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 March 31, 2002

                                      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  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 March  31,  2002,  15,883,749  shares of the  Registrant's  common
stock, par value $0.01 per share, were outstanding.


<PAGE>


                              INDEX TO FORM 10-Q

                                                                      Page No.

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements (unaudited)

         Consolidated  Balance  Sheets as of March 31, 2002 and
         December 31, 2001.................................................. 1

         Consolidated Statements of Operations for the three months ended
         March 31, 2002 and March 31, 2001.................................. 2

         Consolidated Statements of Cash Flows for the three months ended
         March 31, 2002 and March 31, 2001.................................. 3

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

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


PART II- OTHER INFORMATION

Item 1.  Legal Proceedings................................................. 29

Item 2.  Changes in Securities and Use of Proceeds......................... 32

Item 3.  Defaults Upon Senior Securities................................... 32

Item 4.  Submission of Matters to a Vote of Security Holders............... 32

Item 5.  Other Information................................................. 32

Item 6.  Exhibits and Current Reports on Form 8-K.......................... 32

Signatures................................................................. 33


<PAGE>


                         PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)

                  DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)
<TABLE>
<S>                                              <C>             <C>
                                                    MARCH 31,     DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA)         2002            2001
                                                   __________     ___________
ASSETS
Cash and interest-bearing deposits                $   3,991           6,410
Accounts receivable                                   2,896           2,654
Loans held for sale, net                             64,754          94,407
Accrued interest receivable                              59             812
Excess cash flow certificates, net                   18,422          16,765
Equipment, net                                        4,017           4,998
Prepaid and other assets                              1,244             752
Deferred tax asset, net                               5,600           5,600
                                                   --------       ---------
   Total assets                                   $ 100,983       $ 132,398
                                                   ========       =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Bank payable                                      $   1,105           1,267
Warehouse financing and other borrowings             56,634          89,628
Senior Notes                                         10,844          10,844
Accounts payable and accrued expenses                18,305          18,809
                                                   --------         -------
   Total liabilities                                 86,888         120,548
                                                   --------         -------

Stockholders' Equity:
Preferred stock, Series A, $.01 par value.
   Authorized 150,000 Shares, 139,156 shares
   outstanding at March 31, 2002 and
   December 31, 2001                                 13,916          13,916
Common stock, $.01 par value. Authorized
   49,000,000 shares; 16,000,549 shares issued
   and 15,883,749 shares outstanding at
   March 31, 2002 and December 31, 2001                 160             160
Additional paid-in capital                           99,472          99,472
Retained deficit                                    (98,135)       (100,380)
Treasury stock, at cost (116,800 shares)             (1,318)         (1,318)
                                                  ----------       ---------
   Total stockholders' equity                        14,095          11,850
                                                  ----------       ---------
    Total liabilities and stockholders' equity    $ 100,983         132,398
                                                  ==========       =========

          See accompanying notes to consolidated financial statements.

                                       1
</TABLE>
<PAGE>


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

                                                      THREE MONTHS ENDED
                                                          MARCH 31,
                                                      ------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)         2002          2001
                                                      ____          ____
<TABLE>
<S>                                           <C>             <C>

REVENUES
   Net gain on sale of mortgage loans             $ 12,338         6,043
   Interest                                          3,902       (14,789)
   Servicing fees                                       --         2,213
   Net origination fees and other income             3,349         3,496
                                                  --------       --------
      Total revenues                                19,589        (3,037)
                                                  --------       --------

EXPENSES
   Payroll and related costs                         9,677        11,324
   Interest expense                                  1,547         5,829
   General and administrative                        6,000        11,831
   Restructuring and other special charges              --         1,259
                                                  --------       --------
   Total expenses                                   17,224        30,243
                                                  --------       --------

Income (loss) before income tax expense              2,365       (33,280)
Provision for income tax expense                       120           472
                                                  --------       --------
      Net income (loss)                           $  2,245       (33,752)
                                                  ========       ========

Per share data:
   Net income (loss) per common share -
       basic and diluted                          $   0.14         (2.12)
                                                ==========     ==========
   Weighted-average number of shares
       Outstanding - Basic                      15,883,749     15,883,749
                                                ==========     ==========
   Weighted-average number of shares
       Outstanding - Diluted                    16,406,317     15,883,749
                                                ==========     ==========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       2


<PAGE>

                  DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
<TABLE>
<S>                                                    <C>          <C>
                                                           THREE MONTHS ENDED
                                                                MARCH 31,
                                                          -------------------
(DOLLARS IN THOUSANDS)                                     2002         2001
                                                           ____         ____
Cash flows from operating activities:
  Net income (loss)                                     $ 2,245      (33,752)
  Adjustments to reconcile net income to net
   cash used in operating activities:
    Provision for loan and recourse losses                  441           87
    Depreciation and amortization                           994        1,217
    Deferred origination costs                              225         (646)
    Excess cashflow certificates received in
     securitization transactions, net                    (1,657)      20,837
   Changes in operating assets and liabilities:
     (Increase) decrease in accounts receivable            (242)       6,173
     Decrease (increase) in loans held for sale, net     28,987      (18,016)
     Decrease in accrued interest receivable                753        5,598
     (Increase) decrease in prepaid and other assets       (492)      16,811
     Decrease in accounts payable and accrued expenses     (504)      (4,370)
     Increase in investor payable                            --        3,579
     Decrease in advance payments by borrowers for
         taxes and insurance                                 --         (757)
                                                         -------      -------
Net cash provided by (used in) operating activities      30,750       (3,239)
                                                         -------      -------

Cash flows from investing activities:
     (Purchase) disposition of equipment                    (13)         390
                                                         -------      -------
Net cash (used in) provided by investing activities         (13)         390
                                                         -------      -------
Cash flows from financing activities:
   (Proceeds from) repayments of warehouse financing
   & other borrowings, net                              (32,994)      18,183
   (Decrease) increase in bank payable, net                (162)       1,769
                                                        --------      -------
Net cash (used in) provided by financing activities     (33,156)      19,952
                                                        --------      -------

Net (decrease) increase in cash and
  interest-bearing deposits                              (2,419)      17,103

Cash and interest-bearing deposits at beginning
  of period                                               6,410       62,270
                                                        --------      -------
Cash and interest-bearing deposits at end
  of period                                             $ 3,991       79,373
                                                        ========      =======

Supplemental Information:
Cash paid during the period for:
   Interest                                             $ 1,807        9,119
                                                        ========      =======
   Income taxes                                         $     7           20
                                                        ========      =======

          See accompanying notes to consolidated financial statements.

                                       3
</TABLE>

                  DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)   BASIS OF PRESENTATION

   Delta  Financial  Corporation  (together with its  subsidiaries  "Delta" or
"we") is a Delaware corporation, which was organized in August 1996.

   The accompanying  unaudited  consolidated  financial statements include the
accounts of Delta and its wholly  owned  subsidiaries.  In  consolidation,  we
have eliminated all significant inter-company accounts and transactions.

   We  have  prepared  the  accompanying   unaudited   consolidated  financial
statements in accordance with accounting  principles generally accepted in the
United  States of America  (GAAP) 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 GAAP
have been  condensed or omitted  pursuant to the rules and  regulations of the
Securities  and  Exchange   Commission.   You  should  read  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"  in  conjunction   with  our  audited
consolidated  financial  statements  and  related  notes  for the  year  ended
December 31, 2001. The results of operations for the three-month  period ended
March 31,  2002 is not  necessarily  indicative  of the  results  that will be
expected for the entire year.

   We have  made all  adjustments  that 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.   We  have
reclassified  certain  prior period  amounts in the  financial  statements  to
conform to the current year presentation.

(2)   SUMMARY OF REGULATORY SETTLEMENTS

   In September  1999,  we settled  allegations  by the New York State Banking
Department  (the  "NYSBD")  and a lawsuit by the New York State  Office of the
Attorney  General (the "NYOAG")  alleging  that we had violated  various state
and  federal  lending  laws.  The global  settlement  was  evidenced  by (a) a
Remediation  Agreement by and between Delta Funding and the NYSBD, dated as of
September  17, 1999 and (b) a  Stipulated  Order on Consent by and among Delta
Funding,  Delta  Financial  and the NYOAG,  dated as of September 17, 1999. As
part of the  Settlement,  we,  among  other  things,  implemented  agreed upon
changes  to  our  lending  practices;  are  providing  reduced  loan  payments
aggregating  $7.25 million to certain  borrowers  identified by the NYSBD; and
have  created a fund managed by the NYSBD and financed by the grant of 525,000
shares of Delta  Financial's  common stock, with an agreed upon fixed value of
$9.10 per share which  approximates  the stock's book value at the time of the
settlement.

      Each month,  on behalf of  borrowers  designated  by the NYSBD,  we make
subsidy  payments  to  the  related   securitization   trusts.  These  subsidy
payments  fund the  differential  between the original  loan  payments and the
reduced loan  payments.  As part of the second  exchange offer we completed in
August 2001 (see Note No. 3 "-Corporate Restructuring,  Debt Modification, and

                                       4

Debt  Restructuring"),  Delta  Funding  Residual  Exchange  Company,  LLC (the
"LLC") (an  unaffiliated  entity to us) - a  newly-formed  entity,  the voting
membership  interests  of which are owned by the former  holders of our senior
secured  notes and senior  notes due 2004 (the  "Notes")  who  tendered  their
Notes for such  membership  interests  and other  securities - is obligated to
satisfy  these  payment  subsidies  out of the  cash  flows  generated  by the
mortgage related securities (primarily from the excess cashflow  certificates)
it owns.  Management  believes  the LLC will have  sufficient  cash flows from
its assets to satisfy  these  payment  subsidies.  However,  if the LLC's cash
flows  are  insufficient  to pay this  obligation,  we remain  responsible  to
satisfy our obligations under the Remediation Agreement.

      The  proceeds  of the stock  fund will be used to pay  borrowers  and to
finance a variety of consumer educational and counseling  programs.  We do not
manage  the fund  created  for this  purpose.  The  number of shares of common
stock  deposited  in the fund does not adjust to account for  fluctuations  in
the market  price of our common  stock.  Changes to the market  price of these
shares of common  stock  deposited  in the fund do not have any  impact on our
financial  statements.  We did not make any additional  financial  commitments
between the settlement date and March 2000.

      In March 2000,  we finalized an agreement  with the U.S.  Department  of
Justice,  the Federal Trade Commission and the Department of Housing and Urban
Development,  to complete the global  settlement we had reached with the NYSBD
and NYOAG. The federal agreement  mandates some additional  compliance efforts
for us, but it does not require any additional financial commitment by us.

(3)   CORPORATE RESTRUCTURING, DEBT MODIFICATION, AND DEBT RESTRUCTURING

   In 2000,  we began a corporate  restructuring  - by reducing our  workforce
and modifying  the terms of the indenture  governing our senior notes due 2004
(the "senior notes") - as part of our continuing  efforts to improve operating
efficiencies and to address our negative cash flow from  operations.  Entering
2001,  management still had several  concerns,  which we believed needed to be
addressed for us to remain a viable company.  Our principal concerns were:

  o   the cash drain created by our ongoing monthly  delinquency and servicing
      advance  requirements  as servicer for  securitization  trusts (known as
      "securitization advances");
  o   the high cost of  servicing a seasoned  loan  portfolio,  including  the
      capital charges associated with making securitization advances;
  o   our ability to make  timely  interest  payments on our senior  notes and
      senior secured notes due 2004 (the "senior secured notes"); and
  o   our  ability  to  effectuate  a  successful  business  model  given  the
      overhang of corporate ratings of "Caa2" by Moody's and "CC" by Fitch.

   Therefore  in  the  first quarter of 2001, we embarked upon a business plan
aimed at alleviating some of these concerns and issues.

                                       5

   CORPORATE RESTRUCTURING

   In  January  2001,  we  entered  into an  agreement  with  Ocwen  Financial
Corporation  ("Ocwen") to transfer our  servicing  portfolio to Ocwen.  In May
2001, we physically  transferred our entire servicing  portfolio to Ocwen, and
laid-off the majority of our servicing  staff - a total of 128  employees.  We
recorded a $0.5 million  pre-tax charge relating to this  restructuring  which
is included in the line item called  "restructuring and other special charges"
on  our  consolidated  statements  of  operations.   This  charge  relates  to
employee  severance  associated with closing our servicing  operations.  We no
longer service loans nor do we have a servicing operation.

   We have accrued  restructuring  charges  related to the write down of lease
obligations  of $0.5  million and $0.6  million at March 31, 2002 and December
31, 2001,  respectively.  There was no additional accruals recorded during the
three months ended March 31, 2002.

   DEBT MODIFICATION AND DEBT RESTRUCTURING

   In August  2000,  we  announced  an  agreement  to modify  the terms of the
indenture  governing  our senior  notes (the  "Debt  Modification").  With the
consent of the holders of greater than fifty percent of our senior  notes,  we
modified a negative pledge covenant in the senior notes  indenture,  which had
previously  prevented  us from  selling or  otherwise  obtaining  financing by
using our excess cashflow  certificates as collateral.  In  consideration  for
the senior  noteholders'  consent, we agreed, in an exchange offer (the "First
Exchange  Offer"),  to offer then current  holders the opportunity to exchange
their then  existing  senior  notes for (a) new senior  secured  notes and (b)
ten-year  warrants to buy approximately 1.6 million shares of common stock, at
an initial  exercise  price of $9.10 per share,  subject to upward or downward
adjustment in certain  circumstances.  The senior  secured notes have the same
coupon,  face amount and  maturity  date as the senior notes and, up until the
Second Debt  Restructuring  (see below) were  secured by at least $165 million
of  our  excess   cashflow   certificates.   The  First   Exchange  Offer  was
consummated  in December  2000,  with holders of greater than $148 million (of
$150 million) of senior notes tendering in the exchange.

   In February  2001,  we entered into a letter of intent with the  beneficial
holders of over fifty percent of our senior secured notes to restructure,  and
ultimately   extinguish,   the  senior   secured   notes  (the   "Second  Debt
Restructuring").  In March  2001,  we  obtained  the  formal  consent of these
beneficial holders of the senior secured notes through a consent  solicitation
that modified  certain  provisions of the senior  secured notes  indenture to,
among other things, allow for the release of two excess cashflow  certificates
then  securing the senior  secured  notes.  We were able to first  finance and
ultimately   sell   the   excess   cashflow   certificates   underlying   five
securitizations   (including  two  excess  cashflow   certificates  that  were
released as part of the Second  Debt  Restructuring)  for a $15  million  cash
purchase price to provide working capital.

   In consideration  for their consent,  we agreed to offer the holders of the
senior  secured notes (and the senior notes,  collectively,  the "notes"),  an
opportunity to exchange their notes for new securities  described  immediately
below  (the  "Second   Exchange   Offer").   The  Second  Exchange  Offer  was
consummated  on August 29, 2001,  pursuant to which  holders of  approximately
$138.1 million (of $148.2  million) in principal  amount of our senior secured
notes and $1.1  million (of $1.8  million) in  principal  amount of our senior
notes, exchanged their notes for commensurate interests in:

                                       6

  o   voting  membership  interests in Delta Funding Residual Exchange Company
      LLC (the "LLC"), a newly-formed limited liability company  (unaffiliated
      with  us),  to  which  we  transferred   all  of  the   mortgage-related
      securities  previously  securing  the senior  secured  notes  (primarily
      comprised of excess cashflow certificates);

  o   shares of common stock of a  newly-formed  management  corporation  that
      will manage the LLC's assets; and

  o   shares of our newly-issued  Series A preferred stock having an aggregate
      preference amount of $13.9 million.

   The LLC is  controlled  by the  former  noteholders  that  now hold all the
voting  membership  interests  in the  LLC.  As  part of the  transaction,  we
obtained a non-voting  membership  interest in the LLC,  which  entitles us to
receive  15% of the net cash  flows  from the LLC for the  first  three  years
(through June 2004) and,  thereafter,  10% of the net cash flows from the LLC.
The net cash flows  from the LLC are equal to the total  cash flows  generated
by the assets held by the LLC for a particular  period,  less (a) all expenses
of the LLC,  (b)  certain  related  income  tax  payments,  and (c) the  NYSBD
subsidy payments.  We began receiving  distributions from the LLC in the first
quarter of 2002 from a fourth quarter 2001 distribution.

   As part of the Second  Exchange  Offer,  all tendering  noteholders  waived
their right to receive any future  interest  coupon  payments on the  tendered
notes  beginning  with the  August  2001  interest  coupon  payment.  With the
closing of the Second  Exchange Offer, we paid the August 2001 interest coupon
payment  on the  approximately  $10.8  million of notes that did not tender in
the  Second  Exchange  Offer.  By  extinguishing   substantially  all  of  our
long-term  debt,  the  rating  agencies  that  previously  rated  us  and  our
long-term debt have withdrawn their corporate ratings.

(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 income (loss) from  continuing
operations.

For the three months ended March 31:


(DOLLARS IN THOUSANDS, EXCEPT EPS DATA)        2002                2001
------------------------------------------------------------------------------
Net Income (loss)                           $    2,245           (33,752)
Weighted-average shares                     15,883,749         15,883,749
Basic EPS                                   $     0.14             (2.12)
Weighted-average shares                     15,883,749         15,883,749
Incremental shares-options                     522,568                 --
------------------------------------------------------------------------------
                                            16,406,317         15,883,749
Diluted EPS                                 $     0.14             (2.12)
------------------------------------------------------------------------------

 (5) IMPACT OF NEW ACCOUNTING STANDARDS

   In July 2001, the FASB issued SFAS No. 142,  "Goodwill and Other Intangible
Assets," which requires that goodwill and  intangible  assets with  indefinite
useful lives no longer be amortized,  but instead be tested for  impairment at
least annually in accordance  with the provision of SFAS No. 142. SFAS No. 142
also requires that intangible  assets with estimable useful lives

                                       7

be amortized over their  respective  estimated useful lives to their estimated
residual values.  The amortizing  intangible  assets will also be reviewed for
impairment  at least  annually.  SFAS No. 142 is  applicable  to fiscal  years
beginning  after  December  15,  2001 and is  required  to be  applied  at the
beginning of the entity's  fiscal year.  There was no impact on our  financial
condition or results of operations upon adoption of SFAS No. 142 on January 1,
2002.

   In  October  2001,  the FASB  issued  SFAS  No.  144,  "Accounting  for the
Impairment of Disposal of  Long-Lived  Assets,"  which  replaces SFAS No. 121,
"Accounting for the Impairment of Long-Lived  Assets and for Long-Lived Assets
to be  Disposed  Of."  The  provisions  of  SFAS  No.  144 are  effective  for
financial  statements  issued for fiscal years  beginning  after  December 15,
2001 and, generally,  are to be applied prospectively.  There was no impact on
our  financial  condition or results of  operations  upon adoption of SFAS No.
144 on January 1, 2002.


                                       8
<PAGE>


ITEM 2.  MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND
RESULTS OF OPERATIONS

THE FOLLOWING  DISCUSSION  SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES TO CONSOLIDATED  FINANCIAL STATEMENTS SET FORTH
THEREIN.

GENERAL

   Delta Financial  Corporation  (together with its  subsidiaries,  "Delta" or
"we"), is a specialty  consumer finance company that originates,  securitizes,
and sells (and, prior to May 2001,  serviced)  non-conforming  mortgage loans,
which  are  primarily  secured  by  first  mortgages  on one-  to  four-family
residential  properties.  Throughout  our 20 years of  operating  history,  we
have  focused on lending to  individuals  who  generally  do not  satisfy  the
credit,  documentation or other underwriting standards set by more traditional
sources  of  mortgage  credit,  including  those  entities  that make loans in
compliance  with  conventional  mortgage  lending  guidelines  established  by
Fannie  Mae and  Freddie  Mac.  We make  loans  to  these  borrowers  for such
purposes as debt consolidation, refinancing, education and home improvements.

   Our  mortgage  business  has  two  principal  components.  First,  we  make
mortgage  loans,  which is a cash and expense  outlay for us, because our cost
to originate a loan exceeds the fees we collect at the time we originate  that
loan.  At the time we  originate  a loan,  and  prior to the time we sell that
loan,  we finance  that loan by  borrowing  under a warehouse  line of credit.
Second,  we sell  loans,  either  through  securitization  or on a whole  loan
basis, to generate cash and non-cash revenues.  We use the proceeds from these
sales  to  repay  our  warehouse  line  of  credit  and for  working  capital,
recording  the premiums  received from the loan sales and  securitizations  as
revenue.

   ORIGINATION  OF  MORTGAGE   LOANS.  We  make  mortgage  loans  through  two
distribution  channels - wholesale  (or broker)  and retail.  We receive  loan
applications both directly from borrowers and from licensed  independent third
party mortgage  brokers who submit  applications  on a borrower's  behalf.  We
process and  underwrite  the  submission  and, if the loan  comports  with our
underwriting  criteria,  approve the loan and lend the money to the  borrower.
While we  generally  collect  points  and fees from the  borrower  when a loan
closes,  our cost to originate a loan  typically far outweighs any fees we may
collect from the borrower.

   Through our wholesale  distribution  channel,  we originate  mortgage loans
indirectly   through   licensed   mortgage   brokers  and  other  real  estate
professionals who submit loan  applications on behalf of borrowers  ("brokered
loans").  We currently  originate  the  majority of our  brokered  loans in 20
states, through our network of approximately 1,500 brokers.

   Through  our retail  distribution  channel,  we develop  retail  loan leads
("retail loans") primarily  through our  telemarketing  system and our network
of 11  retail  offices  located  in seven  states.  In 2001,  we  closed  four
under-performing  retail  offices  - two in  Florida,  one in Ohio  and one in
Indiana  -  and  opened  our  second   retail  call   center  in   Pittsburgh,
Pennsylvania.

   For the three months ended March 31, 2002, we originated  $190.0 million of
loans,  an increase of 11% over the $170.7 million of loans  originated in the
comparable  period in 2001. Of these  amounts,  approximately  $122.8  million
were brokered  loans and $67.2  million were retail loans,  compared to $105.1
million and $65.6 million,  respectively,  during the three months ended March
31, 2001. In addition,  loan production in the first quarter of 2002 increased
36%

                                       9

from  $139.2  million  in the  fourth  quarter  of 2001.  The  fourth  quarter
production  was comprised of $74.8 million of brokered loans and $64.4 million
of retail loans.

   POOLING  OF  LOANS  PRIOR  TO  SALE.  After  we  close  or fund a loan,  we
typically  pledge the loan as collateral  under a warehouse  line of credit to
obtain  financing  against that loan. By doing so, we replenish our capital so
we can make new loans.  Typically,  loans are financed on a warehouse  line of
credit  for only a limited  time -  generally,  not more than  three  months -
until such time as we can pool enough  loans and sell the pool of loans either
through  securitization  or on a whole-loan  basis.  During this time, we earn
interest paid by the borrower as income,  but this income is offset in part by
the interest we pay to the warehouse creditor for providing us with financing.

   SALE OF LOANS.  We derive  the  majority  of our  revenues  and cash  flows
primarily  from  selling  mortgage  loans  (and  related  interests  including
securitization  servicing  rights on newly originated pools of mortgage loans)
through  securitization  or on a whole  loan  basis.  In the first  quarter of
2002, we  securitized  $175.0 million of mortgage loans and sold $38.7 million
of  mortgage  loans,  on a whole loan  servicing  released  basis.  We plan to
continue to utilize a combination of  securitization  and whole loan sales for
the foreseeable future.

   SECURITIZATION.  Securitizations  effectively  provide  us with a source of
long-term financing.  In a securitization,  we pool together loans,  typically
each  quarter,  and sell these  loans to a  securitization  trust,  which is a
qualified  special  purpose  entity or SPE.  The  securitization  trust raises
money to purchase  the  mortgage  loans from us by selling  securities  to the
public - known as  asset-backed  pass-through  securities  that are secured by
the  pool  of  mortgage  loans  held  by  the   securitization   trust.  These
asset-backed  securities or senior  certificates,  which are usually purchased
by insurance  companies,  mutual funds and/or other  institutional  investors,
represent  senior  interests in the cash flows from the mortgage  loans in the
trust.  Following  the  securitization,  holders of these senior  certificates
receive the principal collected,  including  prepayments of principal,  on the
mortgage  loans in the trust.  In addition,  holders  receive a portion of the
interest on the loans in the trust equal to the pass-through  interest rate on
the remaining  principal  balance.  These  securities are typically sold for a
par purchase price, or a slight  discount to par - with par  representing  the
aggregate  principal  balance of the mortgage  loans backing the  asset-backed
securities.  For example,  if a  securitization  trust contains  collateral of
$100 million of mortgage loans, we typically  receive close to $100 million in
proceeds from the sales of these  securities,  depending upon the structure we
utilize for the securitization.

   The  securitization  trust also  issues a  certificate  (referred  to as an
excess  cashflow  certificate),  which  entitles  the  holder to  receive  the
difference  between the interest  payments  due on the mortgage  loans sold to
the  securitization  trust and the interest  payments due, at the pass-through
rates,  to the holders of the  pass-through  securities,  less the contractual
servicing   fee  and  other   costs  and   expenses   of   administering   the
securitization  trust. For any monthly  distribution,  the holder of an excess
cashflow  certificate  receives payments only after payments have been made on
all the other  securities  issued by the  securitization  trust.  In addition,
before the holder of the excess cash flow certificate receives payments,  cash
flows from such excess cashflow certificates are applied as follows:

                                       10

  o   first,  to  cover  any  losses  on the  mortgage  loans  in the  related
      mortgage pool, because the excess cashflow  certificates are subordinate
      in  right  of   payment   to  all   other   securities   issued  by  the
      securitization trust;
  o   second,  to  reimburse  the  insurer,  if any, of the related  series of
      pass-through  certificates  for amounts  paid by or  otherwise  owing to
      that insurer;
  o   third,  to build or maintain  the  overcollateralization  (described  in
      more  detail  immediately  below) for that  securitization  trust at the
      required level by being applied as an  accelerated  payment of principal
      to the holders of the pass-through certificates of the related series;
  o   fourth,  to reimburse  holders of the  subordinated  certificates of the
      related series of pass-through  certificates for unpaid interest and for
      any losses previously allocated to those certificates; and
  o   fifth, to pay interest on the related  pass-through  certificates  which
      was not paid because of the  imposition  of a cap on their  pass-through
      rates - these payments being called basis risk shortfall amounts.

   Overcollateralization  occurs when  additional  payments of  principal  are
made to the holders of the  pass-through  certificates in order to establish a
spread between the principal amount of the trust's  outstanding  loans and the
amount  of  outstanding  pass-through  certificates.   Pooling  and  Servicing
Agreements,  which govern our securitizations,  require  overcollateralization
and the  "waterfall"  described above to provide credit  enhancement  (I.E., a
source of funds to absorb  losses)  for the  senior  securities  issued by the
securitization trust and for the insurer, if any.

   Our  securitizations  typically  require  overcollateralization  of between
1.5% and  3.0% of the  initial  securitization  principal  amount  securitized
(known   as   the   "overcollateralization    limit").    Historically,    our
securitizations provided for the overcollateralization  limits to be funded by
the  cash  flows  generated  by the  excess  cashflow  certificates.  Once the
overcollateralization  limit is reached - which typically occurs between 18-24
months after the  completion  of a  securitization,  with the specific  timing
depending  upon the structure and  performance of the  securitization  - these
cash flows are then  distributed  to us as the  holder of the excess  cashflow
certificates.  Cash flows from our excess  cashflow  certificates  are subject
to certain  delinquency or loss tests,  as defined by the rating  agencies and
or the bond  insurer  insuring  the  securitization.  Over  time,  we  receive
distributions   from  the   overcollateralization   account   subject  to  the
performance of the mortgage loans in each securitization.

   In each of our more recent securitizations prior to this quarter, including
those that we issued in 2001, we derived the following economic interests:

  o   we  received a cash  purchase  price  from the sale of an  interest-only
      certificate sold in connection with a  securitization.  This certificate
      entitles  the holder to a recurring  interest  payment over a guaranteed
      period of 36  months,  and  reduces  the cash  flows we would  otherwise
      receive as owner of the excess cashflow certificates;
  o   we received a cash  premium  from selling the right to service the loans
      being  securitized.  This right  entitles  the  contractual  servicer to
      service  the  loans on behalf of the  securitization  trust,  and earn a
      contractual   servicing  fee,  and  ancillary  servicing  fees  in  such
      capacity; and
  o   we  retained an excess  cashflow  certificate.  Although  the cash flows
      generated by excess cashflow  certificates are received over time, under
      existing  accounting  rules, we must report as income at the time of the
      securitization  the present value of all projected  cash

                                       11

      flows we expect to  receive in the future  from  these  excess  cashflow
      certificates based upon an assumed discount rate. Our valuation of these
      excess  cashflow  certificates is primarily based on (1) our estimate of
      the amount of expected  losses or  defaults  that will take place on the
      underlying  mortgage loans over the life of the mortgage loans,  and (2)
      the expected  amount of  prepayments  on the  mortgage  loans due to the
      underlying  borrowers  of the mortgage  loans paying off their  mortgage
      loan prior to the loan's stated maturity.

   We utilized a new  securitization  structure in the first  quarter of 2002.
In  lieu of  selling  an  interest-only  certificate,  we sold a net  interest
margin  certificate or NIM. The NIM is generally  structured where we sell the
excess  cashflow  certificate to a qualified  special  purpose entity or owner
trust (the NIM trust)  and the NIM trust in turn  issues (1)  interest-bearing
NIM note(s)  (backed by the excess  cashflow  certificate),  and (2) NIM owner
trust certificate  evidencing  ownership in the NIM trust. We sell this excess
cashflow   certificate   without   recourse  except  that  we  provide  normal
representations  and  warranties  to the  NIM  trust.  One or  more  investors
purchase the NIM note(s) and the proceeds from the sale of the note(s),  along
with a owner trust  certificate that is subordinate to the note(s),  represent
the consideration to us for the sale of the excess cashflow certificate.

   The NIM note entitles the holder to be paid a specified  interest rate, and
further  provides  for  all  cash  flows  generated  by  the  excess  cashflow
certificates  to be used to pay all  principal  and  interest  on the NIM note
until  paid in full.  As part of the NIM  transaction,  we  received  the cash
proceeds  from  the sale of the NIM note  and a  subordinate  interest  in the
owner  trust,  represented  by the owner trust  certificate.  This owner trust
certificate  entitles us to all cash flows  generated  by the excess  cashflow
certificates  after  the  holder  of the NIM note has  been  paid in full.  As
such, we classify the NIM owner trust  certificate  on our balance sheet as an
excess cashflow  certificate and value the NIM owner trust  certificate  using
the same assumptions that we utilize in valuing excess cashflow certificates.

   As  part  of the NIM  transaction,  we were  required  to  fully  fund  the
overcollateralization  amount at  closing - as  opposed  to having it build up
over time as we had in past  securitizations.  We used a  portion  of the cash
proceeds from the NIM note to do so.

   In  the securitization  that we  issued in  the  first  quarter of 2002, we
derived the following economic interests:

  o   we received a cash  purchase  price from the sale of the NIM note issued
      by a NIM trust, to which we sold the excess cashflow certificate;
  o   we received a cash  premium  from selling the right to service the loans
      being securitized; and
  o   we retained a NIM owner trust certificate,  which entitles us to receive
      cash flows  generated  by the  excess  cashflow  certificates  issued in
      connection with the securitization  after the holder of the NIM note has
      been paid in full.

   At the  time  we  completed  the  first  quarter  2002  securitization,  we
recognized as revenue each of the three economic  interests  described  above,
which was recorded as net gain on sale of mortgage  loans on our  consolidated
statement of operations.

                                      12

   A summary  of the gain on sale and cash flow  from our first  quarter  2002
securitization is presented below:

   GAIN ON SALE SUMMARY
      Loans (thousands)                                            $175,000
      NIM Proceeds, net of Overcollateralization Account             3.91 %
      Excess Cashflow Certificate (owner trust certificate)          1.99 %
      Mortgage Servicing Rights                                      0.89 %
      Less:  Transaction Costs                                      (0.66)%
                                                                   --------
           Net gain on sale recorded                                 6.13 %

   CASH FLOW SUMMARY
      NIM Proceeds, net of Overcollateralization Account             3.91 %
      Mortgage Servicing Rights                                      0.89 %
      Less: Transaction Costs                                       (0.66)%
                                                                   --------
         Net Cash Flow at Closing                                    4.14 %

   Our  net  investment  in  the  pool  of  loans  sold  at  the  date  of the
securitization  represents the amount  originally paid to originate the loans,
adjusted for the following:

  o   any  direct  loan  origination   costs  incurred  (an  increase  in  the
      investment)  and loan  origination  fees  received  (a  decrease  in the
      investment)  in  connection  with the  loans,  which  are  treated  as a
      component of the initial investment in loans;

  o   the principal  payments  received,  and the amortization of the net loan
      fees or  costs,  during  the  period  we held the  loans  prior to their
      securitization; and

  o   any gains (a decrease in the  investment)  or losses (an increase in the
      investment)  we  incur  on any  hedging  instruments  that  we may  have
      utilized  to hedge  against  the  effects of changes in  interest  rates
      during  the  period  we hold the  loans  prior to their  securitization.
      (See "-Hedging," beginning on page 26).

   We  allocate  our  basis  in  the  mortgage   loans  and  excess   cashflow
certificates  between the portion of the  mortgage  loans and excess  cashflow
certificates  sold through  securitization  and the portion  retained (the NIM
owner trust  certificate in this quarter) based on the relative fair values of
those  portions  on the  date  of  sale.  We may  recognize  gains  or  losses
attributable   to  the   changes  in  fair   value  of  the  excess   cashflow
certificates,  which are recorded at estimated fair value and accounted for as
"trading"  securities.  Since  there  is no  active  market  for  such  excess
cashflow  certificates,  we determine the  estimated  fair value of the excess
cashflow certificates by discounting the future expected cash flows.

   WHOLE  LOAN  SALES.  We also sell  loans,  without  retaining  the right to
service the loans, in exchange for a cash premium.  This is recorded as income
under  net gain on sale of  mortgage  loans at the time of sale.  In the first
quarter  of 2002,  we sold  $35.5  million  loans on a whole loan basis for an
average premium (net of reserve) of 4.54% of the principal  amount of mortgage
loans sold.  We also sold $3.2 million of loans,  which we were unable to sell
or  securitize  in the normal  course of business,  at a 17% discount to their
unpaid principal balance.

      OTHER.   In  addition  to  the  income  and  cash  flows  we  earn  from
securitizations  and whole loan sales,  we also earn income and generate  cash
flows from:

                                      13

  o   the net  interest  spread  earned on  mortgage  loans  while we hold the
      mortgage  loans for sale (the  difference  between the interest  rate on
      the mortgage  loan paid by the  underlying  borrower  less the financing
      costs we pay to our warehouse lender to fund our loans);

  o   net loan origination fees on brokered loans and retail loans; and

  o   retained  excess  cashflow  certificates  and  distributions  from Delta
      Funding  Residual  Exchange  Company,  LLC  (described  above in  "-Debt
      Modification and Debt Restructuring").

   CORPORATE  RESTRUCTURING,  DEBT  MODIFICATION  AND DEBT  RESTRUCTURING.  As
discussed in more detail in "Corporate  Restructuring,  Debt  Modification and
Debt  Restructuring"   beginning  on  page  5,  we  engaged  in  a  series  of
transactions  beginning in 2000,  and concluding in the third quarter of 2001,
aimed at improving  operating  efficiencies  and  reducing  our negative  cash
flow.  We spent much of the 2001 working on two  transactions  in  particular,
which we believe were of  tantamount  importance  in this regard - selling our
servicing portfolio and extinguishing most of our long term debt.

  o   In May 2001,  we completed  our  transfer of  servicing to Ocwen,  which
      freed  us  from  the  significant  cash  drain  associated  with  making
      securitization  advances (and the capital costs  associated  with making
      such advances),  and of servicing a highly seasoned portfolio  following
      three  successive  quarters  of  selling  the  securitization  servicing
      rights for newly originated mortgage loans;

  o   In  August  2001,  we  completed  our  Second  Exchange   Offer,   which
      extinguished   substantially   all  of  our  long-term   debt,   leaving
      approximately  $10.8  million  out of $150  million  of our notes  still
      outstanding.  This debt  extinguishment  helped us threefold.  First, it
      eliminated  nearly $140  million of principal  which we otherwise  would
      have had to repay in 2004.  Second,  it eliminated more than $13 million
      of yearly  interest  expense that we would have had to pay to the former
      noteholders  had  they  still  held  their  notes.  Third,  the  ratings
      agencies that  previously  rated us and our notes have  withdrawn  their
      corporate ratings.

   We believe that our transfer of servicing to Ocwen and the Second  Exchange
Offer  were  essential  steps in our  continuing  effort  to  restructure  our
operations and reduce our negative cash flow  previously  associated  with our
servicing operations and the notes. There can be no assurances,  however, that
these or other  factors  described  herein  will not have a  material  adverse
effect on our results of operations  and financial  condition.  (See "-Forward
Looking Statements and Risk Factors").

EXCESS CASHFLOW CERTIFICATES, NET

   We  classify  excess  cashflow   certificates  that  we  receive  upon  the
securitization  of a  pool  of  loans  as  "trading  securities."  The  amount
initially  allocated  to the  excess  cashflow  certificates  at the date of a
securitization  reflects their fair value.  The amount recorded for the excess
cashflow  certificates  is reduced for  distributions  which we receive as the
holder of these excess  cashflow  certificates  and is adjusted for subsequent
changes in the fair value of the excess cashflow certificates we hold.

   At the time  each  securitization  transaction  closes,  we  determine  the
present  value of the

                                      14

related  excess  cashflow  certificates  using  certain  assumptions  we  make
regarding the underlying  mortgage loans.  The excess cashflow  certificate is
then recorded on our  consolidated  financial  statements at an estimated fair
value. Our estimates primarily include the following:

  o  future rate of prepayment of the mortgage loans;

  o  credit losses on the mortgage loans;

  o  a discount rate used to calculate present value; and

  o  the  London  Inter-Bank  Offered  Rate  ("LIBOR")  forward  curve  (using
     current LIBOR as the floor rate).

   The value of each excess cashflow  certificate  represents the cash flow we
expect to  receive  in the future  from such  certificate  based upon our best
estimate.  We monitor  the  performance  of the loans  underlying  each excess
cashflow  certificate,  and  any  changes  in our  estimates  (and  consequent
changes in value of the excess  cashflow  certificates)  is  reflected  in the
line item  called  "interest  income" in the quarter in which we make any such
change in our estimate.  Although we believe that the  assumptions  we use are
reasonable,  there can be no assurance  as to the accuracy of the  assumptions
or estimates.

   In determining the fair value of each of the excess cashflow  certificates,
we  make  the  following  underlying   assumptions   regarding  mortgage  loan
prepayments, mortgage loan default rates and discount rates:

(A)   PREPAYMENTS.  We base our prepayment rate  assumptions upon our on-going
      analysis   of  the   performance   of  mortgage   pools  we   previously
      securitized,  and the  performance  of similar  pools of mortgage  loans
      securitized  by others in the industry.  We apply  different  prepayment
      speed  assumptions  to different  loan product types because it has been
      our  experience  that  different  loan product types  exhibit  different
      prepayment patterns.  Generally,  our loans can be grouped into two loan
      products - fixed rate loans and adjustable  rate loans.  With fixed rate
      loans, an underlying  borrower's  interest rate remains fixed throughout
      the life of the loan.  Our  adjustable  rate loans are really a "hybrid"
      between  fixed and  adjustable  rate loans,  in that the rate  generally
      remains fixed  typically for the first three years of the loan, and then
      adjusts  typically  every six months  thereafter.  Within  each  product
      type,  other factors can affect  prepayment  rate  assumptions.  Some of
      these factors, for instance, include:

        o   whether or not a loan  contain  a prepayment  penalty  - an amount
            that A borrower  must pay to a lender if the borrower  prepays the
            loan  within a certain  time after the loan was  originated. Loans
            containing a prepayment penalty typically do not prepay as quickly
            as those without such a penalty;

        o   as  is  customary   with   adjustable  rate  mortgage  loans,  the
            introductory interest rate charged to the borrower is artificially
            lower, between one and two full percentage  points,  than the rate
            for which the borrower would have otherwise  qualified. Generally,
            once the  adjustable rate mortgage  begins  adjusting on the first
            adjustment date, the interest rate payable on that loan increases,
            at times fairly  substantially. This interest rate increase can be
            exacerbated if there is an absolute increase in interest rates. As
            a result of these increases and the potential for future

                                      15

            increases,  adjustable  rate  mortgage  loans  typically  are more
            susceptible to early prepayments.

      There are several reasons why a loan will  prepay prior to its maturity,
      including (but not limited to):

         o  a decrease in interest rates;

         o  improvement  in  the  borrower's  credit  profile, which may allow
            them to qualify for a lower interest rate loan;

         o  competition  in  the  mortgage  market, which  may result in lower
            interest rates being offered;

         o  the borrower's sale of his or her home; and

         o  a default by the borrower, resulting in foreclosure by the lender.

      It is unusual for a borrower to  prepay a mortgage loan during the first
      few months because of the following:

         o  it  typically  takes  at least  several months  after the mortgage
            loans are originated for any of the above events to occur;

         o  there are costs involved with refinancing a loan; and

         o  the borrower does not want to incur prepayment penalties.

      Thereafter,  we have  found  that the rate at which  loans  prepay  will
      slowly increase and stabilize,  then decrease and eventually  level off.
      Historically,  we used a "ramp"  prepayment curve, in which we projected
      that a loan would  initially begin prepaying at a certain rate, and that
      rate  would  incrementally  increase  (or  "ramp  up") over its first 12
      months,  and level off thereafter.  Commencing in 1998, we began using a
      "vector"  curve,  which is similar to a "ramp curve" in that  prepayment
      rates  incrementally  increase  over a  longer  period  of time and then
      stabilize.  However,  as opposed to a ramp curve (which remains constant
      once  prepayments  stabilize),  we believe  that a vector  curve is more
      representative  of projected  future loan prepayment  experience,  as it
      thereafter decreases and then eventually levels off.

      The following  table  shows  our  most  recent changes to our prepayment
      assumptions - in  the  third  quarter of 2001 and, prior to that, in the
      third quarter 2000:

            LOAN TYPE         SEPTEMBER 30, 2001   SEPTEMBER 30, 2000
            ---------------------------------------------------------
            Fixed Rate:
               At Month One          4.00%                4.00%
               Peak Speed           30.00%               23.00%
            Adjustable Rate:
               At Month One          4.00%                4.00%
               Peak Speed           75.00%               50.00%

  (b) DEFAULT RATE.  A  default  reserve for both  fixed-  and akjustable-rate
      loans sold to the securitization trusts of 5.00% of the amount initially
      securitized  at March 31,  2002  compared to 3.50% at March 31, 2001.

                                      16

      Our loan loss assumption reflects our belief that:

       o  prepayment speeds generally will be slower in the future than in the
          past;

       o  the  rise  in  home  values  will  be  flat  or slightly moderate as
          compared to the past few years; and

       o  borrowers will therefore be less able to refinance  their  mortgages
          to avoid  default   which  may  have  an   adverse   effect  on  the
          non-performing loans in the  securitizations  trusts  underlying our
          excess cashflow certificates.

  (c) DISCOUNT RATE.    We  use a  discount  rate  that  we  believe  reflects
      the  risks  associated  with our  excess  cashflow  certificates.  While
      quoted market prices on comparable excess cashflow  certificates are not
      available,   we  compare  our  valuation   assumptions  and  performance
      experience to our competitors' in the non-conforming  mortgage industry.
      Our  discount  rate  takes  into  account  the  asset  quality  and  the
      performance  of our  securitized  mortgage loans compared to that of the
      industry  and  other   characteristics  of  our  securitized  loans.  We
      quantify the risks  associated with our excess cashflow  certificates by
      comparing the asset quality and payment and loss performance  experience
      of the  underlying  securitized  mortgage  pools to comparable  industry
      performance.  We believe  that the  practice  of many  companies  in the
      non-conventional  mortgage industry has been to add a spread for risk to
      the all-in cost of  securitizations  to determine  their  discount rate.
      From these  comparisons,  we have identified a spread that we add to the
      all-in  cost  of  our  mortgage  loan  securitization  trusts'  investor
      certificates.  The discount  rate we use to determine  the present value
      of cash flows  from  excess  cashflow  certificates  reflects  increased
      uncertainty surrounding current and future market conditions,  including
      without limitation,  uncertainty concerning inflation,  recession,  home
      prices, interest rates and equity markets.

      We utilized a discount  rate of 15% at March 31, 2002 compared to 13% at
      March 31, 2001 on all excess  cashflow  certificates,  except those that
      at March 31, 2001 were subject to a NIM  transaction  we  consummated in
      November  2000, for which we used an 18% discount rate. We increased the
      discount rate on these excess  cashflow  certificates  during the period
      that the senior NIM securities remained outstanding,  to account for the
      potentially   higher  risk  associated  with  the  residual  cash  flows
      expected to be received  by the holder of the  certificated  interest in
      the NIM trust,  which was subordinated to the multiple senior securities
      sold in the NIM  transaction.  As part of the Second Exchange Offer, all
      of the excess  cashflow  certificates  that were subject to the November
      2000 NIM  transaction  were  transferred to the LLC. We did not increase
      the discount rate on the excess  cashflow  certificates  from our latest
      securitization  despite issuing a NIM security  because the NIM security
      in this most recent transaction was:

      o  issued from a single securitization as compared to the November  2000
         NIM   transaction,   which  was  backed  by  a  combination   of  six
         securitizations   issued  between   September  1997  and  March  1999
         resulting  in more  volatility  or  variability  in  determining  the
         timing of cash flows to be received by the NIM.

      o  issued from a new securitization as compared to the November 2000 NIM
         transaction,  which was  backed by  several  seasoned  securitization
         trusts.  The  predictability  in determining the timing of cash flows
         for  the  first  two  years  on  a  newly  issued

                                      17

         securitization  is typically  higher than  securitizations  that have
         been  outstanding  for a greater  period of time because  defaults or
         losses  to the  trust  within  the fist few  years  of  issuance  are
         typically  lower and more  predictable  compared to a  securitization
         that  has  been  outstanding  for a  longer  period  of  time (a more
         seasoned  transaction).  Therefore,  there is a higher probability in
         determining  the  timing of cash flows to the NIM  investor  on a new
         issuance securitization as compared to a seasoned transaction.

    At March 31,  2002,  we recorded a charge to interest  income to reflect a
fair value  adjustment  to our excess  cashflow  certificates,  totaling  $2.1
million,  relating to the timing of excess  cashflows  that are to be received
by the excess  cashflow  certificate  after the release or  "stepdown"  of the
overcollateralization account.

DEFERRED TAX ASSET

   As of March 31, 2002, we carried a deferred tax asset,  net of $5.6 million
on our consolidated  financial statements - comprised primarily of federal and
state net  operating  losses or "NOLs"  less the tax  impact  and a  valuation
allowance.

   As of March 31, 2002,  we have a gross  deferred tax asset of $51.5 million
and a valuation allowance of $45.9 million.  Following two successive years of
posting  significant  losses, and the modest amount of earnings we have earned
over  the  past two  quarters  and  project  to earn  over  the  next  several
quarters,  we believe it was appropriate to establish this valuation allowance
under GAAP. If we are able to continue to record  earnings in upcoming  years,
we expect to:

   o  utilize a larger  amount of the gross  deferred  tax asset to offset the
      majority of such earnings; and

   o  potentially  decrease the amount of,  and/or  eliminate,  the  valuation
      allowance in accordance with GAAP.

   As of March 31, 2002,  Federal and State net operating  loss  carryforwards
("NOLs")  totaled $103.8 million,  with $18.8 million  expiring in 2019, $12.4
million expiring in 2020, and $72.6 million expiring in 2021.

RESULTS OF OPERATIONS

THREE  MONTHS  ENDED MARCH 31, 2002  COMPARED TO THE THREE  MONTHS ENDED MARCH
31, 2001

GENERAL

   Our net income for the three months ended March 31, 2002 was $2.2  million,
or $0.14 per  share,  compared  to a net loss of $33.8  million,  or $2.12 per
share,  for the three  months  ended March 31, 2001.  Comments  regarding  the
components of net income are detailed in the following paragraphs.

REVENUES

   Total  revenues  increased  $22.6  million,  to $19.6 million for the three
months ended March 31, 2002, from $(3.0) million for the comparable  period in
2001.  The increase in revenue was  primarily  attributable  to our write down
of five excess cashflow  certificates sold under a sale agreement entered into
in the first  quarter of 2001 (that closed in May 2001),  for a cash  purchase
price   significantly  below  our  carrying  value  of  such  excess  cashflow
certificates.  In addition,  the

                                      18

increase was also  attributed  to a higher net gain on sale of mortgage  loans
due to our completing a securitization  in this quarter.  We did not execute a
securitization  in the same period in 2001. The increase was partially  offset
by our not receiving any  servicing  fees  following the sale of our servicing
portfolio to Ocwen in May of 2001.

   We originated  $190.0  million of mortgage loans for the three months ended
March 31, 2002,  representing  a 11% increase from $170.7  million of mortgage
loans  originated for the comparable  period in 2001. We securitized  and sold
$213.7  million  of loans  during  the three  months  ended  March  31,  2002,
compared to $144.3 million sold on a servicing-released  basis during the same
period in 2001.

   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 non-cash  excess  cashflow
certificates  retained by us in a securitization for each period, (b) the cash
premium  purchase price we receive in connection with selling an interest-only
certificate in a securitization  for each period,  (c) the cash purchase price
we   receive   in   connection    with   selling   a   NIM   note,    net   of
overcollateralization  amount,  (d) the cash  premium  received  from  selling
mortgage servicing rights in connection with each  securitization,  and/or the
fair value of the non-cash  capitalized  mortgage  servicing rights associated
with  loans  securitized  in each  period  (if we  retain  mortgage  servicing
rights,  which we do not anticipate doing in the foreseeable  future, as we no
longer  have a  servicing  platform),  and (e) the cash  premiums  earned from
selling  whole  loans on a  servicing-released  basis,  (2) less the (i) costs
associated with securitizations,  (ii) any hedge loss (gain) associated with a
particular securitization,  and (iii) any loss associated with loans sold at a
discount.

   Net gain on sale of mortgage  loans  increased  $6.3  million,  or 105%, to
$12.3  million for the three months  ended March 31,  2002,  from $6.0 million
for the comparable  period in 2001.  This increase was primarily due to (i) an
increase  in the amount of loans  securitized  and sold  compared to the first
quarter  of  2001  and  (ii)  our  selling   whole  loan  sales,   instead  of
securitizing  (which typically results in a higher net gain on sale percentage
than whole loan sales),  during the first quarter of 2001. We securitized $175
million of  mortgage  loans and sold  $38.7  million  of  mortgage  loans on a
servicing-released  basis in the first  quarter  of 2002,  compared  to $144.3
million  of  mortgage  loans  sold  during  the  same  period  in  2001.  Loan
production  totaled $190.0  million in the first quarter of 2002,  compared to
$170.7 million during the same period in 2001.

   INTEREST INCOME.  Interest income  primarily  represents the sum of (1) the
gross cash  interest  we earn on loans held for sale,  (2) the cash we receive
from our excess  cashflow  certificates,  (3) the non-cash  mark-to-market  or
non-cash valuation  adjustments to our excess cashflow certificates to reflect
changes in fair value, and (4) the cash interest earned on bank accounts.

   Interest income  increased $18.7 million,  or 126%, to $3.9 million for the
three  months ended March 31, 2002,  from $(14.8)  million for the  comparable
period in 2001.  The increase in interest  income was primarily due to a $25.4
million  write down of excess  cashflow  certificates  in the first quarter of
2001 in  connection  with the sell of such  certificates  for a cash  purchase
price of $15 million.  The increase was also  attributed  to a higher  average
loan balance (and, consequently,  more interest earned on loans held for sale)
in the  first  quarter  of 2002  compared  to the same  period  in  2001.  The
increase was  partially  offset by a decrease in cash received from our excess
cashflow  certificates,  as we transferred the majority of our excess cashflow
certificates as part of our Second  Exchange Offer in 2001   (See  "-Corporate
Restructuring, Debt

                                      19

Modification and Debt Restructuring").

   SERVICING  FEES.  Servicing  fees represent all  contractual  and ancillary
servicing  revenue  we  receive,  less  the  offsetting  amortization  of  the
capitalized  mortgage  servicing  rights,  and  any  adjustments  recorded  to
reflect valuation allowances for the impairment in mortgage servicing rights.

   We did not receive any  servicing  fees during the three months ended March
31, 2002, as a result of our selling our entire  servicing  portfolio to Ocwen
in May of 2001.  For the three  months ended March 31,  2001,  servicing  fees
totaled $2.2 million.

   NET  ORIGINATION  FEES AND OTHER  INCOME.  Net  origination  fees and other
income  represent (1) fees earned on broker and retail  originated  loans, (2)
premiums paid to originate mortgage loans and (3) other miscellaneous  income,
if any.

   Net  origination  fees and other income  decreased $0.2 million,  or 6%, to
$3.3 million for the three months ended March 31, 2002,  from $3.5 million for
the  comparable  period in 2001.  The  decrease  was  primarily  the result of
higher broker  premiums paid in the first quarter of 2002 due to higher broker
originations.

EXPENSES

   Total  expenses  decreased by $13.0  million,  or 43%, to $17.2 million for
the three months ended March 31, 2002,  from $30.2 million for the  comparable
period in 2001.  The  decrease  was  primarily  related to lower  general  and
administrative  and payroll and related  costs  associated  with our corporate
restructuring charges incurred in 2001. In addition,  the decrease in expenses
was  also  the  result  of  a  decrease  in  interest  expense  relating  to a
significantly  lower amount of interest due resulting  from our  extinguishing
approximately  $139.2  million  of Notes in the  Second  Exchange  Offer  (see
"-Corporate Restructuring,  Debt Modification and Debt Restructuring"),  and a
lower interest rate environment.

   PAYROLL AND RELATED  COSTS.  Payroll and related  costs  include  salaries,
benefits and payroll taxes for all employees.

   Payroll  and  related  costs  decreased  by $1.6  million,  or 14%, to $9.7
million for the three months ended March 31, 2002,  from $11.3 million for the
comparable  period  in 2001.  The  decrease  was  primarily  the  result  of a
downsizing we  effectuated,  as part of our overall  corporate  restructuring,
related to our  transfer of servicing  operation in May 2001.  As of March 31,
2002,  we employed 618 full- and  part-time  employees,  compared to 735 full-
and part-time employees as of March 31, 2001.

   INTEREST  EXPENSE.  Interest expense includes the borrowing costs under our
warehouse credit facility to finance loan  originations,  equipment  financing
and the Notes.

   Interest  expense  decreased by $4.3  million,  or 74%, to $1.5 million for
the three  months  ended March 31, 2002 from $5.8  million for the  comparable
period  in 2001.  The  decrease  was  primarily  due to (i) our  extinguishing
$139.2  million  of Notes,  and the  corresponding  interest  expense  related
thereto,  and (ii)  lower  warehouse  financing  costs due to lower  borrowing
costs - the average  one-month  LIBOR rate,  which is the benchmark index used
to determine our cost of borrowed funds,  decreased on average to 1.8% for the
first  quarter  2002,  compared  to an average  of 5.5% for the first  quarter
2001.

                                      20

   GENERAL AND ADMINISTRATIVE  EXPENSES.  General and administrative  expenses
consist primarily of office rent, insurance,  telephone,  depreciation,  legal
reserves and fees,  license fees,  accounting fees,  travel and  entertainment
expenses,  advertising  and  promotional  expenses and the  provision for loan
losses on the inventory of loans held for sale and recourse loans.

   General and  administrative  expenses  decreased  $5.8 million,  or 49%, to
$6.0 million for the three months  ended March 31,  2002,  from $11.8  million
for the comparable  period in 2001. The decrease  primarily  resulted from the
cost  savings  related  to the  our  corporate  restructuring,  including  the
disposition of our servicing  portfolio in May 2001,  and the capital  charges
previously associated with our interest and servicing advance  securitizations
prior to the sale of the servicing portfolio.

   RESTRUCTURING  AND OTHER SPECIAL CHARGES.  In 2001 we recorded $1.3 million
of  restructuring  and other special  charges  relating to our  disposition of
branches and severance costs associated with closing our servicing operation.

   INCOME TAXES.  Deferred tax assets and  liabilities  are  recognized  based
upon 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.  We  recorded a tax  provision  of $0.1  million  and $0.5
million,  primarily related to excess inclusion income generated by our excess
cashflow  certificates,  for  the  period  ended  March  31,  2002  and  2001,
respectively.  Excess  inclusion  income  cannot be offset by our NOL's  under
the REMIC tax laws. It is primarily caused by the REMIC  securitization  trust
utilizing  cash,  that  otherwise  would have been paid to us as holder of the
excess cashflow  certificate,  to make payments to other security holders,  to
create and/or maintain  overcollateralization  by artificially paying down the
principal balance of the asset-backed securities.

   Going  forward,  we expect to continue  to incur a modest  amount of excess
inclusion income, which we will be unable to offset with our NOL's.

FINANCIAL CONDITION

MARCH 31, 2002 COMPARED TO DECEMBER 31, 2001

   Cash and interest-bearing  deposits decreased $2.4 million, or 38%, to $4.0
million  at March 31,  2002,  from $6.4  million at  December  31,  2001.  The
decrease  is  primarily  due to our  utilizing  operating  cash  to  fund  our
production of mortgage loans.

   Loans held for sale, net decreased $29.6 million,  or 31%, to $64.8 million
at March 31, 2002,  from $94.4  million at December 31,  2001.  This  decrease
was primarily due to the net difference  between loan  originations  and loans
securitized or sold during the three months ended March 31, 2002.

   Excess cashflow certificates,  net increased $1.6 million, or 10%, to $18.4
million at March 31,  2002,  from $16.8  million at December  31,  2001.  This
increase  was  primarily   due  to  our   recording  a  new  excess   cashflow
certificate,  totaling  $3.5  million  from  loans  securitized  in the  first
quarter  of  2002.  This  increase  was  partially  offset  by  a  fair  value
mark-to-market adjustment of our excess cashflow certificates,  reflecting the
change in fair value of such excess cashflow certificates.

                                      21

   Equipment,  net,  decreased $1.0 million,  or 20%, to $4.0 million at March
31, 2002,  from $5.0 million at December 31,  2001.  This  decrease  primarily
reflects the periodic depreciation of our fixed assets.

   Prepaid and other assets  increased  $0.4 million,  or 50%, to $1.2 million
at March 31, 2002,  from $0.8 million at December 31, 2001.  This increase was
primarily attributable to the renewal of our insurance policies.

   Warehouse  financing and other borrowings  decreased $33.0 million, or 37%,
to $56.6  million at March 31, 2002,  from $89.6 at December  31,  2001.  This
decrease  was  primarily  attributable  to a lower  amount of monies  borrowed
under our warehouse credit facility to fund our loans held for sale.

   Senior  notes  totaled  $10.8  million at March 31, 2002 and  December  31,
2001.  The senior notes accrue  interest at a rate of 9.5% per annum,  payable
semi-annually on February 1 and August 1.

   Accounts  payable and accrued  expense  decreased  $0.5 million,  or 3%, to
$18.3  million at March 31,  2002 from $18.8  million at  December  31,  2001.
This  decrease  was  primarily  the  result  of timing  of  various  operating
accruals and payables.

LIQUIDITY AND CAPITAL RESOURCES

   We  require  substantial  amounts  of cash to fund our  loan  originations,
securitization  activities  and  operations.  In the  past,  we have  operated
generally  on a  negative  cash  flow  basis.  Embedded  in our  current  cost
structure  are many  fixed  costs,  which are not  likely to be  significantly
affected by a  relatively  substantial  increase in loan  originations.  If we
can increase our loan production to generate  sufficient  additional  revenues
from our  securitizations  and loan sales to offset our current cost structure
and negative cash flow,  we believe we can generate  positive cash flow within
the  foreseeable  future.  There can be no  assurance,  however,  that we will
begin generating positive cash flow within the foreseeable future or at all.

   Currently,  our  primary  sources of cash - the vast  majority  of which we
typically  generate  towards the end of the quarter when we securitize  and/or
sell our mortgage loans on whole loan basis - include:

   o  the premiums we receive from selling  interest-only  or NIM certificates
      and mortgage servicing rights in connection with our securitizations;

   o  the premiums we receive from selling whole loans, servicing released;

   o  origination fees on newly closed loans;

   o  cash flows from excess  cashflow  certificates  we retain in  connection
      with our securitizations; and

   o  distributions from the LLC (an unaffiliated entity to us).

   Currently,   our  primary  uses  of  cash,  which  are  generally  incurred
continuously throughout the quarter, include the funding of:

   o  loan  originations  pending  their  pooling and sale,  net of  warehouse
      financing;
   o  interest  expense on warehouse lines of credit,  the remaining notes and
      other financing;

                                      22

   o  fees, expenses,  and tax payments on excess inclusion income incurred in
      connection with our securitization program; and
   o  general ongoing administrative and operating expenses.

   Because  of the timing of our cash  inflows  and cash  uses,  we  typically
expend cash  throughout  the quarter and  replenish  it towards the end of the
quarter.

   Historically,  we have financed our operations  utilizing  various  secured
credit financing facilities,  issuance of corporate debt (I.E., senior notes),
issuance  of  equity,  and the  sale of  interest-only  certificates  (sold in
conjunction with each of our  securizations) to offset our negative  operating
cash flow and support our originations,  securitizations,  servicing (prior to
May 2001) and general  operating  expenses.  Over the past few years,  we have
engaged in a series of  transactions  to further  address  our  negative  cash
flow, including the following:

  o   in 2000, completing three securitizations of interest  (delinquency) and
      servicing  advances,  in which we sold our rights to be  reimbursed  for
      our  outstanding  delinquency  and  servicing  advances  that we made as
      servicer for a cash  purchase  price.  We used the  proceeds  from these
      securitizations  to (1) repay a $25 million working capital  sub-line of
      our former bank syndicate  warehouse facility that expired in June 2000,
      which was secured by our delinquency and servicing advance  receivables,
      and (2) for working  capital to finance our  operations,  including  the
      funding  of  new  delinquency  and  servicing  advances.  We  ultimately
      repurchased these  securitizations  in 2001, in connection with the sale
      of servicing to Ocwen,  using the proceeds we received  from selling the
      underlying delinquency and servicing advance receivables to Ocwen;

  o   modifying  our  senior  notes in 2000 as part of the  Debt  Modification
      (see   "-Corporate    Restructuring,    Debt   Modification   and   Debt
      Restructuring"),  which  enabled us to  monetize a portion of our excess
      cashflow  certificates,  first by  obtaining  $17  million  in  residual
      financing  in  August  2000,  secured  by  some of our  excess  cashflow
      certificates.  Shortly thereafter,  in November 2000, we sold six excess
      cashflow  certificates through a private placement NIM transaction to an
      owner trust that issued senior  certificates to institutional  investors
      for a cash  purchase.  The net  proceeds of the NIM  transaction,  after
      expenses,  was  used  entirely  to repay  the $17  million  of  residual
      financing  we  borrowed  in August  2000 and to create a $7.125  million
      cash escrow account to be used to pay the semi-annual  interest  payment
      due on the notes in February 2001;

  o.  as part of our Second Debt Restructuring,  at the time of the signing of
      the Letter of Intent in February  2001, we obtained  approximately  $2.5
      million of residual  financing secured by several of our excess cashflow
      certificates.  We  received  approximately  $7.1  million of  additional
      residual  financing  secured  primarily by  additional  excess  cashflow
      certificates  following the consummation of the consent solicitation and
      the execution of the third  supplemental  indenture in March 2001.  Also
      in March  2001,  we entered  into a sale  agreement  to sell five excess
      cashflow  certificates  for  a  $15  million  cash  purchase  price.  As
      customary  with sales of similar  assets,  the cash  settlement  did not
      occur  until the  pools of  mortgage  loans  underlying  the six  excess
      cashflow  certificates  were  transferred  to an agreed upon servicer to
      service  the pool of mortgage  loans for the  benefit of the  purchaser.
      The  purchaser  of these  five  excess  cashflow  certificates  provided
      bridge  financing,  in the form of residual  financing  described above,
      until the

                                      23

      transfer of servicing in May 2001.  We used these  proceeds to repay the
      residual  financing  and have been using the  balance  of the  proceeds,
      together  with the initial  residual  financing,  for  working  capital.
      Because these excess  cashflow  certificates  were sold at a significant
      discount to our book value for such  excess  cashflow  certificates,  we
      recorded $25.4 million  pre-tax  non-cash charge in the first quarter of
      2001.

   Currently,  our primary  sources of  liquidity  continue to be,  subject to
market conditions:

      o  on-balance sheet warehouse  financing  and  other  secured  financing
         facilities (e.g., capital leasing);

      o  securitizations  of mortgage loans  and  our  corresponding  sale  of
         interest-only  certificates (or NIM certificates,  depending upon the
         securitization structure) and mortgage servicing rights;

      o  sales of whole loans;

      o  cash flows from retained excess cashflow certificates;

      o  distributions from  the LLC (an  unaffiliated   entity  to  us)  (see
         "-Corporate    Restructuring,     Debt    Modification    and    Debt
         Restructuring"); and

      o  utilizing   NIM  securitizations  and/or  selling  or  financing  our
         retained excess cashflow certificates.

   If we are not able to obtain  financing,  we will not be able to  originate
new loans and our business and results of operations  will be  materially  and
adversely affected.

   To  accumulate  loans for  securitization  or sale,  we  borrow  money on a
short-term  basis  through  warehouse  lines of credit.  We have relied upon a
few  lenders  to  provide  the  primary   credit   facilities   for  our  loan
originations.  At March 31, 2002 we had one $200  million  warehouse  facility
that has a variable  rate of interest and was due to expire on April 30, 2002,
which was  subsequently  extended  until  April  2003.  We  obtained  a second
committed $200 million  warehouse line of credit  subsequent to the end of the
first  quarter  that has a variable  rate of interest  and expires on in April
2003.  There can be no assurance that we will be able to renew these warehouse
facilities at their maturity,  or obtain new ones, at terms satisfactory to us
or at all.

   We are required to comply with various  operating and  financial  covenants
as provided in our warehouse  agreements,  which are customary for  agreements
of their type. The continued  availability of funds provided to us under these
agreements is subject to, among other  conditions,  our  continued  compliance
with  these   covenants.   Additionally,   we  are  required  to  comply  with
restrictive  covenants in connection with our Series A preferred stock and our
warrants.  We believe we are in  compliance  with such  covenants  as of March
31, 2002.

   We have repurchase  agreements with certain of the  institutions  that have
purchased  mortgages.  Currently,  some  of the  agreements  provide  for  the
repurchase  by us of any of the mortgage  loans that go to  foreclosure  sale.
At the foreclosure  sale, we will repurchase the mortgage,  if necessary,  and
make the institution  whole. The dollar amount of loans,  which were sold with
recourse,  is $3.0  million  at March 31,  2002 and $5.4  million at March 31,
2001.  We have an allowance  for recourse  losses of $1.3 million at March 31,
2002 and $1.5 million at March 31, 2001, respectively.

                                      24

   We may,  from  time to  time,  if  opportunities  arise  that we deem to be
appropriate,  repurchase in the open market some of our outstanding  preferred
stock  and/or  senior  notes.  The  funds  for any such  repurchases  would be
expected to come from our existing  cash.  There is no assurance  that we will
effectuate any such repurchases or the terms thereof.

   Subject to our ability to execute  our  business  strategy  and the various
uncertainties  described  above (and  described  in more  detail in  "-Forward
Looking  Statements and Risk Factors" below),  we anticipate that we will have
sufficient cash flows,  short-term  funding and capital  resources to meet our
liquidity obligations for the foreseeable future.

INTEREST RATE RISK

    Our primary  market risk  exposure  is interest  rate risk.  Profitability
may be directly  affected by the level of, and fluctuation in, interest rates,
which  affect our ability to earn a spread  between  interest  received on our
loans and the costs of our  borrowings,  which  are tied to  various  interest
rate swap maturities,  commercial paper rates and LIBOR. Our  profitability 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 our ability to originate  loans.  A significant
decline  in  interest  rates  could  increase  the  level of loan  prepayments
thereby  decreasing  the size of the loan servicing  portfolio  underlying our
securitizations.   To  the  extent  excess  cashflow  certificates  have  been
capitalized  on our financial  statements,  higher than  anticipated  rates of
loan  prepayments  or losses could  require us to write down the value of such
excess cashflow  certificates,  adversely impacting our earnings. In an effort
to  mitigate  the effect of interest  rate risk,  we  periodically  review our
various  mortgage  products  and  identify  and modify  those that have proven
historically  more  susceptible  to  prepayments.  However,  there  can  be no
assurance  that  these   modifications  to  our  product  line  will  mitigate
effectively interest rate risk in the future.

   Periods of  unexpected  or rapid  changes in interest  rates,  and/or other
volatility or uncertainty  regarding interest rates, also can adversely affect
us by  increasing  the  likelihood  that  asset-backed  investors  will demand
higher spreads than normal to offset the volatility and/or uncertainty,  which
decreases  the  value  of the  excess  cashflow  certificates  we  receive  in
connection with a securitization.

   Fluctuating  interest  rates  also may affect  the net  interest  income we
earn,  resulting  from the  difference  between  the yield we receive on loans
held pending  sales and the interest paid by us for funds  borrowed  under our
warehouse  facility.  We do, however,  undertake to hedge our exposure to this
risk by using  various  hedging  strategies,  including  Fannie  Mae  mortgage
securities,  treasury rate lock  contracts  and/or  interest rate swaps.  (See
"--Hedging").  Fluctuating  interest rates also may affect net interest income
as certain  of our  asset-backed  securities  are  priced  based on  one-month
LIBOR,  but  the  collateral  underlying  such  securities  are  comprised  of
mortgage loans with either fixed  interest rates or "hybrid"  interest rates -
fixed for the initial two or three years of the mortgage  loan,  and adjusting
thereafter every six months - which creates basis risk.

HEDGING

   We  adopted  SFAS No.  133,  "Accounting  for  Derivative  Instruments  and
Hedging  Activities,"  as of January 1, 2001.  The Standard  requires that all
derivative  instruments  be

                                      25

recorded  in the balance  sheet at fair value.  However,  the  accounting  for
changes  in fair value of the  derivative  instrument  depends on whether  the
derivative  instrument qualifies as a hedge. If the derivative instrument does
not qualify as a hedge,  changes in fair value are  reported in earnings  when
they occur. If the derivative  instrument qualifies as a hedge, the accounting
treatment  varies based on the type of risk being hedged.  There was no impact
on our financial  condition or results of operations upon the adoption of SFAS
No. 133, as amended.

   We originate  mortgage  loans and then sell them through a  combination  of
whole  loan  sales and  securitizations.  Between  the time we  originate  the
mortgage  and  sell it in the  secondary  market,  we may  hedge  the  risk of
fluctuations  in interest  rates.  Our risk begins  subsequent to  originating
mortgage  loans and prior to  selling or  securitizing  such  mortgage  loans.
Since we have a closed (and  funded)  mortgage  loan at a  specified  interest
rate  with an  expected  gain at time of  sale,  our  exposure  is to a higher
interest rate  environment  due to market  conditions.  A higher interest rate
market implies that we will have a higher cost of funds,  which  decreases the
net spread we would earn between the mortgage  interest  rate on each mortgage
loan less the cost of funds.  As a result,  we may  experience a lower gain on
sale.

   The cost of funds is  generally  composed of two  components,  the interest
rate swap with a similar  duration  and average  life and the swaps  spread or
profit margin  required by the investors.  We had previously  used a "Treasury
Rate Lock" and 15-year Fannie Mae mortgage  securities ("FNMA  Securities") to
hedge our cost of funds exposure.  However recently,  the  securitizations are
priced to the investor  using the  interest  rate swaps  curve.  As such,  our
cost of funds is more closely  tied to interest  rate swaps and we will likely
use  interest  rate swaps to hedge our  mortgage  loans in  inventory  pending
securitization  pricing.  While  none of the  above  are  perfect  hedges,  we
believe  interest rate swaps will  demonstrate the highest  correlation to our
cost of funds on a go-forward  basis.  We determine the nature and quantity of
hedging   transactions   based  upon  various   factors   including,   without
limitation,   market   conditions   and  the   expected   volume  of  mortgage
originations.  We will enter into these hedging  strategies through one of our
warehouse  lenders  and/or one of the investment  bankers that  underwrite our
securitizations.  These  strategies  are designated as hedges on our financial
statements and are closed out when we sell the associated loans.

   If the value of the hedges  decrease,  offsetting  an increase in the value
of the loans,  upon  settlement with our hedge  counterparty,  we will pay the
hedge loss in cash and then  realize the  corresponding  increase in the value
of the loans as part of our net gain on sale of mortgage  loans through either
the excess cashflow  certificates we retain from  securitization or from whole
loan premiums.  Conversely, if the value of the hedges increase,  offsetting a
decrease  in  the  value  of  the  loans,   upon  settlement  with  our  hedge
counterparty,  we  will  receive  the  hedge  gain  in cash  and  realize  the
corresponding  decrease  in the value of the  loans  through  a  reduction  in
either the value of the  corresponding  excess cashflow  certificates or whole
loan premiums.

   We believe  our hedging  strategy  has largely  been an  effective  tool to
manage our interest rate risk on loans prior to  securitization,  by providing
us with a cash  gain (or  loss) to  largely  offset  the  reduced  (increased)
excess  spread  (and  resultant  lower (or  higher)  net gain on sale) from an
increase  (decrease) in interest rates. A hedge may not, however,  perform its
intended purpose of offsetting changes in net gain on sale.

   We make decisions  concerning the nature of our hedging  transactions based
upon various factors including, without limitation,  market conditions and the
expected  volume of  mortgage

                                      26

originations.  We may enter into these hedging  strategies  through one of our
warehouse   lenders   and/or  an   investment   bank  that   underwrites   our
securitizations. We will review continually the frequency and effectiveness of
our hedging strategy to mitigate risk pending a securitization or loan sale.

   If a hedging  transaction  is deemed to be appropriate, and can be properly
documented  and  mathematically  shown  to meet  the appropriate effectiveness
criteria, we  will account for these hedges as fair value hedges in accordance
with SFAS No. 133, as amended.

   We will  continue to review our  hedging  strategy  to best  mitigate  risk
pending securitization or loan sales.

   We did not hedge during the quarters ended March 31, 2002 and 2001.

INFLATION

   Inflation most  significantly  affects our loan  originations and values of
our excess cashflow certificates,  because of the substantial effect inflation
can have on interest  rates.  Interest rates normally  increase during periods
of  high  inflation  and  decrease  during  periods  of  low  inflation.  (See
"--Interest Rate Risk").

IMPACT OF NEW ACCOUNTING STANDARDS

   For discussion regarding the impact of new accounting  standards,  refer to
Note 5 of Notes to the Consolidated Financial Statements.

FORWARD-LOOKING STATEMENTS AND 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 our operations and business  environment,
and are  subject  to  change on  various  important  factors.  We wish 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 our  actual  results to differ
materially from those expressed in any forward-looking  statements made by us,
or on our behalf.  The following  include some, but not all, of the factors or
uncertainties that could cause actual results to differ from projections:

   o  Our ability or inability to increase our loan  originations to specified
      levels (and subsequent sale or  securitization  of such loans) to offset
      our current cost structure and negative cash flow;

   o  Our  ability  or  inability  to  continue  to access  lines of credit at
      favorable terms and conditions,  including without limitation, warehouse
      and other credit  facilities used to finance  newly-originated  mortgage
      loans held for sale;

   o  Our ability or  inability  to  continue  our  practice  of  securitizing
      mortgage loans held for sale, as well as our ability to utilize  optimal
      securitization  structures  (including the sale of  interest-only or NIM
      certificates,  and  the  sale  of  servicing  rights,  at  the  time  of
      securitization) at terms favorable to us;

   o  Our ability or  inability  to continue  monetizing  our excess  cashflow
      certificates,   including

                                      27

      without  limitation,  selling,  financing or  securitizing  (through NIM
      transactions) such assets;

   o  Costs associated with litigation,  compliance with the NYSBD Remediation
      Agreement  and  NYOAG  Stipulated   Order  on  Consent,   and  rapid  or
      unforeseen  escalation of the cost of regulatory  compliance,  generally
      including  but not limited  to,  adoption of new, or changes in federal,
      state or local lending laws and  regulations and the application of such
      laws and regulations,  licenses,  environmental compliance,  adoption of
      new,  or  changes  in   accounting   policies  and   practices  and  the
      application  of such  polices  and  practices.  Failure  to comply  with
      various  federal,  state and  local  regulations,  accounting  policies,
      environmental compliance,  and compliance with the Remediation Agreement
      and  Stipulated  Order on Consent can lead to loss of  approved  status,
      certain rights of rescission for mortgage  loans,  class action lawsuits
      and administrative enforcement action against us;

   o  A general economic  slowdown.  Periods of economic slowdown or recession
      may  be  accompanied  by  decreased   demand  for  consumer  credit  and
      declining  real estate values.  Because of our focus on  credit-impaired
      borrowers, the actual rate of delinquencies,  foreclosures and losses on
      loans  affected by the borrowers  reduced  ability to use home equity to
      support  borrowings could be higher than those generally  experienced in
      the  mortgage  lending  industry.  Any  sustained  period  of  increased
      delinquencies,  foreclosure,  losses or increased  costs could adversely
      affect our ability to securitize or sell loans in the secondary market;

   o  The effects of interest rate  fluctuations  and our ability or inability
      to hedge  effectively  against such  fluctuations in interest rates, the
      effect  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;

   o  Increased  competition  within our markets has taken on many forms, such
      as  convenience  in obtaining a loan,  customer  service,  marketing and
      distribution  channels,  loan  origination  fees and interest  rates. We
      are  currently  competing  with large finance  companies and  conforming
      mortgage originators many of whom have greater financial,  technological
      and marketing resources;

   o  Unpredictable  delays or  difficulties  in  development  of new  product
      programs; and

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

PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

   Because the nature of our  business  involves  the  collection  of numerous
accounts,  the validity of liens and compliance with various state and federal
lending  laws, we are subject,  in the normal course of business,  to numerous
claims and legal  proceedings.  Our lending practices have been the subject of
several  lawsuits  styled as class  actions and of  investigations  by various
regulatory

                                      28

agencies  including the NYSBD,  the NYOAG and the United States  Department of
Justice (the "DOJ"). The current status of these actions is summarized below.

   o  In or about November 1998, we received  notice that we had been named in
      a lawsuit  filed in the United  States  District  Court for the  Eastern
      District of New York.  In  December  1998,  plaintiffs  filed an amended
      complaint  alleging  that we had violated the Home  Ownership and Equity
      Protection  Act  ("HOEPA"),  the Truth in Lending Act  ("TILA")  and New
      York  State  General  Business  Lawss.  349.  The  complaint  seeks  (a)
      certification  of  a  class  of  plaintiffs,  (b)  declaratory  judgment
      permitting  rescission,  (c) unspecified actual,  statutory,  treble and
      punitive damages  (including  attorneys'  fees), (d) certain  injunctive
      relief, and (e) declaratory  judgment declaring the loan transactions as
      void and unconscionable.  On December 7, 1998,  plaintiff filed a motion
      seeking  a  temporary  restraining  order  and  preliminary  injunction,
      enjoining us from  conducting  foreclosure  sales on 11 properties.  The
      District  Court  Judge  ruled that in order to  consider  such a motion,
      plaintiff  must  move to  intervene  on  behalf  of these 11  borrowers.
      Thereafter,  plaintiff  moved to  intervene  on  behalf of 3 of these 11
      borrowers and sought  injunctive  relief on their behalf. We opposed the
      motions.  On December 14, 1998,  the  District  Court Judge  granted the
      motion to intervene and on December 23, 1998,  the District  Court Judge
      issued a preliminary  injunction  that enjoined us from  proceeding with
      the foreclosure sales of the three intervenors'  properties.  We filed a
      motion for  reconsideration  of the December 23, 1998 order.  In January
      1999,  we filed an answer to  plaintiffs'  first amended  complaint.  In
      July 1999,  plaintiffs were granted leave, on consent,  to file a second
      amended  complaint.  In August 1999,  plaintiffs  filed a second amended
      complaint  that,  among  other  things,  added  additional  parties  but
      contained  the same  causes  of  action  alleged  in the  first  amended
      complaint.  In  September  1999,  we  filed  a  motion  to  dismiss  the
      complaint,  which was  opposed by  plaintiffs  and,  in June  2000,  was
      denied in part and  granted  in part by the Court.  In or about  October
      1999,  plaintiffs  filed a motion  seeking an order  preventing  us, our
      attorneys  and/or  the NYSBD  from  issuing  notices  to  certain of our
      borrowers,  in accordance  with a settlement  agreement  entered into by
      and between  Delta and the NYSBD.  In or about October 1999 and November
      1999,   respectively,   we  and  the  NYSBD   submitted   opposition  to
      plaintiffs'  motion.  In March  2000,  the Court  issued  an order  that
      permitted  us to issue an  approved  form of the  notice.  In  September
      1999,  plaintiffs  filed a  motion  for  class  certification,  which we
      opposed  in  February  2000,  and  was  ultimately   withdrawn   without
      prejudice by plaintiffs  in January 2001. In February  2002, we executed
      a settlement agreement with plaintiffs,  pursuant to which we denied all
      wrongdoing,  but agreed to resolve the litigation on a class-wide basis.
      A fairness  hearing has been scheduled for May 2002, at which point,  we
      anticipate  that  the  Court  will  approve  the   settlement.   If  the
      settlement  is  not  approved,  we  believe  that  we  have  meritorious
      defenses and intend to defend this suit,  but cannot  estimate  with any
      certainty  our  ultimate  legal or  financial  liability,  if any,  with
      respect to the alleged claims.

   o  In or about March 1999,  we received  notice that we had been named in a
      lawsuit  filed in the Supreme  Court of the State of New York,  New York
      County,  alleging  that  we had  improperly  charged  certain  borrowers
      processing  fees. The complaint  seeks (a)  certification  of a class of
      plaintiffs,  (b) an accounting,  and (c)  unspecified  compensatory  and
      punitive damages  (including  attorneys'  fees),  based upon alleged (i)
      unjust enrichment,  (ii) fraud, and (iii) deceptive trade practices.  In
      April 1999, we filed an answer to the complaint.  In September  1999, we
      filed  a  motion  to  dismiss  the  complaint,   which  was  opposed  by
      plaintiffs,  and in  February  2000,  the  Court  denied  the  motion to
      dismiss.  In  April  1999,  we  filed  a  motion  to  change  venue  and
      plaintiffs  opposed  the  motion.  In July  1999,  the Court  denied the
      motion to change  venue.  We appealed and in March 2000,  the  Appellate
      Court  granted our appeal to change venue from New York County to Nassau
      County.   In  August   1999,   plaintiffs   filed  a  motion  for  class
      certification,  which we  opposed in July  2000.  In or about  September
      2000,  the Court  granted  plaintiffs'  motion for class  certification,
      from which we filed a Notice of Appeal.  In or about June 2001, we filed
      a motion for  summary  judgment  to  dismiss  the  complaint,  which was
      denied by the Court in October  2001.  We have appealed that decision as
      well,  and the trial court agreed to stay the action  pending the result
      of that appeal. We believe that we have meritorious  defenses and intend
      to  defend  this  suit,  but  cannot  estimate  with any  certainty  our
      ultimate  legal or  financial  liability,  if any,  with  respect to the
      alleged claims.

   o  In or about July 1999,  we  received  notice that we had been named in a
      lawsuit  filed in the  United  States  District  Court  for the  Western
      District of New York,  alleging that amounts collected and maintained by
      us in certain  borrowers'  tax and insurance  escrow  accounts  exceeded
      certain statutory (RESPA) and/or contractual (the respective  borrowers'
      mortgage  agreements)  ceilings.  The complaint seeks (a)  certification
      of a class  of  plaintiffs,  (b)  declaratory  relief  finding  that our
      practices violated applicable  statutes and/or the mortgage  agreements,
      (c) injunctive  relief,  and (d) unspecified  compensatory  and punitive
      damages (including  attorneys' fees). In October 1999, we filed a motion
      to  dismiss  the  complaint.  In or about  November  1999,  the case was
      transferred  to the  United  States  District  Court  for  the  Northern
      District  of  Illinois.  In February  2000,  the  plaintiff  opposed our
      motion to  dismiss.  In March  2000,  the Court  granted  our  motion to
      dismiss in part,  and denied it in part. In February 2002, we executed a
      settlement  agreement  with  plaintiffs  pursuant to which we denied all
      wrongdoing,  but agreed to resolve the litigation on a class-wide basis.
      A fairness  hearing has been  scheduled for June 2002, at which point we
      anticipate  that  the  Court  will  approve  the   settlement.   If  the
      settlement  is  not  approved,  we  believe  that  we  have  meritorious
      defenses and intend to defend this suit,  but cannot  estimate  with any
      certainty  our  ultimate  legal or  financial  liability,  if any,  with
      respect to the alleged claims.

   o  In or about August 1999,  the NYOAG filed a lawsuit  against us alleging
      violations  of (a) RESPA (by paying  yield spread  premiums),  (b) HOEPA
      and TILA,  (c) ECOA,  (d) New York  Executive  Lawss.296-a,  and (e) New
      York Executive Lawss.63(12).  In September  1999, we settled the lawsuit
      with the  NYOAG,  as part of a global  settlement  by and among us,  the
      NYOAG  and  the  NYSBD,   evidenced  by  that  certain  (a)  Remediation
      Agreement  by and between us and the NYSBD,  dated as of  September  17,
      1999 and (b) Stipulated  Order on Consent by and among us and the NYOAG,
      dated as of September  17, 1999.  As part of the  Settlement,  we, among
      other  things,  have  implemented  agreed  upon  changes to our  lending
      practices;   are  providing  reduced  loan  payments  aggregating  $7.25
      million to certain  borrowers  identified by the NYSBD; and have created
      a fund financed by the grant of 525,000 shares of our common stock,  the
      proceeds  of  which  will  be  used,  for  among  other  things,  to pay
      borrowers  and for a variety  of  consumer

                                      30

      educational and counseling programs.  As a result, the NYOAG lawsuit has
      been dismissed as against us. The  Remediation  Agreement and Stipulated
      Order on Consent supersede our previously announced settlements with the
      NYSBD and the NYOAG. In March 2000, we finalized a settlement  agreement
      with  the  United  States  Department  of  Justice,  the  Federal  Trade
      Commission and the Department of Housing and Urban Renewal,  to complete
      the global  settlement  it had  reached  with the NYSBD and  NYOAG.  The
      federal agreement mandates some additional  compliance  efforts,  but it
      does not require any additional financial commitment.

   o  In  November  1999,  we  received  notice  that we had  been  named in a
      lawsuit  filed in the  United  States  District  Court  for the  Eastern
      District  of New  York,  seeking  certification  as a class  action  and
      alleging  violations of the federal  securities  laws in connection with
      our initial public offering in 1996 and our reports  subsequently  filed
      with the Securities and Exchange Commission.  The complaint alleges that
      the  scope  of the  violations  alleged  in the  consumer  lawsuits  and
      regulatory  actions  brought  in or around  1999  indicate  a  pervasive
      pattern  of action  and risk  that  should  have  been  more  thoroughly
      disclosed  to  investors  in our common  stock.  In May 2000,  the Court
      consolidated  this case and  several  other  lawsuits  that  purportedly
      contain  the same or similar  allegations  against us and in August 2000
      plaintiffs filed their Consolidated Amended Complaint.  In October 2000,
      we filed a motion to dismiss the  Complaint in its  entirety,  which was
      opposed  by  plaintiffs  in  November  2000,  and denied by the Court in
      September 2001. We believe that we have meritorious  defenses and intend
      to  defend  this  suit,  but  cannot  estimate  with any  certainty  our
      ultimate  legal or  financial  liability,  if any,  with  respect to the
      alleged claims.

  o   In or about April 2000,  we received  notice that we had been named in a
      lawsuit  filed in the  Supreme  Court of the State of New  York,  Nassau
      County,  alleging  that we had  improperly  charged and  collected  from
      borrowers  certain fees when they paid off their mortgage loans with us.
      The complaint  seeks (a)  certification  of a class of  plaintiffs,  (b)
      declaratory  relief  finding  that the payoff  statements  used  include
      unauthorized  charges  and are  deceptive  and  unfair,  (c)  injunctive
      relief,  and  (d)  unspecified  compensatory,   statutory  and  punitive
      damages  (including legal fees),  based upon alleged  violations of Real
      Property  Law  274-a,  unfair  and  deceptive  practices,  money had and
      received  and  unjust  enrichment,   and  conversion.  We  answered  the
      complaint  in June 2000.  In March  2001,  we filed a motion for summary
      judgment,  which was opposed by plaintiffs  in March 2001,  and we filed
      reply  papers in April  2001.  In June  2001,  our  motion  for  summary
      judgment   dismissing  the  complaint  was  granted.   In  August  2001,
      plaintiffs  appealed the decision.  We believe that we have  meritorious
      defenses and intend to defend this suit,  but cannot  estimate  with any
      certainty  our  ultimate  legal or  financial  liability,  if any,  with
      respect to the alleged claims.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.   None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.  None

ITEM 4.  SUBMISSION TO A VOTE OF SECURITY HOLDERS.  None


                                      31


ITEM 5.  OTHER INFORMATION.  None

ITEM 6.  EXHIBITS AND CURRENT REPORTS ON FORM 8-K.

(a)   Exhibits:  None

(b)   Reports on Form 8-K:   None

                                      32
<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)

Dated: May 10, 2002
                                                By:  /S/ HUGH MILLER
                                                     -------------------------
                                                     Hugh Miller
                                                     PRESIDENT      &    CHIEF
                                                     EXECUTIVE OFFICER


                                                By:  /S/ RICHARD BLASS
                                                     -------------------------
                                                     Richard Blass
                                                     EXECUTIVE  VICE PRESIDENT
                                                     & CHIEF FINANCIAL OFFICER



                                      33