association Mortgage-Backed
Certificates,  (iii)  Federal  Home Loan  Mortgage  Corporation  Mortgage-Backed
Certificates,  (iv) Government  National  Mortgage  Association  Mortgage-Backed
Certificates,     (v)    other    mortgage    pass-through    certificates    or
mortgage-collateralized  obligations,  (vi) property tax  receivables  and (vii)
consumer installment loans (collectively,  the "Collateral"). In the future, the
Company may also securitize other types of loans.

     After  payment of the  expenses of an offering  and certain  administrative
expenses,  the net  proceeds  from an offering of Bonds will be used to purchase
Collateral  from IHC or various  third  parties.  IHC can be expected to use the
proceeds  to reduce  indebtedness  incurred  to obtain  such loans or to acquire
additional Collateral.  After the issuance of a series of Bonds, the Company may
sell the  Collateral  securing that series of Bonds,  subject to the lien of the
Bonds.

                               FINANCIAL CONDITION

<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------
                                                       March 31,             December 31,
(amounts in thousands except per share data)             1999                    1998
-------------------------------------------------------------------------------------------
<S>                                                       <C>                     <C> 

Collateral for collateralized bonds                 $   3,277,519           $   3,350,344
Non-recourse debt - collateralized bonds                3,049,988               3,153,060
Shareholder's equity                                      244,061                 203,311

Collateralized bond series outstanding                          3                       8

------------------------------------------------------------------------------------------
</TABLE>

Collateral for collateralized bonds
     Collateral for collateralized bonds consists primarily of securities backed
by  adjustable-rate  and  fixed-rate  mortgage  loans  secured by first liens on
single family  properties,  manufactured  housing  installment  loans secured by
either a UCC filing or a motor vehicle title and property tax receivables. As of
March 31, 1999, the Company had 3 series of  collateralized  bonds  outstanding.
The collateral for  collateralized  bonds decreased to $3.3 billion at March 31,
1999  compared  to $3.4  billion at December  31,  1998.  This  decrease of $0.1
billion is  primarily  the result of $387.2  million in paydowns on  collateral,
which was principally offset by the net addition of $321.6 million of collateral
as a result of a $1.4 billion issuance of collateralized bonds in March 1999, of
which $1.1 billion related to the collapse and  re-securitization  of six series
of previously issued collateralized bonds.

Non-recourse debt - collateralized bonds
     Collateralized  bonds decreased to $3.0 billion at March 31, 1999 from $3.2
billion at December  31, 1998 as a result of $383.9  million in paydowns  during
the three months ended March 31, 1999. This decrease was partially offset by the
issuance of one series of collateralized  bonds, totaling $1.4 billion, of which
$1.1 billion was related to the collapse and  re-securitization of six series on
collateralized bonds.

Shareholder's Equity
     Shareholder's  equity  increased  to $244.1  million at March 31, 1999 from
$203.3  million at December 31, 1998.  This increase was primarily the result of
$30.9  million of net income  for the three  months  ended  March 31,  1999.  In
addition,  the net unrealized gain on investments  available-for-sale  increased
$6.6 million to $40.2  million at March 31, 1999 from $33.6  million at December
31, 1998,  primarily  due to the issuance of  collateralized  bonds during March
1999.

<PAGE>

                              RESULTS OF OPERATIONS
<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------
                                                                       Three Months Ended
                                                                           March 31,
                                                               -----------------------------------
(amounts in thousands)                                              1999               1998
--------------------------------------------------------------------------------------------------
<S>                                                                  <C>                <C> 

Interest income                                                  $     52,315       $     58,145
Interest expense on collateralized bonds                               47,034             61,190
Net interest margin                                                     2,813             (5,264)
Gain on sale of securities                                                397                  -
Extraordinary item - gain on extinguishment of debt                    27,842                  -
Net income (loss)                                                      30,884             (5,918)

--------------------------------------------------------------------------------------------------
</TABLE>

     Interest  income on the collateral for  collateralized  bonds  decreased to
$52.3  million for the three months ended March 31, 1999 from $58.1  million for
the same  period in 1997.  This  decrease  was a result of the  decrease  in the
six-month  LIBOR rate  during the latter  half of 1998.  In  addition,  interest
income  continued  to be  impacted by  prepayments,  as average  collateral  for
collateralized  bonds declined from $3.4 billion in the first quarter of 1998 to
$3.0 billion in the first quarter of 1999.

     Interest  expense on  collateralized  bonds also decreased to $47.0 million
for the three  months  ended  March 31,  1999 from $61.2  million  for the three
months ended March 31,  1998,  primarily  due to the  decrease in the  one-month
LIBOR rate during the fourth quarter of 1998. Also,  interest expense  decreased
as a result of the decline in average collateralized bonds due to prepayments on
the related collateral for collateralized bonds.

     Net interest  margin for the three months ended March 31, 1999 increased to
a positive  $2.8 million from a negative $5.3 million for the three months ended
March 31,  1998.  This  increase  was  primarily  the  result  of lower  premium
amortization caused by lower prepayments during the three months ended March 31,
1999 than during the same period in 1998.

     Gain  on  sale  of  securities  is the  result  of the  recognition  of the
remaining gain on the sale of the Merit 11B A-1 class,  with a principal balance
of $4.9 million during the three months ended March 31, 1999, for a gain of $0.4
million.

     The Company also incurred an extraordinary gain of $27.8 million related to
the recognition of unamortized premiums net of unamortized issuance costs on six
series of  collateralized  bonds which were  collapsed  during the quarter ended
March  31,  1999.  The  collateral  securing  these   collateralized  bonds  was
re-securitized in the Company's $1.4 billion securitization in March 1999.

     Credit Exposures With collateralized  bond structures,  the Company retains
credit  risk  relative  to  the  amount  of  overcollateralization  required  in
conjunction  with the bond insurance.  Losses are generally first applied to the
overcollateralized amount, with any losses in excess of that amount borne by the
bond insurer or the holders of the collateralized bonds. The Company only incurs
credit  losses to the extent  that  losses  are  incurred  in the  repossession,
foreclosure and sale of the underlying  collateral.  Such losses generally equal
the excess of the principal amount outstanding,  less any proceeds from mortgage
or hazard insurance, over the liquidation value of the collateral. To compensate
the Company for retaining this loss exposure,  the Company generally receives an
excess  yield on the  collateralized  securities  relative  to the  yield on the
collateralized  bonds. At March 31, 1999, the Company retained $168.7 million in
aggregate  principal  amount  of  overcollateralization,  and had  reserves,  or
otherwise had provided  coverage on $50.5 million of this potential  credit loss
exposure.  $30.3  million  of  this  reserve  amount  is in the  form  of a loss
reimbursement  guarantee from a third-party rated A by Standards & Poors Ratings
Services, Inc.

Other Matters
     At March 31,  1999,  the  Company had  securities  of  approximately  $23.4
million  remaining for issuance  under a registration  statement  filed with the
Securities and Exchange  Commission.  The Company anticipates issuing additional
Bonds in the future.

Year 2000
     The  Company  relies  upon its  ultimate  parent  company,  Dynex,  for all
computer  systems  operations.  Dynex is dependent upon purchased,  leased,  and
internally-developed  software to conduct certain operations.  In addition,  the
Company relies upon certain  counterparties such as banks and loan servicers who
are also highly  dependent upon computer  systems.  The Company  recognizes that
some computer software may incorrectly recognize dates beyond December 31, 1999.
The ability of the Company and its  counterparties to correctly operate computer
software in the Year 2000 is critical to the Company's viability.

     The Dynex  computer  systems  that the  Company  relies upon to conduct its
business operations are as follows:

  -  The internally-developed investment portfolio analytics, securitization, 
     and securities  administration software

  -  The purchased servicing system for single family and manufactured housing
     loans

  -  The purchased general ledger accounting system

     In  addition,  Dynex is  involved  in data  interchange  with a  number  of
counterparties  in the normal course of business.  Each system or interface that
Dynex relies on is being tested and evaluated for Year 2000 compliance.

     Dynex has contacted all of its key software vendors to determine their Year
2000  readiness.  We  have  received  documentation  from  each  of the  vendors
providing assurances of Year 2000 compliance:

  -  Baan/CODA, vendor of the general ledger  accounting  system,  has 
     provided  confirmation  that their current software release is fully 
     Year 2000 compliant.  Dynex plans to apply this release by June 30, 1999.

  -  Interlinq Software, vendor of the single-family and manufactured housing 
     loan servicing  software,  has provided  assurance  that their  software 
     is Year 2000  compliant.  The Company has begun Year 2000  assurance
     testing on this product with no issues discovered to date.

     All  software  developed  internally  by Dynex was designed to be Year 2000
compliant.  Nevertheless,  Dynex has  established a Year 2000 test-bed to ensure
that there were no design or  development  oversights  that could lead to a Year
2000 problem.  Initial testing of all key  applications was completed in January
of 1999, with only minor issues  discovered and remedied.  Continued  testing of
certain applications will continue through June of 1999.

     Dynex has  reviewed or is reviewing  the Year 2000  progress of its primary
financial  counterparties.  Based on initial reviews,  these  counterparties are
expected to be in compliance.  Dynex, as master  servicer of certain  securities
including those held on the Company's  books, is in the process of assessing the
Year 2000 readiness of its external servicers, to ensure that these parties will
be able to correctly  remit loan  information  and payments  after  December 31,
1999.

     Dynex believes that,  other than its exposure to financial  counterparties,
its most significant risk with respect to internal or purchased  software is the
software systems used to service single family loans.  Dynex will not be able to
service  these  loans  without  the  automated  system.  Should  these  loans go
unattended  for a period  greater  than three  months,  the result  could have a
material  adverse  impact on the  Company  as Dynex  services  the  manufactured
housing loans which are included in the Company's  collateral for collateralized
bonds.

     Dynex  is  also  at  significant  risk  if the  systems  of  the  financial
institutions  that provide Dynex software for cash  management  services  should
fail. In a worst case scenario,  Dynex would be unable to fund its operations or
pay on its  obligations  for an  unknown  period of  failure.  This  would  have
material adverse impact on the Company.

     Dynex is also at  significant  risk if the  voice  and data  communications
network supplied by its provider should fail. In such an instance Dynex would be
unable to efficiently  service its Manufactured  Housing loans until the problem
is  remedied.  Dynex  is  closely  monitoring  the  Year  2000  efforts  of  its
telecommunications  provider and is  developing  contingency  plans in the event
that the provider does not give  sufficient  assurance of compliance by June 30,
1999.

     Dynex is also at significant  risk should the electric  utility company for
Dynex's  offices in Glen  Allen,  Virginia,  fail to provide  power for  several
business  days.  In such  an  instance,  the  Company  would  be  unable  (i) to
communicate over its telecommunication  systems, (ii) would be unable to process
data,  and (iii) would be unable to service loans until the problem is remedied.
Dynex continues to monitor the Year 2000 status of its utility  provider,  whose
plan is scheduled to be completed in the fall of 1999.

     Dynex uses many other purchased and internally developed systems, including
non-IT,  that  could  fail  to  perform  accurately  after  December  31,  1999.
Management  believes  that the  functions  performed by these systems are either
non-critical or could be performed manually in the event of failure.

     Dynex will complete its Year 2000 test plan and remediation  efforts in the
second quarter of 1999.  Management believes that there is little possibility of
a significant  disruption in business.  The major risks are those related to the
ability of vendors and  business  partners to  complete  Year 2000 plans.  Dynex
expects that those  vendors and  counterparties  will  complete  their Year 2000
compliance programs before January 1, 2000.

     The Company will not incur any costs related to Year 2000 as all costs will
be paid by Dynex.  Dynex has  incurred  less  than  $50,000  in costs to date in
carrying out its Year 2000  compliance  program.  Dynex  estimates  that it will
spend less than $100,000 to complete the plan. Costs could increase in the event
that Dynex determines that a counter-party will not be Year 2000 compliant.

     Dynex is still developing  contingency  plans in the event that a system or
counterparty is not Year 2000  compliant.  These plans will be developed by June
30, 1999.

<PAGE>

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Market risk generally  represents the risk of loss that may result from the
potential  change in the value of a financial  instrument due to fluctuations in
interest and foreign exchange rates and in equity and commodity  prices.  Market
risk is inherent to both derivative and  non-derivative  financial  instruments,
and  accordingly,  the scope of the  Company's  market risk  management  extends
beyond derivatives to include all market risk sensitive  financial  instruments.
As a financial  services  company,  net interest  income  comprises  the primary
component of the Company's earnings. As a result, the Company is subject to risk
resulting  from  interest  rate  fluctuations  to the extent that there is a gap
between the amount of the  Company's  interest-earning  assets and the amount of
interest-bearing   liabilities  that  are  prepaid,  mature  or  reprice  within
specified  periods.  The  Company's  strategy is to mitigate  interest rate risk
through the structuring of the related  securitization  to create a stable yield
profile and reduce interest rate risk.

     A the Company's  parent,  Dynex  continuously  monitors the aggregate  cash
flow,  projected net yield and market value of the collateral for collateralized
bonds  under  various  interest  rate and  prepayment  assumptions.  Dynex has a
Portfolio  Executive  Committee  ("PEC"),  which includes  executive  management
representatives,   monitors  and  manages  the  interest  rate  sensitivity  and
repricing  characteristics  of the  balance  sheet  components  consistent  with
maintaining  acceptable levels of change in both the net portfolio value and net
interest income. Dynex's exposure to interest rate risk is reviewed on a monthly
basis by the PEC and quarterly by the Board of Directors.

     Dynex utilizes several tools and risk management  strategies to monitor and
address interest rate risk, including (i) a quarterly sensitivity analysis using
option-adjusted  spread ("OAS")  methodology to calculate the expected change in
net interest  margin as well as the change in the market value of various assets
within the portfolio under various extreme scenarios;  and (ii) a monthly static
cash flow and yield  projection under 49 different  scenarios.  Such tools allow
Dynex to  continually  monitor and  evaluate  its exposure to these risks and to
manage the risk profile of the collateral for  collateralized  bonds in response
to changes in the market risk.  While the Company may use such tools,  there can
be no assurance Dynex will  accomplish the goal of adequately  managing the risk
profile of collateral for collateralized bonds.

     Dynex  measures the  sensitivity  of its net interest  income to changes in
interest  rates.  Changes  in  interest  rates  are  defined  as  instantaneous,
parallel,  and sustained  interest rate movements in 100 basis point increments.
Dynex  estimates  its  interest  income for the next twelve  months  assuming no
changes in interest  rates from those at period end. Once the base case has been
estimated,  cash  flows are  projected  for each of the  defined  interest  rate
scenarios.  Those  scenario  results are then compared  against the base case to
determine the estimated change to net interest income.

     The  following   table   summarizes  the  Company's  net  interest   margin
sensitivity  analysis as of March 31, 1999 and December 31, 1998.  This analysis
represents management's estimate of the percentage change in net interest margin
given a parallel  shift in  interest  rates.  The  "Base"  case  represents  the
interest  rate  environment  as it existed as of March 31, 1999 and December 31,
1998. The analysis is heavily  dependent upon the assumptions used in the model.
The effect of changes in future interest rates,  the shape of the yield curve or
the mix of assets and  liabilities  may cause actual  results to differ from the
modeled results. In addition,  certain financial instruments provide a degree of
"optionality."  The model  considers the effects of these embedded  options when
projecting cash flows and earnings.  The most  significant  option affecting the
Company's portfolio is the borrowers' option to prepay the loans. The model uses
a dynamic prepayment model that applies a Constant Prepayment Rate (CPR) ranging
from 6.0% for fixed-rate  manufactured  housing loans to 69.1% for single family
ARM loans indexed to the six month certificate of deposit rate. The model varies
the CPR based on the projected  incentive to refinance for each loan type in any
given period.  While the Company's model considers these factors,  the extent to
which  borrowers  utilize the ability to exercise  their option may cause actual
results to significantly  differ from the analysis.  Furthermore,  its projected
results assume no additions or subtractions to the Company's  portfolio,  and no
change to the Company's liability structure.  Historically, the Company has made
significant changes to its assets and liabilities, and is likely to do so in the
future.
<TABLE>
<CAPTION>

            ---------------------- --------------------------------------------
                 Basis Point
             Increase (Decrease)    % Change in Net Interest Margin from Base
              in Interest Rates                       Case
            ---------------------- --------------------------------------------
                                    March 31, 1999         December 31, 1998
                                   ------------------     ---------------------
                    <S>                   <C>                      <C> 

                    +200                    (5.45)%                (4.37)%
                    +100                    (9.85)%               (13.20)%
                    Base                     -                      -
                    -100                    10.24%                 13.75%
                    -200                    21.69%                 30.56%
            ---------------------- ------------------ --- ---------------------
</TABLE>

     The March 31, 1999 analysis  illustrates  that net interest  margin is less
sensitive to interest rate changes than it was at December 31, 1998. This change
is primarily the result of the  securitization of $360.9 million of manufactured
housing loans which support $323.3 million of fixed-rate collateralized bonds at
March 31, 1999.

     The Company's investment policy sets forth guidelines for assuming interest
rate  risk.  The  investment  policy  stipulates  that  given a 200 basis  point
increase or decrease in interest rates over a twelve month period, the estimated
net  interest  margin may not change by more than 25% of  current  net  interest
margin during the subsequent one year period.  Based on the  projections  above,
the Company is in compliance with its stated policy  regarding the interest rate
sensitivity of net interest margin.

     Approximately  $2.2  billion of the  Company's  investment  portfolio as of
March 31, 1999 is comprised of loans or securities  that have coupon rates which
adjust over time  (subject to certain  periodic  and  lifetime  limitations)  in
conjunction with changes in short-term interest rates. Approximately 62% and 29%
of the ARM loans underlying the Company's  collateral for  collateralized  bonds
are indexed to and reset based upon the level of  six-month  LIBOR and  one-year
CMT, respectively.

     Generally,  during  a period  of  rising  short-term  interest  rates,  the
Company's net interest spread earned on its collateralized  bonds will decrease.
The  decrease of the net interest  spread  results from (i) the lag in resets of
the ARM loans underlying the collateral for collateralized bonds relative to the
rate  resets on the  collateralized  bonds and (ii) rate resets on the ARM loans
which are generally limited to 1% every six months or 2% every twelve months and
subject  to  lifetime  caps,  while  the  collateralized   bonds  have  no  such
limitation.  As short-term interest rates stabilize and the ARM loans reset, the
net interest margin may be restored to its former level as the yields on the ARM
loans adjust to market conditions.  Conversely, net interest margin may increase
following a fall in short-term interest rates. This increase may be temporary as
the  yields on the ARM loans  adjust to the new  market  conditions  after a lag
period. In each case, however, the Company expects that the increase or decrease
in the net interest spread due to changes in the short-term interest rates to be
temporary.  The net  interest  spread may also be  increased or decreased by the
proceeds or costs of interest rate swap and cap agreements.

     As part of its asset/liability  management process, the Company has entered
into interest rate cap and swap  agreements.  These interest rate agreements are
used  by  the  Company  to  help  mitigate  the  risk  to  the   collateral  for
collateralized  bonds of  fluctuations  in interest rates that would  ultimately
impact net interest income. To help protect the Company's net interest income in
a rising interest rate environment, the Company has purchased interest rate caps
with a notional amount of $351 million, which help reduce the Company's exposure
to interest rate risk rising above the lifetime  interest rate caps on ARM loans
underlying  the collateral for  collateralized  bonds.  These interest rate caps
provide the Company with  additional cash flow should the related index increase
above the contracted rates. The contracted rates on these interest rate caps are
based on one-month LIBOR,  six-month LIBOR or one-year CMT. The Company has also
utilize  interest rate swaps to convert  floating rate  borrowings to fixed rate
where the associated  collateral  financed is fixed rate. The interest rate caps
that the Company uses to manage certain interest rate risks represent protection
for the earnings and cash flow of the net collateral for collateralized bonds in
adverse markets.  To date, short term interest rates have not risen at the speed
or to the extent  such that the  protective  cashflows  provided by the caps and
swaps have been realized.

     The remaining portion of the Company's  collateral for collateralized bonds
as of March 31, 1999,  approximately  $1.1  billion,  is comprised of loans that
have  coupon  rates  that are  either  fixed or do not reset  within the next 15
months.  The  Company  has limited  its  interest  rate risk on such  collateral
primarily through the issuance of fixed-rate  collateralized bonds. Overall, the
Company's interest rate risk is primarily related to the rate of change in short
term interest rates, not the level of short term interest rates.


PART II.          OTHER INFORMATION

Item 1.           Legal Proceedings:

                  None

Item 5.           Other Information:

                  None

Item 6.           Exhibits and Reports on Form 8-K:

(a)               Exhibits


3.1      Articles  of  Incorporation  of the  Registrant  (Incorporated  herein
         by  reference to the Exhibits to Registrant's Registration Statement 
         No. 33-83524 on Form S-3 filed August 31, 1994).

3.2      Bylaws of the Registrant  (Incorporated  herein by reference to the 
         Exhibits to Registrant's  Registration Statement No. 33-83524 on Form
         S-3 filed August 31, 1994).

3.3      Amended and Restated Articles of Incorporation of the Registrant,  
         effective April 19, 1995  (Incorporated herein by reference to Exhibit
         to the Registrant's Current Report on Form 8-K, filed April 21, 1995).

4.1      Indenture between  Registrant and Trustee,  dated as of August 1, 1994
         (Incorporated  herein by reference to the Exhibits to Registrant's 
         Registration Statement No. 33-83524 on Form S-3 filed August 31, 1994).

4.2      Form of Supplement Indenture between Registrant and Trustee 
         (Incorporated  herein by reference to the Exhibits to Registrant's 
         Registration Statement No. 33-83524 on Form S-3 filed August 31, 1994).

         Copy of the  Indenture, dated as of  November 1, 1994, by and between 
         the  Registrant and Texas Commerce Bank National  Association, as 
         Trustee  (Incorporated  herein by  reference  to  Exhibit  to the 
         Registrant's Current Report on Form 8-K, filed December 19, 1994).

         Copy of the Series 4  Indenture  Supplement,  dated as of June 1, 1995,
         by and between  the  Registrant  and Texas Commerce Bank National  
         Association,  as Trustee (including  schedules and exhibits) 
         (Incorporated herein by reference to Exhibit to the Registrant's 
         Current Report on Form 8-K, filed July 10, 1995).

4.5      Copy of the Series 10 Indenture  Supplement,  dated as of December 1, 
         1997, by and between the Registrant and Texas Commerce Bank National  
         Association,  as Trustee (related  schedules and exhibits available 
         upon request of the Trustee).  (Incorporated  herein by reference to 
         Exhibit of Registrant's  Current Report on Form 8-K, filed January 6, 
         1998).

4.6      Copy of the Series 11 Indenture Supplement, dated as of March 1, 1998,
         by and between the  Registrant and Texas Commerce Bank National  
         Association, as Trustee (related  schedules and exhibits available 
         upon request of the Trustee).  (Incorporated herein by reference to 
         Exhibit of Registrant's  Current Report on Form 8-K, filed June 12, 
         1998).

4.7      Copy of the Series 12  Indenture  Supplement,  dated as of March 1, 
         1999,  by and between the  Registrant and Texas Commerce Bank National
         Association,  as Trustee (related  schedules and exhibits available 
         upon request of the Trustee).  (Incorporated  herein by reference to 
         Exhibit of Registrant's Current Report on Form 8-K, filed April 12, 
         1999).

99.1     Standard  Provisions  to  Servicing  Agreement  (Incorporated  herein
         by  reference  to the  Exhibits  to Registrant's Registration Statement
         No. 33-83524 on Form S-3 filed August 31, 1994).

99.2     Form of Servicing  Agreement (Incorporated herein by reference to the
         Exhibits to Registrant's Registration Statement No. 33-83524 on Form 
         S-3 filed August 31, 1994).

99.3     Standard Terms to Master Servicing Agreement (Incorporated herein by 
         reference to the Exhibits to Registrant's Registration Statement No.
         33-83524 on Form S-3 filed August 31, 1994).

99.4     Form of Master Servicing Agreement (Incorporated  herein by reference
         to the Exhibits to Registrant's Registration Statement No. 33-83524 on
         Form S-3 filed August 31, 1994).

99.5     Form of Prospectus Supplement of Bonds secured by adjustable-rate 
         mortgage loans (Incorporated herein by reference to Exhibits to  
         Registrant's Pre-Effective Amendment  No. 4 to Registration Statement 
         No. 33-83524 on Form S-3 filed December 5, 1994).

99.6     Form of Financial Guaranty  Assurance Policy (Incorporated  herein by
         reference  to the  Exhibits  to Registrant's Registration Statement 
         No. 33-83524 on Form S-3 filed August 31, 1994).

99.7     Form of GEMICO Mortgage Pool Insurance  Policy (Incorporated herein by
         reference  to the Exhibits to Registrant's Registration Statement No. 
         33-83524 on Form S-3 filed August 31, 1994).

99.8     Form of PMI  Mortgage Insurance Co. Pool Insurance Policy 
         (Incorporated  herein by  reference  to the Exhibits to Registrant's 
         Registration Statement No. 33-83524 on Form S-3 filed August 31, 1994).

99.9     Form of Prospectus Supplement of Bonds secured by fixed-rate mortgage
         loans (Incorporated herein by reference to Exhibits to Registrant's
         Pre-Effective  Amendment  No. 4 to  Registration  Statement  No.
         33-83524 on Form S-3 filed December 5, 1994).

99.10    Copy of the Saxon Mortgage Funding  Corporation  Servicing Guide for 
         Credit Sensitive Loans, February 1, 1995 Edition (Incorporated herein 
         by reference to Exhibit to the  Registrant's  Current  Report on Form
         8-K, filed March 8, 1995).

99.11    Copy of Financial  Guaranty  Insurance  Policy No. 50364-N issued by 
         Financial Guaranty Assurance Inc., dated April 7, 1995,  with respect 
         to the Series 3 Bonds  (Incorporated  herein by reference to Exhibit to
         the Registrant's Current Report on Form 8-K, filed April 21, 1995).

99.12    Copy of Financial  Guaranty  Insurance  Policy No. 50382-N issued by 
         Financial Guaranty Assurance Inc., dated June 29, 1995, with respect to
         the Series 4 Bonds  (Incorporated  herein by reference to Exhibit to
         the Registrant's Current Report on Form 8-K, filed July 10, 1995).

99.13    Copy of the Standard Terms to Master Servicing Agreement, June 1, 1995
         Edition (Incorporated herein by reference to Exhibit to the 
         Registrant's Current Report on Form 8-K, filed July 10, 1995).

99.14    Copy of Financial Guaranty Insurance Policy No. 19804 issued by MBIA 
         Insurance Corporation (Incorporated herein by reference to Exhibit to 
         the Registrant's Current Report on Form 8-K, filed November 15, 1995).

99.15    Copy of Financial Guaranty Insurance Policy No. 20596 issued by MBIA 
         Insurance Corporation (Incorporated herein by reference to Exhibit to 
         the Registrant's Current Report on Form 8-K, filed March 21, 1996).

99.16    Copy of Financial Guaranty Insurance Policy No. 21296 issued by MBIA 
         Insurance  Corporation  (Incorporated herein by reference to Exhibit to
         the Registrant's Current Report on Form 8-K, filed June 19, 1996).

         Copy of the Series 8 Indenture Supplement, dated as of September  1, 
         1996, by and between the Registrant and Texas Commerce Bank National  
         Association,  as Trustee  (related  schedules and exhibits  available 
         upon request of the Trustee).  (Incorporates  herein by reference to 
         Exhibit of Registrant's Current Report on Form 8-K, filed October 9, 
         1996).

         Copy of the Series 9 Indenture Supplement, dated as of June 1, 1997,  
         by and between  the  Registrant  and Texas Commerce Bank National  
         Association, as Trustee (related schedules and exhibits available 
         upon request of the Trustee). (Incorporates herein by reference to 
         Exhibit of  Registrant's  Current Report on Form 8-K, filed July 11, 
         1997).

         Copy of the Series 10 Indenture Supplement, dated as of December 1, 
         1997, by and  between the Registrant and Texas Commerce Bank National
         Association, as Trustee (related schedules and exhibits available upon
         request of the Trustee). (Incorporates herein by reference to Exhibit 
         of Registrant's  Current Report on Form 8-K, filed January 6, 1998).

(b)      Reports on Form 8-K

         Current  Report on Form 8-K as filed with the Commission on February 2,
         1999,  relating to the  Registrant's Series 8 Bonds.

         Current  Report on Form 8-K as filed with the Commission on February 3,
         1999,  relating to the  Registrant's Series 11 Bonds.


<PAGE>



                                   SIGNATURES



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



                                 MERIT SECURITIES CORPORATION


                                 By:  /s/ Lynn K. Geurin
                                      Lynn K. Geurin
                                      (Principal Executive Officer)





                                      /s/ Stephen J. Benedetti
                                      Stephen J. Benedetti
                                      (Principal Financial & Accounting Officer)






Dated:  May 17, 1999