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

                                  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 June 30, 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 July 31, 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.

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



                          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 June 30, 1999 and
                      December 31, 1998                                                  3

                      Statements of Operations for the three and six months
                      ended June 30, 1999 and 1998                                       4

                      Statement of Shareholder's Equity for the six months
                      ended June 30, 1999                                                5

                      Statements of Cash Flows for the six months ended
                      June 30, 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>

                                                                     June 30,            December 31,
                                                                      1999                   1998
                                                                ------------------     ------------------
<S>                                                                    <C>                     <C>

ASSETS:
   Collateral for collateralized bonds                           $    2,936,109         $    3,350,344
   Due from affiliates, net                                                   -                  5,611
   Prepaid shelf registration fees                                          313                    406
   Cash                                                                      10                     10
                                                                ==================     ==================
                                                                 $    2,936,432         $    3,356,371
                                                                ==================     ==================

LIABILITIES AND SHAREHOLDER'S EQUITY

LIABILITIES:
   Non-recourse debt - collateralized bonds                      $    2,728,050         $    3,153,060
   Due to affiliates, net                                                41,052                      -
                                                                ------------------     ------------------
                                                                      2,769,102              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                                           121,415                190,156
   Accumulated other comprehensive income                                27,224                 33,575
   Retained earnings (accumulated deficit)                               18,681                (20,430)
                                                                ------------------     ------------------
                                                                        167,330                203,311
                                                                ==================     ==================
                                                                 $    2,936,432         $    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              Six Months Ended
                                                                   June 30,                       June 30,
                                                          ----------------------------   ----------------------------
                                                             1999            1998            1999           1998
                                                          ------------   -------------   -------------   ------------
<S>                                                           <C>             <C>             <C>             <C>

Interest Income:
    Collateral for collateralized bonds                  $   51,961     $    61,923      $  104,276      $  120,068
                                                         -------------  --------------  --------------  -------------

Interest and related expense:
    Interest expense on collateralized bonds                 40,546          61,795          87,580         122,985
    Other collateralized bond expense                           417             944             923           1,985
                                                         -------------  --------------  --------------  -------------
                                                             40,963          62,739          88,503         124,970
                                                         -------------  --------------  --------------  -------------

Net interest margin before provision for losses              10,998            (816)         15,773          (4,902)
Provision for losses                                         (2,604)         (1,686)         (4,566)         (2,864)
                                                         -------------  --------------  --------------  -------------
Net interest margin                                           8,394          (2,502)         11,207          (7,766)

Gain on sale of securities                                        -           1,125             397           1,125
Interest on due to affiliates, net                             (167)           (700)           (335)         (1,354)
                                                         -------------  --------------  --------------  -------------
Income (loss) before extraordinary item                       8,227          (2,077)         11,269          (7,995)
Extraordinary item-gain on extinguishment of debt                 -               -          27,842               -
                                                         -------------  --------------  --------------  -------------
Net income (loss)                                        $    8,227          (2,077)     $   39,111      $   (7,995)
                                                         =============  ==============  ==============  =============


<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
                                    ------------- ------------- ------------------- --------------- -------------
<S>                                      <C>           <C>              <C>               <C>            <C>

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

Comprehensive income:
   Net income                               -                -                 -          39,111         39,111

   Change in net unrealized gain on
      investments available-for-sale        -                -            (6,351)              -         (6,351)
                                    ------------ -------------- ------------------  -------------- --------------
Total comprehensive income                  -                -            (6,351)         39,111         32,760

Capital distribution                        -          (68,741)                -               -        (68,741)
                                    ------------ -------------- ------------------  -------------- --------------

Balance at June 30, 1999              $    10    $     121,415 $          27,224    $     18,681   $    167,330
                                    ============ ============== ==================  ============== ==============




<FN>

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

<PAGE>

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

                                                                             Six Months Ended
                                                                                 June 30,
                                                                        1999                   1998
                                                                 -------------------     ------------------
<S>                                                                     <C>                     <C>

Operating activities:
  Net income (loss)                                                 $   39,111            $      (7,995)
  Adjustments to reconcile net income (loss) to net cash
   provided by operating activities:
    Gain on sale of securities                                            (397)                  (1,125)
    Provision for losses                                                 4,566                    2,864
    Gain on extinguishment of debt                                     (27,842)                       -
    Amortization, net                                                    9,930                   20,495
    Net change in prepaid shelf registration fees                           93                      223
    Net change in deferred income                                            -                    4,359
    Other                                                                 (323)                     (33)
                                                                 -------------------     ------------------
      Net cash provided by operating activities                         25,138                   18,788
                                                                 -------------------     ------------------

Investing activities:
  Collateral for collateralized bonds:
    Purchase of loans subsequently securitized                        (322,429)              (1,711,862)
    Principal payments on collateral                                   710,172                1,012,653
    Proceeds from sale of collateralized bonds                           5,250                   58,675
    Net decrease (increase) in accrued interest receivable and
      funds held by trustee                                              1,814                   (6,125)
                                                                 -------------------     ------------------
      Net cash provided by (used for) investing activities             394,807                 (646,659)
                                                                 -------------------     ------------------

Financing activities:
  Collateralized bonds:
    Proceeds from issuance of collateralized bonds                     309,424                1,589,340
    Principal payments on collateralized bonds                        (704,921)              (1,011,461)
    (Decrease) increase in accrued interest payable                     (2,370)                     174
    Increase (decrease) in due from affiliates                          46,663                  (14,386)
    (Repayments of) proceeds from capital contributions                (68,741)                  64,204
                                                                 -------------------     ------------------
    Net cash (used for) provided by financing activities              (419,945)                 627,871
                                                                 -------------------     ------------------

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

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

Supplemental disclosure of cash flow information:
  Cash paid for interest                                         $      89,855            $     120,305
                                                                 ===================     ==================

  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
June 30, 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 June 30, 1999, the
Statements  of  Operations  for the three and six months ended June 30, 1999 and
1998,  the Statement of  Shareholder's  Equity for the six months ended June 30,
1999,  the  Statements  of Cash Flows for the six months ended June 30, 1999 and
1998, and the related notes to financial  statements  are  unaudited.  Operating
results for the six months ended June 30, 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 June 30, 1999 and
December 31, 1998, and the related average effective  interest rates (calculated
for the  month  ended  June 30,  1999  and  December  31,  1998,  and  excluding
unrealized gains and losses):

<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------------
                                                     June 30, 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                        $      2,922,246           7.0%       $      3,333,362         7.3%
   Allowance for losses                           (13,361)                              (16,593)
-------------------------------------------------------------------------------------------------------------------
      Amortized cost, net                       2,908,885                             3,316,769
   Gross unrealized gains                          35,204                                47,244
   Gross unrealized losses                         (7,980)                              (13,669)
-------------------------------------------------------------------------------------------------------------------
                                         $      2,936,109                      $      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 six months ended June 30, 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 as  defined  by this
accounting standard.


<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>

-------------------------------------------------- ------------------ --- --------------------
                                                       June 30,              December 31,
(amounts in thousands except per share data)             1999                    1998
-------------------------------------------------- ------------------ --- --------------------
<S>                                                       <C>                    <C>

Collateral for collateralized bonds                 $   2,936,109           $   3,350,344
Non-recourse debt - collateralized bonds                2,728,050               3,153,060
Shareholder's equity                                      167,330                 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
June 30, 1999, the Company had 3 series of collateralized bonds outstanding. The
collateral for  collateralized  bonds decreased to $2.9 billion at June 30, 1999
compared to $3.4 billion at December 31, 1998.  This decrease of $0.5 billion is
primarily  the result of $710.2  million in  paydowns on  collateral,  which was
principally  offset by the net  addition of $322.4  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 $2.7 billion at June 30, 1999 from $3.2
billion at December  31, 1998 as a result of $704.9  million in paydowns  during
the six months ended June 30, 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  decreased  to $167.3  million at June 30,  1999 from
$203.3 million at December 31, 1998. This decrease was primarily the result of a
$68.7 capital  distribution to IHC during the six months ended June 30, 1999. In
addition,  the net unrealized gain on investments  available-for-sale  decreased
$6.4  million to $27.2  million at June 30, 1999 from $33.6  million at December
31, 1998,  primarily due to prepayments  on the  collateral  for  collateralized
bonds,  the recent 25 basis point  increase in the  targeted  Fed Funds rate and
approximately  an 80 basis point  increase in longer term interest  rates during
the six months ended June 30, 1999.


                              RESULTS OF OPERATIONS
<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------------------------------------
                                                              Three Months Ended                      Six Months Ended
                                                                   June 30,                               June 30,
                                                      -----------------------------------    -----------------------------------
(amounts in thousands)                                     1999               1998                1999               1998
-----------------------------------------------------------------------------------------    -----------------------------------
<S>                                                          <C>                 <C>               <C>                <C>

Interest income                                         $     51,961       $     61,923        $    104,276       $    120,068
Interest expense on collateralized bonds                      40,546             61,795              87,580            122,985
Net interest margin                                            8,394             (2,502)             11,207             (7,766)
Gain on sale of securities                                         -              1,125                 397              1,125
Extraordinary item - gain on extinguishment of debt                -                  -              27,842                  -
Net income (loss)                                              8,227             (2,077)             39,111             (7,995)

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

     Interest  income on the collateral for  collateralized  bonds  decreased to
$52.0  million for the three months  ended June 30, 1999 from $61.9  million for
the same period in 1998.  Interest  income on the collateral for  collateralized
bonds  decreased  to $104.3  million for the six months ended June 30, 1999 from
$120.1  million for the same period in 1998.  These  decreases  were primarily a
result of the continued  impact of  prepayments on interest  income,  as average
collateral for  collateralized  bonds declined from $3.5 billion to $3.0 billion
for the three months ended June 30, 1998 and 1999,  respectively,  and from $3.4
billion  to $3.0  billion  for the six  months  ended  June 30,  1998 and  1999,
respectively.  In addition interest income decreased as a result of the decrease
in the six-month LIBOR rate during the latter half of 1998.

     Interest  expense on  collateralized  bonds also decreased to $40.5 million
for the three months ended June 30, 1999 from $61.8 million for the three months
ended June 30,  1998 and $87.6  million  for the six months  ended June 30, 1999
from $123.0 million for the same period in 1998.  These decreases were primarily
due to the  decrease in the  one-month  LIBOR rate during the fourth  quarter of
1998 and the decline in average  collateralized  bonds due to prepayments on the
related collateral for collateralized bonds.

     Net interest margin for the three months ended June 30, 1999 increased to a
positive  $8.4 million  from a negative  $2.5 million for the three months ended
June 30, 1998. Net interest margin increased to a positive $11.2 million for the
six months ended June 30, 1999 from a negative  $7.8 million for the same period
in 1998. These increases were primarily the result of lower premium amortization
caused by lower prepayments  during the three and six months ended June 30, 1999
than during the same period in 1998.

     Gain on sale of securities of $0.4 million during the six months ended June
30, 1999 is the result of the  recognition  of the remaining gain on the sale of
the Merit 11B A-1 class, which had a principal balance of $4.9 million.  Gain on
sale of  securities  during the three and six months  ended June 30, 1998 is the
result of the recognition of the initial gain on the sale of Merit 11B A-1 class
for a gain of $1.1 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 six months ended
June  30,  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 June 30, 1999, the Company  retained $158.8 million in
aggregate  principal  amount  of  overcollateralization,  and had  reserves,  or
otherwise had provided  coverage on $47.8 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 June 30, 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.

     -    Interlinq  Software,  vendor  of the  single-family  and  manufactured
          housing loan  servicing  software,  has provided  assurance that their
          software is Year 2000 compliant.

     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 subsequently  remedied.  Critical
applications  testing  was  completed  in June  of  1999,  and  new or  upgraded
applications  will  continue to be tested as required  through the century  date
change.

     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  manufactured  housing 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  ; the provider has provided  assurance that their network is
filly compliant at this time.

     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  $75,000  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
September 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 parallel interest rate
movements  in 100 basis  point  increments  over a twelve  month  period.  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 June 30,  1999 and March 31,  1999.  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 June 30, 1999 and March 31, 1999.
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
            ---------------------- --------------------------------------------
                                     June 30, 1999           March 31, 1999
                                   ------------------     ---------------------
                     <S>                    <C>                    <C>

                    +200                   (17.86)%               (19.80)%
                    +100                    (9.40)%                (9.85)%
                    Base                     -                      -
                    -100                     7.83%                 10.24%
                    -200                    16.77%                 21.69%
            ---------------------- ------------------ --- ---------------------
</TABLE>

     The June 30, 1999  analysis  illustrates  that net interest  margin is less
sensitive to interest  rate changes than it was at March 31, 199. This change is
primarily the result of a larger portion of the Company's  investment  portfolio
being  comprised of fixed rate assets.  At June 30, 1999,  35% of the  Company's
investment portfolio was fixed rate assets compared to 33% at March 31, 1999.

     Approximately $1.9 billion of the Company's investment portfolio as of June
30, 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 63% and 28% 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 June 30, 1999, approximately $1.0 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    Copyof 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    Copyof 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    Copyof 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).

(b)      Reports on Form 8-K

          Current  Report on Form 8-K as filed with the  Commission on April 12,
          1999, relating to the Registrant's Series 12 Bonds.

          Current  Report on Form 8-K as filed with the  Commission on April 13,
          1999, relating to the Registrant's Series 11 Bonds.

          Current  Report on Form 8-K as filed  with the  Commission  on June 9,
          1999, relating to the Registrant's Series 11 Bonds.

          Current  Report on Form 8-K as filed  with the  Commission  on June 9,
          1999, relating to the Registrant's Series 12 Bonds.

          Current  Report on Form 8-K as filed with the  Commission  on June 10,
          1999, relating to the Registrant's Series 12 Bonds.



                                   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/ Teresa G. Eastep
                                   Teresa G. Eastep
                                   (Principal Financial & Accounting Officer)






Dated:  August 13, 1999