UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 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, 1998
                                       OR
              ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the transition period from ----- to -----

                             Commission File Number

                                     1-11785

                      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.)

4949 Meadows Road, Suite 600, Lake Oswego, OR                      97035
(Address of principal executive offices)                         (Zip Code)

                                 (503) 303-5400

              (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 July 31, 1998: 20,750,300 shares.

<PAGE>

                      SOUTHERN PACIFIC FUNDING CORPORATION
                                    FORM 10-Q
                     THREE MONTH PERIOD ENDED JUNE 30, 1998


<TABLE>
TABLE OF CONTENTS                                                                      PAGE
-----------------                                                                      ----

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

         Item 1 - Financial Statements

<S>                                                                                     <C>
                         Condensed Consolidated Balance Sheets
                         At June 30, 1998 and December 31, 1997                           2

                         Condensed Consolidated Statements of Earnings for the
                         Three month periods ended June 30, 1998 and 1997 and
                         Six month periods ended June 30, 1998 and 1997                   3

                         Condensed Consolidated Statements of Cash Flows for the
                         Six month periods ended June 30, 1998 and 1997                   4

                         Condensed Consolidated Statements of Shareholders' Equity
                         and Comprehensive Income for the
                         Six month period ended June 30, 1998                             5

                         Notes to Condensed Consolidated Financial Statements             6

         Item 2 - Management's Discussion and Analysis of
                  Financial Condition and Results of Operations                          10

         Item 3 - Quantitative and Qualitative Disclosures About
                  Market Risk                                                            19

PART II OTHER INFORMATION

         Item 1 - Legal Proceedings                                                      19

         Item 4 - Submission of Matters to a Vote of Security Holders                    20

         Item 6 - Exhibits and Reports on Form 8-K                                       21

                 Signatures                                                              22
</TABLE>


<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS


                      SOUTHERN PACIFIC FUNDING CORPORATION

                      CONDENSED CONSOLIDATED BALANCE SHEETS


<TABLE>
                                                                   JUNE 30,             DECEMBER 31,
                                                                    1998                   1997
                                                                 -------------          -------------       
                                                                  (UNAUDITED)                               

ASSETS
<S>                                                              <C>                    <C>               
Cash                                                             $  14,622,731          $   7,886,412       
Loans held for sale                                                248,554,326            264,384,993       
Interest-only and residual certificates                            396,830,091            274,631,779       
Mortgage servicing rights                                            8,143,128              2,524,564       
Accrued interest receivable                                          3,152,875              4,568,977       
Premises and equipment, net                                         11,426,955              7,660,691       
Goodwill, net                                                        6,326,918              6,615,080       
Other assets                                                        40,781,819             21,072,897       
                                                                 -------------          -------------       
      Total assets                                               $ 729,838,843          $ 589,345,393       
                                                                 =============          =============       
   
LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:
Borrowings under warehouse lines of credit                       $ 253,141,860          $ 205,031,055       
Notes payable                                                       43,382,738              3,431,972       
Deferred tax liability                                              63,637,374             48,074,988       
Long term debt                                                     175,000,000            175,000,000       
Other liabilities                                                   28,452,659             18,652,471       
                                                                 -------------          -------------       
      Total liabilities                                            563,614,631            450,190,486       

Shareholders' equity:
Preferred stock, $.01 par value,
      5,000,000 shares authorized; none issued or
      outstanding at June 30, 1998 and
      December 31, 1997                                                      -                      -
Common stock, no par value,
      50,000,000 shares authorized; 20,744,400
      and 20,760,450 shares issued and outstanding
      at June 30, 1998 and December 31, 1997 respectively           53,866,921             54,100,622       
Contributed capital                                                    247,500                247,500       
Cumulative comprehensive income-Translation adjustment                  22,097                 (8,745)      
Retained earnings                                                  112,087,694             84,815,530       
                                                                 -------------          -------------       
      Total shareholders' equity                                   166,224,212            139,154,907       
                                                                 -------------          -------------       
      Total liabilities and shareholders' equity                 $ 729,838,843          $ 589,345,393       
                                                                 =============          =============       
</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                       2
<PAGE>
                      SOUTHERN PACIFIC FUNDING CORPORATION

                  CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
                                   (UNAUDITED)


<TABLE>
                                                                THREE MONTHS ENDED                  SIX MONTHS ENDED
                                                                     JUNE 30,                           JUNE 30,
                                                           1998                  1997             1998             1997
                                                          ------------       ------------     ------------      ----------

Revenues: 
                                                                                            
<S>                                                       <C>                <C>              <C>             <C>         
      Gains on sales of loans                             $ 51,554,609       $ 33,864,920     $ 95,923,525    $ 61,938,379
      Interest income                                       16,115,186          9,987,773       30,891,651      16,427,030
      Securities valuation and other income                  2,987,026         (1,156,765)       7,054,772       1,297,968

                                                          ------------       ------------     ------------      ----------
                 Total revenues                             70,656,821         42,695,928      133,869,948      79,663,377
                                                          ------------       ------------     ------------      ----------

Expenses:

      Interest                                              14,737,377          5,775,349       27,363,850       9,395,394
      Personnel and commission expense                      19,536,093          9,357,900       38,081,288      16,463,872
      General and administrative expense                    11,601,223          4,615,921       21,819,627       9,234,329
                                                          ------------       ------------     ------------      ----------
                 Total expenses                             45,874,693         19,749,170       87,264,765      35,093,595

Earnings before taxes                                       24,782,128         22,946,758       46,605,183      44,569,782
Income taxes                                                10,276,447          9,521,465       19,333,019      18,496,460
                                                          ------------       ------------     ------------      ----------
                 Net earnings                             $ 14,505,681       $ 13,425,293     $ 27,272,164      26,073,322
                                                          ============       ============     ============      ==========

NET EARNINGS PER SHARE:
      Basic                                               $       0.70       $       0.65     $       1.31          $ 1.26
                                                          ============       ============     ============      ==========

      Diluted                                             $       0.60       $       0.56     $       1.14          $ 1.08
                                                          ============       ============     ============      ==========

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
      Basic                                                 20,741,733         20,739,354       20,742,944      20,738,432

      Diluted                                               25,359,958         25,431,262       25,277,087      25,423,409
</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                       3
<PAGE>
                      SOUTHERN PACIFIC FUNDING CORPORATION

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)



<TABLE>
                                                                                      SIX MONTHS ENDED
                                                                                          JUNE 30,
                                                                                 1998                   1997               
                                                                          ------------------     ------------------

Cash flows from operating activities:
<S>                                                                          <C>                    <C>                  
Net earnings                                                                  $  27,272,164          $  26,073,322         
Adjustments to reconcile net income to net
      cash used in operating activities:
      Depreciation and amortization                                               2,686,588                875,007         
      Deferred tax expense                                                       15,562,386             17,263,876         
      Translation adjustment                                                         30,842                (14,683)        
      Changes in certain assets and  liabilities,  net of effect
        of acquisitions and contribution transaction:
        Mortgage loans held for sale                                             15,830,667             (7,471,321)        
        Net change in interest only and residual certificates                  (122,198,312)           (85,647,086)        
        Accrued interest receivable                                               1,416,102               (727,872)        
        Other assets                                                            (19,708,922)              (494,621)        
        Other liabilities                                                         9,921,892             19,033,700         
        Capitalized mortgage servicing rights                                    (6,051,118)                     -         

                                                                          ------------------     ------------------
Net cash used in operating activities                                           (75,237,711)           (31,109,678)        
                                                                          ------------------     ------------------

Cash flows used in investing activities:
      Payment for acquisitions                                                            -             (3,800,000)
      Purchases of premises and equipment                                        (5,732,136)            (2,458,584)        

                                                                          ------------------     ------------------
Net cash used in investing activities                                            (5,732,136)            (6,258,584)        
                                                                          ------------------     ------------------

Cash flows from financing activities:
   Net changes in:
      Borrowings under warehouse lines of credit                                 48,110,805             39,293,670         
      Repurchase of Common Stock                                                   (489,185)                     -         
      Proceeds from issuance of Common Stock                                        255,484                152,681         
      Proceeds from issuance of note payable, net of repayments                  39,829,062                      -         

                                                                          ------------------     ------------------
Net cash provided by financing activities                                        87,706,166             39,446,351         
                                                                          ------------------     ------------------

Net change in cash                                                                6,736,319              2,078,089         
Cash at beginning of period                                                       7,886,412             14,175,566         

                                                                          ------------------     ------------------
Cash at end of period                                                         $  14,622,731          $  16,253,655         
                                                                          ==================     ==================
</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                       4
<PAGE>
                      SOUTHERN PACIFIC FUNDING CORPORATION
            CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                            AND COMPREHENSIVE INCOME
                                   (UNAUDITED)



<TABLE>
                                                                                  ACCUMULATED
                                                                                    OTHER
                                                                CONTRIBUTED      COMPREHENSIVE    RETAINED        SHAREHOLDERS'
                                           COMMON STOCK          CAPTIAL            INCOME        EARNINGS            EQUITY
                                           ------------         ---------          --------    -------------      -------------

<S>                                        <C>                  <C>                <C>         <C>                <C>          
Balance at December 31, 1997               $ 54,100,622         $ 247,500          $ (8,745)   $  84,815,530      $ 139,154,907
  Repurchase of common stock                   (489,185)                                                               (489,185)
  Exercise of stock options                     255,484                                                                 255,484
  Foreign currency translation
   adjustments                                                                       30,842                              30,842
  Net earnings, six months ended
   June 30, 1998                                                                                  27,272,164         27,272,164
                                           ------------         ---------          --------    -------------      -------------
Balance at June 30, 1998                   $ 53,866,921         $ 247,500          $ 22,097    $ 112,087,694      $ 166,224,212
                                           ============         =========          ========    =============      =============
</TABLE>




<TABLE>
                                                            THREE MONTHS ENDED                    SIX MONTHS ENDED
                                                                 JUNE 30,                             JUNE 30,
                                                         1998               1997               1998              1997
                                                    ------------       ------------       ------------      ------------
Comprehensive income
<S>                                                 <C>                <C>                <C>               <C>         
     Net earnings                                   $ 14,505,681       $ 13,425,293       $ 27,272,164      $ 26,073,322
     Foreign currency translation adjustments           (106,352)           (14,683)            30,842           (14,683)
                                                    ------------       ------------       ------------      ------------

        Comprehensive income                        $ 14,399,329       $ 13,410,610       $ 27,303,006      $ 26,058,639
                                                    ============       ============       ============      ============
</TABLE>



     See accompanying notes to condensed consolidated financial statements.

                                       5
<PAGE>
                      SOUTHERN PACIFIC FUNDING CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE A - BASIS OF PRESENTATION

The accompanying condensed 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, 1997 audited
consolidated  financial  statements and notes thereto  included in the Company's
1997 Form 10-K.

In the opinion of management,  all adjustments  (consisting of normal  recurring
adjustments)  considered  necessary for a fair  presentation have been included.
Operating  results for the six months  ended June 30,  1998 are not  necessarily
indicative  of the results that may be expected for the year ended  December 31,
1998.

In preparing  the condensed  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  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 will hedge
its interest  rate risk related to loans held for sale by selling U.S.  Treasury
securities short or in the forward market.

     As of June 30,  1998 and  December  31,  1997,  the  Company had open hedge
positions of nil and $65.6 million,  respectively,  related to the sales of U.S.
Treasury securities in the forward market. The proceeds from the short sales are
shown net of loans held for sales in the accompanying balance sheets.


NOTE C - COMMITMENTS AND CONTINGENCIES

FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK

     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 

                                       6
<PAGE>
                      SOUTHERN PACIFIC FUNDING CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


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.

     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,  1998,  the  Company  had  agreements  to fund  fixed  rate  loans  of
approximately $12.9 million.

SALES OF LOANS AND SERVICING RIGHTS

     In the  ordinary  course of  business,  the Company is exposed to liability
from  representations and warranties made to purchasers and insurers of mortgage
loans and the purchasers of servicing rights. Under certain  circumstances,  the
Company is required to repurchase mortgage loans if there has been a breach of a
representation or warranty.  For loans that have been  securitized,  the Company
includes  an  estimate  of credit  loss in  determining  its  interest-only  and
residual certificates.  On a periodic basis, the Company reviews its assumptions
in  light of  historical  experience  and  economic  trends  to  evaluate  their
reasonableness in measuring the fair value of recorded assets.

     Through  December  1997,  the  Company  contracted  for  the  servicing  of
substantially  all the  loans it  originated,  purchased  and held for sale with
Advanta Corp. under a servicing  agreement  entered into between the Company and
Advanta in September 1995. In addition,  Advanta has serviced or subserviced all
1997 and prior public  securitizations  of the Company's  loans  pursuant to the
related pooling and servicing agreement.

     The  Company's  acquisition  in December  1997 of North  American  Mortgage
Company's  loan  servicing  operations  in Santa  Rosa,  California  allowed the
Company to begin its own loan  servicing  operation in  mid-January  for all new
loans originated and purchased.

     In the second quarter of 1998, the Company transferred over to its internal
servicing  department  the  servicing  of the loans  included  in the  Company's
December 1997  securitization and of remaining loans originated and purchased in
December 1997 and January 1998.

     The Company paid Advanta $1.1 million during the second quarter in order to
transfer the  servicing  of  approximately  10,000 loans from the December  1997
securitization and the remaining loans originated and purchased in December 1997
and January 1998 to the Santa Rosa location.

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


LITIGATION

      The Company, its subsidiary Oceanmark Financial Corporation and members of
its board of directors are  defendants in a lawsuit in US District Court for the
southern  district of Florida.  Oceanmark  Bank,  F.S.B.  is the plaintiff.  The
Company  was served on March 9, 1998.  The  complaint  relates to the  Company's
acquisition  of  mortgages  and notes of  Oceanmark  Bank  beginning in 1995 and
ending with the Company's  acquisition  of the mortgage  operations of Oceanmark
Bank and certain  residual  assets in May 1997, as well as events  subsequent to
the May 1997  acquisition.  The  complaint  alleges,  among other  things,  that
employees of  Oceanmark  Bank  conspired  with the Company to lower the purchase
price of the assets sold to the Company by Oceanmark  Bank. The plaintiff  seeks
relief under theories of  racketeering,  securities  fraud,  breach of contract,
breach of fiduciary duty,  conspiracy,  and negligence and requests compensatory
and punitive damages totaling $75 million.

    The Company's  management  believes  that the  Oceanmark  claims are without
merit and  intends  to defend  the  Company's  position  vigorously.  Management
believes  that the  resolution  of this matter will not have a material  adverse
effect on the Company's financial condition, results of operations or liquidity.

    SPFC occasionally becomes involved in other litigation arising in the normal
course of business.  Management believes that any liability with respect to such
legal  actions,  individually  or in the  aggregate,  will not  have a  material
adverse effect on the Company's financial condition or results of operations.


NOTE D - NET EARNINGS PER SHARE

    The  following   illustrates  the   reconciliation  of  the  numerators  and
denominators of the basic and diluted earnings per share (EPS) computations:

<TABLE>
                                                 Three months ended June 30, 1998
                                         ---------------------------------------------------
                                                              Weighted
                                                               average           Per share
                                           Net earnings         shares             amount
                                         ---------------   ---------------   ---------------
Basic EPS
<S>                                         <C>               <C>                  <C>  
  Net earnings available to common
  shareholders                              $14,505,681       20,741,733           $0.70
  Effect of dilutive securities:
     Stock options                                    -        1,466,965
     Convertible subordinated notes             740,952        3,151,260
                                            -----------       ----------
Diluted EPS                                 $15,246,633       25,359,958           $0.60
                                            ===========       ==========           =====
</TABLE>


                                       8
<PAGE>
                      SOUTHERN PACIFIC FUNDING CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)





<TABLE>
                                                                Three months ended June 30, 1997
                                                    ------------------------------------------------------
                                                                            Weighted
                                                                             average             Per share
                                                    Net earnings             shares                amount
                                                    ------------           ----------               -----

Basic EPS
<S>                                                  <C>                   <C>                      <C>  
  Net earnings available to common
  shareholders                                       $13,425,293           20,739,354               $0.65
  Effect of dilutive securities:
     Stock options                                             -            1,540,648
     Convertible subordinated notes                      735,821            3,151,260
                                                     -----------           ----------
Diluted EPS                                          $14,161,114           25,431,262               $0.56
                                                     ===========           ==========               =====




                                                                 Six months ended June 30, 1998
                                                    ------------------------------------------------------
                                                                            Weighted
                                                                             average             Per share
                                                    Net earnings             shares                amount
                                                    ------------           ----------               -----
Basic EPS
  Net earnings available to common
  shareholders                                       $27,272,164           20,742,944               $1.31
  Effect of dilutive securities:
     Stock options                                             -            1,382,883
     Convertible subordinated notes                    1,471,200            3,151,260
                                                     -----------           ----------
Diluted EPS                                          $28,743,364           25,277,087               $1.14
                                                     ===========           ==========               =====


                                                                 Six months ended June 30, 1997
                                                    ------------------------------------------------------
                                                                            Weighted
                                                                             average             Per share
                                                    Net earnings             shares                amount
                                                    ------------           ----------               -----
Basic EPS
  Net earnings available to common
  shareholders                                       $26,073,322           20,738,432               $1.26
  Effect of dilutive securities:
     Stock options                                             -            1,533,717
     Convertible subordinated notes                    1,358,439            3,151,260
                                                     -----------           ----------
Diluted EPS                                          $27,431,761           25,423,409               $1.08
                                                     ===========           ==========               =====
</TABLE>


                                       9
<PAGE>


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

    The following should be read in conjunction  with the Selected  Consolidated
Financial  Data and  Consolidated  Financial  Statements  of the Company and the
accompanying  notes  included in Item 1 of the Form 10-Q.  This report  contains
forward-looking  statements  within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Such statements are based on current expectations and are subject to
risks, uncertainties and assumptions. Such risks and uncertainties include those
related to economic  conditions,  changes in  valuations  of  interest-only  and
residual  certificates,  the financial and securities markets,  acquisitions and
the  integration  of  acquired  businesses,  operations  in the United  Kingdom,
changes  in  government   regulations  including  regulatory  fees,  changes  in
prevailing interest rates, management of interest rate fluctuations,  the market
for whole loan sales,  prepayment speeds, demand for the Company's services, the
Company's financing needs,  delinquencies and default rates, the degree to which
the Company is leveraged and other risks identified in the Company's  Securities
and Exchange  Commission  filings,  including  Item 7 of the Company's 1997 Form
10-K. Should one or more of these risks or uncertainties materialize,  or should
underlying assumptions prove incorrect,  actual results may vary materially from
those anticipated, estimated or projected.

     Given  these  uncertainties,  investors  are  cautioned  not to place undue
reliance on the forward-looking statements. The Company disclaims any obligation
to update any such factors or to publicly  announce the result of any  revisions
to any of the  forward-looking  statements  contained  in the  report to reflect
future events or developments.


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  for  mortgage  refinancing,  home  purchase,  debt
consolidation,  home improvements and educational expenditures.  The Company has
experienced  significant  growth in loan production  primarily due to geographic
expansion,  further penetration into established markets and the addition of new
loan production sources.

     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  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.  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 $769.6 million and $411.2 million during the three months ended June
30, 1998 and

                                       10
<PAGE>

1997,  respectively,  and $1.4 billion and $755.0  million during the six months
ended June 30, 1998 and 1997, respectively. The Company sold loans through whole
loan  transactions  with  principal  balances of $14.2  million and $6.6 million
during the three  months ended June 30, 1998 and 1997,  respectively,  and $32.7
million and $10.0  million  during the six months  ended June 30, 1998 and 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.



FINANCIAL CONDITION

JUNE 30, 1998

     Interest-only and residual  certificates  increased $122.2 million or 44.5%
to $396.8  million at June 30, 1998 from $274.6  million at December  31,  1997.
This increase resulted  primarily from  interest-only and residual  certificates
generated from new securitizations in the U.S and the U.K. during the six months
ended June 30, 1998 of $121.3  million.  In addition,  the asset  increased $0.9
million  as a result of the excess of the  accretion  of the  interest-only  and
residual  certificates  of $18.1  million over the  adjustment  to fair value of
$17.2 million for the six months ended June 30, 1998.

     Net premises and equipment increased $3.7 million or 48.1% to $11.4 million
at June 30, 1998 from $7.7 million at December 31,  1997.  This growth  reflects
leasehold  improvements and the acquisition of computer and office equipment for
the move to the Company's new corporate headquarters, the continued expansion of
branch loan  origination  offices and the  Company's  new  servicing  operations
center in Santa Rosa, California.

     Mortgage  servicing rights increased $5.6 million or 224.0% to $8.1 million
at June 30, 1998 from $2.5 million at December 31, 1997. This increase  resulted
from the  capitalization  of  mortgage  servicing  rights  related to loans sold
through securitizations in the U.S. during the six months ended June 30, 1998.

     Other assets  increased $19.7 million or 93.4% to $40.8 million at June 30,
1998 from $21.1  million at December 31, 1997.  Other assets  include  servicing
advances,  prepaid  expenses,  accounts  receivable,  bond issuance  costs and a
receivable  from an affiliate of $23.3  million at June 30, 1998 that is secured
by mortgage loans financed by the Company through its warehouse lines.

     Borrowings under warehouse lines of credit increased $48.1 million or 23.5%
to $253.1  million at June 30,  1998 from $205.0  million at  December  31, 1997
associated  with the net use of cash in  operations  and the increase in cash of
$6.7 million at June 30, 1998.

                                       11
<PAGE>

     Notes payable  increased $40.0 million or 1,176.5% to $43.4 million at June
30, 1998 from $3.4 million at December 31, 1997. This increase reflects the draw
down on the subordinate and residual  financing facility entered into during the
six months ended June 30, 1998.

     Other liabilities  increased $9.8 million or 52.4% to $28.5 million at June
30, 1998 from $18.7 million at December 31, 1997 primarily due to an increase in
accrued  interest  payable on long term debt of $3.5  million,  an  increase  in
bonuses  payable of $2.1 million and an increase in strategic  notes  payable of
$4.2 million during the six months ended June 30, 1998.


RESULTS OF OPERATIONS

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

     Total  revenues  increased  $28.0 million or 65.6% to $70.7 million for the
three months  ended June 30, 1998 from $42.7  million for the three months ended
June 30, 1997.  During the same period,  the Company's total expenses  increased
$26.2 million or 133.0% to $45.9 million from $19.7  million.  As a result,  the
Company's earnings increased $1.1 million or 8.2% to $14.5 million for the three
months  ended June 30, 1998 from $13.4  million for the three  months ended June
30, 1997.

     The increase in revenues was  primarily  attributable  to the  expansion of
loan  originations  that  facilitated  the  increase in interest  income and the
securitization  and sale of whole  loans.  During  the  second  quarter of 1998,
Wholesale  Division loan production  increased $155.2 million or 57.5% to $425.1
million  compared  to $269.9  million  in the  comparable  period  in 1997.  The
origination of loans by the Consumer Division  increased $91.3 million or 449.7%
to $111.6  million  compared to $20.3 million in the 1997 second  quarter.  Loan
originations from the Strategic  Alliance program increased to $172.0 million or
366.7% to $218.9  million  compared to $46.9  million in the three  months ended
June 30, 1997. Loans originated in the United Kingdom increased $16.7 million or
59.9% to $44.6 million.  Correspondent purchases of loans were nil for the three
months ended June 30, 1998 compared to $74.6 million for the same period of 1997
reflecting  the Company's  decision  during the first quarter of 1998 to suspend
this  channel of loan  origination.  Total  residential  loan  originations  and
purchases  increased  $360.6  million or 82.0% to $800.2  million for the second
quarter of 1998 from $439.6 million during the second quarter of 1997.

     Gains on sales of loans  increased  $17.7 million or 52.2% to $51.6 million
on sales and  securitizations  of $783.8 million for the three months ended June
30, 1998 from $33.9 million on sales and  securitizations  of $417.8 million for
the three  months  ended  June 30,  1997.  Total  loans of $755.3  million  were
securitized  in the United  States  during the three  months ended June 30, 1998
compared to $411.2  million of loans  securitized  in the  comparable  period of
1997,  with a  weighted  average  net gain on  securitization  of 6.7% and 8.5%,
respectively.   This  includes  the  completion  of  the  Company's  first  High

                                       12
<PAGE>

Loan-To-Value ("HLTV") securitization in the three months ended June 30, 1998, a
$105 million  mortgage  loan  securitization.  The decrease in the net gain on a
percentage  basis is attributable  to a decrease in interest  margins and higher
costs associated with the production of loans.

     Interest  income  increased  $6.1 million or 61.0% to $16.1 million for the
three months ended June 30, 1998 from $10.0 million in the comparable  period in
1997 as a result of the  higher  average  balance of loans held for sale in 1998
generated  from the increased  loan  production  during the period.  The average
loans held for sale  inventory  for the three  months  ended  June 30,  1998 was
$491.3  million  compared to $312.6  million for the three months ended June 30,
1997.

     Securities  valuation and other income  increased $4.1 million or 358.2% to
$3.0 million for the three months ended June 30, 1998 from $(1.1) million in the
comparable  period of 1997.  Total  securities  valuation  and  other  income is
summarized below.

<TABLE>
                                                                         Three months ended
                                                                              June 30,
                                                         1998            1997                Variance
                                                         ----            ----                --------

<S>                                                  <C>           <C>             <C>              <C>   
Residual valuation, net                              $   (865,544) $   (195,098)   $   (670,446)    -343.6%
Provision for losses related to residual interests       (562,938)   (2,767,471)      2,204,533       79.7%
Prepayment penalty income                               2,582,087       724,446       1,857,641      256.4%
Loan origination income                                   473,347       791,874        (318,527)     -40.2%
Servicing income                                        1,404,615             -       1,404,615      100.0%
Miscellaneous                                             (44,541)      289,484        (334,025)    -115.4%
                                                     ------------------------------------------------------
   Total securities valuation and other income       $  2,987,026  $ (1,156,765)   $  4,143,791      358.2%
                                                     ======================================================
</TABLE>


     Interest expense  increased $8.9 million or 153.4% to $14.7 million for the
three months ended June 30, 1998 from $5.8 million for the comparable  period in
1997. The increase in interest  expense was  attributable  to the interest costs
associated  with  higher  borrowings  under  warehouse  lines of credit  used to
finance the  increased  loan  origination  and purchase  volume during the three
months ended June 30, 1998.  The increase in interest  expense  during the three
months  ended June 30,  1998 also  reflects  the  expense  attributable  to $100
million in senior notes issued in November 1997.

     Personnel and commission expense increased $10.1 million or 107.4% to $19.5
million  in the three  months  ended  June 30,  1998 from  $9.4  million  in the
comparable period in 1997. The increase in personnel and commission  expense was
primarily  due to  increased  staffing  levels  that  related  to the  Wholesale
Division's  growth.  As of June 30, 1998,  the Company  operated 47 regional and
satellite  offices and  employed  1,090  persons as compared to 23 regional  and
satellite offices and 927 employees as of June 30, 1997.

     General and administrative  expense,  which consists primarily of occupancy
and other operating expenses,  increased $7.0 million or 152.2% to $11.6 million
in the three

                                       13
<PAGE>

months ended June 30, 1998 from $4.6 million in the  comparable  period in 1997.
The  increase in general  and  administrative  expense  included a one time loan
transfer  fee paid to  Advanta of $1.1  million  and $0.7  million in  strategic
alliance  consulting  fees.  Additional  increases in expenses  were incurred in
association  with the increase in the number of regional and  satellite  offices
and increased loan origination and purchase volume.

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

     Total revenues  increased  $54.2 million or 68.0% to $133.9 million for the
six months ended June 30, 1998 from $79.7  million for the six months ended June
30, 1997. During the same period,  the Company's total expenses  increased $52.2
million or 148.7% to $87.3 million from $35.1 million in 1997. As a result,  the
Company's  earnings  increased  $1.2 million or 4.6% to $27.3 million in the six
months  ended  June 30,  1998 from  $26.1  million  in the same  period of 1997.
Expenses for the six months ended June 30, 1998 included $3.8 million associated
with the start-up of the  Company's  new  servicing  operations  center in Santa
Rosa, California.

     The increase in revenues was  primarily  attributable  to the  expansion of
loan  originations  that  facilitated  the  increase in interest  income and the
securitization  and sale of whole  loans.  During  the first six months of 1998,
Wholesale  Division loan production  increased $301.6 million or 64.5% to $769.2
million   compared  to  $467.6  million  in  the  comparable   period  in  1997.
Correspondent  purchases  of loans  decreased  $135.9  million or 82.5% to $28.8
million  compared to $164.7 million in 1997,  reflecting the Company's  decision
during the first  quarter of 1998 to suspend this  channel of loan  origination.
The origination of loans by the Consumer  Division  increased  $153.0 million or
508.3% to $183.1 million  compared to $30.1 million in 1997.  Loan  originations
from the Strategic Alliance program increased $305.4 million or 459.9% to $371.8
million from $66.4 million.  Loans  originated in the United  Kingdom  increased
$66.6 million or 238.7% to $94.5 million compared to $27.9 million. As a result,
total  residential loan  originations and purchases  increased $690.7 million or
91.2% to $1.447  billion  for the first six months of 1998 from  $756.7  million
during the first six months of 1997.

     Gains on sales of loans  increased  $34.0 million or 54.9% to $95.9 million
on sales and  securitizations  of $1.4 billion for the six months ended June 30,
1998 from $61.9 million on sales and  securitizations  of $765.0  million during
the six months ended June 30, 1997. Total loans of $1.3 billion were securitized
in the United  States  during the first six  months of 1998  compared  to $755.0
million of loans  securitized in the comparable  period of 1997, with a weighted
average net gain on securitization of 6.9% and 8.4%, respectively.  The decrease
in the net gain on a percentage  basis is attributable to a decrease in interest
margins and higher costs associated with the production of loans.

     Interest  income  increased  $14.5 million or 88.4% to $30.9 million in the
first six months of 1998 from $16.4 million in the comparable  period in 1997 as
a result of the higher average  balance of loans held for sale in 1998 generated
from the increased loan production during the period.

                                       14
<PAGE>

     Securities  valuation and other income  increased $5.8 million or 443.5% to
$7.1 million in the first six months of 1998 from $1.3 million in the comparable
period of 1997. Total securities valuation and other income is summarized below.

<TABLE>
                                                                          Six months ended
                                                                              June 30,
                                                         1998            1997                Variance
                                                         ----            ----                --------

<S>                                                   <C>            <C>           <C>                  <C>  
Residual valuation, net                               $   882,246    $ 1,597,543   $  (715,297)        -44.8%
Provision for losses related to residual interests       (568,203)    (2,838,396)    2,270,193          80.0%
Prepayment penalty income                               4,343,932      1,155,073     3,188,859         276.1%
Loan origination income                                   818,458      1,306,482      (488,024)        -37.4%
Servicing income                                        1,423,234              -     1,423,234         100.0%
Miscellaneous                                             155,105         77,266        77,839         100.7%
                                                      -------------------------------------------------------
     Total securities valuation and other income      $ 7,054,772    $ 1,297,968   $ 5,756,804         443.5%
                                                      =======================================================
</TABLE>

     Interest expense increased $18.0 million or 191.5% to $27.4 million for the
six months  ended June 30, 1998 from $9.4 million for the  comparable  period in
1997. The increase in interest  expense was  attributable  to the interest costs
associated  with  higher  borrowings  under  warehouse  lines of credit  used to
finance the increased loan origination and purchase volume during the six months
ended June 30,  1998.  The  increase in interest  expense  during the six months
ended June 30, 1998 also  reflects the expense  attributable  to $100 million in
senior notes issued in November 1997.

     Personnel and commission expense increased $21.6 million or 130.9% to $38.1
million  in the six  months  ended  June 30,  1998  from  $16.5  million  in the
comparable period in 1997. The increase in personnel and commission  expense was
primarily  due to  increased  staffing  levels  that  related  to the  Wholesale
Division's  growth.  As of June 30, 1998,  the Company  operated 47 regional and
satellite  offices and  employed  1,090  persons as compared to 23 regional  and
satellite offices and 927 employees as of June 30, 1997.

     General and administrative  expense,  which consists primarily of occupancy
and other operating expenses, increased $12.6 million or 137.0% to $21.8 million
in the six months ended June 30, 1998 from $9.2 million in the comparable period
in 1997.  The  increase  in general and  administrative  expense  included  $3.8
million  for the  Company's  servicing  operations  facility,  a one  time  loan
transfer  fee paid to  Advanta of $1.1  million  and $0.7  million in  strategic
alliance  consulting  fees.  Additional  increases in expenses  were incurred in
association  with the increase in the number of regional and  satellite  offices
and increased loan origination and purchase volume.

                                       15
<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

    The Company funds its cash  requirements  primarily  through  capital market
transactions   and  warehouse   financing  as  well  as  whole  loan  sales  and
securitizations.  The Company  anticipates that it 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  on the loans sold. To reduce this negative cash flow,  the Company
plans to sell loans through whole loan transactions.

    The Company relies  substantially  upon short-term  warehouse  facilities to
fund  loan  originations  and  purchases.  The  Company  has  entered  into four
warehouse  and  purchase  facilities.  Under these  facilities,  the Company has
available  $1.3  billion in warehouse  lines of credit  secured by the loans the
Company originates and purchases. The facilities are scheduled to expire between
August 1998 and June 1999.

      The Company is required to comply with  various  operating  and  financial
covenants as defined in the agreements governing the warehouse facilities.  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  facilities,  (ii)  selling  any asset  other than in the
ordinary  course of business,  (iii)  guaranteeing  the debt  obligations of any
other entity, (iv) the use of proceeds from such facilities,  including delivery
standard,  LTV  ("loan-to-value")  and product mix and (v) the Company's minimum
net worth,  debt to net worth ratio,  profitability  and minimum  borrowing base
requirements.  The continued availability of funds provided to the Company under
the  facilities  is  subject  to the  Company's  continued  compliance  with the
operating and financial covenants contained in such agreements;  the Company was
in compliance with the covenants at June 30, 1998.

       Pursuant to the  indenture  relating to the $100  million in senior notes
issued in November  1997,  the  Company is  required to maintain a  consolidated
leverage ratio not to exceed 2.0 to 1.0. The Company's  ability to pay dividends
on its capital stock is extremely  limited as a result of this  requirement  and
other provisions in the indenture.

    During the  quarter  ended June 30,  1998,  the Company  securitized  $769.6
million in loans.  The  Company  expects to continue to depend on its ability to
securitize loans in the secondary market to generate cash proceeds for repayment
of its warehouse lines and to create credit  availability to purchase additional
loans.  In addition,  the cash  generated  from the  interest-only  residuals is
retained and used as collateral for residual  financing.  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 have a material  adverse  effect on the  Company's  results of
operations, financial condition and ability to generate sufficient cash flows to
continue originating and purchasing loans.

                                       16
<PAGE>

      During the second  quarter  ended June 30,  1998,  the Company  borrowed a
maximum of $21.5 million from Imperial Credit  Industries,  Inc.  ("ICII") at an
interest  rate of 12%.  The  average  loan  balance  during the quarter was $8.0
million.  The loan was repaid in full plus accrued interest on June 29, 1998. As
of June 30, 1998, the Company had no loans outstanding to ICII.

      In June 1998,  the  Company  entered  into a $50 million  subordinate  and
residual  financing  facility to be used for general  corporate  purposes  which
matures on August 17,  1998.  The  Company  had drawn upon  approximately  $41.3
million of this facility at August 13, 1998. The Company is currently seeking an
extension  of  such  facility  for  a  short  period  and  is  also  negotiating
replacement  financing with other third party lenders that would,  combined with
planned whole loan sales and  securitizations,  provide funding of the Company's
cash  requirements  for  the  foreseeable  future.  There  can,  however,  be no
assurance  that  the  Company  will be  able  to  obtain  such  extension  or to
successfully  negotiate  replacement funding on terms acceptable to the Company,
if at all.  Failure to obtain such funding would have a material  adverse effect
on the Company's business and financial condition.

      On July 28,  1998,  the  Company  issued a press  release  announcing  its
engagement  of Morgan  Stanley  Dean  Witter to explore  strategic  alternatives
available  to the Company,  including  the  acquisition  of the Company by, or a
strategic  alliance  with, a third party.  The press release is attached to this
report as Exhibit 99.1.



CASH FLOWS

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

     Operating  Activities.  Cash used in operating  activities  increased $44.1
million to $75.2  million for the six months  ended June 30, 1998 as compared to
the $31.1 million used in operating activities for the six months ended June 30,
1997.  For the six months ended June 30,  1998,  the Company used cash of $122.2
million for  interest-only and residual  certificates  compared to $85.6 million
used in the six months  ended June 30,  1997,  an increase  of $36.6  million or
42.8%. Operating cash provided by the net change in mortgage loans held for sale
increased  by $23.3  million to $15.8  million for the six months ended June 30,
1998 from a net use of $7.5 million for the six months ended June 30, 1997.  The
increase  in the net  change  in other  assets  of $19.2  million  was the other
principal increase in the use of operating cash during the six months ended June
30, 1998.

     Investment Activities. Net cash used in investing activities decreased $0.6
million or 9.5% to $5.7 million for the six months ended June 30, 1998 from $6.3
million  for the six months  ended June 30,  1997.  Cash used for  payments  for
acquisitions  was nil for the six months ended June 30, 1998 and $3.8 million in
1997.  Cash used for purchases of premises and equipment  increased $3.2 million
or 128.0% to $5.7  million  for the six  months  ended  June 30,  1998 from $2.5
million for the same  period in 1997.  This  increase  was  associated  with the
Company's new headquarters,  offices,  servicing  operations center and expanded
branch operations.

     Financing  Activities.  Net cash provided by financing activities increased
$48.3  million or 122.6% to $87.7 million for the six months ended June 30, 1998
compared to $39.4 million for the six months ended June 30, 1997  resulting from
the increased  borrowings  under  warehouse  lines of credit and subordinate and
residual financing facilities.


                                       17
<PAGE>

RECENT ACCOUNTING DEVELOPMENTS

     In June 1998,  the FASB  issued SFAS No. 133,  "Accounting  for  Derivative
Instruments and Hedging Activities".  This Statement establishes  accounting and
reporting  standards for derivative  instruments,  including certain  derivative
instruments   embedded  in  other   contracts   (collectively   referred  to  as
derivatives),  and for hedging activities.  It requires that an entity recognize
all  derivatives  as either assets or  liabilities in the statement of financial
position and measure those instruments at fair value.

     Under this  Statement,  an entity that elects to apply hedge  accounting is
required to establish  at the  inception of the hedge the method it will use for
assessing  the  effectiveness  of the  hedging  derivative  and the  measurement
approach for determining the ineffective aspect of the hedge. Those methods must
be consistent  with the entity's  approach to managing  risk.  This Statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
The  Company  expects to adopt the  Statement  effective  January 1, 2000 and is
currently evaluating the impact of this Statement.

YEAR 2000

      The Year 2000 issue refers to a flaw in many  computer  programs and other
computer  applications  relating to their ability to properly interpret the year
as a result of using only a two-digit  representation,  such as "99" for "1999."
If not corrected,  many computer applications may fail or produce erroneous data
relating to the year 2000 and beyond.

      The  Company  is in the  process  of  assessing  which of its  information
technology  systems and other  applications  are not Year 2000  compliant,  both
within the parent company and with respect to its subsidiaries, National Capital
Funding, Inc., Oceanmark Financial Corporation, Home America Financial Services,
Inc., and Hallmark America Corp. The Company expects to complete its analysis of
the Year 2000 readiness of its subsidiaries by September 30, 1998.

      Approximately  90 percent of the products used in the  Company's  computer
systems are  "off-the-shelf"  retail  products for which Year 2000  upgrades are
available.  The  Company  expects  to  complete  installation  of these  upgrade
releases by October 1998.  With respect to the Company's  specialized  servicing
application,  the Company expects to complete the required code modifications by
October 1998, at which time testing and  validation of the modified  system will
begin.  The Company  plans to rely  primarily  on internal  resources to perform
testing and validation assessments. The cost of such system upgrades and testing
is not expected to exceed $3 million.

      The Company  has not  determined  whether to upgrade its loan  origination
data   processing   system  or  to  replace  it  with  a  system  with  enhanced
technological  capabilities.  The cost of upgrading for Year 2000  compliance is
not  anticipated to exceed  $25,000,  while  replacement  costs are estimated to
range  between $1.5 million and $2.0  million.  This  decision is expected to be
made by November 1998.

      Embedded  technology with respect to the Company's  telephone  systems and
other  office  equipment  has  been  analyzed  and  determined  to be Year  2000
compliant at all  locations.  The building  systems,  such as elevators and HVAC
equipment,  at our new  corporate  headquarters  facilities  are also  Year 2000
compliant.  The  Company's  branch

                                       18
<PAGE>

office  locations are being assessed for compliance;  such review is expected to
be  completed  by  year-end.  The  total  cost of  these  Year  2000  compliance
activities is not anticipated to be material to the Company's financial position
or results of operations.

      The Company also faces the risk that its strategic alliance partners,  its
third-party  loan  servicer  (Advanta),  or other  significant  vendors may have
computer   systems  which  are  not  compliant  with  Year  2000   requirements.
Disruptions  in the  operations  of its  partners or vendors may have a material
adverse  effect on the Company.  The Company is  monitoring  the progress of its
partners and vendors in achieving Year 2000 compliance. However, there can be no
assurance that the systems of such other companies will be timely converted.

      The  Company  is in the  process  of  forming  a  task  force  to  develop
contingency plans to address various operational scenarios relating to potential
Year 2000  noncompliance  with  respect to  systems of the  Company or its major
vendors. The task force will be working to implement such plans during the first
half of 1999 in conjunction with system testing.






ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    Since the Company  believes that no  substantial  changes have occurred from
disclosures  in the  Company's  annual report on Form 10-K,  no  information  is
required under this item.





PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS

      The Company, its subsidiary Oceanmark Financial Corporation and members of
its board of directors are  defendants in a lawsuit in US District Court for the
southern  district of Florida.  Oceanmark  Bank,  F.S.B.  is the plaintiff.  The
Company  was served on March 9, 1998.  The  complaint  relates to the  Company's
acquisition  of  mortgages  and notes of  Oceanmark  Bank  beginning in 1995 and
ending with the Company's  acquisition  of the mortgage  operations of Oceanmark
Bank and certain  residual  assets in May 1997, as well as events  subsequent to
the May 1997  acquisition.  The  complaint  alleges,  among other  things,  that
employees of  Oceanmark  Bank  conspired  with the Company to lower the purchase
price of the assets sold to the Company by Oceanmark  Bank. The plaintiff  seeks
relief under theories of  racketeering,  securities  fraud,  breach of contract,
breach of fiduciary duty,  conspiracy,  and negligence and requests compensatory
and punitive damages totaling $75 million.

                                       19
<PAGE>

        The Company's  management believes that the Oceanmark claims are without
merit and  intends  to defend  the  Company's  position  vigorously.  Management
believes  that the  resolution  of this matter will not have a material  adverse
effect on the Company's financial condition, results of operations or liquidity.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      The  annual  meeting  of  stockholders  was held on June 8,  1998.  At the
meeting H. Wayne Snavely,  Robert W. Howard,  Bernard A. Guy, E. James Hedemark,
Stephen J.  Shugerman  and Frank P. Willey were  elected as  directors  to serve
until the next  annual  meeting  of  stockholders  and  thereafter  until  their
successors are elected and qualified.

         Votes cast in favor of Mr. Snavely's election totaled 18,253,821, while
130,403 votes were withheld.

         Votes cast in favor of Mr. Howard's election totaled 18,273,821,  while
110,403 votes were withheld.

         Votes cast in favor of Mr. Guy's  election  totaled  18,272,421,  while
111,803 votes were withheld.

         Votes  cast in favor of Mr.  Hedemark's  election  totaled  18,273,821,
while 110,403 votes were withheld.

         Votes cast in favor of Mr.  Shugerman's  election  totaled  18,274,121,
while 110,103 votes were withheld.

         Votes cast in favor of Mr. Willey's election totaled 18,274,121,  while
110,103 votes were withheld.

         The stockholders  voted to approve the appointment of KPMG Peat Marwick
LLP to act as  independent  auditors  for the Company for the fiscal year ending
December 31, 1998. Votes cast in favor of this proposal were  18,348,501,  while
votes cast against were 14,648 and abstentions totaled 11,160.

         The  stockholders  also voted to approve an amendment to the 1995 stock
option plan. Votes cast in favor of this election were  13,136,717,  while votes
cast against were 1,076,206 and abstentions totaled 43,877.


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<PAGE>


ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

        (a)  Exhibits

             10.1 - Draft  Form  of Key  Employee  Severance  Agreement  (Tier 2
                    Executive)

             27.1 - 2Q98 Financial Data Schedule (EDGAR Filing only)

             27.2 - Restated 2Q97 Financial Data Schedule (EDGAR Filing Only)

             99.1 - Press Release dated July 28, 1998.

        (b)  Reports on Form 8-K
                There were no reports filed on Form 8-K during the quarter ended
                 June 30, 1998.



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<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/ Peter F. Makowiecki
                                              Peter F. Makowiecki
                                              Chief Financial Officer
                                              (principal financial and principal
                                              accounting officer)


Dated:  August 14, 1998


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