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 June 30, 2003

                                       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 June 30, 2003,  16,245,589 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 June 30, 2003 and
         December 31, 2002................................................. 1

         Consolidated Statements of Operations for the Three and Six Months
         Ended June 30, 2003 and June 30, 2002............................. 2

         Consolidated Statements of Cash Flows for the Six Months Ended
         June 30, 2003 and June 30, 2002................................... 3

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

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

Item 3.  Quantitative and Qualitative Disclosures about Market Risk....... 33

Item 4.  Controls and Procedures.......................................... 35

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings.................................................35

Item 2.  Changes in Securities and Use of Proceeds.........................37

Item 3.  Defaults upon Senior Securities...................................37

Item 4.  Submission of Matters to a Vote of Security Holders...............38

Item 5.  Other Information.................................................38

Item 6.  Exhibits and Current Reports on Form 8-K..........................38

Signatures.................................................................39


<PAGE>
                        PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)

                  DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<S>                                               <C>             <C>
                                                    JUNE 30,      DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA)         2003            2002
                                                   ----------      -----------
ASSETS                                             (UNAUDITED)      (AUDITED)
Cash and interest-bearing deposits                 $  3,740           3,405
Accounts receivable                                   2,228           1,700
Loans held for sale, net                             71,146          33,984
Excess cash flow certificates, net                   28,301          24,565
Equipment, net                                        2,464           2,553
Prepaid and other assets                              3,068           1,737
Deferred tax asset, net                               5,600           5,600
                                                   --------        --------
   Total assets                                    $116,547          73,544
                                                   =========       ========

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Bank payable                                       $    498           1,369
Warehouse financing and other borrowings             41,330          16,352
Senior notes                                         10,844          10,844
Accounts payable and accrued expenses                13,826          12,327
Income taxes payable                                  2,817           3,155
                                                   --------        --------
   Total liabilities                                 69,315          44,047
                                                   --------        --------

STOCKHOLDERS' EQUITY:
Preferred stock, Series A, $.01 par value.
   Authorized 150,000 shares, 139,156 shares
   outstanding at June 30, 2003 and
   December 31, 2002                                 13,916          13,916
Common stock,  $.01 par value.
   Authorized  49,000,000  shares; 16,362,389
   and 16,022,349 shares issued and 16,245,589
   and 15,905,549 shares outstanding at June 30,
   2003 and December 31, 2002, respectively             164             160
Additional paid-in capital                           99,511          99,482
Accumulated deficit                                 (65,041)        (82,743)
Treasury stock, at cost (116,800 shares)             (1,318)         (1,318)
                                                   ---------       ---------
   Total stockholders' equity                        47,232          29,497
                                                   ---------       --------
     Total liabilities and stockholders' equity    $116,547          73,544
                                                   =========       ========

</TABLE>
          See accompanying notes to consolidated financial statements.

                                       1
<PAGE>

                  DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
<TABLE>
<S>                                       <C>          <C>              <C>          <C>
                                            THREE MONTHS ENDED             SIX MONTHS ENDED
                                                  JUNE 30,                    JUNE 30,
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)                                  2003         2002            2003          2002
                                            -------     -------          -------      -------
REVENUES
  Net gain on sale of mortgage loans       $ 24,351      14,725           42,516       27,063
  Interest                                    3,409       3,225            6,219        7,127
  Net origination fees and other income       6,325       3,627           11,896        7,031
                                            -------     -------         --------     --------
      Total revenues                         34,085      21,577           60,631       41,221
                                            -------     -------         --------     --------
EXPENSES
  Payroll and related costs                  13,960      10,099           26,689       19,776
  Interest expense                            1,396       1,469            2,475        3,016
  General and administrative                  6,993       5,905           12,766       11,960
                                            -------     -------         --------     --------
      Total expenses                         22,349      17,473           41,930       34,752
                                            --------    -------         --------     --------

Income before income
   tax expense                               11,736       4,104           18,701        6,469
Provision for income tax expense                 35         132              303          252
                                            -------    --------         --------     --------
      Net income                           $ 11,701       3,972           18,398        6,217
                                           ========    ========         ========     ========

PER SHARE DATA:
Basic -weighted average number of
  shares outstanding                      16,207,593    15,888,014     16,065,175   15,885,893
                                          ==========    ==========     ==========   ==========
Diluted -weighted average number of
  shares outstanding                      19,137,433    16,941,584     18,952,356   16,855,349
                                          ==========    ==========     ==========   ==========

Net income applicable to common shares    $   11,005         3,972         17,702        6,217
                                          ==========       =======       ========      =======

Basic earnings per share - net income     $     0.68          0.25           1.10         0.39
                                          ==========       =======       ========      ========
Diluted earnings per share - net income   $     0.58          0.23           0.93         0.37
                                          ==========       =======       ========      ========

</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>
                                                                                     SIX MONTHS ENDED
                                                                                          JUNE 30,
                                                                                --------------------------
(DOLLARS IN THOUSANDS)                                                           2003                2002
                                                                                ------              ------
Cash flows from operating activities:
    Net income                                                               $  18,398               6,217
    Adjustments to reconcile net income to net cash provided by
    (used in) operating activities:
       Provision for loan and recourse losses                                       64                 441
       Depreciation and amortization                                               881               1,810
       Deferred origination costs                                                 (176)                529
Excess cashflow certificates received in
          securitization transactions, net                                      (3,736)             (4,000)
       Changes in operating assets and liabilities:
          Increase in accounts receivable                                         (528)               (516)
          (Increase) decrease in loans held for sale, net                      (36,986)             59,460
          (Increase) decrease in prepaid and other assets                       (1,331)                636
          Increase (decrease) in warehouse lines of credit                      25,649             (64,475)
          Increase (decrease) in accounts payable and accrued expenses           1,435              (1,339)
          (Decrease) increase in income taxes payable                             (338)                131
                                                                              ---------            --------
Net cash provided by (used in) operating activities                              3,332              (1,106)
                                                                              ---------            --------

Cash flows from investing activities:
          Purchase of equipment                                                   (792)               (184)
                                                                              ---------            --------
Net cash used in investing activities                                             (792)               (184)
                                                                              ---------            --------

Cash flows from financing activities:
       Decrease in bank payable                                                   (871)               (457)
       Repayments of other borrowings                                             (671)             (1,764)
       Cash dividends paid on preferred stock                                     (696)                 --
       Proceeds from exercise of warrants                                            3                  --
       Proceeds from exercise of stock options                                      30                   9
                                                                              ---------            --------
Net cash used in financing activities                                           (2,205)             (2,212)
                                                                              ---------            --------

Net decrease in cash and interest-bearing deposits                                 335              (3,502)

Cash and interest-bearing deposits at beginning of period                        3,405               6,410
                                                                              --------             --------

Cash and interest-bearing deposits at end of period                          $   3,740               2,908
                                                                              ========             ========

Supplemental Information:
Cash paid during the period for:
    Interest                                                                 $   2,492               2,916
                                                                             =========             ========
    Income taxes                                                             $     641                 121
                                                                             =========             ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       3
<PAGE>

                  DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) BASIS OF PRESENTATION

    Delta Financial Corporation  (together with its subsidiaries,  "Delta, we or
the Company") 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, 2002,  which were filed with
the  Securities  and Exchange  Commission  with our most recent annual report on
Form 10-K. The results of operations for the three-month  and six-month  periods
ended June 30, 2003 are 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) STOCK OPTION PLANS

    We apply  the  intrinsic-value-based  method  of  accounting  prescribed  by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to  Employees",  and related  interpretations,  including  Financial  Accounting
Standards  Board  ("FASB")   Interpretation  No.  44,  "Accounting  for  Certain
Transactions involving Stock Compensation,  an interpretation of APB Opinion No.
25",  issued in March 2000, to account for our fixed-plan  stock options.  Under
this method,  compensation  expense is recorded on the date of grant only if the
current  market price of the  underlying  stock  exceeded  the  exercise  price.
Statement of Financial  Accounting  Standards ("SFAS") No. 123,  "Accounting for
Stock-Based  Compensation",  established accounting and disclosure  requirements
using  a  fair-value-based   method  of  accounting  for  stock-based   employee
compensation  plans.  As allowed by SFAS No. 123, we have elected to continue to
apply the  intrinsic-value-based  method of accounting described above, and have
adopted only the  disclosure  requirements  of SFAS No. 123. In April 2003,  the
FASB  announced  it will,  in the future,  require all  companies to expense the
value of  employee  stock  options  but has not  decided how to measure the fair
value of the  options.  As a result,  the  financial  statement  impact of stock
option expensing is not known at this time. The following

                                       4

table  illustrates the  effect on net income if  the fair-value-based method had
been applied:
<TABLE>
<S>                                           <C>           <C>            <C>         <C>
                                                THREE MONTHS ENDED          SIX MONTHS ENDED
                                                     JUNE 30,                   JUNE 30,
                                                -------------------         -----------------
 (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)        2003        2002            2003       2002
----------------------------------------------------------------------------------------------
Net income, as reported                        $11,701       3,972          18,398      6,217
==============================================================================================
Deduct total stock-based employee
        compensation expense determined
        under fair-value-based method for
        all awards, net of tax                     127         117             235        235
----------------------------------------------------------------------------------------------
Pro forma net income                           $11,574       3,855          18,163      5,982
==============================================================================================

Earnings per share:
Basic - as reported                              $0.68        0.25            1.10       0.39
Basic - pro forma                                $0.67        0.24            1.09       0.38
Diluted - as reported                            $0.58        0.23            0.93       0.37
Diluted - pro forma                              $0.57        0.23            0.92       0.35
</TABLE>


(3) LOANS HELD FOR SALE, NET

    Our  inventory  consists  of  first  and  second  mortgages,   which  had  a
weighted-average  interest  rate of 8.06% at June 30, 2003 and 8.45% at December
31, 2002. These mortgages are being held, at the lower of cost or estimated fair
value, for future sale. Certain of these mortgages are pledged as collateral for
a portion of the warehouse financing and other borrowings. Mortgages are payable
in monthly  installments of principal and interest and have  maturities  varying
from five to thirty years.

    Loans held for sale, net, are summarized as follows:
<TABLE>
<S>     <C>    <C>    <C>    <C>       <C>                   <C>
(DOLLARS IN THOUSANDS)                  June 30, 2003   December 31, 2002
--------------------------------------------------------------------------------
Loans held for sale                     $   71,156            34,170
Net deferred origination cost                  425               249
Valuation allowance                           (435)             (435)
--------------------------------------------------------------------------------
Loans held for sale, net                $   71,146            33,984
--------------------------------------------------------------------------------
</TABLE>

(4) EXCESS CASHFLOW CERTIFICATES, NET

    The activity related to our excess cashflow certificates, net is as follows:
<TABLE>
<S>                                            <C>                  <C>
(DOLLARS IN THOUSANDS)                         June 30, 2003   December 31, 2002
--------------------------------------------------------------------------------
Balance, beginning of year                      $   24,565           16,765
New excess cashflow certificates                     5,959           10,499
Cash received from excess cashflow certificates     (3,460)          (2,588)
Net accretion of excess cashflow certificates        1,237            1,974
Fair value adjustments                                  --           (2,085)
--------------------------------------------------------------------------------
Balance, end of period                          $   28,301           24,565
--------------------------------------------------------------------------------
</TABLE>

   In August 2003, we sold three of our excess cashflow  certificates to a third
party  purchaser

                                       5

for $10.2 million, representing a slight premium to our  book  value at June 30,
2003.  The  proceeds of this sale  will be used for working capital.

(5)   WAREHOUSE FINANCING AND OTHER BORROWINGS

   At  June  30,  2003  and  December  31,  2002,  we had two  warehouse  credit
facilities for a combined amount of $400.0 million. In May 2003, we extended one
of our warehouse lines of credit and allowed the second warehouse line of credit
to expire,  replacing it with a new $200 million warehouse line of credit from a
new creditor. Both warehouse lines of credit are due to expire in May 2004, have
floating  interest  rates based on  one-month  London  Inter-Bank  Offered  Rate
("LIBOR") + 1.125%, and are collateralized by specific mortgage loans, which are
equal to or greater than the outstanding balances under the line at any point in
time.  Available  borrowings  under  these  lines are based on the amount of the
collateral pledged.

   The  following  table  summarizes  certain  information  regarding  warehouse
financing and other borrowings at the respective dates:

(DOLLARS IN MILLIONS)
<TABLE>
<S>                          <C>            <C>                 <C>         <C>        <C>        <C>

                                                                       BALANCE
                              Facility                                 -------                  Expiration
Facility Description           Amount            Rate             6/30/03    12/31/02              Date
-----------------------------------------------------------------------------------------------------------
Warehouse line of credit      $200.0         LIBOR + 1.125%       $ 39.4        --                 May 2004
Warehouse line of credit      $200.0         LIBOR + 1.125%           --       n/a                 May 2004
Warehouse line of credit         n/a         LIBOR + 1.125%          n/a      13.8                 May 2003
Capital leases                   n/a         3.76% - 12.50%          1.9       2.6     July 2003 - Jun 2006
-----------------------------------------------------------------------------------------------------------
Total                                                             $ 41.3      16.4
-----------------------------------------------------------------------------------------------------------
</TABLE>

    Warehouse  agreements require  us  to  comply  with  various  operating  and
financial  covenants.  The continued  availability of funds provided to us under
these agreements is subject to, among other conditions, our continued compliance
with these covenants.  We believe that we are in compliance with these covenants
as of June 30, 2003.

(6) EARNINGS PER SHARE

    The  following  is  a  reconciliation   of  the  denominators  used  in  the
computations of basic and diluted Earnings Per Share ("EPS").  The numerator for
calculating  both  basic  and  diluted  EPS is net  income  available  to common
shareholders.
<TABLE>
<S>                                           <C>           <C>                <C>            <C>
                                                       THREE MONTHS ENDED                SIX MONTHS ENDED
                                                           JUNE 30,                         JUNE 30,
                                                     -------------------              ------------------
 (DOLLARS IN THOUSANDS, EXCEPT EPS DATA)             2003           2002              2003          2002
--------------------------------------------------------------------------------------------------------------
Net income                                        $11,701          3,972            18,398          6,217
Less preferred stock dividends                        696             --               696             --
--------------------------------------------------------------------------------------------------------------
Net income available to common shareholders        11,005          3,972            17,702          6,217

Basic - weighted-average shares                16,207,593     15,888,014        16,065,175     15,885,893
Basic EPS                                           $0.68           0.25              1.10           0.39

                                       6


Basic - weighted-average shares                16,207,593     15,888,014        16,065,175     15,885,893
Incremental shares-options                      2,929,840      1,053,570         2,887,181        969,456
--------------------------------------------------------------------------------------------------------------
Diluted - weighted-average shares              19,137,433     16,941,584        18,952,356     16,855,349
Diluted EPS                                         $0.58           0.23              0.93           0.37
--------------------------------------------------------------------------------------------------------------
</TABLE>

(7) WARRANTS

    In December 2000, as part of our first exchange  offer,  we issued  ten-year
warrants to buy  approximately  1.6 million  shares of our common  stock,  at an
initial  exercise price of $9.10 per share,  subject to adjustment.  In December
2002,  the  exercise  price for the  warrants was adjusted to $0.01 per share in
accordance  with the  terms  of the  warrant  agreement  pursuant  to which  the
warrants  were  granted.  During the six months  ended  June 30,  2003,  281,240
warrants were exercised.  At June 2003, warrants to purchase 1,287,953 shares of
common stock were outstanding.

(8) PREFERRED STOCK - SERIES A

    In August  2001,  as part of our  second  exchange  offer,  the  holders  of
approximately $139.2 million (of the initial $150.0 million) principal amount of
our 9 1/2%  senior  notes  due 2003  exchanged  their  notes  for,  among  other
interests,  139,156 shares of our newly issued Series A preferred stock,  having
an aggregate preference amount of $13.9 million.

    Holders of the Series A preferred  stock are entitled to receive  cumulative
preferential  dividends at the rate of 10% per annum of the  preference  amount,
payable in cash semi-annually on the first business date of January and July. On
June 30,  2003,  we  transferred  $695,780 to the  transfer  agent for the first
dividend payment to the Series A holders on July 1st.

(9) IMPACT OF NEW ACCOUNTING STANDARDS

    In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with  Characteristics  of both Liabilities and Equity." SFAS No. 150
addresses the accounting for certain financial  instruments that, under previous
guidance, issuers could account for as equity. The statement requires that those
instruments be classified as liabilities in statements of financial position.

    SFAS No. 150 is  effective  for all  financial  instruments  entered into or
modified  after May 31, 2003, and otherwise is effective at the beginning of the
first interim period  beginning after June 15, 2003.  Management does not expect
that the  provisions  of SFAS No. 150 will impact our results of  operations  or
financial condition.

    In April 2003, the FASB issued SFAS No. 149,  "Amendment of Statement 133 on
Derivative  Instruments  and Hedging  Activities."  SFAS No. 149 amends SFAS No.
133,  "Accounting  for  Derivatives  Instruments  and Hedging  Activities,"  for
certain  decisions made by the Board as part of the  Derivatives  Implementation
Group  process.  This  statement  is  effective  for  contracts  entered into or
modified after June 30, 2003 and hedging  relationships  entered into after June
30, 2003.  Management  does not expect that the  provisions of SFAS No. 149 will
impact our results of operations or financial condition.

                                       7

    In January  2003,  the FASB  issued  Interpretation  No. 46 ("FIN No.  46"),
"Consolidation of Variable Interest Entities," which is an interpretation of ARB
No. 51. This Interpretation  addresses  consolidation by business enterprises of
variable interest entities.  The Interpretation  applies immediately to variable
interest  entities  created  after  January 31, 2003,  and to variable  interest
entities in which an enterprise  obtains an interest after that date. It applies
in the first fiscal year or interim  period  beginning  after June 15, 2003,  to
various interest  entities in which an enterprise holds a variable interest that
it  acquired  before  February  1, 2003.  Management  does not  expect  that the
provisions  of FIN No. 46 will impact our  results of  operations  or  financial
condition.

                                       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 INCLUDED IN
OUR FORM 10-K FOR OUR YEAR  ENDED  DECEMBER  31,  2003.  SEE  "-FORWARD  LOOKING
STATEMENTS AND RISK FACTORS" BELOW.

SUMMARY OF CRITICAL ACCOUNTING POLICIES

   EXCESS  CASHFLOW  CERTIFICATES.  Our excess cashflow  certificates  primarily
consist of the right to  receive  the  future  excess  cash flows from a pool of
securitized mortgage loans. The future excess cash flows generally consists of:

    o  The  positive  difference  between the  interest  paid on the  underlying
       mortgage   loans  and  the   interest   paid  on  bonds   issued  in  the
       securitization (which, when we sell net interest margin ("NIM") notes, is
       only received after the NIM notes are paid in full);

    o  In our 2003 securitizations, prepayment penalties received from borrowers
       who  payoff  their  loans  generally  within the first few years of their
       lives  (which,  when we sell NIM notes,  is only  received  after the NIM
       notes are paid in full ); and

    o  Additional  mortgage  loans  pledged  as  collateral  in  excess  of  the
       principal    amount    of   bonds    issued    and    outstanding;    the
       "overcollateralization"  is designed to provide additional assurance that
       the securities sold in the securitization will be paid according to their
       terms (and which we describe in greater detail under "-Securitizations").

    The excess cash flows we receive are highly dependent upon the interest rate
environment,  because  "basis risk" exists  between the  securitization  trust's
assets and  liabilities.  For example,  in each of the  securitizations  that we
issued since 2002,  the cost of financing for the  securitized  loans is indexed
against one-month LIBOR,  meaning that each month, the interest rate received by
the  pass-through  certificate  holders  may  adjust  upwards  or  downwards  as
one-month  LIBOR  changes  (liability),  while the  majority  of the  underlying
mortgage loans in the  securitization  trust have a fixed note rate for at least
three  years  (asset).  As a result,  as rates rise and fall,  the amount of our
excess cash flows will fall and rise, respectively,  which in turn will increase
or decrease the value of our excess cashflow certificates.

    In each of our  securitizations in which we sold NIM note(s),  we purchased,
on  behalf  of  the NIM owner trust, an interest rate cap for the benefit of the
NIM noteholder(s),  which helps mitigate the basis risk for the approximate time
that the NIM notes are outstanding.

    The accounting  estimates  related to the  valuation of our excess  cashflow
certificates  is a  "critical  accounting  estimate"  because it can  materially
affect  our net  income.  The  valuation  of our  excess  cashflow  certificates
requires us to forecast interest rates, mortgage principal payments, prepayments
and loan loss  assumptions,  each of which is highly  uncertain  and  requires a
large degree of judgment.  The rate used to discount the projected cash flows is
also critical in the valuation of our excess cashflow  certificates.  Management
uses internal,  historical  collateral  performance  data and published  forward
LIBOR curves to value  future  expected  excess cash flows.  We believe that the
value of our excess cashflow  certificates is fair, but can provide no assurance
that future prepayment and loss experience, changes in LIBOR or changes in their
required  market  discount  rate  will not  require  write-downs  of our  excess
cashflow  certificate  asset.  We have  written  down the  value  of our  excess
cashflow certificates in the past. Write-

                                       9

downs would reduce our income in future periods.

GENERAL

    Delta Financial Corporation  (together with its subsidiaries,  "Delta, we or
the  Company")  is  a  specialty   consumer  finance  company  that  originates,
securitizes and sells non-conforming mortgage loans, which are primarily secured
by first mortgages on one- to four-family residential properties. Throughout our
21-year  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  to  individual  borrowers,  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,  recording the premiums received
as revenues.  We use the proceeds from these sales to repay our warehouse  lines
of credit and for working capital.

    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  independent  third-party
mortgage brokers who submit  applications on a borrower's behalf. We process and
underwrite  the  submission  and,  if the loan  complies  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 exceeds any fees we may collect from the borrower.

    INDEPENDENT  MORTGAGE  BROKER  (WHOLESALE)  CHANNEL.  Through our  wholesale
distribution channel, we originate mortgage loans indirectly through independent
mortgage   brokers  and  other  real  estate   professionals   who  submit  loan
applications on behalf of borrowers.  We currently originate the majority of our
wholesale loans in 26 states,  through a network of approximately 1,500 brokers.
The broker's role is to source the business,  identify the applicant,  assist in
completing  the loan  application,  and to process the loans,  which include the
gathering necessary information and documents and serving as the liaison between
us and the borrower through the entire origination  process. We review,  process
and underwrite  the  applications  submitted by the broker,  approve or deny the
application,  set the  interest  rate and  other  terms of the  loan  and,  upon
acceptance by the borrower and  satisfaction of all conditions that we impose as
the lender,  lend the money to the borrower.  Because  brokers conduct their own
marketing  and employ their own  personnel  to complete  loan  applications  and
maintain  contact  with  borrowers  - for which they charge a broker fee that is
commensurate  with their services - originating loans through our broker network
is designed to allow us to increase our loan volume without incurring the higher
marketing and employee costs associated with increased retail originations.

    RETAIL LOAN CHANNEL.  Through our retail  distribution  channel,  we develop
retail loan leads ("retail loans") primarily  through our  telemarketing  system
and our network of eight retail offices and four origination  centers located in
nine states.  Our origination  centers are typically  staffed with  considerably
more loan  officers  and  cover a  broader  area  than our  retail  offices.  We

                                       10

continually  monitor  the  performance  of our retail  operations  and  evaluate
current  and  potential  retail  office  locations  on  the  basis  of  selected
demographic  statistics,  marketing analyses and other criteria developed by us.
In July 2003, we opened our eighth retail office in Kansas City, Kansas.

    Typically,  contact  with the  customer  is  initially  handled  through our
telemarketing center. On the basis of an initial screening conducted at the time
of the call, our telemarketer  makes a preliminary  determination of whether the
customer and the property meet our lending  criteria.  If the customer does meet
our  criteria,  the  telemarketer  will forward the customer to one of our local
branches or  origination  centers.  The mortgage  analyst at the local branch or
origination center may complete the application over the telephone,  or schedule
an  appointment  in the retail  loan  office  most  conveniently  located to the
customer or in the  customer's  home,  depending on the  customer's  needs.  The
mortgage  analyst  assists the  applicant in  completing  the loan  application,
ensures that an  appraisal  has been  ordered  from an  independent  third party
appraisal  company,  orders  a credit  report  from an  independent,  nationally
recognized   credit  reporting  agency  and  performs  various  other  tasks  in
connection  with the completion of the loan package.  Our mortgage  analysts are
trained to structure loans that meet the applicant's  needs while satisfying our
lending  guidelines.  The loan package is  underwritten  for loan  approval on a
centralized basis. If the loan package is approved, we will fund the loan.

   For the three  months  ended June 30,  2003,  we  originated  $348 million of
loans,  an  increase  of 66% over the $210  million of loans  originated  in the
comparable  period in 2002. Of these  amounts,  approximately  $195 million were
wholesale loans and $153 million were retail loans, compared to $141 million and
$69 million,  respectively,  during the three  months ended June 30, 2002.  Loan
production  in the second  quarter  of 2003  increased  8% from $323  million of
mortgage loan  originations in the first quarter of 2003. Our first quarter 2003
loan production consisted of $175 million of wholesale loans and $148 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 though a warehouse line of credit
for only a limited time - generally,  not more than three months -long enough so
we can pool enough  loans to sell them  either  through a  securitization  or as
whole-loans.  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  substantial  majority of our revenues and cash
flows  from  selling   mortgage   loans   through  one  of  two   outlets:   (i)
securitization,  which involves the public offering by a securitization trust of
asset-backed   pass-through   securities   (and  related   interests   including
securitization  servicing rights on  newly-originated  pools of mortgage loans);
and (ii) whole loan sales,  which includes the sale of pools of individual loans
to institutional investors,  banks and consumer  finance-related  companies on a
servicing  released basis. We select the outlet depending on market  conditions,
relative  profitability and cash flows. We generally realize higher gain on sale
when we  securitize  loans  than we do when we sell  whole  loans.  We apply the
proceeds from loan sales,  whether through  securitizations or whole loan basis,
to repay our  warehouse  lines of credit - in order to make  available  capacity
under these  facilities  for future  funding of mortgage loans - and utilize any
additional funds for working capital.

                                       11

   We expect to continue to use a combination of securitizations  and whole loan
sales, with the amounts of each dependent upon conditions in the marketplace and
our goal of maximizing earnings and liquidity.

   The  following  table sets forth  certain  information  regarding  loans sold
through our  securitizations  and on a whole loan basis during the quarter ended
June 30, 2003, (dollars in thousands):
<TABLE>
<S>                                              <C>                 <C>

                                                    AMOUNT      PERCENTAGE
                                                  ------------------------
       Loan securitizations                       $ 334,865           97%
       Whole loan sales                               9,116            3%
                                                  ------------------------
       Total securitizations and loans sold       $ 343,981          100%
                                                  ========================
</TABLE>

   SECURITIZATION.  When we securitize loans, we create securitization trusts in
the form of off-balance  sheet  qualified  special purpose  entities,  or QSPEs.
These trusts are  established  for the limited  purpose of buying and  reselling
mortgage loans.  Typically each quarter,  we pool together loans, and sell these
loans to these  trusts.  We carry no  contractual  obligation  related  to these
trusts  or the  loans  sold to them,  nor do we have any  direct  or  contingent
liability  related to the trusts,  except for the standard  representations  and
warranties made in connection with each securitization  trust.  Furthermore,  we
provide no guarantees to investors with respect to cash flow or performance  for
these trusts.  These entities  represent  qualified special purpose entities and
are therefore not  consolidated for financial  reporting  purposes in accordance
with SFAS No. 140  "Accounting  for Transfers and Servicing of Financial  Assets
and Extinguishments of Liabilities".

   The securitization  trust raises money to purchase the mortgage loans from us
by selling securities to the public.  These securities are known as asset-backed
pass-through securities, and they are secured by the pool of mortgage loans held
by  the  securitization   trust.   These   asset-backed   securities  or  senior
certificates,  which are  usually  purchased  for cash by  insurance  companies,
mutual funds and/or other institutional investors, represent senior interests in
the cash flows from the mortgage loans in the trust.

   The  securitization  trust  issues  senior  certificates,  which  entitle the
holders  of these  senior  certificates  to  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. The
securitization  trust also issues a subordinate  certificate or BIO  certificate
(referred  to as an excess  cashflow  certificate),  and a P  certificate.  Each
month,  the P  certificate  holder is entitled to receive  prepayment  penalties
received from borrowers who payoff their loans early in their life.

   For any monthly  distribution,  the holder of an excess cashflow  certificate
receives  payments  only after all required  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  in a  "waterfall"  manner as
follows:

    o  first, to cover any losses on the mortgage loans in the related  mortgage
       loan 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 bond insurer,  if any, of the related series of
       pass-through  certificates for amounts paid by or otherwise owing to that
       insurer;

                                       12

    o  third, to build or maintain the overcollateralization provision described
       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.

   The overcollateralization provision or "O/C" is a credit enhancement which is
designed  to protect  the  securities  sold to the  securitization  pass-through
investors  from  credit  loss  on  the  underlying  mortgage  loans.  In  short,
overcollateralization  is when the amount of collateral  (I.E.,  mortgage loans)
owned  by  a  securitization  trust  exceeds  the  aggregate  amount  of  senior
pass-through  certificates.  The  O/C is  created  to  absorb  losses  that  the
securitization   trust  may  suffer,   as  loans  are   liquidated  at  a  loss.
Historically,  we built up the O/C  typically  over the first 18-24  months of a
securitization (with the specific timing depending upon the structure, amount of
excess spread,  and  performance of the  securitization),  by utilizing the cash
flows from the excess  cashflow  certificates  to make  additional  payments  of
principal to the holders of the pass-through certificates until the required O/C
level was reached. Beginning in our 2002 securitizations,  we created the O/C by
initially selling  pass-through  securities totaling  approximately 98.5% of the
total  amount of  mortgage  loans sold to the trust.  In doing so, we create the
full  amount  of the O/C  required  by the  trust  at the time we  complete  the
securitization,  instead of over time. For example,  if a  securitization  trust
contains  collateral of $100 million of mortgage  loans,  we sell  approximately
$98.5  million  in  senior   pass-through   certificates.   Prior  to  our  2002
securitization transactions, we typically issued pass-through certificates 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  received  close to $100  million in
proceeds from the sales of these  certificates,  depending upon the structure we
use for the securitization.

   The O/C is generally  expressed as a percentage of the initial  mortgage loan
or collateral  principal balance sold to the securitization  trust. The required
O/C is  initially  determined  by either  the  rating  agencies  and/or the bond
insurer,  if any, using various  factors  including (1)  characteristics  of the
mortgage  loans  sold to the  trust,  such as credit  scores  and  loan-to-value
ratios; (2) the amount of excess spread between the interest rate on the pool of
mortgage  loans sold to the  securitization  trust and the interest  paid to the
pass-through  certificate  holders,  less the  servicing  fee, and other related
expenses  such as  trustee  fees  and  bond  insurer  fee,  if any;  and (3) the
structure of the underlying securitization.

   Our securitizations  have typically required an O/C of between 1.25% and 3.0%
of the initial mortgage loans sold to the securitization trust. The required O/C
can increase or decrease  throughout the life of the transaction  depending upon
subordination  levels,  delinquency and/or loss tests and is subject to minimums
and maximums, as defined by the rating agencies and/or the bond insurer insuring
the  securitization.  In our  securitizations  prior  to  2002,  after  the  O/C
requirement is reached, the cash flows from the excess cashflow certificates are
then  distributed to us as the holder of the excess  cashflow  certificates,  in
accordance  with  the  "waterfall"

                                       13

described above. Over time, if the cash collected during the periods exceeds the
amount   necessary  to  maintain  the  required  O/C  and  all  other   required
distributions  have been met, and there is no shortfall in the related  required
O/C,  the  excess  is then  released  to us as  holder  of the  excess  cashflow
certificate.

   We began utilizing a new securitization structure in 2002, in which we sold a
net interest  margin  certificate,  or NIM, in lieu of selling an  interest-only
certificate   in  each  of  our  2002   securitizations,   and  in  addition  to
interest-only  certificate  in  each  of our  2003  securitizations.  The NIM is
generally  structured  where  we sell  the  excess  cashflow  certificate  and P
certificate to a QSPE or owner trust.  This owner trust is referred to as a "NIM
trust." The NIM trust in turn issues (1) interest-bearing NIM note(s) (backed by
the excess cashflow  certificate  and P certificate),  and (2) a NIM owner trust
certificate  evidencing  ownership in the NIM trust. We sell the excess cashflow
certificate and P 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),  together with an
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(s) entitles the holder to be paid a specified interest rate, and
further provides for all cash flows generated by the excess cashflow certificate
and P  certificate  to be used  to pay all  principal  and  interest  on the NIM
note(s) until paid in full.  This typically  occurs  approximately  22-25 months
from the date the NIM  note(s)  were  issued.  The NIM owner  trust  certificate
entitles us to all cash flows generated by the excess cashflow certificate and P
certificate  after the holder of the NIM note(s) 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 a NIM  transaction,  we were  required to "fully  fund" the O/C at
closing  - as  opposed  to  having  it  build  up  over  time  as we had in past
securitizations - which is why we sold senior pass-through certificates totaling
approximately 1.5% less than the collateral in the securitization  trust. We use
a portion of the proceeds we receive from selling NIM note(s) to make up for the
difference between (1) the value of the mortgage loans sold and (2) the proceeds
from selling the senior pass-through certificates.

   In our second quarter 2003 securitization,  we derived the following economic
interests:

    o  we received a cash purchase price from the sale of the NIM note(s) issued
       by a NIM trust, to which we sold the excess cashflow certificates;

    o  we  received  a cash  purchase  price  from the sale of an  interest-only
       certificate, which entitles the holder to receive payments of interest at
       a  pre-determined  rate and over a fixed period of time - I.E., the first
       30 months of the securitization transaction in this case;

    o  we retained a NIM owner trust  certificate,  which entitles us to receive
       cash  flows  generated  by the  excess  cashflow  certificates  and the P
       certificate issued in connection with the securitization after the holder
       of the NIM  note(s)  has been  paid in  full.  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 flows we expect to
       receive in the future from these

                                       14

       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,

       (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,

       (3) the LIBOR forward curve (using current LIBOR as the floor rate), and

       (4) a discount rate; and

    o  we received a cash  premium  from  selling the right to service the loans
       that we  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,  including
       prepayment  penalties  for  certain  securitization  servicing  rights we
       previously sold, in such capacity.

   At  the  time  we  completed  the  second  quarter  2003  securitization,  we
recognized as revenue each of the economic interests described above, which were
recorded as net gain on sale of mortgage loans on our consolidated  statement of
operations.

   The gain on sale we  recorded  and cash we received  from our second  quarter
2003 and 2002 securitizations is summarized below. "Loans Sold" is the principal
amount of loans  actually  transferred to the  securitization  trusts during the
period.
<TABLE>
<S>                                                             <C>          <C>

    GAIN ON SALE                                                   2003         2002
    ------------                                                   ----         ----
        Loans Sold (in thousands)                                $334,865     $200,000

    NIM Proceeds, Net of Up Front Overcollateralization           5.61 %        5.15 %
        Interest-Only Certificate Proceeds                        0.51 %          -
        Excess Cashflow Certificate (owner trust certificate)     1.00 %        1.29 %
        Mortgage Servicing Rights                                 0.56 %        0.89 %
        Less:  Transaction Costs                                 (0.53)%       (0.78)%
                                                                 -------       -------
             Net Gain on Sale Recorded                            7.15 %        6.55 %
                                                                 =======       =======

    CASH RECEIVED
    -------------
        NIM Proceeds, Net of Up Front Overcollateralization       5.61 %        5.15 %
        Interest-Only Certificate Proceeds                        0.51 %          -
        Mortgage Servicing Rights                                 0.56 %        0.89 %
        Less: Transaction Costs                                  (0.53)%       (0.78)%
                                                                 -------       -------
        Cash at Closing                                           6.15 %        5.26 %
                                                                 =======       =======
</TABLE>

    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

                                       15

    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").

    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
since 2002) 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.

    Each securitization  trust has the  benefit of either a  financial  guaranty
insurance  policy  from a monoline  insurance  company or a  senior-subordinated
securitization structure,  which helps ensure the timely payment of interest and
the ultimate payment of principal of the credit-enhanced  investor  certificate,
or both (known as a "hybrid"). In "senior-subordinated"  structures,  the senior
certificate  holders are  protected  from losses by  subordinated  certificates,
which absorb any such losses first. In addition to such credit enhancement,  the
excess  cash  flows  that  would  otherwise  be paid to the holder of the excess
cashflow  certificate is used when and if it subsequently  becomes  necessary to
obtain or maintain required overcollateralization limits.  Overcollateralization
is used to  absorb  losses  prior to  making a claim on the  financial  guaranty
insurance policy or the subordinated certificates.

    WHOLE LOAN SALES. We also sell loans, without retaining the right to service
the loans, in exchange for a cash premium. The premiums we receive from the loan
sales are  recorded  as  revenue  at the time of sale  under net gain on sale of
mortgage loans. The cash premiums ranged between 5.0% to 5.6% (prior to reserve)
of the principal amount of mortgage loans sold in the second quarter of 2003.

    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:

    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 borrower less the financing costs we pay to our
       warehouse lender to fund our loans);

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

    o  retained excess cashflow certificates;

    o  distributions  from Delta  Funding  Residual  Exchange  Company  LLC (the
       "LLC"),  a limited  liability  company  (unaffiliated  to us).  We have a
       non-voting  membership  interest in the LLC, which entitles us to receive
       15% of the net cash flows from the LLC through June 2004 and, thereafter,
       10% of the net cash flows from the LLC. We did not receive the  quarterly
       distribution of $142,000 due on or about June 30, 2003,  which has led us
       to  commence a lawsuit to recover  all  amounts due to us. (See "Part II,
       Item 1-Litigation" for a description of this matter); and

    o  miscellaneous interest income, including prepayment penalties received on
       certain of the loans we sold in securitizations prior to 2002.

                                       16

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 related excess cashflow certificates (which, in the securitizations
we have  issued  since 2002,  includes  NIM owner  trust  certificates,  and the
underlying BIO certificates and P  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 - 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
       expected maturity;

    o  credit  losses on the  mortgage  loans - 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  because the excess
       cashflow  certificates  are  subordinate in right of payment to all other
       securities issued by the securitization trust.  Consequently,  any losses
       sustained on mortgage loans comprising a particular  securitization trust
       are first absorbed by the excess cashflow certificates;

    o  the LIBOR  forward  curve (using  current  LIBOR as the floor rate) - our
       estimate of future  interest  rates,  which affects both the rate paid to
       the  floating  rate  pass-through   security  investors   (primarily  the
       one-month LIBOR index) and the adjustable rate mortgage loans sold to the
       securitization  trust (which provide for a fixed rate of interest for the
       first  24  or 36  months  and  a  six-month  variable  rate  of  interest
       thereafter using the six-month LIBOR index); and

    o  a discount rate used to calculate present value.

   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)  are  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, the LIBOR forward curve and discount rates:

   (A) PREPAYMENTS.  We base our prepayment rate  assumptions  upon our on-going
       analysis  of  the   performance  of  the  mortgage  pools  we  previously
       securitized,  and the  performance  of

                                       17

       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 contains 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; and

       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  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 the
          borrower 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;

       o  the borrower's need for additional funds; 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.

       The  following  table shows our current  prepayment  assumptions  for the
       month  one and  peak  speed.  The  assumptions  have  not  changed  since
       September 2001.

                                       18
<TABLE>
<S>   <C>                 <C>                <C>

       LOAN TYPE         MONTH ONE         PEAK SPEED
       ---------         ---------         ----------
       Fixed Rate          4.00%              30.00%
       Adjustable Rate     4.00%              75.00%
</TABLE>

       If  mortgage  loans  prepay  faster than  anticipated,  we will earn less
       income in connection with the mortgage loans and receive less excess cash
       flow in the future because the mortgage loans have paid off.  Conversely,
       if mortgage loans prepay at a slower rate than anticipated,  we earn more
       income and more excess cash flow in the future.

   (b) DEFAULT  RATE.   At  June  30,  2003  and  2002,  on  each  newly  issued
       securitization,   we  apply  a  default   reserve  for  both  fixed-  and
       adjustable-rate loans sold to the securitization trusts totaling 5.00% of
       the amount initially securitized.  We apply a default or loss rate to the
       excess cashflow  certificate  because it is the "first-loss" piece and is
       subordinated  in right of payment to all other  securities  issued by the
       securitization trust. If defaults are higher than we anticipate,  we will
       receive  less  income  and less  excess  cash flow than  expected  in the
       future.  Conversely,  if  defaults  are lower than we  expected,  we will
       receive  more  income  and more  excess  cash flow than  expected  in the
       future.

   (c) LIBOR FORWARD  CURVE.  The LIBOR forward  curve is used to project future
       interest  rates,  which  affects both the rate paid to the floating  rate
       pass-through security investors (primarily the one-month LIBOR index) and
       the adjustable  rate mortgage loans sold to the  securitization  trust (a
       fixed  rate of  interest  for  either  the first 24 or 36  months  then a
       six-month variable rate of interest  thereafter using the six-month LIBOR
       index). A significant portion of our loans are fixed rate mortgages,  and
       a  significant  amount of these  fixed rate loans are backed by  floating
       rate  securities,  such as one-month  LIBOR. As such, our excess cashflow
       certificates are subject to significant  basis risk and a change in LIBOR
       will, impact our excess spread.  If LIBOR is lower than  anticipated,  we
       will receive more income and more excess cash flows than  expected in the
       future;  conversely,  if LIBOR is higher than  expected,  we will receive
       less income and less excess  cash flows than  expected in the future.  In
       each of our  securitizations in which we sold NIM note(s),  we purchased,
       on behalf of the NIM owner trust, an interest rate cap for the benefit of
       the NIM  noteholder(s),  which  helps  mitigate  the  basis  risk for the
       approximate time that the NIM notes are outstanding.

   (d) DISCOUNT RATE.  We use a discount rate that we believe reflects the risks
       associated with our excess cashflow  certificates.  Because 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.  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 conditions in the equity markets.

                                       19

       We  utilized  a  discount rate  of  15%  at June 30, 2003 and 2002 on all
       excess cashflow certificates.

    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  cash flows  that are to be  received  by the
excess   cashflow   certificates   after  the  release  or   "stepdown"  of  the
overcollateralization account.

    Our valuation of retained excess cashflow  certificates is highly  dependent
upon  the  reasonableness  of our  assumptions  and  the  predictiveness  of the
relationships  that drive the results of our valuation model. The assumptions we
utilize,  described above, are complex, as we must make judgment calls about the
effect of matters that are inherently uncertain.  As the number of variables and
assumptions  affecting  the  possible  future  resolution  of the  uncertainties
increase, those judgments become even more complex.

    In volatile  markets, like those we have  experienced  over the past several
quarters, there is increased risk that our actual results may vary significantly
from our assumed results.  The longer the time period over which the uncertainty
will exist, the greater the potential volatility for our valuation assumptions.

    For example, assumptions  regarding  prepayment  speeds,  defaults and LIBOR
rates are used in estimating fair values of our excess cashflow certificates. If
loans  prepay  faster  than  estimated,  or loan loss  levels  are  higher  than
anticipated,  or LIBOR is higher than  anticipated,  we may be required to write
down the value of such  certificates.  While we believe that our assumptions are
reasonable  estimates using our historical loan  performance and the performance
of similar  mortgage  pools from other lenders - in addition to accessing  other
public  information  about  market  factors such as interest  rates,  inflation,
recession,  unemployment  and real estate  market  values,  among other things -
these are just  estimates  and it is virtually  impossible to predict the actual
level of prepayments and losses, which are also driven by consumer behavior.

DEFERRED TAX ASSET

    As of June 30,  2003, we carried a net deferred tax asset 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 June 30, 2003, we have a gross deferred tax asset of $42.8 million and
a valuation  allowance of $37.2 million. We established this valuation allowance
in 2001, during the second of two successive years of posting significant losses
(2000 and 2001), and the modest amount of earnings we had projected at that time
that we would earn over the ensuing  several  quarters.  We believe  that it was
appropriate to establish this valuation  allowance in accordance  with generally
accepted  accounting  principles  ("GAAP.") Since then, we have now posted seven
consecutive  quarters  of  profitability.  If we are able to  continue to record
positive  earnings  over the next several  quarters and  demonstrate  a reliable
future earnings stream, we expect to:

   o   utilize a larger amount of the gross deferred tax asset to offset the tax
       that would otherwise be recorded on the majority of such earnings; and

   o   potentially  reduce  the  amount  of,  and/or  eliminate,  the  valuation
       allowance in accordance  with GAAP.  Upon any reduction or elimination of
       the  valuation  allowance,   net  earnings

                                       20

       and retained earnings will increase; however, in  subsequent quarters net
       earnings and retained earnings will be  reduced  by the amount of the tax
       provision.

    As of June 30, 2003, Federal and State NOLs totaled $81.0 million,  expiring
in 2021.

    Our deferred tax asset of $42.8 million  consists  primarily of NOLs, net of
tax,  of $32.4  million,  and the excess of the tax basis over book basis on our
excess cashflow certificates, net of tax, of $8.3 million.

RESULTS OF OPERATIONS

THREE  MONTHS  ENDED JUNE  30, 2003  COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2002

GENERAL

    Our net income for the three months  ended June 30, 2003 was $11.7  million,
or $0.68 per share basic and $0.58 per share diluted,  compared to $4.0 million,
or $0.25 per share basic and $0.23 per share diluted, for the three months ended
June 30, 2002.

REVENUES

    Total  revenues  increased  $12.5  million,  to $34.1  million for the three
months  ended June 30, 2003,  from $21.6  million for the  comparable  period in
2002.  The increase in revenue was  primarily  attributable  to (1) us selling a
higher  number of  mortgage  loans  due to a larger  amount  of  mortgage  loans
originated during the period ended June 30, 2003, compared to the same period in
2002 (and the consequent  increase in net gain on sale of mortgage loans and net
origination  fees and other income),  and (2) an increase to our gain on sale of
approximately  83 basis points for the quarter ended June 30, 2003 primarily due
to more favorable securitization market conditions,  compared to the same period
one year ago.

    We originated  $348.2  million of mortgage  loans for the three months ended
June 30, 2003, representing a 66% increase from $210.1 million of mortgage loans
originated  for the comparable  period in 2002. We  securitized  and sold $344.0
million of loans  during the three  months  ended  June 30,  2003 -  securitized
$334.9  million of mortgage  loans and sold $9.1 million of mortgage  loans on a
servicing-released  basis - compared to $235.4  million of loans during the same
period in 2002 - $200.0 million of mortgage loans  securitized and $35.4 million
of mortgage loans sold on a servicing-released basis.

    NET GAIN ON SALE OF MORTGAGE  LOANS.  Net gain on sale of mortgage  loans is
represented by the following:

   (1)  the sum of:
        (a)  the cash purchase price we receive in connection  with  selling one
             or more of the  following   securities   in   connection  with  our
             securitization(s)  for a particular  period: (i) a NIM note, net of
             the overcollateralization  amount and interest rate cap and/or (ii)
             an interest-only certificate;

        (b)  the fair value of the  non-cash  excess  cashflow  certificates  we
             retain in a securitization for each period;

        (c)  the cash premium received from selling mortgage servicing rights in
             connection with each securitization; and

        (d)  the  cash   premium   earned   from   selling   whole  loans  on  a
             servicing-released basis,

                                       21

   (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 $9.7 million,  or 66%, to $24.4
million for the three  months ended June 30,  2003,  from $14.7  million for the
comparable period in 2002. This increase was primarily due to an increase in the
amount of loans  securitized and sold compared to the second quarter of 2002 and
an  increase  in our  weighted  average  net gain on sale ratio to 7.08% for the
three months ended June 30, 2003 from 6.25% for the  comparable  period in 2002,
due to more favorable securitization market conditions,  leading to a higher net
interest  margin (which is the spread  between the average  mortgage rate on the
pool of mortgage loans securitized, minus the cost of funds and related expenses
on our  securitized  loans).  The  weighted-average  net  gain on sale  ratio is
calculated  by  dividing  the net  gain on sale by the  total  amount  of  loans
securitized and sold.

    INTEREST. Interest income primarily represents the sum of:

        (1)  the gross 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 (up
             or down) to our excess cashflow  certificates to reflect changes in
             fair value;

        (4)  cash interest earned on bank accounts; and

        (5)  miscellaneous  interest  income,   including  prepayment  penalties
             received on certain of our securitizations prior to 2002.

    Interest income increased $0.2 million, or 6%, to $3.4 million for the three
months ended June 30, 2003, from $3.2 million for the comparable period in 2002.
The increase in interest income is due to the higher average loan balance on the
loans we originated; offset by the lower weighted-average interest rate on loans
held for sale in the second  quarter  of 2003,  compared  to the same  period in
2002.  In addition,  interest  income  increased due to higher excess cash flows
that we received; partially offset by lower prepayment penalties received in the
second quarter of 2003, compared to the same period in 2002.

    NET  ORIGINATION  FEES  AND OTHER INCOME. Origination fees represent the sum
    of:

        (1)  fees earned on broker and retail originated loans,

        (2)  distributions from the LLC, and

        (3)  other miscellaneous income, if any,

less premiums paid to originate mortgage loans.

    Net  origination  fees and other income  increased $2.7 million,  or 75%, to
$6.3 million for the three months ended June 30, 2003, from $3.6 million for the
comparable  period in 2002.  The  increase  was  primarily  the result of higher
mortgage loan  production,  and  consequently  higher fees  (associated with the
higher loan production) during the second quarter of 2003,  compared to the same
period in 2002.

                                       22

EXPENSES

    Total expenses  increased by $4.8 million,  or 27%, to $22.3 million for the
three months ended June 30, 2003,  from $17.5 million for the comparable  period
in 2002. The increase was primarily  related to higher payroll and related costs
required to support the significant increase in our mortgage loan production.

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

    Payroll  and  related  costs  increased  by $3.9  million,  or 39%, to $14.0
million for the three  months ended June 30,  2003,  from $10.1  million for the
comparable  period in 2002.  The  increase  was  primarily  the result of higher
commissions paid and our higher number of employees,  related to the increase in
our loan  production.  As of June 30, 2003,  we employed 790 full- and part-time
employees, compared to 594 full- and part-time employees as of June 30, 2002.

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

    Interest expense  decreased by $0.1 million,  or 7%, to $1.4 million for the
three months ended June 30, 2003 from $1.5 million for the comparable  period in
2002. The decrease was primarily due to lower warehouse  financing costs arising
from our 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 1.3% for the second quarter 2003,  compared to an average of 1.8% for
the second quarter 2002.

    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  increased by $1.1 million,  or 19%, to
$7.0  million for the three months ended June 30, 2003 from $5.9 million for the
comparable  period in 2002.  The  increase was  primarily  due to an increase in
expenses  associated  with higher loan  production and ongoing  expansion of our
retail  division.  This was  partially  offset  by lower  depreciation  expenses
resulting from fully depreciated assets.

    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 approximately $35,000 and $132,000, primarily
related  to  excess   inclusion   income   generated  by  our  excess   cashflow
certificates,  for the three months ended June 30, 2003 and 2002,  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.

                                       23

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

SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2002

GENERAL

    Our net income for the six months ended June 30, 2003 was $18.4 million,  or
$1.10 per share basic and $0.93 per share diluted,  compared to $6.2 million, or
$0.39 per share basic and $0.37 per share  diluted for the six months ended June
30, 2002.

REVENUES

    Total revenues increased $19.4 million,  to $60.6 million for the six months
ended June 30, 2003,  from $41.2 million for the comparable  period in 2002. The
increase in revenue was primarily attributable to (1) us selling a higher number
of mortgage loans due to a larger amount of mortgage loans originated during the
six months  ended June 30,  2003,  compared  to the same period in 2002 (and the
consequent  increase in net gain on sale of mortgage  loans and net  origination
fees and other income), and (2) an increase in our gain on sale of approximately
85 basis  points for the six months  ended June 30, 2003  primarily  due to more
favorable securitization market conditions, compared to the same period one year
ago.

    We originated $671.6 million of mortgage loans for the six months ended June
30, 2003,  representing  a 68% increase  from $400.1  million of mortgage  loans
originated  for the comparable  period in 2002. We  securitized  and sold $617.2
million of loans during the six months ended June 30, 2003 - securitized  $595.9
million  of  mortgage  loans  and sold  $21.3  million  of  mortgage  loans on a
servicing-released  basis - compared to $449.1  million of loans during the same
period in 2002 -  securitized  $375.0  million of mortgage  loans and sold $74.1
million of mortgage loans on a servicing-released basis.

    Net gain on sale of mortgage loans increased $15.4 million, or 57%, to $42.5
million  for the six months  ended June 30,  2003,  from $27.1  million  for the
comparable period in 2002. This increase was primarily due to (1) an increase in
the amount of loans  securitized  and sold compared to the six months ended June
30, 2002, and (2) an increase in our weighted-average net gain on sale ratio for
the six months ended June 30, 2003,  and for the  comparable  period in 2002, of
6.88% and  6.03%,  respectively,  due to more  favorable  securitization  market
conditions leading to a higher net interest margin.

    Interest income decreased $0.9 million,  or 13%, to $6.2 million for the six
months ended June 30, 2003, from $7.1 million for the comparable period in 2002.
The decrease in interest  income was primarily  due to a lower  weighted-average
interest rate on loans held for sale (and, consequently, less interest earned on
these  loans)  during the six months  ended June 30,  2003  compared to the same
period  in 2002 - 8.40%  and  9.73%,  respectively.  In  addition,  we had lower
prepayment  penalties received in the six months ended June 30, 2003 compared to
the same period in 2002. We also recorded a charge to interest income to reflect
a fair  value  adjustment  to our excess  cashflow  certificates  totaling  $2.1
million during the six months ended June 30, 2002.

    Net  origination  fees and other income  increased $4.9 million,  or 70%, to
$11.9 million for the six months ended June 30, 2003,  from $7.0 million for the
comparable  period in 2002.  The  increase  was  primarily  the result of higher
mortgage loan production,  and consequently  higher

                                       24

fees earned  (associated  with the higher loan production) during the six months
ended June 30, 2003,  compared to the same period in 2002.

EXPENSES

   Total  expenses  increased by $7.1 million,  or 20%, to $41.9 million for the
six months ended June 30, 2003, from $34.8 million for the comparable  period in
2002.  The increase was  primarily  related to higher  payroll and related costs
required to support the significant increase in our mortgage loan production.

   Payroll and related costs increased by $6.9 million, or 35%, to $26.7 million
for the six months ended June 30, 2003,  from $19.8  million for the  comparable
period in 2002. The increase was primarily the result of higher commissions paid
and our  higher  number  of  employees,  related  to the  increase  in our  loan
production.

   Interest expense  decreased by $0.5 million,  or 17%, to $2.5 million for the
six months  ended June 30, 2003 from $3.0 million for the  comparable  period in
2002. The decrease was primarily due to lower warehouse  financing costs arising
from our 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 1.3% for the six months ended June 30,  2003,  compared to an average
of 1.8% for the same period in 2002.

   General and  administrative  expenses  increased by $0.8  million,  or 7%, to
$12.8  million for the six months ended June 30, 2003 from $12.0 million for the
comparable  period in 2002.  The  increase was  primarily  due to an increase in
expenses  associated  with higher loan  production and ongoing  expansion of our
retail  division.  This was  partially  offset  by lower  depreciation  expenses
resulting from fully depreciated assets.

   We recorded a tax  provision  of $0.3  million,  primarily  related to excess
inclusion  income  generated by our excess  cashflow  certificates,  for the six
months ended June 30, 2003 and 2002.

FINANCIAL CONDITION

JUNE 30, 2003 COMPARED TO DECEMBER 31, 2002

   Accounts  receivable  increased $0.5 million, or 29%, to $2.2 million at June
30, 2003,  from $1.7 million at December 31, 2002. The increase is primarily due
to the timing of interest  on mortgage  loans  collected  by our loan  servicing
provider, which is paid to us in the following period.

   Loans held for sale, net increased  $37.1 million,  or 109%, to $71.1 million
at June 30, 2003, from $34.0 million at December 31, 2002. This asset represents
mortgage  loans held in  inventory  that we plan to sell in a whole loan sale or
securitization.  This increase was primarily due to the net  difference  between
loan originations and loans securitized or sold during the six months ended June
30, 2003.

   Excess cashflow  certificates,  net increased $3.7 million,  or 15%, to $28.3
million at June 30, 2003, from $24.6 million at December 31, 2002. This increase
was primarily due to new excess  cashflow  certificates,  totaling $6.0 million,
from loans securitized during 2003, partially offset by the change in fair value
of such excess  cashflow  certificates.  Changes in fair value  incorporate  any
change in value  (accretion or  reduction)  in the carrying  value of the excess

                                       25

cashflow  certificates  and the cash  distributions we received from such excess
cashflow certificates.  (See "-Footnote 4 to the Notes to Consolidated Financial
Statements - Excess Cashflow Certificates, Net").

   Prepaid and other assets  increased $1.4 million,  or 82%, to $3.1 million at
June 30,  2003,  from $1.7  million at December  31,  2002.  This  increase  was
primarily due to prepaid expenses associated with the pre-funding feature in our
second quarter 2003 securitization transaction.

   Bank  payable  decreased  $0.9  million,  or 64%, to $0.5 million at June 30,
2003,  from $1.4  million at December  31, 2002.  This  account  represents  the
outstanding  balance of checks  issued that have not been  presented to the bank
for payment by individual payees.

   Warehouse financing and other borrowings increased $24.9 million, or 152%, to
$41.3 million at June 30, 2003,  from $16.4  million at December 31, 2002.  This
increase was primarily  attributable  to a higher amount of mortgage  loans held
for sale (mortgage  loans held in inventory that we plan to sell in a whole loan
sale or securitization) financed under our warehouse credit facilities.

   Accounts payable and accrued expense increased $1.5 million, or 12%, to $13.8
million at June 30, 2003 from $12.3 million at December 31, 2002.  This increase
was  primarily  the  result of the  timing of  various  operating  accruals  and
payables.

   Stockholders'  equity  increased  $17.7 million,  or 60%, to $47.2 million at
June 30,  2003 from  $29.5  million at  December  31,  2002.  This  increase  is
primarily due to our positive earnings for the six-month period.

LIQUIDITY AND CAPITAL RESOURCES

   We  require  substantial  amounts  of  cash to fund  our  loan  originations,
securitization  activities and  operations.  We have  organically  increased our
working capital over the last seven quarters.  In the past, however, we 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  continue to
originate a sufficient  amount of mortgage  loans and generate  sufficient  cash
revenues from our securitizations and sales of these loans to offset our current
cost  structure and cash uses,  we believe we can continue to generate  positive
cash flow in 2003. However, there can be no assurance that we will be successful
in this regard. To do so, we must generate sufficient cash from:

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

   o  the  premiums we receive from  selling our  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  excess   cashflow   certificates   we  retain  in   connection   with  our
      securitizations;

   o  interest   income  we  receive  on  our  loans  held  for  sale  prior  to
      securitization and/or whole loans sales; and

                                       26

   o  distributions from the LLC.

   There can be no assurance, however, that we will continue generating positive
cash flow in 2003 or at all.

   Currently, our primary uses of cash requirements include the funding of:

   o  interest expense on warehouse lines of credit,  the Senior Notes and other
      financing;

   o  scheduled principal paydowns on other financing;

   o  expenses incurred in connection with our securitization program;

   o  general ongoing administrative and operating expenses,  including the cost
      to originate loans;

   o  tax payments on excess inclusion income generated from our excess cashflow
      certificates; and

   o  preferred stock dividends.

   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 and/or NIM notes
and  mortgage   servicing   rights  sold  in   conjunction   with  each  of  our
securitizations  to offset our  negative  operating  cash flow and  support  our
originations, securitizations, and general operating expenses.

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

     o  on-balance  sheet  warehouse   financing  and  other  secured  financing
        facilities, such as capital leasing;

     o  securitizations  of  mortgage  loans and our  corresponding  sale of NIM
        certificates  and/or  interest-only  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;

     o  origination fees, interest income and other cash revenues; and

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

   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 and
at June 30, 2003, we had two warehouse facilities for this purpose.  Both credit
facilities  have a variable  rate of interest and are due to expire in May 2004.
There can be no assurance  that we will be able to either renew or replace these
warehouse facilities at their maturities at terms satisfactory to us or at all.

   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.

   In addition to our common stock,  we currently have the following  securities
outstanding:

                                       27

     o  Series  A  preferred  stock  having  an  aggregate  preference  of $13.9
        million, for which we are required to pay a 10% annual dividend, payable
        semi-annually, commencing in July 2003;

     o  Ten-year  warrants to purchase  approximately  1.3 million shares of our
        common stock, currently at an exercise price of $0.01 per share; and

     o  Approximately $10.8 million of senior notes due 2004, paying 9.5% annual
        interest, payable semi-annually.

   Our  warehouse  agreements  require us to comply with various  operating  and
financial  covenants.  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 these covenants as of June 30, 2003.

   We have repurchase  agreements with certain  institutions that have purchased
mortgage  loans  from us.  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 that were sold with recourse
and are still outstanding totaled $2.1 million at June 30, 2003 and $2.6 million
at December 31, 2002.  Included in accounts payable is an allowance for recourse
losses of $1.2 million at June 30, 2003 and December 31, 2002, respectively.

   In August 2003, we sold three of our excess cashflow  certificates to a third
party  purchaser for $10.2  million,  representing  a slight premium to our book
value at June 30,  2003.  The  proceeds  of this sale  will be used for  working
capital.

   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. From July through August 2003, we repurchased in
the open  market  approximately  $85,000  principal  amount of our 9 1/2% senior
notes due 2004 at a discount to its face value. As a result, we will recognize a
gain on the  extinguishment  of this debt in the third quarter of 2003. There is
no assurance that we will effectuate any further repurchases of this debt 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 at least the next 12 months.

INTEREST RATE RISK

   Our primary  market  risk  exposure  is  interest  rate risk.  Our results of
operations  may be  significantly  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,  including  the cost of
interest  rate  caps,  if any,  that  are tied to  various  interest  rate  swap
maturities,  LIBOR, and other interest rate spread  products,  such as mortgage,
auto and credit card backed receivable certificates. 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

                                       28

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
sale  and the  interest  paid  by us for  funds  borrowed  under  our  warehouse
facility. We may, 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  significantly  affect  the excess  cash flows from our
excess  cashflow   certificates,   as  the  interest  rate  on  certain  of  our
asset-backed  securities  change  monthly  based  on  one-month  LIBOR,  but the
collateral  that backs 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. (See "- Excess Cashflow Certificate, Net").

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 recorded in the balance sheet at their 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 whole loan sales and
securitizations.  Between the time we originate the mortgage loans and sell them
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.

                                       29

   The cost of funds is generally  composed of two  components  - the  benchmark
interest rate,  such as the LIBOR 1 month index or the interest rate swap with a
similar  duration and average life, and the spread or profit margin  required by
the  investors.  In the past,  we had 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 Eurodollar  interest rate swaps or Eurodollar  interest rate caps and, to the
extent we hedge, we will likely use interest rate swaps or interest rate caps to
hedge our mortgage loans in inventory pending securitization pricing. While none
of the above are perfect  hedges,  we believe  these  hedging  instruments  will
demonstrate the highest correlation to our cost of funds in the future.

   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  originations.  We may enter  into  these  hedging
strategies  through one of our warehouse  lenders and/or an investment bank that
underwrites our  securitizations.  These  strategies are designated as hedges on
our financial  statements and are closed out when we sell the associated  loans.
We will  review  continually  the  frequency  and  effectiveness  of our hedging
strategy to mitigate risk pending a securitization or loan sale.

   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  historically  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.

   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 did not hedge during the six month  period ended June 30, 2003,  or during
the year ended December 31, 2002, primarily due to the considerable  uncertainty
in the United States economy  resulting from an overall  weakened  economy,  the
depressed stock market,  uncertainties  in the Middle East,  among other things,
that have caused  U.S.  interest  rates to remain at or near 40 year  historical
lows.

   By not hedging, we are more susceptible to interest rate fluctuations between
the time we originate mortgage loans and the time we sell such loans:

   o  If interest  rates  decrease  between the time we  originate  our mortgage
      loans and the time we sell them,  our  earnings  and cash  proceeds may be
      higher at the time of sale;

                                       30

   o  Alternatively,  if interest rates  increase  between the time we originate
      our  mortgage  loans  and the time we sell  them,  our  earnings  and cash
      proceeds may be lower at the time of sale;

   o  If interest  rates are  unchanged,  our earnings may not be  significantly
      affected.

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

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 9 of the 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 (the "PSLRA") of 1995, which involve risk and
uncertainties  that exist in our  operations and business  environment,  and are
subject to change on a variety of important factors. A forward-looking statement
may  contain  words  such  as  "anticipate  that,"  "believes,"  "continue  to,"
"estimates,"  "expects  to,"  "hopes,"  "intends,"  "plans," "to be," "will be,"
"will  continue to be," or similar  words.  Such  statements  are subject to the
"safe  harbor"  provisions  of the  PSLRA.  We  caution  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 herein. The following include
some, but not all, of the factors or  uncertainties  that could cause our actual
results to differ from our projections:

   o  Our ability or inability to earn a sufficient  spread  between our cost of
      funds and our average mortgage rates to generate  sufficient  revenues and
      cash flows to offset our current cost structure and cash uses;

   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  Our ability or  inability  to  originate a  sufficient  amount of mortgage
      loans, and subsequent sale or  securitization of such loans, to offset our
      current cost structure and cash uses;

   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 NIM and/or interest-only
      certificates,   and  the  sale  of  servicing   rights,  at  the  time  of

                                       31

      securitization)  at terms  favorable  to us to  generate  sufficient  cash
      proceeds to offset our current cost structure;

   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  The potential effect that possible conflicts with other sovereign nations,
      including the conflict in Iraq, or terrorist acts and/or threats, may have
      on the capital markets, and in particular the asset-backed market;

   o  The effect that the adoption of new, or amendments in,  federal,  state or
      local lending laws and  regulations  and the  application of such laws and
      regulations may have on our ability to originate loans within a particular
      area, or to ultimately  sell those loans  through  securitization  or on a
      whole-loan basis. Many states and local municipalities have adopted and/or
      are  considering  adopting laws that are intended to further  regulate our
      industry.  Many  of  these  laws  and  regulations  seek to  impose  broad
      restrictions on certain  commonly  accepted lending  practices,  including
      some of our practices.  In some cases, the  restrictions  and/or costs and
      risks associated with complying with the laws have been so onerous that we
      have decided to not lend in a state (I.E., Georgia, before it was amended)
      or municipality (I.E.,  Oakland). In those cases where we continue to make
      mortgage  loans,  our costs of  complying  with a variety  of  potentially
      inconsistent  federal,  state and local laws has increased our  compliance
      costs,  as  well  as the  risk  of  litigation  or  administrative  action
      associated with complying with these proposed and enacted  federal,  state
      and local laws,  particularly  those  aspects of such proposed and enacted
      laws that contain subjective (as opposed to objective) requirements, among
      other things.  In addition,  enacted  federal,  state and local laws could
      impact  overcollateralization  requirements  set by the ratings  agencies,
      which  could   decrease  the  cash   proceeds  we  may  receive  from  our
      securitizations.  Moreover,  regulations  adopted  by the Office of Thrift
      Supervision  recently  became  effective  that  eliminated  the ability of
      state-chartered  financial  institutions and bankers to charge  prepayment
      penalties on alternative  mortgages under the Federal Alternative Mortgage
      Transactions  Parity Act, while  federally-regulated  entities still enjoy
      that  right,  providing a  competitive  disadvantage  for  state-chartered
      entities,  such as Delta,  in certain  states with respect to  alternative
      mortgages;

   o  The effect that the FTC's Do Not Call  Registry may have on our ability to
      utilize telemarketing to generate retail leads and originate retail loans,
      and our ability or inability  to find  alternative  methods of  generating
      retail leads and originating retail loans;

   o  Costs associated with litigation and rapid or unforeseen escalation of the
      cost of regulatory compliance, generally including but not limited to, the
      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,  the 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 and/or  environmental  compliance can lead to the loss
      of approved status, certain rights of rescission for mortgage loans, class
      action lawsuits and administrative enforcement action against us;

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

                                       32

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

   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  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 the  development of new product
      programs;

   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; and

   o  Regulatory actions which may have an adverse impact on our lending.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   We originate  mortgage  loans and then sell the mortgage  loans through whole
loan sales and securitizations. As a result, our primary market risk is interest
rate  risk.  In turn,  interest  rates are  highly  sensitive  to many  factors,
including:

   o  governmental monetary and tax policies;

   o  domestic and international economic and political considerations; and

   o  other factors beyond our control.

   Changes in the general  interest  rate levels  between the time we  originate
mortgage  loans and the time when we sell the mortgage  loans in  securitization
transactions or whole loan sales can affect their value and,  consequently,  our
net gain on sale revenue by affecting the "excess  spread"  between the interest
rate on the  mortgage  loans  and the  interest  rate  paid on the  pass-through
certificates issued by the securitization trusts. If interest rates rise between
the  time  we  originate  the  loans  and  the  time  we  sell  the  loans  in a
securitization transaction,  the excess spread generally narrows, resulting in a
loss in value of the loans  and a lower net gain on sale for us.  Since we close
and fund  mortgage  loans at a specified  interest rate with an expected gain on
sale to be booked at the time of their sale,  our  exposure to  decreases in the
fair value of the  mortgage  loans  arises  when moving from a lower to a higher
interest rate  environment.  A higher interest rate  environment  results in our
having higher cost of funds.  This decreases both the fair value of the mortgage
loans,  and the net spread we earn  between the mortgage  interest  rate on each
mortgage loan and our cost of funds under  available  warehouse  lines of credit
used to finance the loans prior to their sale in a  securitization  transaction.
As a result, we may experience a lower gain on sale.

                                       33

   The following table  illustrates the impact on our earnings  resulting from a
hypothetical 10 basis point change in interest rates. Historically, such a basis
point  increase  has resulted in an  approximately  10 basis point change in the
excess  spread or "yield." The product of 10 basis  points in yield  (0.10%) and
the  duration of 2.5 years  equals a 25.0 basis point or 0.25% change in the net
gain on sale as shown below.
<TABLE>
<S>                     <C>                      <C>                 <C>
                    10 BASIS POINT DECREASE IN                 10 BASIS POINT INCREASE IN
DESCRIPTION              INTEREST RATES             BASE              INTEREST RATES
-----------------------------------------------------------------------------------------

Securitization amount    $100,000,000             $100,000,000        $100,000,000
Net gain on sale %       5.25%                    5.00%               4.75%
Net gain                 $5,250,000               $5,000,000          $4,750,000
</TABLE>

   The table  below  demonstrates  the  sensitivity,  at June 30,  2003,  of the
estimated fair value of our excess cashflow  certificates caused by an immediate
10% and 20%,  respectively,  adverse  change  in the key  assumptions  we use to
estimate fair value:
<TABLE>
<S>                                        <C>                    <C>
                                       FAIR VALUE OF EXCESS      IMPACT TO
(Dollars in thousands)                 CASHFLOW CERTIFICATES      EARNINGS
                                       ---------------------      --------

Fair value as of 06/30/03:                  $ 28,301

10% increase in prepayment speed              22,859               $5,442
20% increase in prepayment speed              19,758                8,543

10% increase in credit losses                 22,235                6,066
20% increase in credit losses                 16,104               12,197

10% increase in discount rates                26,597                1,704
20% increase in discount rates                25,097                3,204

10% increase in one- & six-month LIBOR        24,635                3,666
20% increase in one- & six-month LIBOR        21,283                7,018
</TABLE>

   These  sensitivities  are  hypothetical  and are presented  for  illustrative
purposes only.  Changes in the fair value resulting from a change in assumptions
generally  cannot be  extrapolated  because  the  relationship  of the change in
assumption to the resulting change in fair value may not be linear.  Each change
in assumptions presented above was calculated independently without changing any
other assumption.  However, in reality,  changes in one assumption may result in
changes  in  another   assumption,   which  may   magnify  or   counteract   the
sensitivities. For example, a change in market interest rates may simultaneously
impact prepayment speeds,  credit losses and the discount rate. It is impossible
to  predict  how  one  change  in  a  particular  assumption  may  impact  other
assumptions.

   To reduce our financial  exposure to changes in interest  rates, we may hedge
our mortgage loans held for sale through hedging products that are correlated to
the pass-though certificates issued in connection with the securitization of our
mortgage loans (I.E., interest rate swaps) (See

                                       34

"-Hedging").  Changes in interest rates also could adversely  affect our ability
to originate  loans and/or  could affect the level of loan  prepayments  thereby
impacting  the  size  of the  loan  portfolio  underlying  our  excess  cashflow
certificates and,  consequently,  the value of our excess cashflow certificates.
(See "-Interest Rate Risk" and "-Forward -Looking Statements and Risk Factors").

ITEM 4.  CONTROLS AND PROCEDURES

   At June 30, 2003 management,  including the Chief Executive Officer and Chief
Financial  Officer,  evaluated the effectiveness and operation of our disclosure
controls and procedures. Our Chief Executive Officer and Chief Financial Officer
concluded that, as of June 30, 2003,  these  disclosure  controls and procedures
were effective, in all material respects, to ensure that information required to
be disclosed in the reports we file and submit under the Securities and Exchange
Act is recorded, processed,  summarized and reported as and when required. There
have been no  significant  changes in our internal  controls or in other factors
that could significantly  affect these internal controls following the date that
we performed our evaluation.  There were no significant deficiencies or material
weaknesses  identified  during the course of this  evaluation and therefore,  no
corrective actions were taken.

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,  including  class actions.  The current status of
these class actions and other litigation 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 Law ss.
   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 three 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

                                       35

   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. The
   Court  preliminarily  approved the settlement and a fairness hearing was held
   in May 2002.  We are  awaiting  a  decision  from the  Court on the  fairness
   hearing.  We believe  that the Court will approve the  settlement,  but if it
   does not, 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 appealed.  The Appellate Court denied our
   appeal in December 2001. 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 appealed that decision, but the appellate court denied our appeal in
   November  2002.  We filed a motion to reargue  in  December  2002,  which was
   denied by the Court in January 2003. Discovery will now continue in the lower
   court. 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  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

                                       36

   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
   reached an agreement in principle with plaintiffs' counsel and our insurer to
   settle the action on a class-wide  basis in or about August 2002 and executed
   a  settlement  agreement  in January  2003  (pursuant  to which we denied all
   wrongdoing). The Court approved the settlement at a fairness hearing in April
   2003, and the settlement will be administered in the coming months.

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 granted by the Court in June 2001.
   In August 2001,  plaintiffs  appealed the  decision.  In September  2002,  we
   executed  a  settlement  agreement  with  plaintiffs  in which we denied  all
   wrongdoing,  but agreed to resolve the litigation on a class-wide  basis. The
   Court  approved the  settlement at a fairness  hearing in July 2003,  and the
   settlement will be administered in the coming months.

o  In July 2003,  we  commenced a lawsuit in the  Supreme  Court of the State of
   New York, Nassau County,  against the LLC, Delta Funding Residual Management,
   Inc.  ("DFRM"),  and  James  E.  Morrison  (President  of the LLC and  DFRM),
   alleging that (1) the LLC breached its  contractual  duties by failing to pay
   approximately  $142,000 due to us in June 2003, and (2) that Mr. Morrison and
   DFRM knowingly and intentionally caused the default,  thereby breaching their
   respective  fiduciary  duties to the LLC. The complaint  seeks (a) payment of
   amounts  past due  under  our  agreement  with the LLC,  plus  interest;  (b)
   specific  performance of the LLC's  obligations to us in the future;  and (c)
   monetary  damages for breach of fiduciary duty, in an amount to be determined
   by the Court.  Although the defendants  have not answered the  complaint,  in
   correspondence  prior to the  commencement  of the lawsuit  they  claimed our
   restatement  of the value of certain  assets in 2001  raised  questions,  and
   created a conflict of interest, or an apparent conflict of interest under our
   August 2001 management agreement with the LLC and DFRM. The letter, signed by
   Mr. Morrison,  also advised that the LLC would not make further contractually
   required  payments to us unless and until  these  matters  are  resolved.  We
   responded  that their claims are  baseless  and lack merit,  and that we will
   prosecute our claims vigorously. The defendants have until September 19, 2003
   to answer.


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

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.  None

                                       37

ITEM 4.  SUBMISSION TO A VOTE OF SECURITY HOLDERS.

   Our annual meeting of stockholders  was held on May 13, 2003. At the meeting,
Richard Blass and Arnold B. Pollard were elected as Class I Directors for a term
of three years. Sidney A. Miller,  Martin D. Payson, Hugh Miller and Margaret A.
Williams continue to serve as members of the Board of Directors.

     o  Votes cast in favor of Mr. Blass's selection totaled  13,238,587,  while
        23,080 votes were withheld.

     o  Votes cast in favor of Mr. Pollard's selection totaled 13,238,587, while
        23,080 votes were withheld.

   The  stockholders  also  voted to ratify the  appointment  of KPMG LLP as our
independent auditors for the fiscal year ending December 31, 2003. Votes cast in
favor of this ratification were 13,256,102,  while votes cast against were 4,300
and abstentions totaled 1,265.

ITEM 5.  OTHER INFORMATION.  None

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

(a)   Exhibits:

EXH.
 NO.       DESCRIPTION
 ---       ----------
10.4   --  Employment Agreement dated August 13, 2003 between the Registrant and
           Randall F. Michaels
31.1   --  Certification pursuant to Section 302 of the Sarbanes-Oxley Act 2002
31.2   --  Certification pursuant to Section 302 of the Sarbanes-Oxley Act 2002
32.1   --  Certification pursuant to Section 906 of the Sarbanes-Oxley Act 2002
32.2   --  Certification pursuant to Section 906 of the Sarbanes-Oxley Act 2002


(b) Reports on Form 8-K:

      On May 1, 2003, we filed a Form 8-K containing our April 30, 2003 earnings
      press release.

                                       38

<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: August 13, 2003
                                       By: /S/ HUGH MILLER
                                           -------------------------------------
                                           Hugh Miller
                                           PRESIDENT AND CHIEF EXECUTIVE OFFICER


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


                                       39