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 quarterly period ended September 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                    (I.R.S. 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 September 30, 1998,  15,380,949  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 September 30, 1998 and December 31, 1997. 1

Consolidated Statements of Income for the three months and nine months
ended September 30, 1998 and September 30, 1997............................ 2

Consolidated Statements of Cash Flows for the nine months ended
September 30, 1998 and September 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..............................................23

PART II - OTHER INFORMATION

Other Information..........................................................25

Signatures.................................................................27
<PAGE>

Part I - Financial Information
<TABLE>
<CAPTION>

                  DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                   (Unaudited)

                                                    September 30,   December 31,
(Dollars in thousands, except for share data)           1998            1997
                                                    -------------   ------------
<S>                                                 <C>             <C>
Assets
Cash and interest-bearing deposits                      $  42,922      $  32,858
Accounts receivable                                        23,282         31,209
Loans held for sale                                        87,891         79,247
Accrued interest and late charges receivable               41,518         29,598
Capitalized mortgage servicing rights                      30,683         22,862
Interest-only and residual certificates                   197,839        167,809
Equipment, net                                             16,513         11,211
Cash held for advance payments                             11,580          6,325
Prepaid and other assets                                    6,545          6,224
Goodwill                                                    6,309          5,889
                                                        ---------      ---------
   Total assets                                         $ 465,082      $ 393,232
                                                        =========      =========

Liabilities and Stockholders' Equity
Liabilities:
Bank payable                                            $   1,793      $   2,222
Warehouse financing and other borrowings                   82,033         28,233
Senior Notes                                              149,366        149,307
Accounts payable and accrued expenses                      14,317         15,503
Investor payable                                           53,859         40,852
Advance payment by borrowers for taxes and insurance        9,610          5,750
Income taxes payable                                       21,170         24,912
                                                        ---------      ---------
   Total liabilities                                    $ 332,148      $ 266,779
                                                        ---------      ---------

Stockholders' Equity:
Common stock,$.01 par value. Authorized
 49,000,000 shares; at September 30, 1998,
 15,475,549 shares issued and 15,380,949 shares
 outstanding and at December 31, 1997, 15,372,688
 shares issued and outstanding                          $     155      $     154
Additional paid-in capital                                 94,700         93,476
Retained earnings                                          39,278         32,823
Treasury stock, at cost (94,600 shares and 0 shares
 at September 30, 1998 and December 31, 1997,
 respectively)                                             (1,199)           ---
                                                        ---------      ---------
   Total stockholders' equity                             132,934        126,453
                                                        ---------      ---------
     Total liabilities and stockholders' equity         $ 465,082      $ 393,232
                                                        =========      =========

          See accompanying notes to consolidated financial statements.

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


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


                                                 Three Months Ended            Nine Months Ended
                                                    September 30,                September 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          $   17,858    $   24,733      $   69,439    $   60,502
  Interest                                        10,569         5,246           6,841        17,144
  Servicing fees                                   3,365         1,958           5,690         5,249
  Origination fees                                 6,294         5,477          17,952        12,291
                                              ----------    ----------      ----------    ----------
     Total revenues                               38,086        37,414          99,922        95,186
                                              ----------    ----------      ----------    ----------
Expenses:
  Payroll and related costs                       15,250        11,543          41,737        28,555
  Interest expense                                 8,521         5,670          23,213        12,761
  General and administrative                       9,222         6,521          24,814        15,332
                                              ----------    ----------      ----------    ----------
     Total expenses                               32,993        23,734          89,764        56,648
                                              ----------    ----------      ----------    ----------

Income before income taxes                         5,093        13,680          10,158        38,538
Provision for income taxes                         1,987         5,796           3,703        16,440
                                              ----------    ----------      ----------    ----------
Net income                                    $    3,106    $    7,884      $    6,455    $   22,098
                                              ==========    ==========      ==========    ==========

Per share data:
   Net income per common
     share - basic and diluted                    $ 0.20        $ 0.51          $ 0.42        $ 1.44
                                                 =======       =======         =======       =======
   Weighted-average number
     of shares outstanding                    15,414,210    15,372,288      15,387,923    15,354,810
                                              ==========    ==========      ==========    ==========


          See accompanying notes to consolidated financial statements.

                                       2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                  DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
                                                                           Nine Months Ended
                                                                             September 30,
(Dollars in thousands)                                                    1998          1997
                                                                       ---------     ---------
<S>                                                                    <C>           <C>
Cash flows from operating activities:
   Net income                                                          $  6,455      $ 22,098
   Adjustments to reconcile net income to net cash used in
     operating activities:
      Provision for loan and recourse losses                                 75            75
      Depreciation and amortization                                       3,091         1,791
      Net increase in capitalized mortgage servicing rights              (7,821)       (7,974)
      Decrease (increase) in deferred origination fees                    1,108          (406)
      Net increase in interest-only and residual certificates           (30,030)      (60,977)
      Changes in operating assets and liabilities:
         Decrease (increase) in accounts receivable                       5,022       (17,922)
         Increase in loans held for sale, net                            (9,775)       (1,893)
         Increase in accrued interest and late charges receivable       (11,920)       (7,068)
         Increase in cash held for advance payments                      (5,255)       (3,492)
         Decrease in real estate owned                                      ---           135
         Increase in prepaid and other assets                              (321)       (4,658)
         (Decrease) increase in accounts payable and accrued expenses    (1,238)        2,729
         Increase in investor payable                                    13,007         6,838
         Increase in advance payments by borrowers for taxes and ins.     3,860         3,136
         (Decrease) increase in income taxes payable                       (837)       12,267
                                                                       ---------     ---------
           Net cash used in operating activities                        (34,579)      (55,321)
                                                                       ---------     ---------
Cash flows from investing activities:
   Acquisition of Fidelity Mortgage                                         ---        (4,150)
   Purchase of equipment                                                 (7,554)       (5,529)
                                                                       ---------     ---------
           Net cash used in investing activities                         (7,554)       (9,679)
                                                                       ---------     ---------
Cash flows from financing activities:
   Proceeds from (repayments of) warehouse financing and other
       borrowings, net                                                   53,800       (80,420)
   Proceeds from issuance of Senior notes                                   ---       149,275
   Decrease in bank payable, net                                           (429)       (1,048)
   Purchase of treasury stock                                            (1,199)          ---
   Proceeds from exercise of stock options                                   25           ---
                                                                       ---------     ---------
           Net cash provided by financing activities                     52,197        67,807
                                                                       ---------     ---------
           Net increase in cash and interest-bearing deposits            10,064         2,807

Cash and interest-bearing deposits at beginning of period                32,858        18,741
                                                                       ---------     ---------
Cash and interest-bearing deposits at end of period                    $ 42,922      $ 21,548
                                                                       =========     =========

Supplemental Information:
Cash paid during the period for:
   Interest                                                            $ 26,850      $ 10,835
   Income taxes                                                        $  4,591      $ 18,626
          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 for the
twelve month period  ended June 30,  1998,  the sellers were paid an  additional
$1.2 million of purchase price in the form of, and at a fair value equivalent to
101,361   shares  of  the  Company's   stock  in  August  1998.  The  additional
consideration  has been  recorded as  additional  goodwill and will 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.  The results of operations  for the three and
nine month periods ended  September 30, 1998 are not  necessarily  indicative of
the results that will be expected for the entire year.

   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 have been made.  Certain prior period amounts in
the financial statements have been reclassified

                                       4


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
capitalized mortgage servicing rights to reflect a provision for impairment (the
"fair value adjustments").  Both impairment  provisions resulted from reductions
in the Company's  estimates of the fair value of those assets. The reductions in
the estimated fair value  resulted from a change in the  prepayment  assumptions
used by the  Company to estimate  the future  cash flows to be derived  from the
interest-only and residual certificates and the mortgage servicing rights.

   As required by generally accepted  accounting  principles,  at each reporting
period the Company  estimates the fair value of its  interest-only  and residual
certificates and its capitalized  mortgage servicing rights. The carrying amount
of the interest-only and residual certificates is adjusted to their current fair
value.  For capitalized  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
capitalized 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's review of its prepayment experience and assumptions at June 30,
1998  indicated  that  the  prepayment  rates  during  1998,   particularly  for
adjustable-rate  mortgages, and in particular during the second quarter of 1998,
were higher than those historically experienced, or previously projected, by the
Company.   The  Company  believes  that  these  increases  in  prepayments  were
attributable  to  the  continuation,  for  a  longer  period  than  historically
experienced,  of low interest  rates,  together  with  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 to  estimate  the fair  value of the
interest-only  and residual  certificates  and  capitalized  mortgage  servicing
rights retained by the Company in securitizations  completed prior to the second
quarter of 1998,  requiring the fair value  adjustments  described above.  These
revised prepayment assumptions were also used in initially valuing and recording
the interest-only and residual  certificates and capitalized  mortgage servicing
rights retained by the Company in its  securitizations  completed  subsequent to
the first quarter of 1998.

                                       5

   The following  table compares the prepayment  assumptions  used subsequent to
the first  quarter of 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%
--------------------------------------------------------------------------------

The Company  determined  that no further  adjustments to the prepayment or other
assumptions was necessary at September 30, 1998.

(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 income.

<TABLE>
<CAPTION>

                                             Three Months Ended           Nine Months Ended
                                                September 30,               September 30,
                                            ---------------------        --------------------
(Dollars in thousands, except EPS data)        1998         1997           1998         1997
---------------------------------------------------------------------------------------------
<S>                                       <C>          <C>            <C>          <C>
Net income                                    $3,106       $7,884         $6,455      $22,098
Weighted-average shares - basic           15,414,210   15,372,288     15,387,923   15,354,810
Basic EPS                                      $0.20        $0.51          $0.42        $1.44

Weighted-average shares - basic           15,414,210   15,372,288     15,387,923   15,354,810
Incremental shares-options
    and Fidelity additional shares               ---       54,026         31,341       53,061
---------------------------------------------------------------------------------------------
Weighted-average shares - diluted         15,414,210   15,426,314     15,419,264   15,407,871
Diluted EPS                                    $0.20        $0.51          $0.42        $1.44

</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 made at times and in amounts as the Company deems appropriate and may be
discontinued  at any time. 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.  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.

                                      6


   During the quarter ended  September 30, 1998, the Company  repurchased in the
open market 80,000 shares of its common stock under its stock repurchase plan at
an average per share price of $11.57 per share. At September 30, 1998, the total
number  of  treasury  shares  held by the  Company  equalled  94,600.  Given the
sector-wide  focus on liquidity and conserving  capital,  the Board of Directors
decided in November 1998 to suspend the share  repurchase  program until its 1st
Quarter  1999  Board  meeting,  to be held in or  about  February  1999 (or such
earlier date as the Board may  determine  appropriate),  at which time the Board
will reconsider whether to recommence repurchases.

                                       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 17 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.  Through a
strategic  alliance  between  DFC  Funding  of Canada  Limited,  a  wholly-owned
subsidiary  of Delta  Funding  Corporation,  and MCAP  Mortgage  Corporation,  a
Canadian mortgage loan originator, the Company originates loans in Canada.

   For the three months ended  September 30, 1998,  the Company  originated  and
purchased  $476  million of loans,  an increase of 34% over the $356  million of
loans  originated  and  purchased  in the  comparable  period in 1997.  Of these
amounts,  approximately  $228  million  were  originated  through its network of
brokers,  $178 million were  purchased from its network of  correspondents,  $67
million  were  originated  through  its  retail  network  and  $3  million  were
originated  through its Canadian network in the three months ended September 30,
1998, compared to $134 million,  $171 million, $51 million and $0, respectively,
for the same period in 1997. These  originations  reflect the Company's strategy
to focus on broker and retail  channels which are more  profitable and less cash
intensive than correspondent loan purchases.

   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  retains
interest-only or residual  certificates issued by the securitization  trusts, as
well as the  servicing  rights,  the  value  of each of which  may be  adversely
affected by defaults.

                                       8


                                                     Three Months Ended
                                                  -----------------------------
(Dollars in Thousands)                            September 30,      June 30,
                                                      1998             1998
                                                  ------------     ------------
Total Outstanding Principal Balance
    (at period end).......................        $ 2,690,304      $ 2,391,719
Average Outstanding (1)...................        $ 2,588,189      $ 2,285,348
DELINQUENCY (at period end)
30-59 Days:
    Principal Balance.....................        $   128,623      $   113,197
    Percent of Delinquency(2).............              4.78%            4.73%
60-89 Days:
    Principal Balance.....................        $    51,098      $    38,605
    Percent of Delinquency(2).............              1.90%            1.61%
90 Days or More:
    Principal Balance.....................        $    35,884      $    25,688
    Percent of Delinquency(2).............              1.33%            1.07%
Total Delinquencies:
    Principal Balance.....................        $   215,605      $   177,490
    Percent of Delinquency(2).............              8.01%            7.42%
FORECLOSURES
    Principal Balance.....................        $   124,491      $   110,462
    Percent of Foreclosures by Dollar(2)..              4.63%            4.62%
REO (at end of period)....................        $    17,059      $    13,648
Net Losses on Liquidated Loans............        $    (2,473)     $    (2,044)
Percentage of Net Losses on Liquidated Loans
    (based on Average Outstanding Balance)(3)          (0.38%)          (0.36%)
---------------
(1)Calculated by summing the actual  outstanding  principal  balances at the end
   of each  month and  dividing  the total  principal  balance  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 special  purpose REMIC trust for a
cash price.  The trust,  in turn,  finances the pool of loans it has acquired by
issuing   "pass-through   certificates,"  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 mortgage loans and a specified amount of interest,  determined at the
time of the offering of the certificates.

   When  the  Company  sells a pool of loans to the  securitization  trust,  the
Company  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,  the  economic  value  of  which  is  represented  by
interest-only and residual certificates,  and (b) the

                                       9


right to service the loans on behalf of the trust and earn a  contractual
servicing  fee, as well as other ancillary servicing related fees paid by 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 equal
to the  difference  between the amount of cash  received by the Company from the
trust for the pool of loans and the investment in the loans  remaining after the
allocation of portions of that  investment to record the value of  interest-only
and residual  certificates and capitalized mortgage servicing rights received by
the  Company  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 interest-only  and residual  certificates and
capitalized  mortgage  servicing rights, the Company makes estimates of rates of
prepayments and defaults on the underlying pool of loans sold to the trust,  and
the value of the collateral,  which it believes  reasonably reflect economic and
other  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 conditions and the implicit imprecision
of estimates, and such differences often may be material. Prepayment and default
rates 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.  Conversely,  prepayment  and default
rates 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 six  most  recent  quarterly  securitization
transactions  and intends to continue to sell the  interest-only  certificate as
long as the sale 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
capitalized mortgage servicing rights to reflect a provision for impairment (the
"fair value adjustments").  Both impairment  provisions resulted from reductions
in the Company's  estimates of the fair value of those assets. The reductions in
the estimated fair value  resulted from a change in the  prepayment  assumptions
used by the  Company to estimate  the future  cash flows to be derived  from the
interest-only and residual certificates and the mortgage servicing rights.

   As required by generally accepted  accounting  principles,  at each reporting
period the Company  estimates the fair value of its  interest-only  and residual
certificates and its capitalized  mortgage servicing rights. The carrying amount
of the interest-only and residual certificates is adjusted to their current fair
value.  For capitalized  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
capitalized mortgage

                                       10


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's review of its prepayment experience and assumptions at June 30,
1998  indicated  that  the  prepayment  rates  during  1998,   particularly  for
adjustable-rate  mortgages, and in particular during the second quarter of 1998,
were higher than those historically experienced, or previously projected, by the
Company.   The  Company  believes  that  these  increases  in  prepayments  were
attributable  to  the  continuation,  for  a  longer  period  than  historically
experienced,  of low interest  rates,  together  with  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 to  estimate  the fair  value of the
interest-only  and residual  certificates  and  capitalized  mortgage  servicing
rights retained by the Company in securitizations  completed prior to the second
quarter of 1998,  requiring the fair value  adjustments  described above.  These
revised prepayment assumptions were also used in initially valuing and recording
the interest-only and residual  certificates and capitalized  mortgage servicing
rights retained by the Company in its  securitizations  completed  subsequent to
the first quarter of 1998.

   The following  table compares the prepayment  assumptions  used subsequent to
the first  quarter of 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%
--------------------------------------------------------------------------------

The Company  determined  that no further  adjustments to the prepayment or other
assumptions was necessary at September 30, 1998.

                                       11


Results of Operations

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

Revenues

   Total  revenues for the three months ended  September 30, 1998 increased $0.7
million, or 2%, to $38.1 million from $37.4 million for the comparable period in
1997.  This  increase was primarily  attributable  to increases in interest from
interest only and residual certificates (see "Interest Income" below), servicing
fees and, to a lesser extent,  interest on loans held for sale, and  origination
fees,  partially  offset by a decrease in the net gain recognized on the sale of
mortgage loans.

   For the three months ended  September 30, 1998,  the Company  originated  and
purchased $476 million of mortgage loans,  representing a 34% increase from $356
million of mortgage  loans  originated  and purchased for the three months ended
September 30, 1997. The Company completed a $475 million  securitization  during
the  three  months  ended   September  30,  1998  compared  to  a  $340  million
securitization in the corresponding period of the prior year, representing a 40%
increase.  Total loans  serviced at  September  30, 1998  increased  69% to $2.7
billion from $1.6 billion at September 30, 1997.

   Net  Gain on Sale of  Mortgage  Loans.  Net  gain on sale of  mortgage  loans
represents  (1) the sum of (a)  the  fair  value  of the  residual  certificates
retained by the Company in a securitization for each period and the market value
of the interest-only  certificates sold in connection with each  securitization,
and (b) the fair value of capitalized  mortgage servicing rights associated with
loans securitized in each period, (2) less the (x) premiums paid to originate or
acquire mortgage loans, (y) costs  associated with  securitizations  and (z) any
hedge loss (gain) associated with a particular securitization.

   For the three months ended  September 30, 1998,  net gain on sale of mortgage
loans  decreased  $6.9 million,  or 28%, to $17.8 million from $24.7 million for
the three months ended  September 30, 1997. This decrease was primarily due to a
lower weighted  average net gain on sale ratio,  but was partially  offset by an
increase  in the  amount  of loans  securitized  in the  third  quarter  of 1998
compared  to the same  period in 1997.  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 3.8%  compared  to 7.3% for the three  months  ended
September 30, 1997.

   Net gain on sale of loans decreased  primarily because of (a) the impact of a
hedging  loss during the third  quarter of 1998  resulting  from lower  interest
rates that was not offset by a higher  gain on sale due to  substantially  wider
spreads  demanded  by  asset-backed  investors  who  purchase  the  pass-through
certificates  issued by the securitization  trusts, and (b) the Company's change
to more  conservative  prepayment  assumptions  used in  initially  valuing  the
residual  certificates and capitalized mortgage servicing rights acquired in the
third quarter 1998 securitization (see "-Fair Value Adjustments" above),

   Interest  Income.  Interest  income  primarily  represents the sum of (1) the
difference  between the  distributions the Company receives on its interest-only
and residual certificates and the adjustments recorded to reflect changes in the
fair value of the interest-only and residual  certificates,  (2) interest earned
on loans held for sale, and (3) interest earned on cash collection

                                       12


balances.

      Interest  income for the three months ended  September 30, 1998  increased
$5.3  million,  or 102%,  to $10.5  million from $5.2 million in the  comparable
period in 1997.  The  increase in interest  income was  primarily  due to higher
levels in both the interest earned on  interest-only  and residual  certificates
and the interest  earned on loans held for sale.  However,  interest income from
loans held for sale was reduced, in part, by a decline,  from 10.9% to 10.1%, in
the weighted average coupon rate on the mortgage loans,  reflecting both a lower
interest  rate  environment  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 (1) the offsetting  amortization
of the capitalized  mortgage servicing rights,  and any adjustments  recorded to
reflect  any  impairment  in the fair value of  capitalized  mortgage  servicing
rights and (2) prepaid interest shortfalls.

      Servicing  fees for the three months ended  September  30, 1998  increased
$1.4 million, or 70%, to $3.4 million from $2.0 million in the comparable period
in 1997.  This increase was primarily due to the increase in the aggregate  size
of the Company's  servicing  portfolio.  During the three months ended September
30,  1998,  the  average  balance of  mortgage  loans  serviced  by the  Company
increased 73% to $2.6 billion from $1.5 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 September
30, 1998  increased  $0.8 million,  or 15%, to $6.3 million from $5.5 million in
the comparable period in 1997. The increase is primarily the result of increased
brokered and retail loan originations.

Expenses

   Total  expenses  increased  $9.3 million,  or 39%, to $33.0 million for three
months ended September 30, 1998, from $23.7 million for the comparable period in
1997.  The  increase  in  expenses  was  primarily  the result of (1)  increased
interest  expense due to (a) higher  interest  cost  associated  with  increased
borrowings  under the  Company's  warehouse  facilities to finance the increased
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"),  (2) an increase  in the  Company's  personnel  to support its
higher level of loan  originations,  and (3) costs associated with the Company's
expanded 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  $3.7  million,  or 32%, to $15.2  million for the three  months ended
September 30, 1998 from $11.5 million for the  comparable  period in 1997.  This
increase  is  primarily  due to staff  increases  related to an  increase in the
Company's loan  originations and the costs associated with the Company's broker,
correspondent and Fidelity  Mortgage retail division.  As of September 30, 1998,
the Company employed 1,041 full- and part-time employees,  compared to 850 full-
and part-time employees as of September 30, 1997.

   Interest Expense.  Interest expense includes  borrowing costs to finance loan
originations and purchases under (i) the Company's credit  facilities,  and (ii)
the Senior Notes.

   For the three months ended  September 30, 1998,  interest  expense  increased
$2.8  million,  or 49%, to $8.5  million  from $5.7  million for the  comparable
period in 1997.  The  increase in

                                       13


interest  expense was  attributable  to (i) an increase in loan production,
which increased the level of debt needed throughout the third  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  September  30, 1998,  general and  administrative
expenses  increased $2.7 million,  or 42%, to $9.2 million from $6.5 million for
the comparable  period in 1997.  This increase was primarily  attributable to an
increase  in  expenses   associated  with  (i)  the  Company's   increased  loan
originations  and  purchases  and (ii the  Company's  increasing  the  number of
Fidelity Mortgage retail branch offices from eleven to fifteen.

   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 tax provisions of $2.0 million and $5.8 million for the
three month periods  ended  September  30, 1998 and 1997,  respectively.  Income
taxes provided a 39.0%  effective tax rate for the three months ended  September
30, 1998,  compared to a 42.4%  assumed  effective tax rate for the three months
ended  September 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.


Nine  Months  Ended  September  30, 1998  Compared  to the Nine  Months  Ended
September 30, 1997

Revenues

   Total  revenues for the nine months ended  September 30, 1998  increased $4.7
million, or 5%, to $99.9 million from $95.2 million for the comparable period in
1997. The increase in revenue was primarily  attributable to the increase in the
net gain on sale  recognized by the Company,  which reflects the increase 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" above).

   For the nine months ended  September  30, 1998,  the Company  originated  and
purchased $1.3 billion of mortgage loans,  representing a 52% increase from $858
million of mortgage  loans  originated  and  purchased for the nine months ended
September 30, 1997. The Company  completed three  securitizations  totaling $1.3
billion  during the nine  months  ended  September  30,  1998  compared to three
securitizations  totaling $835 million in the corresponding  period in the prior
year,  representing  a 56% increase.  Total loans serviced at September 30, 1998
increased 69% to $2.7 billion from $1.6 billion at September 30, 1997.

                                       14


   Net Gain on Sale of Mortgage  Loans.  For the nine months ended September 30,
1998,  net gain on sale of mortgage  loans  increased  $8.9 million,  or 15%, to
$69.4 million from $60.5  million for the nine months ended  September 30, 1997.
This  increase  was  primarily  due  to the  increase  in the  amount  of  loans
securitized  for the none months ended  September  30, 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 5.3%  compared to
7.2% for the nine months ended September 30, 1997.

   Net gain on the sale of loans  increased  less than the  overall  increase in
loan  securitizations  primarily  due  to  (a)  the  Company's  change  to  more
conservative  prepayment  assumptions  used in  initially  valuing the  residual
certificates and capitalized  mortgage  servicing rights acquired  subsequent to
the first  quarter of 1998 (see "-Fair Value  Adjustments"  above),  and (b) the
impact of a hedging loss during the third quarter of 1998  resulting  from lower
interest rates that was not offset by a higher gain on sale due to substantially
wider spreads  demanded by asset-backed  investors who purchase the pass-through
certificates issued by securitization trusts.

   Interest Income. Interest income for the nine months ended September 30, 1998
decreased  $10.3  million to $6.8 million from $17.1  million in the  comparable
period in 1997.  The decrease in interest  income was primarily due to the $15.5
million  fair value  adjustment  made  during the second  quarter of 1998 to the
interest-only and residual  certificates  previously discussed (see "-Fair Value
Adjustments"  above).  The effect of that  adjustment  was  partially  offset by
increases in interest income (a) from  interest-only  and residual  certificates
income,  and (b) from bank deposits resulting from a higher average balance held
in securitization trust accounts by the Company. In addition,  interest on loans
held for sale increased due to higher average  balances,  partially  offset by a
decline,  from  11.1% to  10.2%,  in the  weighted  average  coupon  rate on the
mortgage loans, reflecting both a lower interest rate and the Company's shift to
higher credit quality loans.

   Servicing  Fees.  Servicing fees for the nine months ended September 30, 1998
increased  $0.4  million,  or 8%,  to $5.7  million  from  $5.3  million  in the
comparable period in 1997. This increase was primarily due to an increase in the
aggregate size of the Company's  servicing  portfolio,  partially  offset by the
recording of the $1.9 million provision for the Company's  capitalized  mortgage
servicing rights. (See "-Fair Value Adjustments" above).  During the nine months
ended  September 30, 1998, the average balance of mortgage loans serviced by the
Company  increased 92% to $2.3 billion from $1.2 billion  during the  comparable
period in 1997.

   Origination  Fees.  Origination  fees for the nine months ended September 30,
1998 increased $5.7 million,  or 46%, to $18.0 million from $12.3 million in the
comparable  period in 1997.  The increase is  primarily  the result of increased
broker and retail loan originations.

Expenses

   Total expenses increased $33.1 million, or 58%, to $89.7 million for the nine
months ended September 30, 1998, from $56.6 million for the comparable period in
1997. This increase was primarily the result of (1) increased  interest expense,
(2)  increase in the  Company's  personnel  to support its higher  level of loan
originations,  and (3) costs  associated  with the  Company's  expanded  retail,
broker and correspondent divisions.

   Payroll and Related  Costs.  For the nine months  ended  September  30, 1998,
payroll and related  costs expense  increased  $13.2  million,  or 46%, to $41.7
million from $28.5 million for the

                                       15


comparable  period   in  1997.   This  increase   is  primarily   due  to  staff
increases  related to an increase 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
September 30, 1998,  the Company  employed 1,041  full-and  part-time  employees
compared to 850 full- and part-time employees as of September 30, 1997.

   Interest  Expense.  For the nine months ended  September  30, 1998,  interest
expense increased $10.5 million, or 82%, to $23.2 million from $12.7 million for
the comparable period in 1997. The increase in interest expense was attributable
to (1) an increase in loan production,  which increased the level of debt needed
throughout  the first nine months of 1998 to finance the inventory of loans held
for sale prior to their securitizations,  and (2) the Company's issuance in July
1997 of the Senior Notes.

   General and Administrative  Expenses. For the nine months ended September 30,
1998,  general and administrative  expenses  increased $9.5 million,  or 62%, to
$24.8  million  from  $15.3  million  for the  comparable  period in 1997.  This
increase was primarily  attributable (1) an increase in expenses associated with
the Company's  increased loan originations and purchases,  and (2) the expansion
costs associated with the Company's  increasing the number of Fidelity  Mortgage
retail branch offices from five to fifteen.

   Income Taxes.  The Company recorded a tax provision of $3.7 million and $16.4
million for the nine months  ended  September  30, 1998 and 1997,  respectively.
Income  taxes  provided a 36.5%  effective  tax rate for the nine  months  ended
September 30, 1998,  compared to a 42.7% assumed effective tax rate for the nine
months ended  September  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

September 30, 1998 compared to December 31, 1997

   Cash and interest-bearing  deposits increased $10.1 million, or 31%, to $42.9
million at  September  30, 1998 from $32.8  million at December  31,  1997.  The
increase was primarily the result of  additional  monies held in  securitization
trust accounts by the Company, acting as servicer for its ongoing securitization
program.

   Accounts  receivable  decreased  $7.9  million,  or 25%, to $23.3  million at
September  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 50% to $2.7 billion as of
September 30, 1998 from $1.8 billion as of December 31, 1997.

   Loans held for sale  increased  $8.7  million,  or 11%,  to $87.9  million at
September  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 nine months ended  September  30,  1998,  as
compared to the fourth quarter of 1997.

   Accrued interest and late charges receivable increased $11.9 million, or 40%,
to $41.5  million at September 30, 1998 from $29.6 million at December 31, 1997.
This  increase was  primarily  due

                                       16


to  a   higher  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 $7.8 million,  or 34%, to
$30.7  million at September  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 its servicing assets, totaling $15.2 million, resulting from the
Company's  completion of three  securitizations  during the first nine months of
1998,  partially  offset by the amortization of capitalized  mortgage  servicing
rights and the fair  value  adjustment  to the  capitalized  mortgage  servicing
rights (see "-Fair Value Adjustments" above).

   Interest-only and residual  certificates  increased $30.0 million, or 18%, to
$197.8  million at September 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 $70.0  million  from its  securitizations
during the nine months ended  September 30, 1998. The increase was offset by the
effect  of the  fair  value  adjustment  and  normal  amortization  due to  cash
distributions.

   Equipment, net, increased $5.3 million, or 47%, to $16.5 million at September
30, 1998 from $11.2 million at December 31, 1997. The increase was primarily due
to capital expenditures related to new technology and expansion.

   Cash held for  advance  payments  increased  $5.3  million,  or 84%, to $11.6
million at  September  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 $53.8 million, or 191%, to
$82.0  million at  September  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,  the  amount  of loans  held for sale and to fund  purchases  of
equipment.

   The aggregate principal balance of the Senior Notes totaled $149.4 million at
September 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  outstanding  prior to July
1997.

   Accounts payable and accrued expenses decreased $1.2 million, or 8%, to $14.3
million at September  30, 1998 from $15.5  million at December  31,  1997.  This
decrease was  primarily  attributable  to a payment of interest on Senior Notes,
partially offset by the timing of various operating accruals.

   Investor  payable  increased  $13.0  million,  or 32%,  to $53.9  million  at
September  30, 1998 from $40.9  million at December 31, 1997.  This increase was
primarily  due to a 50% 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 $3.8 million,
or 66%, to $9.6 million at September  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

                                       17


and  disbursed  resulting  in additional  monies held in escrow  trust  accounts
by the  Company  acting as a servicer.

   Stockholders'  equity  increased  $6.4 million,  or 5%, to $132.9  million at
September  30, 1998 from $126.5  million at December 31, 1997.  This increase is
due to net income of $6.4 million for the nine month period ending September 30,
1998, and the issuance of $1.2 million of the Company's common stock paid to the
sellers of Fidelity  Mortgage in August 1998,  partially offset by the Company's
repurchase of 94,600 shares of its common stock for $1.2 million.

Liquidity and Capital Resources

     The  Company  has  historically  operated  on a  negative  cash flow  basis
primarily due to increases in the volume of loan purchases and  originations and
the  growth of its  securitization  program.  In recent  quarters,  however  the
Company has reduced its negative cash flow, and expects to continue to do so for
the foreseeable  future,  as a result of aggregate annual increased cash inflows
from  the   Company's   retained   interest-only   and  residual   certificates,
advantageous changes in the securitizations  structures the Company has used and
a greater  concentration on less cash-intensive  broker and retail originations.
Since the second quater of 1997,  the company has sold the senior  interest-only
certificates  in each of its  securitizations  and, in the  Comany's  three most
recent  securitizations,  it has  successfully  increased  the  amount of senior
interest-only   certificates   offered   to   investors,   compared   to   prior
securitizations.

   For the nine  months  ended  September  30,  1998 and 1997,  the  Company had
operating  cash deficits of $34.6 million and $55.3 million,  respectively.  The
improvement  in the Company's  operating cash deficit from 1997 compared to 1998
was  primarily  due to  increased  cash  inflows  from  the  Company's  retained
interest-only  and  residual   certificates,   changes  in  the   securitization
structures  that the Company  has  utilized,  a tax  refund,  an increase in the
Company's  restricted  cash held for  securitization  trust accounts and a lower
percentage of correspondent loan purchases,  partially offset by the semi-annual
Senior Note interest payment.

   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.

   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

                                       18


through  warehouse  lines of credit.  The Company  currently 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 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 Company's  third  warehouse  facility is a
$200 million committed commercial paper conduit with a variable rate of interest
and a maturity  date of  September  1999.  The  outstanding  balance on the $400
million facility as of September 30, 1998 was $75.6 million.  The Company had no
outstanding balances for the $150 million facility as of September 30, 1998. The
Company  utilized $36.1 million of the $200 million facility as of September 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
September  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 the Company is in compliance with all such covenants under these agreements
as of September 30, 1998.

   The Company purchased a total of 94,600 shares of its common stock during the
nine  months  ended  September  30,  1998,  under the  Company's  ongoing  stock
repurchase  program,  at a total cost of $1.2  million.  All of the  repurchased
shares were  purchased in open market  transactions  at then  prevailing  market
prices.

Interest Rate Risk

    Among 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,  commercial  paper rates 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

                                       19


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"
above).  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 have proven  historically 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.  (See
"Hedging" below).

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 paid to  asset-backed  investors  who  purchase  pass-through
certificates issued by securitization  trusts,  which historically was generally
related  to  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 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.

       Up to and including the second quarter of 1998, the Company believes that
its  hedging  strategy  of  using  treasury  rate  lock  contracts  was the most
effective way to manage its interest rate risk on loans prior to securitization.
However,  in the third quarter of 1998,  asset-backed  investors,  responding to
lower  treasury  yields  and  global  financial  market   volatility,   demanded

                                       20


substantially  wider spreads over treasuries than  historically  experienced for
newly issued asset-backed securities.  As a result, Delta's hedge loss resulting
from lower interest rates was not offset by a higher gain on sale as the Company
has historically seen. Because the Company's third quarter securitization closed
on September 30, 1998, the Company had no hedge outstanding as of that date.

       Given the Company's  belief that the volatile  market  experienced in the
third  quarter would likely  continue  well into the fourth  quarter - and, as a
result,  that the amount of the spreads demanded by asset-backed  securitization
investors  would be difficult to predict - the Company has not, to date,  hedged
any of its  warehoused  loans  pending  securitization  in the  fourth  quarter;
believing  that its  historical  hedging  strategy  would continue to be largely
ineffective in the current environment.  The Company will continue to review and
determine how best to mitigate risk pending securitization.


Information Services Year 2000 Project



      The Year 2000 issue centers on the inability of certain computer  hardware
and software  systems and  associated  applications  to correctly  recognize and
process  dates beyond  December 31, 1999.  Many  computer  programs  used by the
Company,  its suppliers and outside service  providers were developed using only
six  digits to define the date field  (two  fields  each for the month,  day and
year) and may recognize "00" as the year 1900, rather than the year 2000. Due to
the  nature  of  financial  information,  if  corrective  action  is not  taken,
calculations  that rely on the integrity of the date field for the processing of
information could be significantly misstated.

STATE OF READINESS

     The  Company  has  implemented  a detailed  Year 2000 Plan (the  "Plan") to
evaluate  the Year 2000  readiness  of the  computer  systems  that  support the
operation  of the  Company  including  vendor  computer  systems.  This  Plan is
expected to conclude in June 1999 with all systems year 2000 compliant.

     The Plan includes upgrading the origination system software,  upgrading the
loan servicing software, upgrading the accounting system software, upgrading the
wide area network software,  assessing the proper integration of all systems and
communicating with vendors and liquidity  providers to ascertain their Year 2000
compliance.

     To date the  accounting  system is Year 2000  compliant and all vendors and
liquidity  providers have been contacted  regarding their readiness.  Results of
system tests conducted by the Company and other service  providers will continue
to be  carefully  monitored to ensure that all issues have been  identified  and
addressed.

     The Company believes it has developed an effective Plan to address the Year
2000 issue and that based on the  available  information,  the  execution of the
Plan will not have any significant or material  impact to the Company's  ability
to  operate  before,  during  or after  the  transition  to the new  millennium.
However,  the  Company  has no  control  over the  process  of third  parties in
addressing  their own Year 2000  issues and,  if the  necessary  changes are not
effected or are not completed in a timely manner,  or if unanticipated  problems
arise, there may be a material impact on the Company's  financial  condition and
result of operations.

                                       21


COST TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES

     The Company's costs to resolve the Year 2000 issue are not expected to have
a material  financial  impact on the Company and are expected to be less than $1
million, which the Company intends to fund from its current operations. However,
as  stated  above,  there  can be no  assurance  that all such  costs  have been
identified,  or that  there  may not be some  unforeseen  cost  which may have a
material  adverse  effect on the  Company's  financial  condition and results of
operations.

RISK OF YEAR 2000 ISSUES

     To date,  the  Company  has not  identified  any  system  which  presents a
material risk of failing to be Year 2000  complaint in a timely  manner,  or for
which a suitable  alternative  cannot be  implemented.  However,  as the Company
progresses with its Plan, systems or equipment may be identified which present a
material  risk  of  business  interruption.  Such  disruption  may  include  the
inability to process customer accounting transactions;  the inability to process
loan  applications;  the inability to reconcile and record daily  activity;  the
inability to track  delinquencies;  or the  inability  to generate  checks or to
clear funds. In addition,  if any of the Company's  liquidity  providers  should
fail to achieve the Year 2000  compliance  and they  experience a disruption  of
their own businesses which prevents them from fulfilling their obligations,  the
Company may be materially impacted.

     To the extent that the risks posed by the Year 2000 issue, which are beyond
the  Company's   control,   are  pervasive  in  data  processing,   utility  and
telecommunication  services worldwide, the Company cannot predict with certainty
that it will remain  materially  unaffected  by issues  related to the Year 2000
problem.


CONTINGENCY PLANS

     As part of the Plan  implemented by the Company,  periodic  assessments are
made to determine  that all Year 2000 issues will be addressed  prior to the new
millennium.  If this  assessment  determines  that any systems are not Year 2000
compliant,  and will not become Year 2000 compliant in a timely  manner,  then a
contingency  plan to implement a suitable  alternative  will be put in place. At
this time all systems are expected to be compliant and no contingency plan is in
place.

                                       22

<PAGE>

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 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.

SFAS No. 134

     In  October  1998,   the  FASB  issued  SFAS  No.  134,   "Accounting   for
Mortgage-Backed  Securities  Retained after the Securitization of Mortgage Loans
Held for Sale by a  Mortgage  Banking  Enterprise".  SFAS No. 134  conforms  the
accounting for securities retained after the securitization or mortgage loans by
a mortgage banking enterprise with the accounting for securities  retained after
the securitization of other types of assets by a nonmortgage banking enterprise.
SFAS No. 134 is effective for the first  quarter  beginning  after  December 15,
1998. Management of the Company believes the implementation of SFAS No. 134 will
not have a material  impact on the Company's  financial  condition or results of
operations.

                                       23


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.

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

      *  The Company's ability  or  inability to obtain  adequate  warehouse and
         other financing facilities.

      *  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.

      *  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.

      *  Risks associated with the Year 2000 (see "-Year 2000" above).

                                       24

<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. In or about March 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.  In
            October 1998,  the Company agreed to an individual  settlement  with
            plaintiffs, and the lawsuit has been dismissed with prejudice.

         b. In or about February 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  or 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.  In  September  and
            October 1998, briefs were submitted by both sides in connection with
            plaintiff's  motion  for  class  certification,  and  a  hearing  is
            expected  to  occur  on the  motion  in  December  1998.  Management
            believes that Company has meritorious defenses and intends to defend
            this suit,  but the Company  cannot  estimate with any certainty its
            ultimate legal or financial  liability,  if any, with respect to the
            alleged claims.

         c. In or about  October  1998,  the  Company  was served with a lawsuit
            filed in the United States District Court for the Northern  District
            of  Georgia,   Atlanta   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  and treble damages
            (including  attorney's fees).  Management  believes that Company has
            meritorious  defenses  and  intends  to defend  this  suit,  but the
            Company has not yet answered

                                       25


            and  cannot  estimate  with  any  certainty  its  ultimate  legal
            or  financial liability, if any, with respect to the alleged claims.

   In or about  September  1998,  the Company  received  notice that it had been
named in a lawsuit filed in the Supreme  Court of the State of New York,  Nassau
County, alleging that the Company did not properly credit payments received from
borrowers to principal and interest.  The complaint seeks (i) certification of a
class of plaintiffs,  (ii) an accounting,  (iii)  unspecified  compensatory  and
punitive damages (including  attorneys' fees), and (iv) injunctive relief, based
upon alleged (a) breach of contract,  (b) unjust enrichment,  (c) fraud, and (d)
deceptive  trade  practices.  Management  believes that Company has  meritorious
defenses  and intends to defend this suit,  but the Company has not yet answered
and  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

Item 4.  Submission of Matters to a Vote of Security Holders.  None

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.

                                       26

<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:  November 12, 1998                  By:/s/ HUGH MILLER
                                             -----------------------------------
                                             Hugh Miller
                                             President & Chief Executive Officer


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

                                       27