<PAGE>

                                UNITED STATES 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                                   FORM 10-Q

(Mark One)

             (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934

                 For the quarterly period ended June 30, 1997
                                      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

                                    1-11785
                                    -------

                     SOUTHERN PACIFIC FUNDING CORPORATION
            (Exact name of registrant as specified in its charter)

              California                                33-0636924
   (State or other jurisdiction of                 (I.R.S. Employer 
    incorporation or organization)                 Identification No.)

One Centerpointe Drive, Suite 500, Lake Oswego, OR              97035
--------------------------------------------------              -----
(Addrss of principal executive offices)                       (Zip Code)

                                (503) 684-4700
                                --------------

              (Registrant's telephone number, including area code)

  (Former name, former address and former fiscal year, if changed since last 
                                    report)

Indicate by check mark whether 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.
(X) Yes () No

                     APPLICABLE ONLY TO CORPORATE ISSUERS;

Indicate the number of shares outstanding of each of the issuer's classes of 
common stock, as of August 10, 1997: 20,748,750 shares.


<PAGE>
 
                     SOUTHERN PACIFIC FUNDING CORPORATION
                                   FORM 10-Q
                          QUARTER ENDED JUNE 30, 1997

TABLE OF CONTENTS                                                 PAGE
-----------------                                                 ----

PART I FINANCIAL INFORMATION
----------------------------

       Item 1 - Financial Statements

                   Consolidated Balance Sheets at June 30,
                   1997 and December 31, 1996                      2

                   Consolidated Statements of Earnings for the
                   three months ended June 30, 1997 and 1996
                   and for the six months ended June 30, 1997
                   and 1996                                        3

                   Consolidated Statements of Cash Flows for
                   the six months ended June 30, 1997 and 1996     4

                   Notes to Consolidated Financial Statements      5-7
                   
       Item 2 - Management's Discussion and Analysis of 
                Financial Condition and Results of Operations      8-16



PART II OTHER INFORMATION
-------------------------

       Item 6 - Exhibits and Reports on Form 8-K                   17

                Signatures                                         18


                                       1

<PAGE>
 
PART I  Financial Information
-----------------------------

        Item 1 - Financial Statements

                     SOUTHERN PACIFIC FUNDING CORPORATION

                          Consolidated Balance Sheets



<TABLE> 
<CAPTION> 
                                                          June 30,         December 31,
                                                            1997               1996
                                                        ------------      -------------
                                                         (Unaudited)    
<S>                                                     <C>               <C>
ASSETS                                                                
Cash                                                    $ 16,253,655       $ 14,175,566
Loans held for sale                                      230,530,423        223,059,102
Interest-only and residual certificates, net             172,663,986         87,016,900
Accrued interest receivable                                3,909,321          3,181,449
Premises and equipment, net                                5,670,266          3,036,388
Goodwill                                                   7,419,158          4,742,571
Other assets                                               5,732,781          5,165,048
                                                        ------------       ------------ 
      Total assets                                      $442,179,590       $340,377,024
                                                        ============       ============
                                                                      
LIABILITIES AND SHAREHOLDERS' EQUITY                                  
                                                                      
Liabilities:                                                          
Borrowings under warehouse lines of credit               191,974,065        152,680,395
Deferred tax liability                                    35,709,371         18,445,495
Convertible subordinated debentures                       75,000,000         75,000,000
Due to affiliates                                             80,096             80,166
Other liabilities                                         28,037,832          9,022,000
                                                                      
                                                        ------------       ------------ 
      Total liabilities                                  330,801,364        255,228,056
                                                                      
Minority interest                                             80,673             62,735
                                                                      
Shareholders' equity:                                                 
Preferred stock, $.01 par value,                                      
       5,000,000 shares authorized; none                              
       issued or outstanding at                                       
       June 30, 1997 and December 31, 1996                       -                  -
Common stock, no par value,                                           
       75,000,000 shares authorized;                                  
       20,748,750 issued and outstanding                              
       at June 30, 1997 and 20,737,500                                
       at December 31, 1996                               53,950,780         53,798,099
Contributed capital                                          247,500            247,500
Translation adjustment                                       (14,683)               -
Retained earnings                                         57,113,956         31,040,634
                                                                      
                                                        ------------       ------------ 
       Total shareholders' equity                        111,297,553         85,086,233
                                                        ------------       ------------
                                                                      
                                                        ------------       ------------
       Total liabilities and shareholders' equity       $442,179,590       $340,377,024
                                                        ============       ============
</TABLE> 

          See accompanying notes to consolidated financial statements.

                                       2
<PAGE>
 
                     SOUTHERN PACIFIC FUNDING CORPORATION

                      Consolidated Statements of Earnings
                                  (Unaudited)



<TABLE> 
<CAPTION> 
                                                        Three months ended                   Six months ended
                                                             June 30,                            June 30,
                                                       1997            1996                1997            1996
                                                       ----            ----                ----            ----
<S>                                                <C>              <C>                <C>             <C> 
Revenue:                                                                                               
                                                                                                       
     Gains on sales of loans                       $33,864,920      $10,321,478        $61,938,379     $18,885,698 
     Interest income                                 9,987,773        2,302,310         16,427,030       4,970,922
     Securities valuation and other income          (1,156,765)       1,158,077          1,297,968       1,901,811

                                                   -----------      -----------        -----------     ----------- 
          Total revenue                             42,695,928       13,781,865         79,663,377      25,758,431
                                                   -----------      -----------        -----------     ----------- 
Expenses:                                                                                              
                                                                                                       
     Interest on borrowings                          5,775,349        1,760,774          9,395,394       3,365,230 
     Personnel and commission expense                9,357,900        2,221,877         16,463,872       4,105,060
     General and administrative expense              4,615,921        1,080,401          9,234,329       1,938,250

                                                   -----------      -----------        -----------     ----------- 
          Total expenses                            19,749,170        5,063,052         35,093,595       9,408,540
                                                   -----------      -----------        -----------     ----------- 

Income before taxes                                 22,946,758        8,718,813         44,569,782      16,349,891
Income taxes                                         9,521,465        3,711,222         18,496,460       6,954,430
                                                                                                       
                                                   -----------      -----------        -----------     ----------- 
          Net income                               $13,425,293      $ 5,007,591        $26,073,322     $ 9,395,461
                                                   ===========      ===========        ===========     ===========  
NET INCOME PER SHARE:                                                                                  
  Primary                                          $      0.61      $      0.29        $      1.17     $      0.56 
                                                   ===========      ===========        ===========     ===========  

  Fully Diluted                                    $      0.56      $      0.29        $      1.08     $      0.56 
                                                   ===========      ===========        ===========     ===========  
Weighted average number of shares outstanding --   
 primary                                            22,019,827       17,204,706         22,272,284      16,772,043
                                                   ===========      ===========        ===========     ===========  
                                                                                                       
Weighted average number of shares outstanding --   
 fully diluted                                      25,431,262       17,204,706         25,423,409      16,772,043
                                                   ===========      ===========        ===========     ===========  
</TABLE> 

         See accompanying notes to consolidated financial statements.

                                       3
<PAGE>
 
                     SOUTHERN PACIFIC FUNDING CORPORATION

                     Consolidated Statements of Cash Flows
                                  (Unaudited)
<TABLE> 
<CAPTION> 
                                                                              Six months ended 
                                                                                  June 30,
                                                                        1997                    1996
                                                                        ----                    ----
<S>                                                                <C>                     <C> 
Cash flows from operating activities:
Net income                                                          $ 26,073,322            $  9,395,461
Adjustments to reconcile net income to 
 net cash provided by (used in) operating activities:
          Depreciation and amortization                                  875,007                 207,553
          Minority interest                                               17,938                      --
          Translation adjustment                                         (14,683)                     --
          Securities valuation income                                 (1,597,543)             (1,901,811)
          Changes in certain assets and liabilities, net of effect 
           of acquisitions and contribution transaction:
              Loans held for sale                                     (7,471,321)            (36,019,620)
              Loans held under repurchase
               agreement                                                      --              12,800,565
              Net change in interest only and residual certificates  (84,049,543)            (22,838,563) 
              Accrued interest receivable                               (727,872)               (329,609)   
              Deferred tax liability                                  17,263,876                      --
              Other assets                                              (494,621)             (1,516,963)
              Other liabilities                                       19,015,832               8,347,344
Net cash provided by (used in) operating activities 
                                                                    ------------            ------------ 
                                                                     (31,109,608)            (31,855,643)
                                                                    ------------            ------------
Cash flows from investing activities:
Payment for acquisitions                                              (3,800,000)                     --
Purchases of premises and equipment                                   (2,458,584)             (1,897,953)

                                                                    ------------            ------------ 
Net cash used in investing activities:                                (6,258,584)             (1,897,953)
                                                                    ------------            ------------
Cash flows from financing activities:
 Net changes in:           
          Borrowings (repayments) under warehouse 
           lines of credit                                            32,293,670             (17,960,229)
          Borrowings from SPTL                                                --                 322,053
          Due to affiliates                                                  (70)                382,148
          Bank overdraft                                                      --                (619,517)
          Capital contribution                                                --                (262,003)
          Proceeds from issuance of common stock                         152,681              53,839,089

Net cash provided by (used in) financing
 activities                                                         ------------            ------------ 
                                                                      39,446,281              35,701,541
                                                                    ------------            ------------ 

Net change in cash                                                     2,078,089               1,947,945
Cash at beginning of period                                           14,175,566                      --
               
                                                                    ------------            ------------ 
Cash at end of period                                               $ 16,253,655            $  1,947,945
                                                                    ============            ============
</TABLE> 
          See accompanying notes to consolidated financial statements

                                       4
<PAGE>
 
                     SOUTHERN PACIFIC FUNDING CORPORATION
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)


NOTE A - BASIS OF PRESENTATION

The accompanying consolidated financial statements have been prepared, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. It is suggested that these consolidated financial
statements be read in conjunction with the Company's December 31, 1996 audited
consolidated financial statements and notes thereto included in the Company's 
Form 10-K.

In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six months ended June 30, 1997 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1997.

In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the balance sheets, contingent assets and
liabilities and revenues and expenses for the periods presented.  Actual results
could differ significantly from those estimates.


NOTE B - HEDGING TRANSACTIONS

The market value of fixed-rate mortgage loans has a greater sensitivity to
changes in market interest rates than adjustable-rate mortgage loans. As the
Company's production of fixed-rate mortgage loans has increased, the Company has
begun to implement various hedging strategies to mitigate the change in market
value of fixed-rate mortgage loans held for sale between the date of origination
and sale. Commencing in August 1995, these strategies have included selling
short and selling forward United States Treasury securities and pre-funding loan
originations in its securitizations. The Company currently hedges its fixed-rate
mortgage loans held for sale by selling forward a combination of United States
Treasury securities of various maturities whose combined change in value due to
a change in interest rates closely approximates the change in value of the
mortgage loans hedged. In the future the Company may hedge its variable-rate
mortgage loans and its interest-only and residual certificates with hedging
transactions which may include forward sales of mortgage loans or mortgage-
backed securities, interest rate caps and floors and buying and selling of
futures and options on futures. The nature and quantity of hedging transactions
are determined by the Company's management based on various factors, including
market conditions and the expected volume of mortgage loan originations and
purchases.

                                       6

<PAGE>
 
                     SOUTHERN PACIFIC FUNDING CORPORATION
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)



The Company believes that it has implemented a cost-effective hedging program to
provide a level of protection against changes in market value of its fixed-rate
mortgage loans held for sale. However, an effective hedging strategy is complex
and no hedging strategy can completely insulate the Company from such changes.
In addition, hedging involves transaction and other costs, and such costs could
increase as the period covered by the hedging protection increases or in periods
of rising and fluctuating interest rates.

In addition, the Company hedges future production of mortgage loans through a
pre-funding mechanism in connection with its securitizations. In its
securitization transactions, investors deposit cash in a pre-funded amount into
the related trust to purchase the loans the Company commits to sell on a forward
basis. Pending use, this pre-funded amount is invested in short term obligations
which pay a lower interest rate than the interest rate the trust is obligated to
pay certificate investors on the outstanding balance of the pre-funded amount.
The Company is required to deposit at the closing of the related transaction an
amount sufficient to make up the difference between these rates.

The Company regularly securitizes and sells fixed and variable-rate mortgage
loans.  To offset the effects of interest rate fluctuations on the value of its
fixed-rate loans held for sale, the Company in certain cases has hedged its
interest rate risk related to loans held for sale by selling U.S. Treasury
securities short or in the forward market.  The Company classifies these sales
as hedges of specific loans held for sale.  The gains or losses derived from
these sales are deferred and recognized as an adjustment to gains on sale of
loans when the loans are sold or securitized.

As of June 30, 1997 and December 31, 1996, the Company had open hedge positions
of $86.4 million and $32.6 million, respectively, related to the sales of United
States Treasury securities in the forward market.  The proceeds from the short
sale are shown net of the related liability in the accompanying balance sheet at
June 30, 1997 and December 31, 1996, respectively.  At June 30, 1997 the
Company's unrealized loss on open positions is $192,044 and $43,023 at December
31, 1996, on forward positions of United States Treasury securities.


NOTE C - COMMITMENTS AND CONTINGENCIES

The Company is a party to financial instruments with off balance sheet risk in
the normal course of business.  These financial instruments include agreements
to fund fixed and variable-rate mortgage loans and loans in process.  For
agreements to fund fixed-rate loans, the contract amounts represent exposure to
loss from market fluctuations as well as credit loss.  The Company controls the
credit risk of its agreements to fund fixed and variable-rate loans through
credit approvals, limits and monitoring procedures.

                                       7
<PAGE>
 
                     SOUTHERN PACIFIC FUNDING CORPORATION
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)



Agreements to fund mortgage loans are agreements to lend to customers as long as
there is no violation of any condition established in the contracts.  Such
agreements generally have fixed expiration dates or other termination clauses.
Since some agreements may expire without being drawn upon, the total agreement
amounts do not necessarily represent future cash requirements.  As of June 30,
1997, the Company had agreements to fund loans of $30.3 million.

                                       7
<PAGE>
 
               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS



    The following discussion and analysis of the financial condition and results
of operations of the Company should be read in conjunction with the Company's
Consolidated Financial Statements included in Item 1 of the Form 10-Q.

GENERAL

  The Company is engaged in the business of originating, purchasing and selling
mortgage loans secured primarily by one-to-four family residences. The majority
of the Company's loans are made to owners of single family residences who use
the loan proceeds to consolidate and refinance debt, finance home improvements
and fund educational expenses. The Company originates and purchases loans
through its Wholesale Division, its Correspondent Program, its Consumer Loan
Division and its Strategic Alliance Program.

  The Company's primary source of revenue is the recognition of gains from the
sale of interests in loans through securitizations. The Company recognizes gains
from the sale of senior interests in trusts of loans as the excess of the net
proceeds received on the sale and the fair value of the interest-only and
residual certificates retained by the Company over the Company's basis in such
loans and a provision for credit losses. The fair value of the interest-only and
residual certificates is an estimate of the present value of the future cash
flows from such certificates, which are subject to the prepayment and loss
characteristics of the underlying loans.  The Company securitized and sold
senior interests in loans with principal balances of $411.2 million and $130.6
million during the three months ended June 30, 1997 and 1996, respectively and
$755.0 and $233.0 during the six months ended June 30, 1997, respectively. The
Company anticipates that it will continue to sell senior interests in a majority
of its loans through securitization transactions and will strategically sell
loans in whole loan transactions when such transactions are economically
advantageous.

                                      8
 
<PAGE>
 
Item 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
       CONDITION AND RESULTS OF OPERATIONS



FINANCIAL CONDITION

JUNE 30, 1997

  Loans held for sale increased $7.4 million or 3.3% to $230.5 million at June
30, 1997 from $223.1 million at December 31, 1996. The increase in loans held
for sale is because the Company originated $812.6 million in loans while
delivering $755.0 million in loans into securitizations, $10.0 million in loans
to whole loan sales and brokering $40.0 million during the six months ended June
30, 1997.

  Interest-only and residual certificates increased $85.7 million or 98.5% to
$172.7 million at June 30, 1997 from $87.0 million at December 31, 1996. The
majority of this increase is the result of the securitizations, increasing the
asset $83.4 million during the six months ended June 30, 1997. The Discounted
recourse liability of $8.8 million at December 31, 1996 was reclassified as a
reduction in the asset to comply with FAS 125, retroactive treatment applied.

  Accrued interest receivable increased $0.7 million or 21.9% to $3.9 million at
June 30, 1997 from $3.2 million at December 31, 1996. This increase primarily
reflects the increased loan production during the six months ended June 30,
1997.

  Premises and equipment, net increased $2.7 million or 90.0% to $5.7 million at
June 30, 1997 from $3.0 million at December 31, 1996. This growth reflects the
acquisition of computer and office equipment related to the Company's
acquisition of new subsidiaries as well as increased computer and office
equipment purchased for the opening of new regional branch centers during the
six months ended June 30, 1997.

  Goodwill increased $2.7 million or 57.4% to $7.4 million at June 30, 1997 from
$4.7 million at December 31, 1996.  This growth reflects the company's
acquisition of new subsidiaries.

  Other assets increased $0.5 million or 9.6% to $5.7 million at June 30, 1997
from $5.2 million at December 31, 1996. Other assets represent prepaid expenses,
accounts receivable and bond issuance costs.

  Borrowings under warehouse lines of credit increased $39.3 million or 25.7% to
$192.0 million at June 30, 1997 from $152.7 million at December 31, 1996
reflecting an increase in loan production over loan securitizations and sales of
$7.6 million and an increased use of cash for operations of $31.7 million.

  Deferred tax liability increased $17.3 million or 94.0% to $35.7 million at
June 30, 1997 from $18.4 million at December 31, 1996. This increase is the
result of an increase in gains on sales of loans of $43.0 million during the six
months ended June 30, 1997.

                                       9
<PAGE>
 

  Shareholders' equity increased $26.2 million or 30.8% to $111.3 million at
June 30, 1997 from $85.1 million at December 31, 1996, due to net income for the
six months ended June 30, 1997 of $26.1 million and the issuance of common stock
under the Employee Stock Option Plan.


RESULTS OF OPERATIONS

Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996

  Total revenues increased $28.9 million or 209.4% to $42.7 million for the
quarter ended June 30, 1997 from $13.8 million for the quarter ended June 30,
1996. During the same period, the Company's total expenses increased $14.6
million or 286.3% to $19.7 million from $5.1 million. As a result, the Company's
net income increased $8.4 million or 168.0% to $13.4 million in the quarter
ended June 30, 1997 from $5.0 million in the quarter ended June 30, 1996.

  The increase in revenues was primarily the result of increased gain on sale of
loans and increased interest income due to higher loan originations and
securitication. Gains on sales of loans increased $23.6 million or 229.1% to
$33.9 million in the second quarter ended June 30, 1997 from $10.3 million in
the second quarter ended June 30, 1996. This increase was primarily the result
of higher loan origination and purchase volume which resulted in a higher level
of loan securitications. Within the second quarter ended June 30, 1997,
Wholesale Division loan originations increased $170.0 million or 133.0% to
$297.8 million compared to $127.8 million in the comparable period in 1996,
Correspondent purchases of loans increased $25.8 million or 52.9% to $74.6
million in the quarter ended June 30, 1997 compared to $48.8 million in the
comparable period in 1996, Consumer Loan Division loan originations increased to
$20.3 million in the quarter ended June 30, 1997 from $0.0 million in the
comparable period in 1996, Strategic Alliance loan originations increased to
$46.9 million in the quarter ended June 30, 1997 from $0.0 million in the
comparable period in 1996 and conforming loan originations increased to $15.0
million in the quarter ended June 30, 1997 from $0.0 million in the comparable
period in 1996.

  As a result, total non-conforming and conforming loan originations and
purchases increased $278.0 million or 157.4% to $454.6 million in the quarter
ended June 30, 1997 from $176.6 million in the comparable period in 1996. Total
loans of $411.2 million were securitized in the quarter ended June 30, 1997
compared to $130.6 million of loans securitized during the comparable period in
1996, with a weighted average net gain on securitization of 8.5% and 7.6%,
respectively.

                                       10
<PAGE>
 

  Interest income increased $7.7 million or 334.8% to $10.0 million in the
quarter ended June 30, 1997 from $2.3 million in the comparable period in 1996.
The increase in interest income was primarily due to a higher average balance of
loans held for sale in 1997 resulting from the increased loan origination and
purchase volume during such period. 

  Securities valuation and other income decreased $2.4 million or 200.0% to
$(1.2) million in the quarter ended June 30, 1997 from $1.2 million in the
quarter ended June 30, 1996. The decrease was primarily the result of a $1.4
million decrease in securities valuation adjustments on interest-only and
residual certificates, a $2.6 million adjustment to anticipated recourse
liability and a $1.6 million increase in miscellaneous income.

  Interest expense increased $4.0 million or 222.2% to $5.8 million in the
quarter ended June 30, 1997 from $1.8 million in the quarter ended June 30,
1996. The increase in interest expense was attributable to the interest costs
associated with higher borrowings resulting from increased loan origination and
purchase volume during the six months ended June 30, 1997.

  Personnel and commission expense increased $7.2 million or 327.3% to $9.4
million in the quarter ended June 30, 1997 from $2.2 million in the comparable
period in 1996. The increase in personnel and commission expenses was primarily
due to new acquisitions and increased staffing levels related to the Wholesale
Division's growth and increased loan originations. As of June 30, 1997 the
Company operated 23 regional branch centers and satellite offices and employed
927 persons as compared to 13 regional branch centers and 175 employees as of
June 30, 1996.

  General and administrative expense, which consists primarily of occupancy,
supplies and other expenses, increased $3.5 million or 318.2% to $4.6 million in
the quarter ended June 30, 1997 from $1.1 million in the comparable period in
1996. The increase in general and administrative expense was primarily due to
new acquisitions and the expenses incurred in association with the increase in
the number of regional branch centers and satellite offices to 23 as of June 30,
1997 from 13 as of June 30, 1996 and increased loan origination and purchase
volume.

                                       11
<PAGE>

Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996

  Total revenues increased $53.9 million or 208.9% to $79.7 million for the six
months ended June 30,1997 from $25.8 million for the six months ended June 30,
1996. During the same period, the Company's total expenses increased $25.7
million or 273.4% to $35.1 million for the six months ended June 30, 1997 from
$9.4 million for the six months ended June 30, 1996. As a result, the Company's
net earnings increased $16.7 million or 177.7% to $26.1 million in the six
months ended June 30, 1997 from $9.4 million in the six months ended June 30,
1996.

  The increase in revenues was primarily the result of increased gain on sale of
loans and increased interest income due to higher loan originations and
securitizations. Gains on sales of loans increased $43.0 million or 227.5% to
$61.9 million in the six months ended June 30, 1997 from $18.9 million in the
six months ended June 30, 1996. This increase was primarily the result of higher
loan origination and purchase volume which resulted in a higher level of loan
securitizations. Within the six months ended June 30, 1997, Wholesale Division
loan originations increased $288.9 million or 139.8% to $495.5 million compared
to $206.6 million in the comparable period in 1996, Correspondent purchases of
loans increased $111.5 million or 209.6% to $164.7 million in the six months
ended June 30, 1997 compared to $53.2 million in the comparable period in 1996,
Consumer Loan Division loan originations increased to $30.1 million in the six
months ended June 30, 1997 from $0.0 million in the comparable period in 1996,
Strategic Alliance loan originations increased to $66.4 million in the six
months ended June 30, 1997 from $0.0 million in the comparable period in 1996
and conforming loan originations increased to $55.9 million in the six months
ended June 30, 1997 from $0.0 million in the comparable period in 1996. As a
result, total non-conforming and conforming loan originations and purchases
increased $552.8 million or 212.8% to $812.6 million in the six months ended
June 30, 1997 from $259.8 million in the comparable period in 1996. Total loans
of $755.0 million were securitized in the six months ended June 30, 1997
compared to $233.0 million of loans sold or securitized during the comparable
period in 1996, with a weighted average net gain on securitization of 8.41% and
9.27% for the six months ending June 30, 1997 and 1996, respectively.

  Interest income increased $11.4 million or 228.0% to $16.4 million in the
six months ended June 30, 1997 from $5.0 million in the comparable period
in1996. The increase in interest income was primarily due to a higher average
balance of loans held for sale in 1997 resulting from the increased loan
origination and purchase volume during such period.

  Securities valuation and other income decreased $0.6 million or 31.6% to $1.3 
million in the quarter ended June 30, 1997 from $1.9 million in the quarter
ended June 30, 1996. The decrease was primarily the result of a $0.3 million
decrease in securities valuation adjustments on interest-only and residual
certificates, a $2.6 million adjustment to anticipated recourse liability and a
$2.3 million increase in miscellaneous income.

                                       12
<PAGE>

  Interest expense increased $6.0 million or 176.5% to $9.4 million in the six
months ended June 30, 1997 from $3.4 million in the six months ended June 30,
1996. The increase in interest expense was attributable to the interest costs
associated with higher borrowings due to a higher balance of loans held pending
sale during 1997 resulting from increased loan origination and purchase volume
during the period.

  Personnel and commission expense increased $12.4 million or 302.4% to $16.5
million in the six months ended June 30, 1997 from $4.1 million in the
comparable period in 1996. The increase in personnel and commission expenses was
primarily due to new acquisitions and increased staffing levels related to the
Wholesale Division's growth and increased loan originations. As of June 30, 1997
the Company operated 23 regional branch centers and satellite offices and
employed 927 persons as compared to 13 regional branch centers and 175 employees
as of June 30, 1996.

  General and administrative expense, which consists primarily of occupancy,
supplies and other expenses, increased $7.3 million or 384.2% to $9.2 million in
the six months ended June 30, 1997 from $1.9 million in the comparable period in
1996. The increase in general and administrative expense was primarily due to
new acquisitions and expenses incurred in association with the increase in the
number of regional branch centers and satellite offices to 23 as of June 30,
1997 from 13 as of June 30, 1996 and increased loan origination and purchase
volume.


LIQUIDITY AND CAPITAL RESOURCES

  The Company relies upon short-term warehouse facilities to fund loan
originations and purchases. In November 1995, the Company entered into a
warehouse and purchases facility (the "First Facility"). Under the First
Facility, the Company has available a $200 million warehouse line of credit
secured by the loans the Company originates and purchases. The First Facility
extends through August 24, 1997. The Company is required to comply with various
operating and financial covenants as defined in the agreement governing the
First Facility. Such covenants include restrictions on (i) changes in the
Company's business that would materially and adversely affect the Company's
ability to perform its obligations under the First Facility, (ii) selling any
asset other than in the ordinary course of business and (iii) guaranteeing the
debt obligations of any other entity. The continued availability of funds
provided to the Company under this facility is subject to the Company's
continued compliance with the operating and financial covenants contained in
such agreement.

                                       13
<PAGE>
 
               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS



  In October 1996, the Company entered into a second warehouse facility (the
"Second Facility"). Under the Second Facility, the Company has available a $400
million warehouse line of credit secured by the loans the Company originates or
purchases using the facility. The second facility extends through October 22,
1997. The Company is required to comply with various operating and financial
covenants as defined in the agreement governing the Second Facility. Such
covenants include restrictions on (i) changes in the Company's business that
would materially and adversely affect the Company's ability to perform its
obligations under the second Facility, (ii) selling any assets other than in the
ordinary course of business and (iii) guaranteeing the debt obligations of any
other entity. The continued availability of funds provided to the Company under
this facility is subject to the Company's continued compliance with the
operating and financial covenants contained in such agreements.

  Prior to January 1, 1994, the Company sold its loans to institutional
purchasers in whole loan transactions. In March 1994, the Company completed its
first securitization of loans for $44.5 million. During the six months ending 
June 30, 1997 and the years ended December 31, 1996, 1995 and 1994, the Company 
securitized $755.0 million, $657.4 million, $164.7 million and $70.2 million,
respectively. The Company expects to continue to depend on its ability to
securitize loans in the secondary market. Several factors affect the Company's
ability to complete securitizations of its loans, including conditions in the
securities markets generally, conditions in the asset-backed securities market
specifically, the credit quality of the Company's portfolio of loans and the
Company's ability to obtain credit enhancement. Adverse changes in such factors
may affect the Company's results of operations, financial condition and ability
to generate sufficient cash flows needed to continue originating and purchasing
loans at increased levels. In addition, in order to gain access to the
securitization market, the Company has relied on credit enhancements provided by
monoline insurance companies to guarantee senior interests in the related
securitization trusts to enable it to obtain an "AAA/Aaa" rating for such
interests. The Company has also relied on credit enhancements structured within
the securitization that sold portions of the loan interests as subordinated to
more senior interests in the securitization (the "Senior/Sub Structure"). Any
substantial reductions in the size or availability of the securitization market
for the Company's loans or the unwillingness of insurance companies to guarantee
senior interests in the Company's loan pools could have a material adverse
effect on the Company's results of operations and financial condition. The
Company will continue operating on a negative cash flow basis as long as it
continues to sell loans through securitizations and it continues to retain
interest-only and residual certificates in the loans sold. The use of cash in
excess of cash generated was primarily the result of the ongoing cash
requirements of the Company's operations and the sale of loans through
securitizations and the resulting investment in interest-only and residual
certificates. The Company has historically invested its entire gains on
securitization in the related interest-only and residual certificates resulting
in an insignificant net cash flow from the securitizations to the Company.

                                       14
<PAGE>

CASH FLOWS

Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996

 
  Operating Activities. For the six months ended June 30, 1997, the Company's
operating activities used cash of $7.5 million on a short term basis from
originating mortgage loans held for sale and $84.0 from interest-only and
residual certificates. Total cash used in operating activities decreased $0.7
million to $31.1 million for the six months ended June 30, 1997 as compared to
$31.9 for the six months ended June 30, 1996.

  Investment Activities. Net cash used in investing activities increased to
$6.3 million for the six months ended June 30, 1997 from $1.9 million for the
six months ended June 30, 1996 relating to the acquisition of new subsidiaries.

  Financing Activities. Net cash provided by financing activities increased $3.7
million to $39.4 million for the six months ended June 30, 1997 as compared to
$35.7 million for the six months ended June 30, 1996. The increase in net cash
provided was primarily the result of $39.3 million in proceeds from the
borrowings under warehouse lines of credit. As of June 30, 1997, total cash on
hand amounted to $16.3 million as compared to $14.2 million at December 30, 
1996.


RECENT DEVELOPMENTS

 
  During the second quarter of 1997, the Company appointed two new individuals
to key positions to strengthen senior management infrastructure. In April 1997,
John D. Horak joined the Company in a newly created position as Senior Vice
President, Credit and Risk Manager to oversee credit management policies and
procedures. In June 1997, the Company appointed Peter F. Makowiecki as Executive
Vice President, Chief Financial Officer and Secretary. Mr. Makowiecki is
responsible for the administration of the accounting, finance, treasury, tax,
audit and secondary marketing functions as well as the strategic alliance
initiative of the Company. Mr. Makowiecki fills the position held on an interim
basis by Bernard A. Guy, Executive Vice President.

  In the second quarter of 1997, the Company restructured the
Retail/Telemarketing Division to be included in the Consumer Loan Division which
was newly formed during the first quarter of 1997.

                                       15
<PAGE>
 


  During the third quarter of 1997, the Company also formed a new subsidiary
that will operate as Home America.  Home America will also originate high loan-
to-value second mortgage products through direct retail origination channels and
wholesale channels.  Three experienced senior management individuals were hired
to operate the subsidiary.  The high loan-to-value second mortgages originated
through the Consumer Loan Division and Home America will be sold servicing
released for cash or will be held for future securitization.

  In May 1997, the Company capitalized a new subsidiary, Oceanmark Financial
Corporation, and acquired management, fixed assets and residual assets from
Oceanmark Bank in a cash transaction.  Oceanmark Financial Corporation
originates non-conforming home equity loans through a national network of
mortgage brokers.  The subsidiary operates five regional branch offices located
in Florida, Georgia, Virginia, Michigan and Missouri.

  Beginning in the second quarter of 1997, the Company began originating loans
through a subsidiary established in 1996, Southern Pacific Mortgage Limited.
This wholly-owned subsidiary is located in London, England and provides non-
conforming home equity loans in the United Kingdom. Southern Pacific Mortgage
Limited originates loans through a network of loan brokers and packagers, an
origination conduit similar to Southern Pacific Funding's Wholesale Division.
Non-conforming loans originated will be held for future whole loan sales or
securitization. Loan servicing for securitized loans will be provided through
sub-servicing relationships. This subsidiary has funded more than $27.9 million
in non-conforming loans through June 30, 1997.

  The Company has also entered into a residual financing facility of $30 million
that allows the Company to obtain debt secured by interest-only and residual
certificates. The facility required the Company to encumber interest-only and
residual certificates totaling approximately two times the debt financed. The
Company's facility is committed for 18 months and would pay down through the
cash flows of the encumbered interest-only and residual certificates. The
Company has drawn upon $29.4 million of this facility.
  
  The Company obtained a short-term $15.0 million working capital facility from 
Imperial Credit Industries, Inc.  This facility had a 60 day maturity from its 
draw date.  The Company drew down the $15 million on July 16, 1997 and repaid 
the facility on August 11, 1997.

  The Company has also signed a commitment letter on a $100 million 364 day
warehouse facility to finance first mortgage loans and high loan-to-value
("LTV") second mortgage loans.  The Company plans on utilizing this line during
the third quarter of 1997.  This agreement would have covenant and operating
requirements similar to its other warehousing facilities and that are typical of
these types of agreements within the industry.

RECENT ACCOUNTING DEVELOPMENTS 

  In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". This Statement establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general-purpose financial statements. This
Statement shall be effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. At this time the Company has determined that
this Statement will have no significant impact on the financial position or
results for operations for 1997.

  In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information". This Statement establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. This Statement shall be effective for fiscal
years beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated. At this time the
Company has determined that this Statement will have no significant impact on
the financial position or results of operations for 1997.

                                       16
<PAGE>
 
                           PART II OTHER INFORMATION


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

        (a)    Exhibits

               11     Statement regarding computation of per share earnings 
                      (loss)

               27     Financial Data Schedule


        (b)    Reports on Form 8-K

               There were no reports filed on Form 8-K during the three months
               ended June 30, 1997.

                                       17
<PAGE>
 
                                  SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the 
registrant has duly caused this report to be signed on its behalf by the 
undersigned thereunto duly authorized.


                                       Southern Pacific Funding Corporation
                                       ------------------------------------
                                                   (Registrant)



                                       By: /s/ Robert W. Howard
                                           -------------------------
                                           Robert W. Howard
                                           President and
                                           Chief Executive Officer



                                       By: /s/ Peter F. Makowiecki
                                           -------------------------
                                           Peter F. Makowiecki
                                           Chief Financial Officer


Dated:  August 11, 1997

                                      18