SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                  FORM 10-Q

      [x]   QUARTERLY  REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
            EXCHANGE ACT OF 1934
            For the quarterly period ended June 30, 1998

                                       or

      [ ]   TRANSITION  REPORT  PURSUANT  TO  SECTION  13  OR  15(d)  OF  THE
            SECURITIES  EXCHANGE  ACT OF 1934  
            For the  transition  period  from _____________ to _____________

                         Commission File Number: 1-12109

                           DELTA FINANCIAL CORPORATION
             (Exact name of registrant as specified in its charter)

            Delaware                                        11-3336165
      (State or other jurisdiction of                       (IRS Employer
      incorporation or organization)                        Identification No.)

             1000 Woodbury Road, Suite 200, Woodbury, New York 11797
    (Address of registrant's principal executive offices including ZIP Code)

                                (516) 364 - 8500
              (Registrant's telephone number, including area code)

                                   No Change
  (Former name, former address and former fiscal year, if changed since last
                                   report)


      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  and 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 90 days

                               Yes [ x ] No [ ]

      As of June 30, 1998,  15,359,588 shares of the Registrant's common stock,
par value $.01 per share, were outstanding.


<PAGE>


                               INDEX TO FORM 10-Q

                                                                        Page No.

PART I - FINANCIAL INFORMATION

Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997...... 1

Consolidated Statements of Operations for the three months and six months
ended June 30, 1998 and June 30, 1997...................................... 2

Consolidated Statements of Cash Flows for the six months ended
June 30, 1998 and June 30, 1997............................................ 3

Notes to Consolidated Financial Statements................................. 4

Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................... 8

New Accounting Pronouncements..............................................22

PART II - OTHER INFORMATION

Other Information..........................................................24

Signatures.................................................................26

<PAGE>

Part I - Financial Information
<TABLE>
<CAPTION>

                  DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                   (Unaudited)

                                                        June 30,    December 31,
(Dollars in thousands, except for share data)             1998          1997
                                                      -----------   ------------
<S>                                                    <C>           <C>
Assets                                                
Cash and interest bearing deposits                     $  37,850      $  32,858
Accounts receivable                                       25,667         31,209
Loans held for sale                                       81,880         79,247
Accrued interest and late charges receivable              37,846         29,598
Capitalized mortgage servicing rights                     26,887         22,862
Interest-only and residual certificates                  183,938        167,809
Equipment, net                                            14,365         11,211
Cash held for advance payments                             8,535          6,325
Prepaid and other assets                                   6,472          6,224
Goodwill                                                   6,605          5,889
                                                       ---------      ---------
   Total assets                                        $ 430,045      $ 393,232
                                                       =========      ========= 
Liabilities and Stockholders' Equity                  
Liabilities:                                          
Bank payable                                           $     864      $   2,222
Warehouse financing and other borrowings                  50,263         28,233
Senior Notes                                             149,346        149,307
Accounts payable and accrued expenses                     16,800         15,503
Investor payable                                          51,428         40,852
Advance payment by borrowers for taxes and insurance       7,934          5,750
Income taxes payable                                      23,852         24,912
                                                       ---------      ---------
   Total liabilities                                   $ 300,487      $ 266,779
                                                       ---------      ---------
                                                      
Stockholders' Equity:                                 
Capital stock, $.01 par value. Authorized             
  49,000,000 shares; issued and outstanding           
  15,359,588 shares and 15,372,688 shares at          
  June 30, 1998 and December 31, 1997, respectively    $     154      $     154
Additional paid-in capital                                93,501         93,476
Retained earnings                                         36,172         32,823
Treasury stock, at cost (14,600 shares and 0 shares   
  at June 30, 1998 and December 31, 1997,
  respectively)                                             (269)           ---
                                                       ---------      ---------
   Total stockholders' equity                            129,558        126,453
     Total liabilities and stockholders' equity        ---------      --------- 
                                                       $ 430,045      $ 393,232
                                                       =========      =========
                                                    

          See accompanying notes to consolidated financial statements.

                                       1
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                  DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)


                                                 Three Months Ended               Six Months Ended
                                                      June 30,                        June 30,
(Dollars in thousands, except per share data)    1998          1997              1998          1997
                                               --------      --------          --------      --------
<S>                                            <C>           <C>               <C>           <C> 
Revenues:                                                                 
  Net gain on sale of mortgage loans           $24,755       $18,454           $51,581       $35,768
  Interest                                     (10,393)        6,339            (3,728)       11,898
  Servicing fees                                   411         1,899             2,325         3,291
  Origination fees                               5,909         3,774            11,658         6,814
                                               --------      --------          --------      --------
      Total revenues                            20,682        30,466            61,836        57,771
                                               --------      --------          --------      --------
Expenses:                                                                 
  Payroll and related costs                     13,141         9,013            26,400        16,945
  Interest expense                               7,626         3,921            14,692         7,091
  General and administrative                     7,951         4,914            15,679         8,877
                                               --------      --------          --------      --------
      Total expenses                            28,718        17,848            56,771        32,913
                                               --------      --------          --------      --------
                                                                          
(Loss) income before income                                               
   taxes (benefit)                              (8,036)       12,618             5,065        24,858
Provision for income taxes (benefit)            (3,134)        5,394             1,716        10,644
                                               --------      --------          --------      --------
Net (loss) income                              $(4,902)      $ 7,224           $ 3,349       $14,214
                                               ========      ========          ========      ========
                                                                          
Per share data:                                                           
    Net (loss) income per common                                          
      share - basic and diluted                 $(0.32)       $ 0.47            $ 0.22        $ 0.92
                                              =========     =========         =========     =========
    Weighted-average number                                               
      of shares outstanding                 15,376,416    15,372,288        15,374,535    15,345,926
                                            ===========   ===========       ===========   ===========
                                                   
        



          See accompanying notes to consolidated financial statements.


                                       2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                  DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
                                                                         Six Months Ended
                                                                              June 30,
(Dollars in thousands)                                                  1998           1997
                                                                     ---------      ---------
<S>                                                                  <C>            <C>
  Cash flows from operating activities:                            
   Net income                                                        $  3,349       $ 14,214
   Adjustments to reconcile net income to net cash used in         
     Operating activities:                                         
      Provision for loan and recourse losses                               50             50
      Depreciation and amortization                                     1,953          1,047
      Net increase in capitalized mortgage servicing rights            (4,025)        (4,615)
      Deferred origination fees                                           896            114
      Net increase in interest-only and residual certificates         (16,129)       (38,543)
      Changes in operating assets and liabilities:                 
         Decrease (increase) in accounts receivable                     5,542        (11,501)
         Increase in loans held for sale, net                          (3,544)           (71)
         Increase in accrued interest and late charges receivable      (8,248)        (3,854)
         Increase in cash held for advance payments                    (2,210)           (39)
         (Increase) decrease in prepaid and other assets                 (248)            32
         Increase in accounts payable and accrued expenses                 62            236
         Increase in investor payable                                  10,576          2,087
         Increase in advance payments by borrowers for             
          taxes and insurance                                           2,184             26
         (Decrease) increase in income taxes payable                   (1,060)         7,168
                                                                     ---------      ---------
           Net cash used in operating activities                      (10,852)       (33,649)
                                                                     ---------      ---------
Cash flows from investing activities:                              
   Acquisition of Fidelity Mortgage                                       ---         (3,675)
   Purchase of equipment                                               (4,584)        (2,968)
                                                                     ---------      ---------
           Net cash used in investing activities                       (4,584)        (6,643)
                                                                     ---------      ---------
Cash flows from financing activities:                              
   Proceeds from warehouse financing and other borrowings, net         22,030         38,058
   (Decrease) increase in bank payable, net                            (1,358)         5,366
   Purchase of treasury stock                                            (269)           ---
   Proceeds from exercise of stock options                                 25            ---
                                                                     ---------      ---------
   Net cash provided by financing activities                           20,428         43,424
                                                                     ---------      ---------
           Net increase in cash and interest bearing deposits           4,992          3,132
                                                                   
Cash and interest bearing deposits at beginning of period              32,858         18,741
                                                                     ---------      ---------
Cash and interest bearing deposits at end of period                  $ 37,850       $ 21,873
                                                                     =========      =========
                                                                   
Supplemental Information:                                          
Cash paid during the period for:                                   
   Interest                                                          $ 14,513       $  7,697
   Income taxes                                                         2,799       $ 12,991
                                                                   
          See accompanying notes to consolidated financial statements.

                                        3
</TABLE>
<PAGE>

                 DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(1) Organization
Delta Financial  Corporation (the "Company") is a Delaware corporation which was
organized in August 1996. On October 31, 1996,  in  connection  with its initial
public  offering,  the Company  acquired all of the outstanding  common stock of
Delta Funding  Corporation  ("Delta Funding"),  a New York corporation which had
been  organized  on January 8, 1982 for the  purpose  of  originating,  selling,
servicing and investing in residential first and second  mortgages.  On November
1, 1996, the Company completed an initial public offering of 4,600,000 shares of
common stock, par value $.01 per share.

On February 11, 1997, the Company acquired  Fidelity  Mortgage Inc. and Fidelity
Mortgage (Florida),  Inc. (together referred to herein as "Fidelity  Mortgage"),
retail residential mortgage origination companies, for a combination of cash and
stock with a value of $6.3 million.  These transactions were accounted for under
the purchase  method of  accounting.  Accordingly,  the results of operations of
Fidelity  Mortgage  from  February 11, 1997 have been  included in the Company's
consolidated  financial  statements.  In connection with these  acquisitions the
Company  recorded  goodwill  of  approximately  $6.3  million,  which  is  being
amortized on a  straight-line  basis over seven years.  On October 1, 1997,  the
acquired  operations  were  merged and have  continued  to  operate as  Fidelity
Mortgage.  As a result of meeting  certain  production  targets  during the year
ended June 30, 1998, the sellers will be paid in August 1998 an additional  $1.2
million of purchase  price in the form of 101,361   shares of  Delta stock.  The
additional  consideration  of $1.2  million  has  been  recorded  as  additional
goodwill  at June  30,  1998 to be  amortized  over  the  remaining  life of the
goodwill.

(2) Basis of Presentation
The  accompanying   unaudited  consolidated  financial  statements  include  the
accounts of the  Company  and its  wholly-owned  subsidiaries.  All  significant
inter-company accounts and transactions have been eliminated in consolidation.

The accompanying  unaudited consolidated financial statements have been prepared
in  accordance  with  generally  accepted  accounting   principles  for  interim
financial information and the instructions to Form 10-Q. Certain information and
footnote  disclosures  normally  included in  financial  statements  prepared in
accordance with generally accepted accounting  principles have been condensed or
omitted  pursuant to the rules and  regulations  of the  Securities and Exchange
Commission. The accompanying unaudited consolidated financial statements and the
information included under the heading "Management's  Discussion and Analysis of
Financial  Condition and Results of  Operations"  should be read in  conjunction
with the consolidated  financial statements and related notes of the Company for
the year ended December 31, 1997.

All adjustments  which are, in the opinion of management,  considered  necessary
for a fair presentation of the financial  position and results of operations for
the interim  periods  presented 

                                       4


have been  made. Certain prior period  amounts in the financial  statements have
been reclassified to conform with the current year presentation.

(3) Fair Value Adjustments
During the second quarter of 1998 the Company recorded a $15.5 million reduction
in the carrying amount of its interest-only and residual certificates,  and also
recorded  a $1.9  million  reduction  in the  carrying  amount  of its  mortgage
servicing  rights to  reflect a  provision  for  impairment  (the  "fair  values
adjustments"). Both provisions result from reductions in the Company's estimates
of the fair values of those assets,  which reductions  resulted from a change in
the prepayment  assumptions used to estimate the future cash flows to be derived
from the interest-only and residual certificates and the servicing rights.

As required by generally  accepted  accounting  principles,  the Company at each
reporting  period  estimates  the fair value of its  interest-only  and residual
certificates  and its mortgage  servicing  rights.  The  carrying  amount of the
interest-only  and  residual  certificates  is adjusted  to the fair value.  For
mortgage  servicing rights, a valuation  allowance is recorded if the fair value
is less than the carrying amount.

The fair values of both  interest-only  and residual  certificates  and mortgage
servicing rights are significantly affected by, among other factors, prepayments
of loans and the estimates of future prepayment  rates. The Company  continually
reviews its prepayment  assumptions in light of company and industry experience,
and makes adjustments to those assumptions when such experience indicates.

During 1997 the Company  made  certain  changes in its  prepayment  assumptions,
principally    increasing   the   estimated   maximum   prepayment   rates   for
adjustable-rate loan pools. The effect of that change in prepayment  assumptions
did not  materially  affect the fair  value of the  interest-only  and  residual
certificates in 1997.

The Company again reviewed its prepayment experience and assumptions at June 30,
1998. Such review indicated that the prepayment rates during 1998,  particularly
for  adjustable-rate  mortgages,  and in particular during the second quarter of
1998,  have been  higher  than those  historically  experienced,  or  previously
projected,  by the  Company.  The  Company  believes  that  these  increases  in
prepayments  are  attributable  to the  continuation,  for a longer  period than
historically  experienced,  of low interest rates, together with recent changes,
to a flatter or  inverted  curve,  of the  relationship  between  long-term  and
short-term interest rates (the "yield curve").

As a result,  at June 30, 1998 the Company adjusted its prepayment  assumptions,
increasing the maximum  prepayment rates for all loans, and changing the rate at
which  prepayments  are assumed to increase from the initial rate to the maximum
rate from a straight-line build-up to a "vector" curve. These revised prepayment
assumptions  were used in  estimating  the fair value of the  interest-only  and
mortgage servicing rights retained by the Company in  securitizations  completed
prior to the second quarter of 1998, requiring the fair value adjustments. These
revised prepayment assumptions were also used in initially valuing and recording
the  interest-only  and  residual  certificates  and mortgage  servicing  rights
retained by the Company in its second quarter 

                                       5


1998 securitization.

The following  table compares the prepayment  assumptions  used at June 30, 1998
(the "new"  assumptions)  with those used at  December  31, 1997 and through the
first quarter of 1998 (the "old" assumptions):

--------------------------------------------------------------------------------
Loan Type              Curve Description    Month 1 Speed        Peak Speed
--------------------------------------------------------------------------------
                          Old      New       Old      New       Old      New
--------------------------------------------------------------------------------
Fixed Rate Loans         Ramp     Vector    4.8%      4.8%      24%      31%
Six-Month LIBOR ARMs     Ramp     Vector    5.6%     10.0%      28%      50%
Hybrid ARMs              Ramp     Vector    5.6%      6.0%      28%      50%
--------------------------------------------------------------------------------

(4) Earnings Per Share
The following is a reconciliation  of the denominators  used in the computations
of basic and diluted  Earnings Per Share (EPS).  The numerator  for  calculating
both basic and diluted EPS is net (loss) income.

<TABLE>
<CAPTION>

                                            Three Months Ended             Six Months Ended
                                                 June 30,                      June 30,
                                          -----------------------     ------------------------
 (Dollars in thousands, except EPS data)       1998         1997           1998        1997
----------------------------------------------------------------------------------------------
<S>                                       <C>          <C>            <C>          <C>    
Net (loss) income                            $(4,902)      $7,224         $3,349      $14,214
Weighted-average shares                   15,376,416   15,372,288     15,374,535   15,345,926
Basic EPS                                     $(0.32)       $0.47          $0.22        $0.92

Weighted-average shares                   15,376,416   15,372,288     15,374,535   15,345,926
Incremental shares-options and
    Fidelity additional shares               143,616       65,156         51,656       64,304
----------------------------------------------------------------------------------------------
                                          15,520,032   15,437,444     15,426,191   15,410,230
Diluted EPS                                   $(0.32)       $0.47          $0.22        $0.92
</TABLE>
  

(5) Stock Repurchase Plan
On May 7,  1998,  the  Company's  Board of  Directors  authorized  a program  to
repurchase  up to two  hundred  thousand  (200,000)  shares  of its  issued  and
outstanding  common stock.  No time limit has been placed on the duration of the
stock repurchase program.  Subject to applicable securities laws, such purchases
will be at times and in  amounts as the  Company  deems  appropriate  and may be
discontinued  at any time.  Repurchased  shares will be held as treasury  shares
available  for  general  corporate  purposes  including,  but  not  limited  to,
satisfying the Company's contingent share obligations to the former shareholders
of Fidelity  Mortgage,  and in connection with Delta Financial's  employee stock
plans.

 During the quarter ended June 30, 1998, the Company  repurchased  14,600 shares
of its common 

                                       6


stock under its stock repurchase plan. At June 30, 1998,  the  total  number  of
treasury shares amounted to 14,600. The repurchases may be effected from time to
time in  accordance  with  applicable  securities  laws,  through  solicited  or
unsolicited  transactions in the open market,  on the New York Stock Exchange or
in  privately  negotiated  transactions,  subject to  availability  of shares at
prices deemed appropriate by the Company.

                                       7

<PAGE>

Management's  Discussion  and Analysis of Financial  Condition  and Results of
Operations

The following  discussion  should be read in conjunction  with the  Consolidated
Financial  Statements  of the Company  and  accompanying  Notes to  Consolidated
Financial Statements set forth therein.

General

   Delta  Financial  Corporation  engages in the  consumer  finance  business by
originating,  acquiring, selling and servicing non-conforming home equity loans.
Throughout its 16 years of operating history, the Company has focused on lending
to individuals  who generally have impaired or limited credit profiles or higher
debt-to-income ratios and typically have substantial equity in their homes.

   Through its wholly-owned subsidiary,  Delta Funding Corporation,  the Company
originates home equity loans indirectly  through  licensed  mortgage brokers and
other real estate  professionals  who submit loan  applications on behalf of the
borrower  ("Brokered  Loans") and also purchases loans from mortgage bankers and
smaller  financial  institutions  that satisfy Delta's  underwriting  guidelines
("Correspondent  Loans").  Delta Funding  Corporation  currently  originates and
purchases  the  majority  of its loans in 22  states,  through  its  network  of
approximately 1,150 brokers and correspondents.

   Through its  wholly-owned  subsidiary,  Fidelity  Mortgage  Inc., the Company
develops retail loan leads ("Retail Loans")  primarily through its telemarketing
system and its network of 15 retail offices located in 9 states.

   For the  three  months  ended  June 30,  1998,  the  Company  originated  and
purchased  $450  million of loans,  an increase of 70% over the $265  million of
loans  originated  and  purchased  in the  comparable  period in 1997.  Of these
amounts,  approximately  $199  million  were  originated  through its network of
brokers,  $199 million were purchased from its network of correspondents and $52
million  were  originated  through its retail  network in the three months ended
June  30,  1998,  compared  to $103  million,  $138  million  and  $24  million,
respectively, for the same period in 1997.

   In May 1998,  the  Company  announced  that it had  entered  into a strategic
alliance to originate, underwrite and service nonconforming loans in Canada with
MCAP Mortgage Corporation and MCAP Service  Corporation.  The strategic alliance
provides that MCAP Mortgage Corp. will originate  non-conforming  mortgage loans
through its network of brokers  with all loans  being  underwritten  by Delta to
meet its underwriting  guidelines.  Once approved, the loans are funded by Delta
and serviced by MCAP Service  Corp.  The  operations in Canada will be conducted
through  a  subsidiary  of Delta  Funding  Corporation,  DFC  Funding  of Canada
Limited.  Delta's  activities in the Canadian  market in the second quarter were
not material.

   The following  table sets forth  information  relating to the delinquency and
loss experience of the mortgage loans serviced by the Company (primarily for the
securitization  trusts,  as  described  below) for the  periods  indicated.  The
Company is not the  holder of the  securitization  loans,  but  generally  holds
interest-only or residual  certificates of the trusts,  as well as the servicing
rights, each of which may be adversely affected by defaults.

                                       8


                                                     Three Months Ended
                                              ----------------------------------
(Dollars in Thousands)                         June 30, 1998     March 31, 1998
                                               -------------     --------------
Total Outstanding Principal Balance           
    (at period end).......................      $ 2,391,719        $ 2,100,124
Average Outstanding(1)....................      $ 2,285,348        $ 2,007,612
DELINQUENCY (at period end)
30-59 Days:       
    Principal Balance.....................      $   113,197          $  88,795
    Percent of Delinquency(2).............            4.73%              4.23%
60-89 Days:                                   
    Principal Balance.....................       $   38,605         $   33,401
    Percent of Delinquency(2).............            1.61%              1.59%
90 Days or More:                              
    Principal Balance.....................       $   25,688          $  22,607
    Percent of Delinquency(2).............            1.07%              1.08%
Total Delinquencies:                          
    Principal Balance.....................       $  177,490          $ 144,803
    Percent of Delinquency(2).............            7.42%              6.90%
FORECLOSURES                                  
    Principal Balance.....................       $  110,462          $ 102,743
    Percent of Foreclosures by Dollar(2)..            4.62%              4.89%
REO (at end of period)....................       $   13,648          $  13,192
Net Losses on Liquidated Loans............       $   (2,044)         $  (1,542)
Percentage of Net Losses on Liquidated Loans  
    (based on Average Outstanding Balance)(3)        (0.36%)            (0.31%)
---------------                              
(1)Calculated by summing the actual  outstanding  principal  balances at the end
   of each  month  and  dividing  the  total  by the  number  of  months  in the
   applicable period.
(2)Percentages are expressed based upon the total outstanding  principal balance
   at the end of the indicated period.
(3)Annualized

Securitizations

   As a  fundamental  part of its business and financing  strategy,  the Company
sells the majority of its loans through securitization and derives a substantial
portion of its income therefrom.  In a securitization,  the Company sells a pool
of loans it has  originated or purchased to a REMIC trust for a cash price.  The
trust,  in  turn,  finances  the  pool  of  loans  it has  acquired  by  issuing
"pass-through  certificates,"  or bonds,  which  represent  undivided  ownership
interests  in the  trust.  The  holders  of the  pass-through  certificates  are
entitled  to receive  monthly  distributions  of all  principal  received on the
underlying  mortgages and a specified  amount of interest,  as determined at the
time of the trust offering.

   When  the  Company  sells a pool of  loans to the  securitization  trust,  it
receives  the  following  economic  interests in the trust:  (a) the  difference
between  the  interest  payments  due on the  loans  sold to the  trust  and the
interest  rate  paid to the  holders  of  pass-through  certificates,  less  the
Company's   contractual   servicing   fee  and  other  costs  and   expenses  of
administering the trust, represented by interest-only and residual certificates,
and (b) the  right to  service  the  loans on 

                                       9


behalf of the trust and  earn a  contractual servicing  fee, as  well  as  other
ancillary  servicing  related fees directly from the borrowers on the underlying
loans.

   Upon the  securitization  of a pool of loans,  the Company (i)  recognizes in
income,  as origination  fees, the unamortized  origination fees included in the
investment  in the loans sold,  and (ii)  recognizes a gain on sale of loans for
the  difference  between cash received from the trust and the  investment in the
loans  remaining  after the allocation of portions of that  investment to record
interest-only  and residual  certificates  and  capitalized  mortgage  servicing
rights received in the  securitization.  The majority of the net gain on sale of
mortgage  loans  results  from,  and is  initially  realized in the form of, the
retention of interest-only and residual certificates.

   In recording and accounting for  capitalized  mortgage  servicing  rights and
interest-only and residual certificates, the Company makes estimates of rates of
prepayments  and  defaults,  and the  value of  collateral,  which  it  believes
reasonably  reflect economic and other relevant  conditions then in effect.  The
actual rate of prepayments,  defaults and the value of collateral will generally
differ from the estimates used, due to subsequent  changes in economic and other
relevant  conditions  and  the  implicit  imprecision  of  estimates,  and  such
differences can be material.  Prepayment and default rates which are higher than
those  estimated  would  adversely  affect  the  value of both  the  capitalized
mortgage  servicing rights (actual  mortgage  servicing income will be less, and
significant  changes could require an  impairment  of the  capitalized  mortgage
servicing  rights) and the interest-only  and residual  certificates,  for which
changes in fair value are recorded in  operations.  Conversely,  prepayment  and
default rates which are lower than those  estimated would increase the servicing
income earned over the life of the loans and positively  impact the value of the
interest-only and residual certificates.

   The Company has sold  interest-only  certificates  created in securitizations
for cash  proceeds  in each of its five  most  recent  quarterly  securitization
transactions  and  intends to  continue  this  practice  as long it  effectively
maximizes cash flow and profitability.

Fair Value Adjustments

   During  the  second  quarter of 1998 the  Company  recorded  a $15.5  million
reduction in the carrying amount of its interest-only and residual certificates,
and also  recorded  a $1.9  million  reduction  in the  carrying  amount  of its
mortgage  servicing  rights to reflect a  provision  for  impairment  (the "fair
values  adjustments").  Both provisions  result from reductions in the Company's
estimates of the fair values of those assets,  which reductions  resulted from a
change in the prepayment  assumptions  used to estimate the future cash flows to
be derived from the  interest-only  and residual  certificates and the servicing
rights.

   As required by generally accepted accounting principles,  the Company at each
reporting  period  estimates  the fair value of its  interest-only  and residual
certificates  and its mortgage  servicing  rights.  The  carrying  amount of the
interest-only  and  residual  certificates  is adjusted  to the fair value.  For
mortgage  servicing rights, a valuation  allowance is recorded if the fair value
is less than the carrying amount.

   The fair values of both interest-only and residual  certificates and mortgage
servicing rights are significantly affected by, among other factors, prepayments
of loans and the estimates of future prepayment  rates. The Company  continually
reviews its prepayment  assumptions in light of

                                       10


company and industry experience, and makes adjustments to those assumptions when
such experience indicates.

   During 1997 the Company made certain  changes in its prepayment  assumptions,
principally    increasing   the   estimated   maximum   prepayment   rates   for
adjustable-rate loan pools. The effect of that change in prepayment  assumptions
did not  materially  affect the fair  value of the  interest-only  and  residual
certificates in 1997.

   The Company again reviewed its prepayment  experience and assumptions at June
30,  1998.  Such  review  indicated  that  the  prepayment  rates  during  1998,
particularly for adjustable-rate  mortgages, and in particular during the second
quarter of 1998,  have been  higher  than  those  historically  experienced,  or
previously projected,  by the Company. The Company believes that these increases
in prepayments are  attributable to the  continuation,  for a longer period than
historically  experienced,  of low interest rates, together with recent changes,
to a flatter or  inverted  curve,  of the  relationship  between  long-term  and
short-term interest rates (the "yield curve").

   As  a  result,   at  June  30,  1998  the  Company  adjusted  its  prepayment
assumptions, increasing the maximum prepayment rates for all loans, and changing
the rate at which  prepayments  are assumed to increase from the initial rate to
the  maximum  rate from a  straight-line  build-up  to a "vector"  curve.  These
revised  prepayment  assumptions  were used in estimating  the fair value of the
interest-only  and  mortgage   servicing  rights  retained  by  the  Company  in
securitizations  completed  prior to the second  quarter of 1998,  requiring the
fair value adjustments.  These revised prepayment  assumptions were also used in
initially valuing and recording the interest-only and residual  certificates and
mortgage  servicing  rights  retained by the Company in its second  quarter 1998
securitization.

   The following table compares the prepayment assumptions used at June 30, 1998
(the "new"  assumptions)  with those used at  December  31, 1997 and through the
first quarter of 1998 (the "old" assumptions):

--------------------------------------------------------------------------------
Loan Type              Curve Description    Month 1 Speed        Peak Speed
--------------------------------------------------------------------------------
                          Old      New       Old      New       Old      New
--------------------------------------------------------------------------------
Fixed Rate Loans         Ramp     Vector    4.8%      4.8%      24%      31%
Six-Month LIBOR ARMs     Ramp     Vector    5.6%     10.0%      28%      50%
Hybrid ARMs              Ramp     Vector    5.6%      6.0%      28%      50%
--------------------------------------------------------------------------------


                                       11

Results of Operations

Three Months  Ended June 30, 1998  Compared to the Three Months Ended June 30,
1997

Revenues

   Total  revenues  for the three  months  ended June 30,  1998  decreased  $9.8
million,  or 32%, to $20.7 million from $30.5 million for the comparable  period
in 1997. This decrease was primarily  attributable to the fair value adjustments
the Company made to its interest-only and residual  certificates and capitalized
mortgage  servicing  rights in the second  quarter of 1998.  (See  "-Fair  Value
Adjustments").  This  was  partially  offset  by an  increase  in the  net  gain
recognized on the sale of mortgage loans, reflecting the growth in the Company's
level of loan  originations,  purchases and  securitizations  and an increase in
origination fees as a result of increased loan originations.

   For the  three  months  ended  June 30,  1998,  the  Company  originated  and
purchased $450 million of mortgage loans,  representing a 70% increase from $265
million of mortgage  loans  originated  and purchased for the three months ended
June 30, 1997. The Company  completed a $445 million  securitization  during the
three months ended June 30, 1998  compared to a $260 million  securitization  in
the corresponding period in the prior year,  representing a 71% increase.  Total
loans  serviced  at June 30,  1998  increased  82% to $2.39  billion  from $1.31
billion at June 30, 1997.

   Net  Gain on Sale of  Mortgage  Loans.  Net  gain on sale of  mortgage  loans
represents  (i) the sum of (a)  the  fair  value  of the  residual  certificates
associated  with loans  securitized  in each period and the market  value of the
sold  interest-only  strips,  and (b) the  fair  value of  capitalized  mortgage
servicing rights associated with loans securitized in each period, (ii) less the
(x) premiums paid to originate or acquire  mortgage loans,  (y) costs associated
with securitizations and (z) any hedge loss (gain).

   For the three months ended June 30, 1998,  net gain on sale of mortgage loans
increased  $6.3  million,  or 34%, to $24.8  million from $18.5  million for the
three  months  ended June 30,  1997.  This  increase  was  primarily  due to the
increase  in the  amount  of loans  securitized  in the  first  quarter  of 1998
compared  to the  same  period  in 1997,  but was  partially  offset  by a lower
weighted  average net gain on sale ratio.  The weighted average net gain on sale
ratio,  which is calculated by dividing the net gain on sale by the total amount
of loans  securitized,  was 5.6%  compared to 7.1% for the six months ended June
30, 1997.

   Net gains from the sale of loans increased less than the overall  increase in
loan  securitizations  primarily  because of (a) the current  period change to a
more   conservative   prepayment   assumption  used  in  initially  valuing  the
interest-only  and  residual  certificates  acquired in the second  quarter 1998
securitization  (see "-Fair Value Adjustments") and (b) a lower weighted average
coupon of 10.2% from 11.3%  reflecting  the  Company's  shift to a higher credit
quality  borrower  which  reduced the value of the  interest-only  and  residual
certificates  the Company  received in connection  with the second  quarter 1998
securitization.

   Interest Income. Interest income primarily represents the sum of (i) interest
earned on loans held for sale, (ii) interest earned on cash collection balances,
and (iii) the difference  between the  distributions the Company receives on its
interest-only and residual  certificates and the adjustments recorded to reflect
the change in the fair value of the interest-only and residual 

                                       12


certificates.

      Interest  income for the three months ended June 30, 1998 decreased  $16.7
million,  or 265%, to ($10.4) million from $6.3 million in the comparable period
in 1997. The decrease in interest  income was primarily due to the $15.5 million
fair value adjustment to the interest-only and residual certificates  previously
discussed  (see "-Fair Value  Adjustments").  The effect of that  adjustment was
partially  offset by increases in interest  income  produced by higher levels of
both loans held for sale and interest-only and residual  certificates.  However,
interest income from loans held for sale was reduced by a decline, from 11.3% to
10.2%,  in the weighted  average coupon rate on the mortgage  loans,  reflecting
both lower  interest  rates and the  Company's  shift to higher  credit  quality
loans.


   Servicing  Fees.  Servicing  fees  represent  all  contractual  and ancillary
servicing  revenue received by the Company less (a) the offsetting  amortization
of the capitalized  mortgage servicing rights,  and any adjustments  recorded to
provide  valuation   allowances  for  the  impairment  in  capitalized  mortgage
servicing rights and (b) prepaid interest shortfalls.

      Servicing  fees for the three  months ended June 30, 1998  decreased  $1.5
million,  or 79%, to $0.4 million from $1.9 million in the comparable  period in
1997.  This  decrease  was  primarily  due  to  recording  of the  $1.9  million
impairment  provision for the Company's mortgage  servicing rights.  (See "-Fair
Value  Adjustments").  Partially  offsetting  the  effect of this  charge was an
increase in servicing fees  reflecting the increase in the aggregate size of the
Company's servicing portfolio.  During the three months ended June 30, 1998, the
average balance of mortgage loans serviced by the Company increased 83% to $2.29
billion from $1.25 billion during the comparable period in 1997.

   Origination  Fees.  Origination  fees  represent  fees earned on brokered and
retail  originated  loans.  Origination fees for the three months ended June 30,
1998  increased  $2.1 million,  or 55%, to $5.9 million from $3.8 million in the
comparable  period in 1997.  The increase is  primarily  the result of increased
Brokered and Retail loan originations.

Expenses

   Total expenses  increased  $10.9 million,  or 61%, to $28.7 million for three
months  ended June 30, 1998,  from $17.8  million for the  comparable  period in
1997.  The  increase  in  expenses  was  primarily  the result of (i)  increased
interest  expense due to (a) higher  interest  cost  associated  with  increased
borrowings  under the  Company's  warehouse  facilities to finance the growth in
loan origination and purchase  activities,  and (b) the issuance in July 1997 of
$150  million  aggregate  principal  amount of 9.5%  Senior  Notes due 2004 (the
"Senior  Notes"),  (ii) an increase in the  Company's  personnel  to support its
higher level of loan originations, and (iii) costs associated with the expansion
of the Company's retail, broker and correspondent divisions.

   Payroll  and Related  Costs.  Payroll and  related  costs  include  salaries,
benefits  and  payroll  taxes  for all  employees.  Payroll  and  related  costs
increased $4.1 million, or 46%, to $13.1 million for the three months ended June
30, 1998 from $9.0 million for the comparable  period in 1997.  This increase is
primarily  due to staff  increases  related  to  growth  in the  Company's  loan
originations and the costs associated with the Company's  broker,  correspondent
and Fidelity 

                                       13


Mortgage  retail  division. As of June 30, 1998, the Company employed 980  full-
and  part-time employees, compared  to 722 full- and  part-time employees as  of
June 30, 1997.

   Interest  Expense.  Interest  expense includes the borrowing costs to finance
loan originations and purchases under (i) the Company's credit facilities,  (ii)
the  Senior  Notes  and (iii)  its  investment  in  interest-only  and  residual
certificates.

   For the three months ended June 30, 1998,  interest  expense  increased  $3.7
million,  or 95%, to $7.6 million from $3.9 million for the comparable period in
1997. The increase in interest  expense was  attributable  to (i) growth in loan
production,  which  increased  the level of debt  needed  throughout  the second
quarter of 1998 to finance the  inventory  of loans held for sale prior to their
securitization and (ii) the Company's issuance in July 1997 of the Senior Notes.

   General and  Administrative  Expenses.  General and  administrative  expenses
consist primarily of office rent, insurance, telephone,  depreciation,  goodwill
amortization,  travel  and  entertainment  expenses,  license  fees,  legal  and
accounting fees, postage expenses,  office supplies,  credit reporting,  repairs
and maintenance, advertising and promotional expenses and the provision for loan
losses on the inventory of loans held for sale and recourse loans.

   For the three months ended June 30, 1998, general and administrative expenses
increased  $3.0  million,  or 61%,  to $7.9  million  from $4.9  million for the
comparable  period in 1997. This increase was primarily  attributable to (i) the
expansion costs associated with the Company's  increasing the number of Fidelity
Mortgage  retail  branch  offices  from eight to fifteen and (ii) an increase in
expenses   associated  with  the  Company's   increased  loan  originations  and
purchases.

   Income Taxes. Income taxes are accounted for under SFAS No. 109,  "Accounting
for Income  Taxes."  Deferred tax assets and  liabilities  are recognized on the
income  reported in the financial  statements  regardless of when such taxes are
paid. These deferred taxes are measured by applying current enacted tax rates.

   The Company  recorded a tax benefit of $3.1  million and a provision  of $5.4
million for the three month periods ended June 30, 1998 and 1997, respectively.

   Income taxes  provided a 39.0%  effective tax rate for the three months ended
June 30, 1998, compared to a 42.7% effective tax rate for the three months ended
June 30, 1997. The reduction in the effective tax rate is primarily attributable
to the Company's  expansion  into lower tax rate states and local  jurisdictions
and to the benefits for permanent book/tax differences.

Six Months Ended June 30, 1998 Compared to the Six Months Ended June 30, 1997

Revenues

   Total revenues for the six months ended June 30, 1998 increased $4.0 million,
or 7%, to $61.8  million from $57.8 million for the  comparable  period in 1997.
The increase in revenue was  primarily  attributable  to the increase in the net
gain  recognized  on the sale of mortgage  loans,  reflecting  the growth in the
Company's level of loan  originations,  purchases and  securitizations.  Revenue
also  increased in origination  fees as a direct result of increased  broker and
retail loan  origination  volume.  These increases were partially  offset by the
fair value  adjustments  the  Company  made to its  interest-only  and  residual
certificates, and capitalized mortgage servicing rights in the second quarter of
1998. (See "-Fair Value Adjustments").

                                       14


   For the six months ended June 30, 1998, the Company  originated and purchased
$836 million of mortgage loans, representing a 67% increase from $502 million of
mortgage loans  originated and purchased for the six months ended June 30, 1997.
The Company completed two  securitizations  totaling $845 million during the six
months ended June 30, 1998 compared to two securitizations totaling $495 million
in the  corresponding  period in the prior year,  representing  a 71%  increase.
Total loans  serviced at June 30, 1998 increased 82% to $2.39 billion from $1.31
billion at June 30, 1997.

   Net Gain on Sale of Mortgage  Loans.  For the six months ended June 30, 1998,
net gain on sale of mortgage loans  increased  $15.8  million,  or 44%, to $51.6
million from $35.8 million for the six months ended June 30, 1997. This increase
was  primarily  due to the  increase in the amount of loans  securitized  in the
first  quarter of 1998  compared to the same period in 1997,  but was  partially
offset by a lower weighted  average net gain on sale ratio. The weighted average
net gain on sale ratio was 6.1%  compared to 7.2% for the six months  ended June
30, 1997.

   Net gains from the sale of loans increased less than the overall  increase in
loan  securitizations  primarily  due to a lower  mortgage  coupon of 10.3% from
11.3%  reflecting the Company's shift to a higher credit quality  borrower which
reduced the value of the  interest-only  and residual  certificates  the Company
received in connection with securitizations during that period. In addition, the
value of the residual  certificate and  capitalized  mortgage  servicing  rights
retained  in the  Company's  second  quarter  1998  securitization  were  lower,
relative  to those  retained in  securitizations  in prior  periods,  due to the
change in the Company's prepayment assumptions (see "-Fair Value Adjustments").

      Interest  Income.  Interest  income for the six months ended June 30, 1998
decreased  $15.6 million to ($3.7)  million from $11.9 million in the comparable
period in 1997.  The decrease in interest  income was primarily due to the $15.5
million fair value  adjustment to the  interest-only  and residual  certificates
previously  discussed  (see  "-Fair  Value  Adjustments").  The  effect  of that
adjustment  was  partially  offset by increases in interest  income  produced by
higher  levels  of both  loans  held  for sale and  interest-only  and  residual
certificates. However, interest income from loans held for sale was reduced by a
decline,  from  11.3% to  10.3%,  in the  weighted  average  coupon  rate on the
mortgage loans,  reflecting both lower interest rates and the Company's shift to
higher credit quality loans.

   Servicing  Fees.  Servicing  fees for the six  months  ended  June  30,  1998
decreased  $1.0  million,  or 30%,  to $2.3  million  from $3.3  million  in the
comparable  period in 1997.  This decrease was primarily due to recording of the
$1.9 million provision for the Company's mortgage servicing rights.  (See "-Fair
Value  Adjustments").  Partially  offsetting  the  effect of this  charge was an
increase in servicing fees  reflecting the increase in the aggregate size of the
Company's  servicing  portfolio.  During the six months ended June 30, 1998, the
average balance of mortgage loans serviced by the Company increased 87% to $2.15
billion from $1.15 billion during the comparable period in 1997.

   Origination  Fees.  Origination  fees for the six months  ended June 30, 1998
increased  $4.8  million,  or 71%,  to $11.6  million  from $6.8  million in the
comparable  period in 1997.  The increase is  primarily  the result of increased
Broker and Retail loan originations.

                                       15


Expenses

   Total  expenses  increased  $23.9  million,  or 73%, to $56.8 million for six
months  ended June 30, 1998,  from $32.9  million for the  comparable  period in
1997. This increase was primarily the result of (i) increased  interest expense,
(ii) an increase in the Company's  personnel to support its higher level of loan
originations,  and (iii) costs  associated  with the  expansion of the Company's
retail, broker and correspondent divisions.

   Payroll and Related  Costs.  For the six months ended June 30, 1998,  payroll
and related costs expense increased $9.5 million,  or 56%, to $26.4 million from
$16.9 million for the comparable  period in 1997. This increase is primarily due
to staff increases  related to growth in the Company's loan originations and the
costs associated with the Company's broker,  correspondent and Fidelity Mortgage
retail division, which only reflects expenses from February 11, 1997. As of June
30, 1998, the Company employed 980 full- and part-time employees compared to 722
full- and part-time employees as of June 30, 1997.

   Interest  Expense.  For the six months ended June 30, 1998,  interest expense
increased  $7.6  million,  or 107%,  to $14.7  million from $7.1 million for the
comparable  period in 1997. The increase in interest expense was attributable to
(i)  growth  in loan  production,  which  increased  the  level  of debt  needed
throughout  the first six months of 1998 to finance the  inventory of loans held
for  sale  prior to their  securitizations,  (ii) a higher  cost of funds on the
Company's  credit  facilities  which were tied to  one-month  London  Inter-Bank
Offered Rate ("LIBOR"),  which increased to an average  interest rate of 5.7% in
the six months ended June 30, 1998, compared to an average interest rate of 5.6%
for the comparable period in 1997, and (iii) the Company's issuance in July 1997
of the Senior  Notes.  This  increase was  partially  offset by the reduction in
interest  expense  attributable  to the Company's  repayment of financing on its
interest-only and residual certificates in July 1997.

   General and Administrative  Expenses. For the six months ended June 30, 1998,
general and  administrative  expenses  increased $6.8 million,  or 76%, to $15.7
million from $8.9 million for the comparable  period in 1997.  This increase was
primarily  attributable to (i) the expansion costs associated with the Company's
increasing  the number of Fidelity  Mortgage  retail branch offices from five to
fifteen and (ii) an increase in expenses associated with the Company's increased
loan originations and purchases.

   Income  Taxes.  The Company  recorded a tax  provision  of $1.7 million and
$10.6 million for the six months ended June 30, 1998 and 1997, respectively.

   Income  taxes  provided a 33.9%  effective  tax rate for the six months ended
June 30, 1998, compared to a 42.8% assumed effective tax rate for the six months
ended June 30,  1997.  The  reduction  in the  effective  tax rate is  primarily
attributable  to the  Company's  expansion  into lower tax rate states and local
jurisdictions and to the benefits for permanent book/tax differences.

Financial Condition

June 30, 1998 compared to December 31, 1997

   Cash and interest bearing deposits  increased $5.0 million,  or 15%, to $37.9
million at June 30, 1998 from $32.9  million at December 31, 1997.  The increase
was  primarily  the result of

                                       16


additional monies  held in securitization  trust accounts by the Company, acting
as servicer for its ongoing securitization program.

   Accounts receivable  decreased $5.5 million, or 18%, to $25.7 million at June
30, 1998 from $31.2  million at December  31, 1997.  The decrease was  primarily
attributable  to the  receipt  of a federal  tax refund  partially  offset by an
increase in  reimbursable  servicing  advances  made by the  Company,  acting as
servicer  on  its  securitizations,   related  to  a  higher  average  servicing
portfolio.  The Company's  servicing portfolio increased 30% to $2.39 billion as
of June 30, 1998 from $1.84 billion as of December 31, 1997.

   Loans held for sale increased  $2.7 million,  or 3%, to $81.9 million at June
30, 1998 from $79.2  million at December 31, 1997.  This increase was the result
of a lower  percentage of loans  securitized  compared to loans  originated  and
purchased,  in the second  quarter of 1998, as compared to the fourth quarter of
1997.

   Accrued interest and late charges receivable  increased $8.2 million, or 28%,
to $37.8 million at June 30, 1998 from $29.6 million at December 31, 1997.  This
increase was primarily due to a higher  average loan servicing  portfolio  which
resulted in increased reimbursable interest advances made by the Company, acting
as servicer on its securitizations.

   Capitalized  mortgage  servicing  rights  increased $4.0 million,  or 17%, to
$26.9 million at June 30, 1998,  from $22.9  million at December 31, 1997.  This
increase was directly attributable to the Company's capitalizing the fair market
value  of the  servicing  assets,  totaling  $9.8  million,  resulting  from the
Company's completion of two securitizations during the first six months of 1998,
partially  offset by the amortization of capitalized  mortgage  servicing rights
and the fair value adjustment (see "-Fair Value Adjustments").

   Interest-only and residual  certificates  increased $16.1 million, or 10%, to
$183.9 million at June 30, 1998 from $167.8  million at December 31, 1997.  This
increase  is  primarily  attributable  to  the  Company's  receipt  of  residual
certificates  valued and  recorded at $23.9  million and $24.1  million from its
securitizations  during the six months  ended June 30,  1998.  The  increase was
partially  offset by the effect of the fair  value  adjustment  to the  residual
certificates.

   Equipment,  net, increased $3.2 million, or 29%, to $14.4 million at June 30,
1998 from $11.2 million at December 31, 1997.  The increase was primarily due to
capital expenditures related to new technology and continued expansion.

   Cash held for  advance  payments  increased  $2.2  million,  or 35%,  to $8.5
million at June 30, 1998 from $6.3 million at December  31,  1997.  The increase
was  primarily due to a higher  average loan  servicing  portfolio  resulting in
additional  monies held in escrow  trust  accounts  by the  Company  acting as a
servicer.

   Warehouse financing and other borrowings  increased $22.0 million, or 78%, to
$50.2  million at June 30, 1998 from $28.2  million at December 31,  1997.  This
increase was primarily  related to the  operating  cash deficit and, to a lesser
extent,  to fund  purchases of equipment  and an increase in the amount of loans
for sale.

   The aggregate principal balance of the Senior Notes totaled $149.3 million at
June 30,  1998,  net of  unamortized  bond  discount.  The Senior  Notes  accrue
interest at a rate of 9.5% per annum,  payable  semi-annually  on February 1 and
August 1. The Company did not have any Senior  Notes

                                       17


outstanding  prior to July 1997.

   Accounts payable and accrued expenses  increased $1.3 million or 8%, to $16.8
million at June 30, 1998 from $15.5 million at December 31, 1997.  This increase
was primarily  attributable to Fidelity Mortgage  additional earn out payable in
the Company's stock during August 1998.

   Investor  payable  increased $10.5 million,  or 26%, to $51.4 million at June
30, 1998 from $40.9  million at December 31, 1997.  This  increase was primarily
due to the 30% increase in the Company's  portfolio of serviced loans.  Investor
payable is comprised of all  principal  collected on mortgage  loans and accrued
interest. Variability in this account is primarily due to the principal payments
collected within a given collection period.

   Advance payments by borrowers for taxes and insurance increased $2.1 million,
or 36%, to $7.9 million at June 30, 1998 from $5.8 million at December 31, 1997.
This increase is primarily due to a higher average loan servicing  portfolio and
the timing of payments  collected and disbursed  resulting in additional  monies
held in escrow trust accounts by the Company acting as a servicer.

   Stockholders' equity increased $3.1 million, or 2%, to $129.6 million at June
30, 1998 from $126.5  million at December 31, 1997.  This increase is due to net
income of $3.4  million  for the six month  period  ending June 30, 1998 and was
partially  offset by the  Company's  repurchase  of 14,600  shares of its common
stock for $0.3 million.

Liquidity and Capital Resources

   While the Company has historically operated on a negative cash flow basis due
primarily to increases in the volume of loan purchases and  originations and the
growth of its securitization  program, the Company has reduced its negative cash
flow in recent  quarters,  and expects to continue to do so for the  foreseeable
future, as a result of (a) increased cash inflows reflecting the increase in the
aggregate  amount  of  the  Company's   retained   interest-only   and  residual
certificates,  (b) changes in the securitization structures that the Company has
utilized, and (c) the Company's  concentration on the less cash-intensive broker
and retail originations (as compared to correspondent purchases). Currently, the
Company's  primary  cash  requirements  include  the  funding  of  (i)  mortgage
originations  and purchases  pending their pooling and sale, (ii) the points and
expenses paid in connection with the acquisition of correspondent  loans,  (iii)
interest  expense on its Senior Notes and warehouse and other  financings,  (iv)
fees,  expenses and tax payments incurred in connection with its  securitization
program,  and (v)  ongoing  administrative  and other  operating  expenses.  The
Company has relied upon a few lenders to provide the primary  credit  facilities
for its loan originations and purchases.

   The Company must be able to sell loans and obtain adequate credit  facilities
and other  sources of funding in order to continue  to  originate  and  purchase
loans.  For the six  months  ended  June 30,  1998 and  1997,  the  Company  had
operating  cash  deficits  of  $10.9  million  and  $33.6,   respectively.   The
improvement  of the  operating  cash  deficit  from  1997  compared  to 1998 was
primarily  due to increased  cash inflows from the Company's  interest-only  and
residual  certificates,  changes  in the  securitization  structures  related to
interest-only certificates,  a one-time tax refund, an increase in the Company's
restricted cash held for securitization trust accounts and a lower percentage of
Correspondent loan purchases.

                                       18


      Since  the   second   quarter   of  1997,   Delta  has  (a)   utilized   a
senior/subordinate  securitization  structure,  which  generally  carries  lower
overcollateralization   levels  because  the  subordinate  certificates  provide
additional  credit  support to the senior  certificates,  thereby  allowing  the
Company to receive cash inflows sooner, and (b) sold the senior (i.e.,,  AAA/Aaa
by Standard & Poor's  Ratings  Group,  Fitch  IBCA,  Inc.  and Moody's  Investor
Services,  Inc.)  interest-only   certificates.   In  addition,  due  to  market
conditions,   the  Company  was  able  to  sell  larger   senior   interest-only
certificates  in connection  with its last two  securitizations,  as compared to
sales of senior interest-only certificates related to prior securitizations. The
increase in cash  inflows  from these  changes in the  Company's  securitization
structure, together with increased cash inflows from the Company's interest-only
and residual  certificates,  receipt of a tax refund,  an increase in restricted
cash held for securitization trusts,  partially offset by the semi-annual Senior
Note interest payment, resulted in additional cash flow for the six months ended
June 30, 1998 compared to 1997.

   Historically,  the Company has utilized various  financing  facilities and an
equity  financing  to offset  negative  operating  cash  flows and  support  the
continued  growth of its loan  originations and purchases,  securitizations  and
general operating expenses. On July 23, 1997, the Company completed its offering
of the Senior  Notes.  A portion of the Senior Notes  proceeds  were used to pay
down various financing  facilities with the remainder used to fund the Company's
growth  in  loan  originations  and  purchases  and its  ongoing  securitization
program. The Company's primary sources of liquidity continue to be warehouse and
other financing  facilities,  securitizations and, subject to market conditions,
sales of whole loans and additional debt and equity securities.

   To  accumulate  loans for  securitization,  the  Company  borrows  money on a
short-term  basis  through  warehouse  lines of credit.  The  Company  has three
warehouse  facilities for this purpose. One warehouse facility is a $400 million
committed  credit line with a variable  rate of interest and a maturity  date of
February  1999.  This facility was converted  from an uncommitted to a committed
line during the three  months  ended March 31,  1997 and the  maturity  date was
extended from February 1998 to February 1999 during the three months ended March
31, 1998. The Company's  second warehouse  facility is a $250 million  committed
revolving  line with a variable  rate of  interest  and a maturity  date of June
1999.  The  Company's  third  warehouse  facility is a  syndicated  $150 million
committed revolving line with a variable rate of interest and a maturity date of
June 1999.  This facility was increased from $140 million to $150 million during
the three  months  ended  June 30,  1998.  The  outstanding  balance on the $400
million  facility  as of June 30,  1998 was $44.6  million.  The  Company had no
outstanding balances for the $250 million facility and the $150 million facility
as of June 30, 1998.

   The Company has in the past obtained  financing  facilities for interest-only
and residual  certificates  acquired as part of its securitizations.  As of June
30, 1998, the Company did not have any indebtedness secured by interest-only and
residual  certificates.  In addition, the Company is limited by the terms of the
Indenture  governing  the Senior  Notes as to the amount of future  indebtedness
permitted to be secured by interest-only and residual certificates.

   The  Company is  required  to comply with  various  operating  and  financial
covenants as provided in the agreements  described above which are customary for
agreements  of their  type.  The  Company  does not  believe  that its  existing
financial  covenants  will  restrict its  operations  or growth.  The  continued
availability of funds provided to the Company under these  agreements is subject
to the Company's continued compliance with these covenants.  Management believes
that

                                       19


the Company is in compliance with all  such covenants under these  agreements as
of June 30, 1998.

   The Company purchased a total of 14,600 shares of its common stock during the
quarter  ended June 30,  1998,  under the  Company's  ongoing  stock  repurchase
program,  at a total cost of $0.3 million.  All of the  repurchased  shares were
purchased in open market transactions at their prevailing market prices.

Interest Rate Risk

      The  Company's  primary  market  risk  exposure  is  interest  rate  risk.
Profitability  may be  directly  affected by the level of, and  fluctuation  in,
interest  rates,  which affect the  Company's  ability to earn a spread  between
interest  received on its loans and the costs of its borrowings,  which are tied
to various United States Treasury  maturities and the London Inter-Bank  Offered
Rate  ("LIBOR").  The  profitability  of the  Company is likely to be  adversely
affected  during any period of unexpected or rapid changes in interest  rates. A
substantial and sustained  increase in interest rates could adversely affect the
Company's  ability to purchase and originate  loans.  A  significant  decline in
interest rates could increase the level of loan prepayments  thereby  decreasing
the size of the Company's  loan  servicing  portfolio.  To the extent  servicing
rights  and  interest-only  and  residual  classes  of  certificates  have  been
capitalized on the books of the Company,  higher than anticipated  rates of loan
prepayments  or losses could require the Company to write down the value of such
servicing  rights  and  interest-only  and  residual   certificates,   adversely
impacting earnings. As previously discussed, the fair value adjustments that the
Company  recorded in the second quarter of 1998 were primarily  attributable  to
the Company's change in prepayment assumptions to reflect higher than originally
anticipated rates of prepayments. (See "-Fair Value Adjustments").  In an effort
to mitigate  the effect of interest  rate risk,  the  Company has  reviewed  its
various   mortgage   products  and  has   identified  and  modified  those  that
historically  proved more susceptible to prepayments.  However,  there can be no
assurance that such modifications to its product line will effectively  mitigate
interest rate risk in the future.

   Fluctuating  interest rates also may affect the net interest income earned by
the Company  resulting from the  difference  between the yield to the Company on
loans held pending sales and the interest paid by the Company for funds borrowed
under the Company's  warehouse  facilities,  although the Company  undertakes to
hedge its exposure to this risk by using treasury rate lock contracts.

Hedging

   The  Company  originates  and  purchases  mortgage  loans and then sells them
primarily through securitizations. At the time of securitization and delivery of
the  loans,  the  Company  recognizes  gain on sale based on a number of factors
including the difference, or "spread" between the interest rate on the loans and
the interest rate on treasury  securities with maturities  corresponding  to the
anticipated  life of the loans.  If  interest  rates rise  between  the time the
Company  originates  or  purchases  the loans and the time the loans are sold at
securitization,  the excess spread narrows,  resulting in a loss in value of the
loans. The Company has implemented a strategy to protect against such losses and
to reduce interest rate risk on loans originated and purchased that have not yet
been  securitized  through the use of treasury rate lock  contracts with various
durations  (which are similar to selling a combination of United States Treasury
securities),  which equate to

                                       20


a  similar  duration  of the  underlying  loans.  The  nature  and  quantity  of
hedging  transactions  are determined by the Company based upon various  factors
including,  without  limitation,  market  conditions and the expected  volume of
mortgage  originations and purchases.  The Company will enter into treasury rate
lock contracts through one of its warehouse lenders and/or one of the investment
bankers which  underwrite  the Company's  securitizations.  These  contracts are
designated  as hedges  in the  Company's  records  and are  closed  out when the
associated loans are sold through securitization.

   If the value of the hedges  decrease,  offsetting an increase in the value of
the loans,  the Company,  upon  settlement with its  counterparty,  will pay the
hedge loss in cash and  realize the  corresponding  increase in the value of the
loans as part of its net gain on sale of  mortgage  loans and its  corresponding
interest-only and residual certificates.  Conversely, if the value of the hedges
increase,  offsetting a decrease in the value of the loans,  the  Company,  upon
settlement  with its  counterparty,  will  receive  the  hedge  gain in cash and
realize the corresponding decrease in the value of the loans through a reduction
in the value of the corresponding interest-only and residual certificates.

   The Company believes that its current hedging strategy of using treasury rate
lock  contracts is the most  effective  way to manage its interest  rate risk on
loans prior to securitization.  Because the Company's  securitization  closed on
June 30, 1998, the Company had no hedge outstanding as of that date.

Information Services Year 2000 Project

   The Year 2000 Problem  centers on the inability of some  computer  systems to
recognize  the year 2000.  Many  existing  computer  programs  and systems  were
originally  programmed  with six digit  dates that  provided  only two digits to
identify the calendar year in the data field,  without  considering the upcoming
change  in the  century.  With  the  impending  millenium,  these  programs  and
computers  may recognize  "00" as the year 1900 rather than the year 2000.  Like
most  financial  service  providers,  the  Company  and  its  operations  may be
significantly  affected by the Year 2000  Problem due to the nature of financial
information.  Software,  hardware,  and  equipment  both  within and outside the
Company's  direct  control  and  with  which  the  Company   electronically   or
operationally  interfaces (e.g.  third party vendors  providing data processing,
information  system  management,  maintenance  of computer  systems,  and credit
bureau information) are likely to be affected.  Furthermore, if computer systems
are not adequately changed to identify the year 2000, many computer applications
could fail or create erroneous  results.  As a result,  many calculations  which
rely on the date field information,  such as interest,  payment or due dates and
other operating  functions,  will generate  results which could be significantly
misstated,  and the Company  could  experience a temporary  inability to process
transactions,  send invoices or engage in similar normal business activities. In
addition,  under certain  circumstances,  failure to adequately address the Year
2000 Problem could adversely affect the viability of the Company's suppliers and
creditors and the  creditworthiness  of its  borrowers.  Thus, if not adequately
addressed,  the Year 2000 Problem could result in a material  adverse  impact on
the Company's products,  services and competitive  condition and therefore,  its
results of operations.

   The Company has developed and is  implementing  a Year 2000 Project Plan (the
"Plan") to address the Year 2000  Problem and its  effects on the  Company.  The
Plan  includes  five  components  which  address  issues  involving   awareness,
assessment,  renovation, validation and 

                                       21


implementation.  As  part  of  the Plan,   the  Company  has  initiated   formal
communications with all of its significant  suppliers to determine the extent to
which the Company is  vulnerable  to those third  parties'  failure to remediate
their  own  Year  2000  Problem.   The  Company  presently  believes  that  with
modifications to existing  software and conversions to new software and hardware
where  necessary,  the Year 2000  Problem will be  mitigated  without  causing a
material  adverse  impact on the  operations  of the Company.  However,  if such
modifications and conversions are not made or are not completed timely, the Year
2000 Problem could have an adverse impact on the operations of the Company.

   Monitoring  and managing the Year 2000 Project Plan will result in additional
direct and indirect costs to the Company. Direct costs include potential charges
by third party  software  vendors for product  enhancements,  costs  involved in
testing software products for the Year 2000 compliance, and costs for developing
and implementing  contingency plans for critical software products which are not
enhanced.  Indirect  costs  will  principally  consist  of the time  devoted  by
existing  employees in monitoring  software vendor  progress,  testing  enhanced
software  products and developing  and  implementing  any necessary  contingency
plans.  Both direct and indirect  costs of addressing the Year 2000 Problem will
be charged to earnings as incurred.  Such costs have not been  material to date.
The  Company  does not  believe  that such costs will have a material  effect on
results of operations,  although there can be no assurance that such costs would
not become material in the future.

New Accounting Pronouncements

SFAS No. 130

   SFAS No. 130, "Reporting on Comprehensive Income" was issued in June 1997 and
is effective for fiscal years  beginning  after December 15, 1997.  SFAS No. 130
establishes  standards for reporting and display of comprehensive income and its
components   (revenues,   expenses,   gains  and   losses)  in  a  full  set  of
general-purpose financial statements.  The Statement requires all items that are
required  to  be  recognized  under   accounting   standards  as  components  of
comprehensive  income to be reported in a financial  statement that is displayed
with  the same  prominence  as  other  financial  statements.  The  Company  has
determined that the  implementation of the requirements of SFAS No. 130 will not
affect the Company's net income, cash flows or financial position.

SFAS No. 131

   SFAS No.  131  "Disclosures  about  Segments  of an  Enterprise  and  Related
Information" was issued in June 1997 and is effective for fiscal years beginning
after  December 15, 1997.  SFAS No. 131  establishes  standards for the way that
public business  enterprises  report  information  about  operating  segments in
annual financial  statements and requires that those enterprises report selected
information  about  operating  segments in interim  financial  reports issued to
shareholders.  The Statement  requires a public business  enterprise to report a
measure of segment profit or loss,  certain  specific  revenue and expense items
and segment assets.  The Company has determined that the  implementation  of the
requirements of SFAS No.131 will not affect the Company's net income, cash flows
or financial position.

SFAS No. 133

   In June 1998, SFAS No. 133 was issued, "Accounting for Derivative Instruments
and

                                       22


Hedging  Activities."  SFAS No. 133 is effective for  fiscal  years  that  begin
after June 15,  1999,  and in  general  requires  that  entities  recognize  all
derivative  financial  instruments  as assets or  liabilities,  measured at fair
value,  and include in earnings the changes in the fair value of such assets and
liabilities. SFAS No. 133 also provides that changes in the fair value of assets
or liabilities being hedged with recognized derivative instruments be recognized
and included in earnings.  The Company has not yet completed  its  evaluation of
SFAS No. 133, and therefore at this time cannot predict what, if any, effect its
adoption will have on the Company's results of operations or financial position.

Risk Factors

   Except for historical information contained herein, certain matters discussed
in this Form 10-Q are  "forward-looking  statements"  as defined in the  Private
Securities  Litigation  Reform  Act  (PSLRA)  of 1995,  which  involve  risk and
uncertainties that exist in the Company's  operations and business  environment,
and are subject to change on various  important  factors.  The Company wishes to
take  advantage  of the "safe  harbor"  provisions  of the  PSLRA by  cautioning
readers that numerous  important factors discussed below,  among others, in some
cases have caused, and in the future could cause the Company's actual results to
differ  materially from those expressed in any  forward-looking  statements made
by, or on behalf of, the Company.  The following  include some,  but not all, of
the  factors or  uncertainties  that could cause  actual  results to differ from
projections:

      *  A general economic slowdown.

      *  Increases in prepayments or loan losses that could require the Company
         to write  down  further  the value of its  interest-only  and  residual
         certificates and its capitalized  mortgage servicing rights,  adversely
         affecting earnings.

      *  The effects of interest rate fluctuations and the Company's ability or
         inability to hedge  effectively  against such  fluctuations in interest
         rates; the effects of changes in monetary and fiscal policies, laws and
         regulations,  other  activities of governments,  agencies,  and similar
         organizations,  social and economic conditions, unforeseen inflationary
         pressures and monetary fluctuation.

      *  The  Company's  ability  or  inability  to  continue  its  practice  of
         securitization of mortgage loans held for sale.

      *  Increased competition within the Company's markets.

      *  The unanticipated expenses of  assimilating  newly-acquired  businesses
         into the Company's structure; as well as the impact of unusual expenses
         from ongoing  evaluations  of business  strategies,  asset  valuations,
         acquisitions, divestitures and organizational structures.

      *  Unpredictable delays or difficulties  in the development of new product
         programs.

      *  Rapid or unforeseen  escalation  of the  cost of regulatory  compliance
         and/or  litigation,   including  but  not  limited  to,   environmental
         compliance,  licenses,  adoption  of  new,  or  changes  in  accounting
         policies  and  practices  and  the  application  of such  policies  and
         practices.

                                       23


<PAGE>


      Part II - Other Information

Item 1.  Legal Proceedings

      Because the nature of the Company's  business  involves the  collection of
numerous  accounts,  the validity of liens and compliance with state and federal
lending laws, the Company is subject to numerous claims and legal actions in the
ordinary  course  of its  business.  While it is  impossible  to  estimate  with
certainty the ultimate legal and financial liability with respect to such claims
and actions,  the Company believes that the aggregate amount of such liabilities
will not result in monetary damages which in the aggregate would have a material
adverse effect on the financial condition or results of the Company.

   Several  class-action  lawsuits  have been filed against a number of consumer
finance companies alleging that the compensation of mortgage brokers through the
payment of yield spread  premiums  violates  various  federal and state consumer
protection laws. The Company has been named in two such lawsuits:

         a. On March 18,  1997,  the  Company  received  notice that it had been
      named in a  lawsuit  filed in the  United  States  District  Court for the
      Eastern District of New York, alleging that the Company's  compensation of
      mortgage brokers by means of yield spread premiums  violates,  among other
      things, the Real Estate Settlement Procedures Act ("RESPA"). The complaint
      seeks  (i)  certification  of a class of  plaintiffs,  (ii) an  injunction
      against  payment  of  yield  spread  premiums  by the  Company  and  (iii)
      unspecified compensatory and punitive damages (including attorney's fees).
      On July 7, 1997,  the Company filed an answer to the  plaintiff's  amended
      complaint.

         b. On or about February 10, 1998, the Company  received  notice that it
      had been named in a lawsuit filed in the United States  District Court for
      the Northern District of Mississippi - Greenville Division,  alleging that
      the Company's  compensation  of mortgage  brokers by means of yield spread
      premiums  violates RESPA. The complaint seeks (i) certification of a class
      of  plaintiffs,  and  (ii)  unspecified  compensatory  damages  (including
      attorney's  fees).  On March 31, 1998,  the Company filed an answer to the
      complaint.

   Management  believes  the Company  has  meritorious  defenses  and intends to
defend these suits,  but the Company  cannot  estimate  with any  certainty  its
ultimate  legal or  financial  liability,  if any,  with  respect to the alleged
claims.

Item 2.  Changes in Securities.  None

Item 3.  Defaults Upon Senior Securities.  None

                                       24


Item 4.  Submission of Matters to a Vote of Security Holders

      The  annual  meeting  of  stockholders  was held on May 19,  1998.  At the
meeting,  Sidney  A.  Miller  and  Martin D.  Payson  were  elected  as Class II
Directors  for a term of three years.  Hugh Miller,  Richard Blass and Arnold B.
Pollard continue to serve as members of the Board of Directors.

            Votes cast in favor of Mr.  Miller's  election  totaled  14,884,446,
            while 27,325 votes were withheld.

            Votes cast in favor of Mr.  Payson's  election  totaled  14,884,146,
            while 27,625 votes were withheld.

      The stockholders also voted to ratify the appointment of KPMG Peat Marwick
LLP as the Company's  independent  public accountants for the fiscal year ending
December 31, 1998.  Votes cast in favor of this  ratification  were  14,903,146,
while votes cast against were 2,600 and abstentions totaled 6,025.

Item 5.  Other Information.  None

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

 (a)  Exhibits:          11.1  Statement re: Computation of Per Share Earnings.

                         27    Financial Data Schedule.

 (b)  Reports on Form 8-K:     None.

                                       25


<PAGE>
                                  SIGNATURES

   Pursuant to the  requirements  of the Securities and Exchange Act of 1934, as
amended, the Registrant has duly caused this Report on Form 10-Q to be signed on
its behalf by the undersigned, thereunto duly authorized.


                                         DELTA FINANCIAL CORPORATION
                                                (Registrant)

Date:  August 14, 1998
                                          By:/s/ HUGH MILLER
                                             -----------------------------------
                                             Hugh Miller
                                             President & Chief Executive Officer


                                          By:/s/ RICHARD BLASS
                                             -----------------------------------
                                             Richard Blass
                                             Senior  Vice President and
                                             Chief Financial Officer


                                       26