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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------

                                    FORM 10-K

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                            ------------------------
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

                           COMMISSION FILE NO. 1-12109
                            ------------------------
                           DELTA FINANCIAL CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

              DELAWARE                               11-3336165
  (STATE OR OTHER JURISDICTION OF                 (I.R.S. EMPLOYER
   INCORPORATION OR ORGANIZATION)                IDENTIFICATION NO.)

   1000 WOODBURY ROAD, SUITE 200,
         WOODBURY, NEW YORK                             11797
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)             (ZIP CODE)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:(516) 364-8500
                            ------------------------
           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

COMMON STOCK, PAR VALUE $.01 PER SHARE         NEW YORK STOCK EXCHANGE
        (TITLE OF EACH CLASS)        (NAME OF EACH EXCHANGE ON WHICH REGISTERED)

       Securities Registered Pursuant to Section 12(g) of the Act: None

   Indicate  by check mark  whether  the  registrant  (1) has filed all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]

   Indicate by check mark if disclosure of  delinquent  filers  pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]

   As of March 4, 1999, the  aggregate  market value of the voting stock held by
non-affiliates  of  the  Registrant,  based on the closing  price of $5.50,  was
approximately $27,101,322.

   As of March 31, 1999, the  Registrant  had 15,358,749  shares of Common Stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

   Part III,  Items 10, 11, 12 and 13 are  incorporated  by reference from Delta
Financial Corporation's definitive proxy statement to stockholders which will be
filed with the Securities  and Exchange  Commission no later than 120 days after
December 31, 1998.
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<PAGE>


PART I
ITEM 1.  BUSINESS

BUSINESS OVERVIEW

   Delta  Financial  Corporation  (the  "Company"  or  "Delta")  is  a  Delaware
corporation  which was  organized  in August  1996.  On  October  31,  1996,  in
connection  with its initial public  offering,  the Company  acquired all of the
outstanding common stock of Delta Funding Corporation  ("Delta Funding"),  a New
York corporation which had been organized on January 8, 1982 to originate, sell,
service and invest in  residential  first and second  mortgages.  On November 1,
1996, the Company  completed an initial public  offering of 4,600,000  shares of
common stock, par value $.01 per share.

   Delta Financial  Corporation,  together with its subsidiaries,  is a consumer
finance  company  that  has  engaged  in  originating,  acquiring,  selling  and
servicing  non-conforming home equity loans since 1982.  Throughout its 17 years
of operating history,  Delta has focused on lending to individuals who generally
have  impaired  or limited  credit  profiles  or higher  debt-to-income  ratios.
Management  believes that these  borrowers have largely been  unsatisfied by the
more  traditional  sources  of  mortgage  credit,   which  underwrite  loans  to
conventional   guidelines   established   by  the  Federal   National   Mortgage
Associations ("FNMA") and the Federal Home Loan Mortgage Corporation  ("FHLMC").
The  Company  makes  loans  to  these   borrowers  for  such  purposes  as  debt
consolidation,  home improvement,  mortgage refinancing or education,  and these
loans  are  primarily   secured  by  first  mortgages  on  one-  to  four-family
residential properties.

   Through its wholly-owned  subsidiary,  Delta Funding,  the Company originates
home equity loans indirectly  through  licensed  mortgage brokers and other real
estate  professionals  who  submit  loan  applications  on behalf  of  borrowers
("Brokered  Loans") and also purchases  loans from mortgage  bankers and smaller
financial   institutions   that   satisfy   Delta's   underwriting    guidelines
("Correspondent  Loans").  Delta Funding  Corporation  currently  originates and
purchases  the  majority  of its loans in 24  states,  through  its  network  of
approximately 1,400 brokers and correspondents.

   In  February  1997,  to broaden  its  origination  sources  and to expand its
geographic presence, the Company acquired two related retail originators of home
equity loans,  Fidelity  Mortgage Inc., based in Cincinnati,  Ohio, and Fidelity
Mortgage (Florida),  Inc., based in West Palm Beach,  Florida,  and subsequently
merged the two companies  into Fidelity  Mortgage  Inc.  ("Fidelity  Mortgage").
Fidelity Mortgage develops retail loan leads primarily through its telemarketing
system and its network of 15 retail  offices  located in Florida  (3),  Georgia,
Illinois,  Indiana,  Missouri,  North Carolina,  Ohio (4),  Pennsylvania (2) and
Tennessee.

   In May 1998,  the  Company and MCAP  Mortgage  Corporation  and MCAP  Service
Corporation  entered  into a strategic  alliance to  originate,  underwrite  and
service  non-conforming  mortgage loans in Canada. In February 1999, the Company
decided to close its Canadian  business to focus  exclusively  on its U.S.-based
business.

   For the year ended  December 31, 1998,  the Company  originated and purchased
approximately  $1.73 billion of loans, of which  approximately $836 million were
originated through its network of brokers,  $653 million were purchased from its
network of  correspondents,  $234 million were  originated  through its Fidelity
Mortgage  retail  network and $5 million  were  originated  through its Canadian
brokered network.

   Substantially  all of the loans  originated and purchased by the Company were
sold in  securitizations  in which the loans were transferred to a trust,  which
had  raised  the  cash  payment  to  purchase  the  loans  through  the  sale of
asset-backed  pass-through  securities.  For the year ended  December  31, 1998,
Delta sold a total of $1.72 billion of loans  through four real estate  mortgage
investment conduit ("REMIC") securitizations. Each of these four securitizations
was  credit-enhanced,  by  an  insurance  policy  provided  through  a  monoline
insurance company and/or a senior-subordinated  structure, to receive ratings of
Aaa from Moody's  Investors  Service,  Inc.  ("Moody's") and AAA from Standard &
Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc. ("S&P"). The
Company sells loans through  securitizations  to improve its operating  leverage
and  liquidity,  to  minimize  financing  costs and to reduce  its  exposure  to
fluctuations in interest rates.

   The  majority  of the  Company's  revenues  and cash  flows  result  from its
securitizations  and servicing of  home-equity  loans that it has  originated or
purchased.  In a  securitization,  the Company  sells the loans to a trust for a
cash

                                       1


payment  while  retaining (1) the  right to  service  the loans,  and  receive a
contractual servicing fee and (2) interest-only and residual certificates in the
trust,   entitling  the  Company  to  receive  any  "Excess  Servicing"  income,
consisting of any remaining cash flows collected by the trust from principal and
interest  payments on its loans after the trust has first paid (a) all principal
and interest required to be passed through to holders of the trust's securities,
(b) all  contractual  servicing  fees, and (c) other recurring fees and costs of
administering  the  trust.  Upon  securitizing  a pool of loans,   the   Company
recognizes a gain on sale of loans ("net gain on sale of mortgage  loans") equal
to  the  difference   between  cash  received  from  the  trust  when  it  sells
asset-backed pass-through certificates and the investment in the loans remaining
after  allocating  portions of that  investment to record the value of servicing
rights  and   interest-only   and   residual   certificates   received   in  the
securitization.  The  majority  of the net  gain on the sale of  mortgage  loans
results  from,  and is initially  realized in the form of, the  retention of the
mortgage  servicing  rights and  interest-only  and residual  certificates.  The
servicing rights and interest-only  and residual  certificates are each recorded
based on their fair values,  estimated based on a discount rate which management
believes  reflects  the rate market  participants  would  utilize in  purchasing
similar servicing rights and interest-only  and residual  certificates,  and the
stated  terms  of  the  transferred  loans  adjusted  for  estimates  of  future
prepayment  rates and defaults among those loans. If actual  prepayments  and/or
defaults  exceed  the  Company's  estimates,  the  future  cash  flows  from the
servicing rights and interest-only and residual certificates would be negatively
affected.  (See "Item 7 -  Management's  Discussion  and  Analysis of  Financial
Condition and Results of Operations - Certain Accounting Considerations.")

   Although the Company  recognizes  income from the  securitization of loans at
the  time of the  securitization,  the  Company  receives  cash  flows  from the
securitization,  in particular the retained  servicing rights and  interest-only
and residual certificates, over the life of the transferred loans.

   The Company  services  substantially  all of the loans it has  originated  or
purchased,  including  all of the  loans  sold  through  securitizations.  As of
December 31, 1998, the Company has a loan servicing portfolio of $2.95 billion.

   The Company begins to receive cash flows from monthly  contractual  servicing
fees in the month following a securitization. The Company's servicing fees range
from  0.50% to 0.65% per annum of the  outstanding  balance  of the loans  being
serviced.

   The Company typically begins to receive cash flows from the interest-only and
residual  certificates  retained  upon  securitization  approximately  eight  to
fifteen months after a securitization, with the specific timing depending on the
structure  and  performance  of the  securitization.  Initially,  securitization
trusts utilize the Excess  Servicing cash flows to make  additional  payments of
principal  on the  pass-through  certificates  in  order to  establish  a spread
between the principal amount of the trust's  outstanding loans and the amount of
outstanding pass-through certificates. Once a spread of between 2% and 3% of the
initial  securitization   principal  (the   "overcollateralization   limit")  is
established,  the Excess  Servicing  cash flows are  distributed to Delta as the
holder of the interest-only and residual certificates.  The Company utilizes the
more  conservative  "cash-out" method of valuing future cash flows from residual
certificates  (See "Item 7  Management's  Discussion  and  Analysis of Financial
Condition and Results of Operations - Certain Accounting Considerations.").

   In  addition  to  the  income  and  cash  flows  earned  from  the  Company's
securitizations,  the Company  also earns income and  generates  cash flows from
whole loan sales,  the net interest  spread  earned on loans while they are held
for sale, and from loan origination fees on Brokered Loans and retail loans.

   The  Company's  business  strategy is to increase  the size of its  servicing
portfolio  and  focus on its more  profitable  broker  and  retail  channels  of
originations  (instead of correspondent  purchases) by (1) continuing to provide
top  quality  service  to its  network  of  brokers,  correspondents  and retail
clients, (2) maintaining its underwriting standards, (3) further penetrating its
established  and  recently-entered  markets and  expanding  into new  geographic
markets, (4) expanding its retail origination  capabilities,  (5) leveraging and
continuing its investment in information  and processing  technologies,  and (6)
strengthening its loan production capabilities through acquisitions.


                                       2


HOME EQUITY LENDING OPERATIONS

OVERVIEW

   Delta's  consumer  finance  activities  consist  of  originating,  acquiring,
selling and servicing  non-conforming  mortgage loans. These loans are primarily
secured  by  first  mortgages  on  one- to  four-family  residences.  Once  loan
applications  have been received,  the  underwriting  process  completed and the
loans funded or purchased, Delta typically packages the loans in a portfolio and
sells the loan portfolio  through a  securitization.  Delta retains the right to
service the loans that it securitizes.

   The Company provides its customers with an array of loan products designed to
meet their  needs.  The  Company  uses a  risk-based  pricing  strategy  and has
developed  products  for  various  risk  categories.  Historically,  the Company
offered  fixed-rate  loan products  and, to date,  the majority of the Company's
loan production is fixed-rate.  As the Company has expanded  geographically,  it
has expanded  its product  offerings to include  adjustable-rate  mortgages  and
fixed/adjustable-rate mortgages. However, during the fourth quarter of 1998, the
Company has virtually  eliminated  originations  of its six-month  LIBOR (London
Inter Bank Offered Rate)  adjustable rate  mortgages,  which are less profitable
and more prepayment sensitive.

   Historically,  the  Company  conducted  substantially  all of its  broker and
correspondent  lending  operations out of its Woodbury,  New York  headquarters.
Recently,  however, the Company has been opening regional branch offices,  which
include loan processing,  underwriting and business  development  functions,  to
bring it in closer  contact with brokers and  correspondents,  enhance  customer
service and underscore Delta's long-term commitment in newer regions. Typically,
these offices are staffed with a combination of experienced  Delta personnel who
oversee  implementation  of Delta's  operating  methods and local employees with
established  relationships  in, and  specific  knowledge  of, the local  market.
Currently,  the Company's Southeast regional office (Atlanta,  Georgia) and West
Coast regional office (Anaheim, California) are the only "full service" regional
branches with full underwriting authority. Delta's Midwest (Chicago,  Illinois),
New England (Warwick,  Rhode Island) and Southeast  (Deerfield  Beach,  Florida)
regional  offices  are "full  processing"  regional  branches,  for which  final
underwriting  approval is required from the Woodbury,  New York headquarters for
all mortgage loans.  As these branches  mature and demonstrate  their ability to
meet  Delta's  operating  standards,  the Company  intends to  strengthen  their
operations by delegating full underwriting  authority.  Fidelity Mortgage retail
loans are  underwritten by two operational  offices  (Cincinnati,  Ohio and West
Palm Beach, Florida), which have full underwriting authority.

LOAN ORIGINATION AND PURCHASES

   The Company  increased  its loan  originations  and purchases by 38% to $1.73
billion  in 1998  from  $1.25  billion  in 1997,  an  increase  of 90% over 1996
production of $659 million.

   The following  tables  highlight  several  important  trends for the Company,
including:  (1) increased overall loan production,  (2) a shift to higher credit
quality  loans,  (3) a de-emphasis of  correspondent  loan purchases and (4) the
maintenance of geographic diversity.

                                       3


   The following table shows the channels of the Company's loan originations and
purchases for the years shown:

                                                    YEAR ENDED DECEMBER 31,
                                                 1998         1997        1996
                                                 ----         ----        ----
                                                    (DOLLARS IN THOUSANDS)
Broker:
    Principal balance...................... $  841,079   $  481,586   $  321,733
    Average principal balance per loan..... $       92   $       87   $       85
    Combined weighted average initial loan-
      to-value ratio(1)....................      72.8%        69.9%        67.7%
    Weighted average interest rate.........      10.0%        10.8%        11.1%
Correspondent:
    Principal balance...................... $  652,503   $  632,639   $  337,033
    Average principal balance per loan..... $       82   $       77   $       73
    Combined weighted average initial loan-
      to-value ratio(1)....................      73.9%        72.8%        69.8%
    Weighted average interest rate.........      10.8%        11.3%        11.7%
Retail:
    Principal balance...................... $  234,011   $  140,386   $      n/a
    Average principal balance per loan..... $       75   $       69   $      n/a
    Combined weighted average initial loan-
      to-value ratio(1)....................      79.9%        80.1%          n/a
    Weighted average interest rate.........       9.4%        10.1%          n/a
Total loan purchases and originations:
    Principal balance...................... $1,727,593   $1,254,611   $  658,766
    Average principal balance per loan..... $       85   $       80   $       78
    Combined weighted average initial loan-
      to-value ratio(1)....................      74.2%        72.5%        68.8%
    Weighted average interest rate.........      10.2%        11.0%        11.4%
Percentage of loans secured by:
    First mortgage.........................      95.5%        94.0%        93.8%
---------------
 (1)The  weighted  average  initial  loan-to-value  ratio of a loan secured by a
    first  mortgage  is  determined  by  dividing  the amount of the loan by the
    lesser of the purchase price or the appraised value of the mortgage property
    at origination.  The weighted average initial  loan-to-value ratio of a loan
    secured by a second  mortgage  is  determined  by taking the sum of the loan
    secured by the first and second  mortgages and dividing by the lesser of the
    purchase  price  or  the  appraised  value  of  the  mortgage   property  at
    origination.

                                       4
<PAGE>

   The following table shows the channels of loan  originations and purchases on
a quarterly basis for 1998:

<TABLE>
<CAPTION>

                                                                         THREE MONTHS ENDED
                                                      ---------------------------------------------------------
                                                      DECEMBER 31,  SEPTEMBER 30,     JUNE 30,      MARCH 31,
                                                          1998           1998           1998          1998
                                                      ------------  -------------  -------------  -------------
<S>                                                   <C>           <C>            <C>            <C>    
                                                                                   
                                                                      (DOLLARS IN THOUSANDS)      
Broker:                                                                                           
    Number of Brokered Loans......................         2,711          2,464          2,140          1,798
    Principal balance.............................      $243,721      $ 231,475      $ 198,327       $167,556
    Average principal balance per loan............      $     90      $      94      $      93       $     93
    Combined weighted average initial loan-                                                        
      to-value ratio(1)..........................          73.1%          73.4%          72.3%          71.9%
    Weighted average interest rate................         10.0%           9.9%          10.0%          10.1%
                                                                                                   
Correspondent:                                                                                     
    Number of Correspondent Loans.................         1,369          2,105          2,404          2,110
    Principal balance.............................      $108,266       $177,753       $199,057       $167,427
    Average principal balance per loan............      $     79      $      84       $     83       $     79
    Combined weighted average initial loan-                                                        
      to-value ratio(1)...........................         73.5%          74.3%          74.0%          73.8%
    Weighted average interest rate................         10.8%          10.8%          10.7%          11.0%
                                                                                                   
Retail:                                                                                            
    Number of retail loans........................           883            870            674            714
    Principal balance.............................     $  63,049       $ 66,974       $ 52,191       $ 51,797
    Average principal balance per loan............     $      71       $     77       $     77       $     73
    Combined weighted average initial loan-                                                        
      to-value ratio(1)...........................         79.1%          80.3%          80.2%          80.2%
    Weighted average interest rate................          9.4%           9.2%           9.3%           9.6%
                                                                                                   
Total loan purchases and originations:                                                             
    Total number of loans.........................         4,963          5,439          5,218          4,622
    Principal balance.............................      $415,036       $476,202       $449,575       $386,780
    Average principal balance per loan............      $     84       $     88       $     86       $     84
    Combined weighted average initial loan-                                                        
      to-value ratio(1)...........................         74.1%          74.7%          74.0%          73.8%
    Weighted average interest rate................         10.1%          10.1%          10.2%          10.4%
---------------                                                                                  
<FN>                                                                               
(1)  The weighted  average  initial  loan-to-value  ratio of a loan secured by a   
     first  mortgage is  determined  by  dividing  the amount of the loan by the  
     lesser  of the  purchase  price  or the  appraised  value  of the  mortgage
     property at origination.  The weighted average initial  loan-to-value ratio
     of a loan secured by a second  mortgage is  determined by taking the sum of
     the loan  secured by the first and second  mortgages  and  dividing  by the
     lesser  of the  purchase  price  or the  appraised  value  of the  mortgage
     property at origination.
</FN>
</TABLE>

                                       5
<PAGE>
      
   The following table shows lien position,  weighted average interest rates and
loan-to-value ratios for the years shown:
                                                       

                                                         YEAR ENDED DECEMBER 31,
                                                         -----------------------
                                                         1998     1997     1996
                                                         ----     ----     ----
First mortgage:                                        
    Percentage of total purchases and originations...    95.5%    94.0%    93.8%
    Weighted average interest rate...................    10.2%    11.0%    11.4%
    Weighted average initial loan-to-value ratio(1)..    74.3%    72.6%    68.9%
                                                       
Second mortgage:                                       
    Percentage of total purchases and originations...     4.5%     6.0%     6.2%
    Weighted average interest rate...................    10.5%    11.3%    11.5%
    Weighted average initial loan-to-value ratio(1)..    70.6%    71.1%    66.6%
---------------                                       
(1)  The weighted  average  initial  loan-to-value  ratio of a loan secured by a
     first  mortgage is  determined  by  dividing  the amount of the loan by the
     lesser  of the  purchase  price  or the  appraised  value  of the  mortgage
     property at origination.  The weighted average initial  loan-to-value ratio
     of a loan secured by a second  mortgage is  determined by taking the sum of
     the loan  secured by the first and second  mortgages  and  dividing  by the
     lesser  of the  purchase  price  or the  appraised  value  of the  mortgage
     property at origination.

   The following  table shows the geographic  distribution of loan purchases and
originations for the periods indicated:
<TABLE>
<CAPTION>

                                                         YEAR ENDED DECEMBER 31,
                                 ----------------------------------------------------------------------------
                                          1998                      1997                      1996
                                 ------------------------  ------------------------  ------------------------
REGION                           PERCENTAGE  DOLLAR VALUE  PERCENTAGE  DOLLAR VALUE  PERCENTAGE  DOLLAR VALUE
------                           ----------  ------------  ----------  ------------  ----------  ------------
<S>                              <C>         <C>           <C>         <C>           <C>         <C>
                                                            (DOLLARS IN MILLIONS)
                               
NY, NJ and PA.............           55.0%       $949.3        52.9%       $664.3        66.3%       $436.9
Midwest...................           19.7         340.3        21.6         270.9        14.9          98.3
Southeast.................            9.3         161.0         9.7         121.4         4.2          27.6
New England...............            7.3         125.8         7.1          89.3         5.9          38.6
Mid-Atlantic*.............            6.9         119.1         6.5          81.3         6.6          43.7
West......................            1.5          26.6         2.2          27.3         2.1          13.7
Canada....................            0.3           5.5         n/a           n/a         n/a           n/a
                                                                                                
------------
*    Excluding New York (NY), New Jersey (NJ) and Pennsylvania (PA).
</TABLE>

   BROKER AND  CORRESPONDENT  MARKETING.  Throughout  its history Delta has been
successful  in  establishing  and  maintaining  relationships  with  brokers and
correspondents  offering  non-conforming  mortgage  products to their clientele.
Management  believes that this success is primarily  attributable to the quality
of service the Company provides to its network of brokers and correspondents.

   Delta  typically  initiates  contact with a broker or  correspondent  through
Delta's Business  Development  Department,  comprised of 33 business development
representatives  as of December 31, 1998,  supervised  by a senior  officer with
over ten years of sales and marketing  experience  in the industry.  The Company
usually  hires  business  development  representatives  who have  contacts  with
brokers and correspondents  that originate  nonconforming  mortgage loans within
their  geographic  territory.  The  business  development   representatives  are
responsible   for  developing   and   maintaining   the  Company's   broker  and
correspondent  networks within their geographic territory by frequently visiting
the  broker  or   correspondent,   communicating   the  Company's   underwriting
guidelines,  disseminating new product  information and pricing changes,  and by
demonstrating  a  continuing  commitment  to  understanding  the  needs  of  the
customer.  The business development  representatives attend industry trade shows
and inform Delta about the products and pricing being offered by competitors and
new market entrants. This information assists Delta in refining its programs and
product  offerings  in  order  to  remain  competitive.   Business   development
representatives  are compensated with a base salary and commissions based on the
volume of loans originated or purchased as a result of their efforts.

                                       6


   APPROVAL  PROCESS.  Before a broker or correspondent  becomes part of Delta's
network,  it must go through an approval  process.  Once  approved,  brokers and
correspondents  may immediately  begin submitting  applications  and/or loans to
Delta.

   To be approved,  a broker must demonstrate  that it is properly  licensed and
registered  in the  state in which it seeks to  transact  business,  submit to a
credit check and sign a standard broker agreement with Delta. A correspondent is
eligible  to  submit  loans to  Delta  for  purchase  only  after  an  extensive
investigation of the prospective correspondent's lending operations including an
on-site  visit,  a review of the  correspondent's  financial  statements for the
prior two years, a credit report on the  correspondent,  a review of sample loan
documentation  and  business  references  provided  by the  correspondent.  Once
approved,  Delta requires that each  correspondent sign an Agreement of Purchase
and  Sale in  which  the  correspondent  makes  representations  and  warranties
governing both the mechanics of doing business with Delta and the quality of the
loan  submissions  themselves.  Delta  also  performs  an annual  review of each
approved  correspondent  in order to  ensure  continued  compliance  with  legal
requirements and that lending operations and financial  information  continue to
meet Delta's standards. In addition,  Delta regularly reviews the performance of
loans originated or purchased through its brokers or correspondents.

   BROKERED  LOANS.  For the year ended December 31, 1998, the Company's  broker
network  accounted  for $841.1  million,  or 49%, of Delta's loan  purchases and
originations  compared to $481.6 million,  or 38%, of Delta's loan purchases and
originations for the year ended December 31, 1997 and $321.7 million, or 49%, of
Delta's loan purchases and originations for the year ended December 31, 1996. No
single  broker  contributed  more  than  5.2%,  5.8% or 11.4% of  Delta's  total
purchases or  originations  in the years ended December 31, 1998, 1997 and 1996,
respectively.

   Once  approved,  a  broker  may  submit  loan  applications  for  prospective
borrowers to Delta. To process broker  submissions,  Delta's broker originations
area is organized into teams,  each  consisting of loan officers and processors,
which are generally  assigned to specific  brokers.  Because Delta operates in a
highly   competitive   environment  where  brokers  may  submit  the  same  loan
application  to several  prospective  lenders  simultaneously,  Delta strives to
provide brokers with a rapid and informed  response.  Loan officers  analyze the
application and provide the broker with a preliminary approval, subject to final
underwriting  approval,  or a denial,  typically within one business day. If the
application is approved by the Company's underwriters,  a "conditional approval"
will be issued to the broker  with a list of specific  conditions  to be met and
additional  documents to be supplied prior to funding the loan. The loan officer
and processor team will then work directly with the submitting broker to collect
the requested information and meet all underwriting  conditions.  In most cases,
the Company funds loans within 14 to 21 days after  preliminary  approval of the
loan  application.  In the case of a  denial,  Delta  will  make all  reasonable
attempts to ensure that there is no missing information  concerning the borrower
or the application that might change the decision on the loan.

   The Company  compensates its loan officers,  who on a loan-by-loan  basis are
the  primary  relationship  contacts  with  the  brokers,   predominantly  on  a
commission  basis. All of the Company's loan officers must complete an extensive
9- to 12-month  training program to attain the level of knowledge and experience
integral to the Company's  commitment to providing the highest  quality  service
for brokers.  Management believes that by maintaining an efficient,  trained and
experienced  staff, it has addressed three central factors which determine where
a broker sends its  business:  (i) the speed with which a lender  closes  loans,
(ii) the lender's knowledge concerning the broker and his business and (iii) the
support a lender provides.

   CORRESPONDENT   LOANS.  For  the  year  ended  December  31,  1998,   Delta's
correspondent  network  accounted for $652.5  million,  or 37%, of Delta's loans
purchases and originations  compared to $632.6 million,  or 51%, of Delta's loan
purchases  and  originations  for the year ended  December  31,  1997 and $337.0
million,  or 51%, of Delta's loan purchases and  originations for the year ended
December 31, 1996. No single  correspondent  contributed more than 3.8%, 6.5% or
6.3% of Delta's total loan  purchases and  originations  in 1998,  1997 or 1996,
respectively.

   An approved  correspondent is a licensed  mortgage banker or savings and loan
who sells  loans to Delta which the  correspondent  has  originated,  processed,
closed  and  funded  in its own name in  conformity  with  Delta's  underwriting
standards.  The loans are sold to Delta either on an individual flow basis or in
block sales. When selling on a flow basis, a correspondent typically will seek a
pre-approval  from Delta prior to closing the loan,  and Delta will  approve the
loan based on a partial or full credit package,  stipulating any items needed to
complete the

                                       7


package in  adherence to Delta's  underwriting  guidelines. On  a block  sale, a
correspondent  will offer a group of loans,  generally  loans that have not been
pre-approved,  to Delta for sale,  and Delta will  purchase  those  loans in the
block that meet Delta's underwriting criteria.

   RETAIL LOANS. The Company acquired its Fidelity  Mortgage retail  origination
network in 1997.  For the year ended December 31, 1998,  this channel  accounted
for $234.0 million, or 14%, of Delta's loan purchases and originations  compared
to $140 million,  or 11%, of Delta's loan  purchases and  originations  in 1997.
Through its marketing efforts, Fidelity Mortgage is able to identify, locate and
focus on  individuals  who,  based on  historic  customer  profiles,  are likely
customers  for  the  Company's  products.   Fidelity  Mortgage's   telemarketing
representatives  identify interested customers and refer these customers to loan
officers  at the  retail  branch  offices  who then  proceed  to  determine  the
applicant's qualifications for the Company's loan products, negotiate loan terms
with the borrower and process the loan through completion.

LOAN UNDERWRITING

   All of Delta's brokers,  correspondents  and retail offices are provided with
the Company's underwriting  guidelines.  Loan applications received from brokers
and  correspondents  or retail  customers  are  classified  according to certain
characteristics,  including but not limited to: credit history of the applicant,
ability to pay,  condition and location of the collateral,  loan-to-value  ratio
and general  stability of the applicant in terms of employment  history and time
in residence.  Delta has established  classifications with respect to the credit
profile  of the  applicant,  and each  loan is  placed  into one of four  letter
ratings "A" through "D", with subratings within those categories. Terms of loans
made by  Delta,  as well as  maximum  loan-to-value  ratios  and  debt-to-income
ratios, vary depending on the applicant's  classification.  Loan applicants with
less favorable  credit ratings are generally  offered loans with higher interest
rates and lower loan-to-value  ratios than applicants with more favorable credit
ratings.  The general criteria used by Delta's underwriting staff in classifying
loan applicants are set forth in the following table:

                                       8

<PAGE>

<TABLE>
<CAPTION>

              
                          DELTA'S UNDERWRITING CRITERIA

                                "A" RISK                "B" RISK                 "C" RISK                "D" RISK
                            EXCELLENT CREDIT
                                HISTORY            GOOD OVERALL CREDIT      GOOD TO FAIR CREDIT      FAIR TO POOR CREDIT    
                            ----------------       -------------------      -------------------      -------------------
<S>                         <C>                    <C>                      <C>                      <C> 
                                                                                                  
 Existing mortgage                                                                                
   history...............   Current at             Current at               Up to 30 days            90 days delinquent
                            application time       application time         delinquent at            or more
                            and a maximum of       and a maximum of         application time         
                            two 30-day late        four 30-day late         and a maximum of         
                            payments in the        payments in the          four 30-day late         
                            last 12 months         last 12 months           payments, two            
                                                                            60-day late              
                                                                            payments and             
                                                                            one 90-day late          
                                                                            payment in the           
                                                                            last 12 months           
                                                                                                     
 Other credit............   Minor 30 day           Some slow pays           Slow pays, some          Not a factor.
                            late items allowed     allowed but              open delinquencies       Derogatory
                            with a letter of       majority of credit       allowed.  Isolated       credit must
                            explanation; no        and installment          charge-offs, collec-     be paid with
                            open collection        debt paid as agreed.     tion accounts or         proceeds.  Must
                            accounts, charge-      Small isolated           judgments case-          demonstrate
                            offs, judgments        charge-offs, collec-     by-case                  ability to pay
                                                   tion accounts or                                  
                                                   judgments case-                                   
                                                   by-case                                           
                                                                                                     
 Bankruptcy filings......   Discharged more        Discharged more          Discharged more          May be open at
                            than three years       than two years           than one year            closing, but must
                            prior to closing       prior to closing         prior to closing         be paid off with
                            and excellent          and excellent            and good                 proceeds
                            reestablished          reestablished            reestablished            
                            credit                 credit                   credit                   
                                                                                                     
 Debt service to                                                                                     
   Income ratio..........   Generally 45%          Generally 50%            Generally 55%            Generally 55%
                            or less                or less                  or less                  or less
                                                                                                     
 Maximum loan-to-value                                                                               
   ratio:                                                                                            
   Owner-occupied........   Generally 80%          Generally 80%            Generally 75%            Generally 65%
                            (up to 90%*) for       (up to 85%*) for         (up to 80%*) for         (up to 70%*) for
                            a one- to four-        a one- to four-          a one- to four-          a one- to four-
                            family residence       family residence         family residence         family residence
   Non-owner                                                                                         
     occupied............   Generally 70%          Generally 70%            Generally 65%            Generally 55%
                            (up to 80%*) for       (up to 80%*) for         (up to 75%*) for         (up to 60%*) for
                            a one- to four-        a one- to four           a one- to four-          a one- to four-
                            family residence       family residence         family residence         family residence
                                                                                                     
 Employment..............   Minimum 2 years        Minimum 2 years          No minimum               No minimum
                            employment in the      employment in the        required                 required
                            same field             same field                                       
 ------------                                                                                       
 * On an exception basis                                                                            
</TABLE>

   Delta uses the foregoing  categories and  characteristics as guidelines only.
On a case-by-case basis, the Company may determine that the prospective borrower
warrants an exception,  if sufficient  compensating  factors exist.  Examples of
such  compensating  factors  are a low  loan-to-value  ratio,  a low debt ratio,
long-term stability of employment and/or residence, excellent payment history on
past mortgages or a significant reduction in monthly housing expenses.

                                       9


   The following  table sets forth certain  information  with respect to Delta's
originations  and  purchases  of first and  second  mortgage  loans by  borrower
classification,  along with weighted average coupons,  for the periods shown and
highlights  the  improved  credit  quality  of the  Company's  originations  and
purchases.


(DOLLARS IN THOUSANDS)

                                    PERCENT
YEAR    CREDIT          TOTAL       OF TOTAL     WAC(1)      WLTV(2)
----     ----           -----       --------     ------      ------

1998       A        $  990,988        57.3%        9.7%       77.0%
           B           425,056        24.6        10.4        73.2
           C           248,488        14.4        11.3        69.0
           D            63,061         3.7        12.7        57.2
                    ----------       -----        ----        ----
      Totals        $1,727,593       100.0%       10.2%       74.2%
                    ==========       =====        ====        ====

1997       A        $  617,724        49.2%       10.4%       76.2%
           B           349,166        27.8        11.0        72.0
           C           222,854        17.8        11.8        67.7
           D            64,867         5.2        13.2        56.7
                    ----------       -----        ----        ----
      Totals        $1,254,611       100.0%       11.0%       72.5%
                    ==========       =====        ====        ====

1996       A        $  219,550        33.4%       10.6%       72.1%
           B           234,589        35.6        11.2        70.2
           C           156,296        23.7        12.2        65.7
           D            48,331         7.3        13.8        56.9
                    ----------       -----        ----        ----
      Totals        $  658,766       100.0%       11.4%       68.8%
                    ==========       =====        ====        ====
------------------
(1)   Weighted Average Coupon ("WAC").
(2)   Weighted Average Initial Loan-to-Value Ratio ("WLTV").

   Delta employs experienced  nonconforming mortgage loan credit underwriters to
scrutinize the  applicant's  credit profile and to evaluate  whether an impaired
credit history is a result of adverse circumstances or a continuing inability or
unwillingness  to  meet  credit   obligations  in  a  timely  manner.   Personal
circumstances  including  divorce,  family illnesses or deaths and temporary job
loss due to layoffs and corporate  downsizing  will often impair an  applicant's
credit record.  Assessment of an applicant's  ability and  willingness to pay is
one of the principal elements that distinguishes  Delta's lending practices from
methods  employed  by  traditional  lenders,  such  as  savings  and  loans  and
commercial  banks. All lenders utilize debt ratios and  loan-to-value  ratios in
the approval  process,  however,  in contrast to Delta,  many lenders simply use
software  packages to score an  applicant  for loan  approval  and fund the loan
after auditing the data provided by the borrower.

   Delta had 97  underwriters  on staff as of December 31, 1998,  and its senior
underwriters  have  an  average  of  more  than  nine  years  of  non-conforming
underwriting  experience.  Delta does not delegate underwriting authority to any
broker or correspondent. Delta's Underwriting Department functions independently
of its Business  Development and Mortgage  Origination  Departments and does not
report to any  individual  directly  involved  in the  origination  process.  No
underwriter at Delta is compensated on an incentive or commission basis.

   Delta has instituted underwriting checks and balances designed to ensure that
every loan is  reviewed  and  approved  by a minimum of two  underwriters,  with
certain higher loan amounts requiring a third approval. Management believes that
by requiring each file be seen by a minimum of two  underwriters,  a high degree
of accuracy and quality control is ensured throughout the underwriting process.


                                       10


   Delta's  underwriting of every loan submitted consists not only of a thorough
review of credit and ability to repay, but also (i) a separate  appraisal review
conducted by Delta's  Appraisal  Review  Department  and (ii) a full  compliance
review to ensure that all documents have been properly prepared,  all applicable
disclosures  have been given in a timely  fashion,  proper  compliance  with all
federal and state regulations, the existence of title insurance insuring Delta's
interest as mortgagee  and  evidence of adequate  homeowner's  insurance  naming
Delta as an additional  insured party.  Appraisals are performed by third party,
fee-based  appraisers or by the Company's staff appraisers and generally conform
to current  FNMA/FHLMC  secondary market  requirements for residential  property
appraisals.  Each such appraisal includes,  among other things, an inspection of
the  exterior of the subject  property  and,  where  available,  data from sales
within the  preceding  12 months of similar  properties  within the same general
location as the subject property.

   Delta performs a thorough  appraisal  review on each loan prior to closing or
prior to  purchasing.  While  Delta  recognizes  that the  general  practice  by
conventional  mortgage  lenders is to perform  only  drive-by  appraisals  after
closings,   management  believes  this  practice  does  not  provide  sufficient
protection.  In addition to reviewing each  appraisal for accuracy,  the Company
accesses  other  sources to validate  sales used in the  appraisal  to determine
market value. These sources include: interfacing with Multiple Listing Services,
Comps,  Inc. and other  similar  databases to access  current  sales and listing
information; and other sources for verification, including broker price opinions
and market analyses by local real estate agents.

   Post closing,  in addition to its normal due diligence,  the Company  selects
one out of every ten  appraisals and performs its own drive-by  appraisal.  This
additional  step  helps to give the  Company  an added  degree of  comfort  with
respect to appraisers with which the Company has had limited  experience.  Delta
actively  tracks all  appraisers  from which it accepts  appraisals  for quality
control purposes and does not accept work from appraisers who have not conformed
to its review standards.

   The Company  performs a  post-funding  quality  control review to monitor and
evaluate the Company's loan origination policies and procedures. At least 10% of
all loan  originations  and purchases  are  subjected to a full quality  control
re-underwriting  and  review,  the  results  of which  are  reported  to  senior
management.  Discrepancies  noted by this  review are  analyzed  and  corrective
actions are instituted. However, to date, this important quality control process
has not  revealed  material  deficiencies  in the  Company's  loan  underwriting
procedures. A typical quality control review currently includes: (a) obtaining a
new drive-by appraisal for each property; (b) obtaining a new credit report from
a  different  credit  report  agency;   (c)  reviewing  loan   applications  for
completeness,  signatures,  and for consistency with other processing documents;
(d) obtaining new written verifications of income and employment;  (e) obtaining
new written verification of mortgage to re-verify any outstanding mortgages; and
(f) analyzing the  underwriting  and program  selection  decisions.  The quality
control  process  is updated  from time to time as the  Company's  policies  and
procedures change.

LOAN SALES

   Delta sells  substantially  all the loans it originates or purchases  through
one of two methods: (i) securitizations,  which involve the private placement or
public  offering  by  a  securitization   trust  of  asset-backed   pass-through
securities,  and (ii)  whole loan  sales,  which  include  the sale of blocks of
individual  loans to  institutional  or individual  investors.  Since 1991,  the
Company has sold more than $4.2 billion of the loans it  originated or purchased
through securitization and $63 million through whole loan sales.

   SECURITIZATIONS.  During 1998, Delta completed four securitizations  totaling
$1.72 billion.  The following table sets forth certain  information with respect
to Delta's  securitizations  (all of which  have been  rated  AAA/Aaa by S&P and
Moody's,  respectively)  by offering  size,  which includes  prefunded  amounts,
weighted average pass-through rate and type of credit enhancement.


                                       11


<TABLE>
<CAPTION>
                                                     INITIAL
                                 OFFERING SIZE   WEIGHTED AVERAGE      CREDIT
SECURITIZATION       COMPLETED     (MILLIONS)    PASS-THROUGH RATE   ENHANCEMENT
--------------       ---------   -------------   -----------------   -----------
<S>                  <C>         <C>             <C>                 <C>
1998-1............   03/31/98       $400.0            7.24%          Senior/Sub Structure
1998-2............   06/29/98       $445.0            7.06%          Senior/Sub Structure
1998-3............   09/29/98       $475.0            7.50%          Bond Insured
1998-4............   12/23/98       $400.0            7.97%          Hybrid *
                                                                   
------------------
* Senior/Sub Structure and Bond Insured
</TABLE>


   When Delta  securitizes  loans,  it sells a portfolio  of loans to a trust (a
"Home  Equity  Loan  Trust")  for a cash  payment and the Home Equity Loan Trust
sells  various  classes  of  pass-through  certificates  representing  undivided
ownership  interests  in such Home  Equity  Loan  Trust.  As  servicer  for each
securitization,  the Company collects and remits principal and interest payments
to the appropriate  Home Equity Loan Trust which,  in turn,  passes through such
payments  to  certificateholders.  For each of the 1998  securitizations,  Delta
retained  100% of the interests in the residual  certificates  while selling the
interest-only  certificates  for cash.  Management  contemplates  continuing  to
retain residual  certificates in the future as long as, in management's opinion,
this practice maximizes earnings while remaining within the Company's  liquidity
requirements.

   Each Home Equity  Loan Trust has the  benefit of either a financial  guaranty
insurance  policy  from a monoline  insurance  company or a  senior-subordinated
securitization  structure,  which insures the timely payment of interest and the
ultimate payment of principal of the credit-enhanced  investor  certificate.  In
"senior-subordinated"  structures,  the senior certificate holders are protected
from losses by subordinated certificates, which absorb any such losses first. In
addition to such credit enhancement,  the Excess Servicing amounts are initially
applied as  additional  payments of  principal  for the  investor  certificates,
thereby accelerating  amortization of the investor  certificates relative to the
amortization  of  the  loans  and  creating   overcollateralization.   Once  the
overcollateralization  limit is reached,  the use of Excess  Servicing to create
overcollateralization  stops unless it subsequently  becomes necessary to obtain
or maintain  required  overcollateralization  limits.  Overcollateralization  is
intended  to create a source  of cash (the  "extra"  payments  on the  loans) to
absorb losses prior to making a claim on the financial guaranty insurance policy
or the subordinated certificates.

   Whole Loan Sales Without  Recourse.  From time to time, the Company has found
that it can receive  better  execution by selling  certain  mortgage  loans on a
whole loan, non-recourse basis, without retaining servicing rights, generally in
private  transactions  to  institutional  or individual  investors.  The Company
recognizes a gain or loss when it sells loans on a whole loan basis equal to the
difference  between the cash  proceeds  received for the loans and the Company's
investment in the loans,  including any unamortized  loan  origination  fees and
costs.

   For the  years  ended  December  31,  1998,  1997 and 1996,  Delta  sold $8.7
million, $0 million and $15.3 million of loans,  respectively,  on a whole loan,
non-recourse basis, which represents 0.5%, 0.0% and 2.3%,  respectively,  of its
originations and purchases.

LOAN SERVICING AND COLLECTIONS

   Delta has been  servicing  loans since its  inception in 1982,  and Delta has
serviced or is servicing  substantially  all of the loans that it has originated
or purchased.  Servicing involves, among other things,  collecting payments when
due,  remitting payments of principal and interest and furnishing reports to the
current  owners of the loans and enforcing  such owners'  rights with respect to
the  loans,   including,   recovering  any  delinquent   payments,   instituting
foreclosure  proceedings  and  liquidating  underlying  collateral.  The Company
receives a servicing fee for servicing  residential  mortgage loans of 0.50% per
annum (0.65% per annum on all securitizations completed before and including the
1996-1  securitization)  on the  declining  principal  balance of all loans sold
through  securitization and on the declining principal balance of the loans sold
to investors on a recourse  basis.  These  servicing  fees are  collected by the
Company out of the monthly mortgage payments. Management believes that servicing
the Company's own portfolio enhances certain operating efficiencies and provides
an  additional  and  profitable  revenue

                                       12


stream that is  less  cyclical  than its  primary business  of  originating  and
purchasing loans. As of December 31, 1998, Delta had a loan servicing  portfolio
of $2.95 billion.

   Delta  services  all loans out of its  headquarters  in  Woodbury,  New York,
utilizing  a  leading   in-house  loan  servicing   system  ("LSAMS")  which  it
implemented in 1995. LSAMS has provided Delta with considerably more flexibility
to adapt the system to Delta's  specific  needs as a  nonconforming  home equity
lender. As such, Delta has achieved  significant cost efficiencies by automating
a substantial  number of previously  manual  servicing  procedures and functions
since its  conversion  to LSAMS on July 1, 1995.  Management  believes that even
greater cost efficiencies can be realized through further automation provided by
LSAMS.

   At the same  time  that it  upgraded  its  primary  servicing  system,  Delta
purchased a default management  sub-servicing system with separate "modules" for
foreclosure,  bankruptcy,  and  REO to  provide  it  with  the  ability  to more
efficiently monitor and service loans in default.  These  sub-servicing  modules
provide  detailed  tracking of all key events in foreclosure and bankruptcy on a
loan-by-loan and portfolio-wide  basis; the ability to track and account for all
pre- and post-petition  payments received in bankruptcy from the borrower and/or
trustee;  and the  ability  to  monitor,  market  and  account  for all  aspects
necessary to liquidate an REO property after foreclosure.  Additionally, Delta's
Management  Information  Systems  Department has created a market value analysis
program to run with LSAMS,  which provides Delta with the ability to monitor its
equity position on a loan-by-loan  and/or  portfolio-wide  basis. These features
have led to cost savings through greater automation and system upgrades and have
helped  mitigate  loan  losses  as the  Servicing  Department  has been  able to
identify problem loans earlier, thus allowing for earlier corrective action.

   Delta's   collections   policy  is  designed  to  identify  payment  problems
sufficiently early to permit Delta to quickly address delinquency  problems and,
when necessary, to act to preserve equity in a pre-foreclosure  property.  Delta
believes that these policies,  combined with the experience level of independent
appraisers  engaged by Delta,  help to reduce the incidence of  charge-offs of a
first or second mortgage loan.

   Centralized  controls and standards  have been  established  by Delta for the
servicing and collection of mortgage loans in its portfolio.  Delta revises such
policies and procedures from time to time in connection  with changing  economic
and market conditions and changing legal and regulatory requirements.

   Borrowers  are  billed  on a  monthly  basis  in  advance  of the  due  date.
Collection  procedures  commence  upon  identification  of a past due account by
Delta's  automated   servicing  system.  If  timely  payment  is  not  received,
proprietary software  automatically places loans in the Unison/Davox  predictive
dialer  auto-queue  downloaded  from the LSAMS  servicing  system and collection
procedures are generally initiated on the day immediately  following the payment
due date for chronic late payers,  or the day  immediately  following the end of
the grace period for those borrowers who usually pay within the grace period, or
shortly  thereafter.   The  Unison/Davox   predictive  dialer,   through  LSAMS,
automatically queues up each loan in the assigned collector's "auto-queue" daily
based upon a particular  borrower's payment history over the prior three months.
The  account  remains in the queue  unless and until a payment is  received,  at
which point LSAMS  automatically  removes  the loan from that  collector's  auto
queue until the next month's payment is due and/or becomes delinquent.

   When a loan appears in a collector's  auto queue,  a collector will telephone
to remind the borrower that a payment is due.  Follow-up  telephone contacts are
attempted until the account is current or other payment  arrangements  have been
made.  Standard form letters are utilized when attempts to reach the borrower by
telephone fail and/or, in some circumstances,  to supplement the phone contacts.
During the  delinquency  period,  the  collector  will  continue  to contact the
borrower.  Company collectors have computer access to telephone numbers, payment
histories,  loan  information  and all past  collection  notes.  All  collection
activity,  including the date collection letters were sent and detailed notes on
the  substance of each  collection  telephone  call, is entered into a permanent
collection  history  for each  account on LSAMS.  Additional  guidance  with the
collection process is derived through frequent communication with Delta's senior
management.

   For those loans in which collection and initial loss mitigation  efforts have
been exhausted without success, the loss mitigation team recommends the loans be
sent to  foreclosure  at one of the  Foreclosure  Committee  Meetings  held each
month. At each such committee  meeting,  the loss mitigation  administrator  and
team leader meet with the Servicing Manager,  the Default Management Manager and
a  member  of  the  Executive  Department,   to  determine

                                       13


whether foreclosure  proceedings are  appropriate, based  upon their analysis of
all relevant factors,  including a market value analysis, reason for default and
efforts by the borrower to cure the default.

   Regulations  and practices  regarding the  liquidation  of properties  (e.g.,
foreclosure)  and the rights of a borrower in default vary greatly from state to
state. As such, all foreclosures are assigned to outside counsel, located in the
same  state  as the  secured  property.  Bankruptcies  filed  by  borrowers  are
similarly assigned to appropriate local counsel. All aspects of foreclosures and
bankruptcies  are closely  monitored  by Delta  through its  sub-servicing  loan
system described above and through monthly status reports from attorneys.

   Prior to foreclosure  sale,  Delta performs an in-depth market value analysis
on all defaulted loans. This analysis  includes:  (i) a current valuation of the
property  obtained  through at least two  drive-by  appraisals  or broker  price
opinions  conducted by an independent  appraiser and/or broker from a network of
real estate  brokers,  complete with a description of the property,  recent list
prices of comparable properties, recent closed comparables,  estimated marketing
time,  estimated  required  or  suggested  repairs  and an estimate of the sales
price;  (ii) an  evaluation  of the amount owed,  if any, for real estate taxes;
(iii) an evaluation of the amount owed, if any, to a senior mortgagee;  and (iv)
estimated  carrying  costs,  broker's fee,  repair costs and other related costs
associated with real estate owned properties. Delta bases the amount it will bid
at foreclosure sales on this analysis.

   If Delta acquires title to a property at a foreclosure sale or otherwise, the
REO Department  immediately  begins working the file by obtaining an estimate of
the sale price of the property by sending at least two local real estate brokers
to inspect the premises, and then hiring one to begin marketing the property. If
the property is not vacant when acquired,  local eviction attorneys are hired to
commence eviction  proceedings and/or negotiations are held with occupants in an
attempt to get them to vacate without  incurring the additional time and cost of
eviction.  Repairs are performed if it is determined that they will increase the
net liquidation  proceeds,  taking into  consideration the cost of repairs,  the
carrying  costs during the repair period and the  marketability  of the property
both before and after the repairs.

   Delta's  loan  servicing  software  also  tracks  and  maintains  homeowners'
insurance  information  and tax and  insurance  escrow  information.  Expiration
reports are generated  bi-weekly listing all policies scheduled to expire within
the next 15 days.  When policies lapse, a letter is issued advising the borrower
of such lapse and  notifying  the borrower  that Delta will obtain  force-placed
insurance at the borrower's expense. Delta also has an insurance policy in place
that provides coverage  automatically for Delta in the event that Delta fails to
obtain force-placed insurance.

   The following  table sets forth  information  relating to the delinquency and
loss  experience  of the mortgage  loans  serviced by Delta  (primarily  for the
securitization trusts) for the periods indicated. Delta is not the holder of the
securitization loans, but generally holds residual or interest-only certificates
of the trusts, as well as the servicing  rights,  each of which may be adversely
affected by defaults.  (See "Item 7 -  Management's  Discussion  and Analysis of
Financial    Condition   and   Results   of   Operations    Certain   Accounting
Considerations"):

                                       14

<TABLE>
<CAPTION>
                                                                      YEAR ENDED DECEMBER 31,
                                                              -------------------------------------
                                                              1998             1997            1996
                           `                                  ----             ----            ----                                 
                                                                       (DOLLARS IN THOUSANDS)
<S>                                                           <C>          <C>              <C>
Total Outstanding Principal Balance
    (at period end)...................................    $ 2,950,435      $ 1,840,150       $ 932,958
Average Outstanding(1)................................    $ 2,436,343      $ 1,376,109       $ 686,465
DELINQUENCY (at period end) 30-59 Days:
    Principal Balance.................................      $ 153,726        $  90,053       $  54,583
    Percent of Delinquency(2).........................          5.21%            4.89%           5.85%
60-89 Days:
    Principal Balance.................................      $  50,034        $  28,864       $  14,273
    Percent of Delinquency(2).........................          1.70%            1.57%           1.53%
90 Days or More:
    Principal Balance.................................      $  47,887        $  17,695       $   9,224
    Percent of Delinquency(2).........................          1.62%            0.96%           0.99%
Total Delinquencies:
    Principal Balance.................................      $ 251,647        $ 136,612       $  78,080
    Percent of Delinquency(2).........................          8.53%            7.42%           8.37%
FORECLOSURES
    Principal Balance.................................      $ 145,679        $  85,500       $  34,766
    Percent of Foreclosures by Dollar(2)..............          4.94%            4.65%           3.73%
REO
     Principal Balance................................      $  18,811        $  10,292       $   5,673
     Percent of  REO..................................          0.64%            0.56%           0.61%
Net Gains/(Losses) on liquidated loans................      $  (8,704)       $  (4,986)      $  (2,866)
Percentage of Net Gains/(Losses) on liquidated
    loans (based on Average Outstanding Balance)......         (0.36%)          (0.36%)         (0.42%)
---------------
<FN>
(1)  Calculated by summing the actual outstanding  principal balances at the end
     of each  month  and  dividing  the  total by the  number  of  months in the
     applicable period.
(2)  Percentages  are  expressed  based  upon the  total  outstanding  principal
     balance at the end of the indicated period.
</FN>
</TABLE>

COMPETITION

   As an originator and purchaser of mortgage  loans,  the Company faces intense
competition, primarily from mortgage banking companies, commercial banks, credit
unions,  savings and loans,  credit card issuers and finance companies.  Many of
these competitors in the financial  services  business are substantially  larger
and have more capital and other resources than the Company. Competition can take
many forms,  including  convenience in obtaining a loan, service,  marketing and
distribution  channels  and  interest  rates.  Furthermore,  the  level of gains
realized  by the Company  and its  competitors  on the sale of the type of loans
originated and purchased has attracted  additional  competitors into this market
with the effect of  lowering  the gains that may be  realized  by the Company on
future loan sales.  In addition,  efficiencies in the  asset-backed  market have
generally  created a desire for even larger  transactions  giving companies with
greater volumes of originations a competitive advantage.

   Competition  may be affected by  fluctuations  in interest  rates and general
economic  conditions.  During  periods of rising rates,  competitors  which have
"locked in" low borrowing costs may have a competitive advantage. During periods
of declining rates, competitors may solicit the Company's borrowers to refinance
their loans.  During economic slowdowns or recessions,  the Company's  borrowers
may have new  financial  difficulties  and may be  receptive  to  offers  by the
Company's competitors. Furthermore, certain large national finance companies and
conforming   mortgage   originators   have  recently  adapted  their  conforming
origination   programs   and   allocated   resources  to  the   origination   of
non-conforming  loans and/or have otherwise  begun to offer products  similar to
those

                                       15


offered   by  the  Company,  targeting   customers  similar  to   those  of  the
Company.  The entrance of these larger and better  capitalized  competitors into
the Company's market may have a material adverse effect on the Company's results
of operations and financial condition.


REGULATION

   Delta's  business  is  subject  to  extensive  regulation,   supervision  and
licensing by federal, state and local governmental authorities and is subject to
various laws and judicial and administrative decisions imposing requirements and
restrictions  on  part  or all  of  its  operations.  Delta's  consumer  lending
activities  are subject to the Federal  Truth-in-Lending  Act and  Regulation  Z
(including  the Home  Ownership and Equity  Protection  Act of 1994),  the Equal
Credit Opportunity Act of 1974, as amended (ECOA), the Fair Credit Reporting Act
of 1970, as amended,  the Real Estate  Settlement  Procedures  Act (RESPA),  and
Regulation X, the Home Mortgage  Disclosure Act and the Federal Debt  Collection
Practices  Act, as well as other  federal  and state  statutes  and  regulations
affecting Delta's activities. Delta is also subject to the rules and regulations
of, and  examinations by HUD and state  regulatory  authorities  with respect to
originating,  processing,  underwriting  and  servicing  loans.  These rules and
regulations,   among  other  things,  impose  licensing  obligations  on  Delta,
establish  eligibility  criteria for mortgage  loans,  prohibit  discrimination,
provide for inspections and appraisals of properties,  require credit reports on
loan  applicants,  regulate  assessment,   collection,  foreclosure  and  claims
handling,  investment  and  interest  payments  on escrow  balances  and payment
features,  mandate  certain  disclosures  and notices to borrowers  and, in some
cases,  fix maximum interest rates,  fees and mortgage loan amounts.  Failure to
comply with these requirements can lead to loss of approved status,  termination
or  suspension  of servicing  contracts  without  compensation  to the servicer,
demands for  indemnifications  or mortgage loans repurchases,  certain rights of
rescission  for  mortgage  loans,   class  action  lawsuits  and  administrative
enforcement actions. Delta believes it is in compliance in all material respects
with applicable federal and state laws and regulations.

ENVIRONMENTAL MATTERS

   To date, Delta has not been required to perform any investigation or clean up
activities, nor has it been subject to any environmental claims. There can be no
assurance,  however,  that  this  will  remain  the case in the  future.  In the
ordinary  course  of its  business,  Delta  from  time  to  time  forecloses  on
properties  securing  loans.   Although  Delta  primarily  lends  to  owners  of
residential  properties,  there  is a risk  that  Delta  could  be  required  to
investigate and clean-up  hazardous or toxic substances or chemical  releases at
such  properties  after  acquisition  by  Delta,  and  may be held  liable  to a
governmental entity or to third parties for property damage, personal injury and
investigation  and cleanup costs incurred by such parties in connection with the
contamination.  In addition,  the owner or former owners of a contaminated  site
may be subject to common law claims by third  parties based on damages and costs
resulting from environmental contamination emanating from such property.

EMPLOYEES

   As of December 31, 1998 Delta had a total of 1,104  employees  (full-time and
part-time).  None of Delta's  employees  are covered by a collective  bargaining
agreement. Delta considers its relations with its employees to be good.

ITEM 2.  PROPERTIES

   Delta's  executive  and  administrative  offices are located at 1000 Woodbury
Road, Woodbury,  New York 11797, where Delta leases approximately 120,000 square
feet of office space at an aggregate annual rent of approximately  $2.4 million.
The lease provides for certain scheduled rent increases and expires in 2008.

   Delta also maintains a full service  office in Atlanta,  Georgia and Anaheim,
California,  full processing offices in Chicago, Illinois, Warwick, Rhode Island
and  Deerfield  Beach,  Florida,  processing  offices  in  Cleveland,  Ohio  and
Farmington  Hills,  Michigan,  and  business  development  offices in  Delaware,
Missouri,  New  Jersey,  Ohio,  Pennsylvania  and  Virginia.  Fidelity  Mortgage
maintains fifteen retail mortgage  origination  offices in Florida (3), Georgia,
Illinois,  Indiana,  Missouri,  North Carolina,  Ohio (4),  Pennsylvania (2) and
Tennessee;  one telemarketing

                                       16


hub in Ohio; and  one corporate  office in Ohio. The terms of the leases vary as
to duration and escalation provisions, with the latest expiring in 2003.

ITEM 3.  LEGAL PROCEEDINGS

   Because the nature of the  Company's  business  involves  the  collection  of
numerous  accounts,  the validity of liens and compliance with various state and
federal lending laws, the Company is subject,  in the normal course of business,
to  numerous  claims  and legal  proceedings,  including  several  class  action
lawsuits set forth below.  While it is impossible to estimate with certainty the
ultimate legal and financial  liability with respect to such claims and actions,
the Company  believes that the  aggregate  amount of such  liabilities  will not
result in monetary  damages which in the aggregate would have a material adverse
effect on the financial condition or results of operations of the Company.

   1. Several class-action lawsuits have been filed against a number of consumer
finance companies alleging that the compensation of mortgage brokers through the
payment of yield spread  premiums  violates  various  federal and state consumer
protection laws. The Company has been named in three such lawsuits:

      a. In or about March 1997,  the Company  received  notice that it had been
         named in a lawsuit  filed in the United States  District  Court for the
         Eastern District of New York, alleging that the Company's  compensation
         of mortgage brokers by means of yield spread premiums  violates,  among
         other things, the Real Estate Settlement Procedures Act ("RESPA").  The
         complaint  seeks (i)  certification  of a class of plaintiffs,  (ii) an
         injunction  against payment of yield spread premiums by the Company and
         (iii)   unspecified   compensatory  and  punitive  damages   (including
         attorney's  fees).  On July 7, 1997, the Company filed an answer to the
         plaintiff's  amended complaint.  In October 1998, the Company agreed to
         an  individual  settlement  with  plaintiffs,  and the lawsuit has been
         dismissed with prejudice.

      b. In or about February 1998, the Company received notice that it had been
         named in a lawsuit  filed in the United States  District  Court for the
         Northern District of Mississippi - Greenville  Division,  alleging that
         the Company's compensation or mortgage brokers by means of yield spread
         premiums  violates RESPA.  The complaint seeks (i)  certification  of a
         class  of  plaintiffs,   and  (ii)  unspecified   compensatory  damages
         (including  attorney's  fees).  On March 31, 1998, the Company filed an
         answer to the complaint.  On December 1, 1998, the district court judge
         denied plaintiff's motion for class certification. Plaintiff petitioned
         the Fifth  Circuit to accept its  interlocutory  appeal and,  after the
         Company submitted opposition papers,  Plaintiff withdrew such petition.
         The case is now proceeding on an individual basis.

      c. In or about October  1998,  the Company was served with a lawsuit filed
         in the  United  States  District  Court for the  Northern  District  of
         Georgia, Atlanta Division,  alleging that the Company's compensation of
         mortgage brokers by means of yield spread premiums  violates RESPA. The
         complaint seeks (i)  certification  of a class of plaintiffs,  and (ii)
         unspecified  compensatory  and  treble  damages  (including  attorney's
         fees).  In November  1998, the Company filed an answer to the complaint
         and  Plaintiff  filed a motion  seeking class  certification.  In March
         1999,  the Company  submitted  its  opposition  to the motion for class
         certification.

   2. In or about September  1998, the Company  received notice that it had been
named in a lawsuit filed in the Supreme  Court of the State of New York,  Nassau
County, alleging that the Company did not properly credit payments received from
borrowers to principal and interest.  The complaint seeks (i) certification of a
class of plaintiffs,  (ii) an accounting,  (iii)  unspecified  compensatory  and
punitive damages (including  attorneys' fees), and (iv) injunctive relief, based
upon alleged (a) breach of contract,  (b) unjust enrichment,  (c) fraud, and (d)
deceptive trade  practices.  The Company's time to answer has been  indefinitely
extended  pending  Plaintiff's  determination  as to whether to proceed with the
lawsuit.

                                       17


   3. In or about November 1998,  the Company  received  notice that it had been
named in a lawsuit  filed in the United  States  District  Court for the Eastern
District of New York. In December 1998,  plaintiffs  filed an amended  complaint
alleging that the Company had violated the Home Equity and Ownership  Protection
Act, the Truth in Lending Act and New York State  General  Business Law ss. 349.
The complaint seeks (a) certification of a class of plaintiffs,  (b) declaratory
judgment permitting rescission,  (c) unspecified actual,  statutory,  treble and
punitive damages (including attorneys' fees), (d) certain injunctive relief, and
(e)  declaratory   judgment   declaring  the  loan   transactions  as  void  and
unconscionable.  In January  1999,  the  Company  filed an answer to the amended
complaint.  On December 7, 1998,  Plaintiff  filed a motion  seeking a temporary
restraining  order and preliminary  injunction,  enjoining Delta from conducting
foreclosure sales on 11 properties. The district court judge ruled that in order
to consider such a motion,  Plaintiff  must move to intervene on behalf of these
11 borrowers.  Thereafter, Plaintiff moved to intervene on behalf of 3 of the 11
borrowers and sought the injunctive relief on their behalf.  The Company opposed
the motions.  On December 14, 1998,  the district court judge granted the motion
to  intervene  and on December  23,  1998,  the  district  court judge  issued a
preliminary   injunction   enjoining  the  Company  from   proceeding  with  the
foreclosure sales of the three intervenors' properties.  The Company has filed a
notice of appeal,  and a motion for  reconsideration  of the  December  23, 1998
order.

   4. In or about January  1999,  the Company  received  notice that it had been
named in a lawsuit filed in the Court of Common Pleas in Cuyahoga County,  Ohio,
alleging  that Delta had violated  Ohio state law and breached its contract with
Plaintiff by assessing a prepayment penalty and certain other miscellaneous fees
when  Plaintiff  paid off his loan.  The complaint  seeks  certification  of two
classes of plaintiffs. The Company has not yet answered the complaint.

   5. In or about March 1999, the Company received notice that it had been named
in a lawsuit  filed in the  Supreme  Court of the  State of New  York,  New York
County,  alleging that Delta had improperly charged certain borrowers processing
fees. The complaint seeks (i)  certification  of a class of plaintiffs,  (ii) an
accounting,  and (iii) unspecified  compensatory and punitive damages (including
attorneys' fees), based upon alleged (a) unjust  enrichment,  (b) fraud, and (c)
deceptive trade practices. The Company has not yet answered the complaint.

   The Company  believes that it has meritorious  defenses and intends to defend
each of these  lawsuits,  but cannot  estimate  with any  certainty its ultimate
legal or financial liability, if any, with respect to the alleged claims.

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

   The annual meeting of stockholders  was held on May 19, 1998. At the meeting,
Sidney A. Miller and Martin D. Payson were elected as Class II  Directors  for a
term of three years.  Hugh Miller,  Richard Blass and Arnold B. Pollard continue
to serve as members of the Board of Directors.

            Votes cast in favor of Mr.  Miller's  election  totaled  14,884,446,
            while 27,325 votes were withheld.

            Votes cast in favor of Mr.  Payson's  election  totaled  14,884,146,
            while 27,625 votes were withheld.

      The  stockholders  also voted to ratify the appointment of KPMG LLP as the
Company's independent public accountants for the fiscal year ending December 31,
1998. Votes cast in favor of this ratification were 14,903,146, while votes cast
against were 2,600 and abstentions totaled 6,025.

                                       18
<PAGE>


                                   PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

PRICE RANGE OF COMMON STOCK

   The  Company's  Common Stock was listed on the New York Stock  Exchange  (the
"NYSE")  under the symbol "DFC" on November 1, 1996.  The  following  table sets
forth for the  periods  indicated  the range of the high and low  closing  sales
prices for the Company's Common Stock on the NYSE.

1998                                                  HIGH        LOW
----                                                  ----        ----
First Quarter ............................           $18.56      $ 9.56
Second Quarter ...........................            20.25       17.06
Third Quarter.............................            18.00        4.50
Fourth Quarter ...........................             7.75        3.13

1997                                                  HIGH        LOW
----                                                  ----        ----
First Quarter ............................           $24.00      $18.13
Second Quarter ...........................            20.50       13.38
Third Quarter.............................            22.13       18.81
Fourth Quarter ...........................            20.69       13.38

   On March 24, 1998, the Company had  approximately  95 stockholders of record.
This number does not include beneficial owners holding shares through nominee or
"street" names.  The Company  believes the number of beneficial  stockholders is
approximately 2,400.

DIVIDEND POLICY

   The Company did not pay any  dividends  in 1998 and, in  accordance  with its
present general policy, has no present intention to pay cash dividends.


                                       19


<PAGE>
<TABLE>
<CAPTION>

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

                                                                             YEAR ENDED DECEMBER 31,
                                                            -----------------------------------------------------------
                                                            1998          1997         1996          1995          1994
                                                            ----          ----         ----          ----          ----
<S>                                                    <C>            <C>           <C>           <C>           <C> 
Income Statement Data:                                            (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA)
  Revenues:
      Net gain on sale of mortgage loans.............   $   92,452    $   86,307    $   46,525    $   15,383    $    6,661
      Interest.......................................       12,458        22,341        16,372        13,588         9,839
      Servicing fees.................................        9,392         7,094         5,368         2,855         2,183
      Origination fees (1) ..........................       25,273        18,108         5,266         4,309         3,114
                                                        ----------    ----------    ----------    ----------    ----------     
           Total revenues............................      139,575       133,850        73,531        36,135        21,797
                                                        ----------    ----------    ----------    ----------    ---------- 
 Expenses:
      Payroll and related costs (1)..................       56,684        41,204        17,633        13,753         9,415
      Interest.......................................       30,019        19,972        11,298         7,964         3,735
      General & administrative (1)...................       34,376        21,524        11,112         9,832         6,638
                                                        ----------    ----------    ----------    ----------    ----------
            Total expenses...........................      121,079        82,700        40,043        31,549        19,788
                                                        ----------    ----------    ----------    ----------    ----------
                                                                                                                   
 Income before income taxes and                                                                                    
      extraordinary item.............................       18,496        51,150        33,488         4,586         2,009
  Provision for income taxes(1)......................        7,168        20,739         9,466            --            --
                                                        ----------    ----------    ----------    ----------    ----------
                                                                                                                   
  Income before extraordinary item...................       11,328        30,411        24,022         4,586         2,009
  Extraordinary item:................................                                                              
      Gain on extinguishment of debt.................           --            --         3,168            --            --
                                                        ----------    ----------    ----------    ----------    ----------
  Net income.........................................   $   11,328        30,411        27,190         4,586         2,009
                                                        ----------    ----------    ----------    ----------    ----------          
Pro forma information (2)(3):                           
  Provision for pro forma income taxes                                                                             
      before extraordinary item......................          N/A           N/A        14,400         1,972           864 
                                                        ----------    ----------    ----------    ----------    ----------

Pro forma income before  extraordinary item..........   $   11,328        30,411        19,088         2,614         1,145
                                                        ----------    ----------    ----------    ----------    ----------          
  Per share data(2)(4):                                                                                            
      Earnings per common share -                                                                                  
            basic and diluted........................   $     0.74          1.98          1.46          0.21          0.09
                                                                                                                   
      Weighted average number of                                                                                   
            shares outstanding.......................   15,382,161    15,359,280    13,066,485    12,629,182    12,629,182


Selected Balance Sheet Data:
  Loans held for sale, net...........................   $   87,170        79,247        82,411        63,324        48,833
  Capitalized mortgage servicing rights..............       33,490        22,862        11,412         3,831         2,421
  Interest-only and residual certificates............      203,803       167,809        83,073        25,310         7,514
  Total assets.......................................      481,907       393,232       231,616       139,293        98,589
   Senior notes, warehouse financing and
      other borrowings...............................      229,660       177,540        95,482        82,756        52,491
  Investor payable...................................       63,790        40,852        20,869        13,444        11,091
  Total liabilities..................................      344,219       266,779       138,098       109,460        70,425
  Stockholders' equity...............................      137,688       126,453        93,518        29,833        28,164

---------------
<FN>
(1)   In connection with the February 1997 acquisition of Fidelity Mortgage, the
      Company incurred  additional  expenses  normally  associated with a retail
      operation. Fidelity Mortgage's loan origination points when recognized are
      reported as origination fee income.
(2)   Figures for December 31, 1998 and 1997 are actual; pro forma  presentation
      for the years 1996, 1995  and 1994. 
(3)   Prior to October 31, 1996,  Delta Funding (a  wholly-owned subsidiary) was
      treated as an S corporation for Federal and state income tax purposes. The
      pro forma presentation reflects a provision for income  taxes  as  if the
      Company  had  always  been  a C corporation at an assumed tax rate of 43%.
(4)   Pro forma  earnings  per common  share has been  computed by dividing  pro
      forma net  income  by the sum of (a)  10,653,000  shares of the  Company's
      common  stock  received by the former  shareholders  in exchange for their
      shares of Delta  Funding,  and (b) the effect of the issuance of 1,976,182
      shares of the  Company's  common  stock  issued in the  Company's  initial
      public  offering to  generate  sufficient  cash for certain S  corporation
      distributions paid to the former shareholders, which shares are treated as
      if they had always been outstanding.
</FN>
</TABLE>

                                       20

<PAGE>

ITEM 7.  MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND
RESULTS OF OPERATIONS

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

GENERAL

   Delta  Financial  Corporation  (the  "Company"  or  "Delta")  engages  in the
consumer  finance  business by  originating,  acquiring,  selling and  servicing
non-conforming home equity loans.  Throughout its 17 year operating history, the
Company has focused on lending to  individuals  who  generally  have impaired or
limited credit profiles or higher debt-to-income ratios.

   Through  its  wholly-owned  subsidiary,  Delta  Funding  Corporation  ("Delta
Funding"),  the Company originates home equity loans indirectly through licensed
mortgage   brokers  and  other  real  estate   professionals   who  submit  loan
applications  on behalf of the borrower  ("Brokered  Loans") and also  purchases
loans from  mortgage  bankers and smaller  financial  institutions  that satisfy
Delta's underwriting guidelines ("Correspondent Loans"). Delta Funding currently
originates  and  purchases  the majority of its loans in 24 states,  through its
network  of  approximately  1,400  brokers  and   correspondents.   Through  its
wholly-owned  subsidiary,  Fidelity  Mortgage,  the Company develops retail loan
leads  ("Retail  Loans")  primarily  through  its  telemarketing  system and its
network of 15 retail offices located in 9 states.  Through a strategic  alliance
between DFC Funding of Canada Limited, an indirectly  wholly-owned subsidiary of
Delta Funding Corporation,  and MCAP Mortgage  Corporation,  a Canadian mortgage
loan originator,  the Company  originated loans in Canada. In February 1999, the
Company  decided to close its  Canadian  business  to focus  exclusively  on its
U.S.-based business.

CERTAIN ACCOUNTING CONSIDERATIONS

   As a fundamental part of its business and financing strategy, Delta sells the
majority of its loans through  securitization and derives a substantial  portion
of its income therefrom. In a securitization,  the Company sells a pool of loans
it has originated or purchased to a REMIC trust for a cash purchase  price.  The
trust,  in turn,  finances  the purchase of the pool of loans it has acquired by
selling  "pass-through   certificates,"  or  bonds,  which  represent  undivided
ownership interests in the trust.  Holders of the pass-through  certificates are
entitled  to receive  monthly  distributions  of all  principal  received on the
underlying  mortgages and a specified  amount of interest,  as determined at the
time of the trust offering.

   When the Company sells a pool of loans to a securitization trust, it receives
the following  economic  interests in the trust: (a) the difference  between the
interest  payments due on the loans sold to the trust and the interest rate paid
to the pass-through certificateholders, less the Company's contractual servicing
fee and other costs and  expenses of  administering  the trust,  represented  by
interest-only and residual certificates,  and (b) the right to service the loans
on  behalf of the trust and earn a  servicing  fee,  as well as other  ancillary
servicing related fees directly from the borrowers on the underlying loans.

   The  Company's  net  investment  in the pool of loans sold at the date of the
securitization represents the amount originally paid to originate or acquire the
loan adjusted for (i) any direct loan  origination  costs incurred (an increase)
and loan  origination  fees received (a decrease) in connection  with the loans,
which are  treated as a  component  of the  initial  investment  in a loan under
Statement of Financial  Accounting  Standards  ("SFAS") No. 91,  "Accounting for
Non-Refundable Fees and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases," and (ii) the principal payments  received,  and
the  amortization  of the net loan fees or costs,  during the period the Company
held the loans prior to their  securitization.  The Company's  investment in the
loans also reflects  adjustments for any gains (a decrease in the investment) or
losses (an increase in the investment) the Company has incurred on treasury rate
lock contracts which the Company has typically used to hedge against the effects
of changes in interest rates during the period it holds the loans prior to their
securitization. (See "Hedging.")

   Upon the  securitization  of a pool of loans,  the Company (i)  recognizes in
income,  as origination  fees, the unamortized  origination fees included in the
investment in   the  loans sold, and  (ii)  recognizes a gain  on  sale of loans

                                       21


equal  to  the  difference  between  cash  received  from   the  trust  and  the
investment  in the loans  remaining  after the  allocation  of  portions of that
investment  to record  interest-only  and  residual  certificates  and  mortgage
servicing rights received in the securitization. The majority of the net gain on
sale of mortgage loans results from,  and is initially  realized in the form of,
the retention of interest-only and residual certificates.

   The  Company  sold  interest-only  certificates  created  in each of the 1998
securitizations   for  cash  proceeds  and  intends  to  continue  to  sell  the
interest-only  certificate as long as the sale  effectively  maximizes cash flow
and profitability.

   The interest-only and residual  certificates received by the Company upon the
securitization of a pool of loans are accounted for as trading  securities under
SFAS  No.  115,   "Accounting  for  Certain   Investments  in  Debt  and  Equity
Securities." In accordance with SFAS No. 115, the amount initially  allocated to
the  interest-only  and residual  certificates  at the date of a  securitization
reflects  the  fair  value of  those  interests.  The  amount  recorded  for the
certificates  is reduced for  distributions  thereon which the Company  receives
from the related trust, and is adjusted for subsequent changes in the fair value
of interest-only and residual certificates, which are reflected in the statement
of operations. The Company assesses the fair value of interest-only and residual
certificates  based upon  updated  estimates  of  prepayment  and default  rates
relating to loan  groups  comprised  of loans of similar  types,  terms,  credit
quality, interest rates, geographic location and value of loan collateral, which
represent the predominant risk characteristics that would affect prepayments and
default rates.

   The  Company   values  the  mortgage   servicing   rights  it  retains  in  a
securitization  under the provisions of SFAS No. 125,  "Accounting for Transfers
and  Servicing  of  Financial  Assets and  Extinguishment  of  Liabilities."  In
accordance  with  SFAS No.  125,  the  amount  of the  investment  in the  loans
allocated to the retained servicing rights is measured at the allocated carrying
amount  of such  servicing  rights,  based  on the fair  value of the  servicing
rights. The fair value of the servicing rights is determined by discounting to a
present value (using a discount rate which management believes reflects the rate
market  participants  would utilize in purchasing similar loan servicing rights)
the estimated future  contractual and ancillary  servicing fees the Company will
receive and the  estimated  costs of servicing  the loans.  Those  estimates are
based on the stated terms of the  transferred  loans  adjusted for  estimates of
future  prepayment  rates made on the basis of interest rate  conditions and the
availability  of alternative  financing,  and estimates of future defaults among
those loans,  each of which would  terminate  the servicing of the loan and thus
negatively  affect  servicing  income.  The fair value of the servicing  rights,
which is  classified  on the balance sheet as  "capitalized  mortgage  servicing
rights,"  is then  amortized  over the period of the  estimated  net future cash
flows from the servicing income. SFAS No. 125 also requires that the capitalized
mortgage loan servicing  rights be assessed  periodically  to determine if there
has been any  impairment  of the  value of the  asset,  based on the date of the
assessment.  The Company  performs this assessment  based on the same prepayment
and default estimates used to value interest-only and residual  certificates.  A
valuation allowance is provided for the capitalized servicing rights relating to
any loan group for which the recorded  investment  exceeds the fair value of the
servicing rights.

   In recording and accounting for mortgage  servicing rights and  interest-only
and residual  certificates,  the Company makes estimates of rates of prepayments
and defaults, and the value of collateral,  which it believes reasonably reflect
economic  and other  relevant  conditions  then in effect.  The  actual  rate of
prepayments, defaults and the value of collateral will generally differ from the
estimates  used  due to  subsequent  changes  in  economic  and  other  relevant
conditions and the implicit  imprecision of estimates,  and such differences can
be  material.  Prepayment  and  default  rates,  which  are  higher  than  those
estimated,  would  adversely  affect  the value of both the  mortgage  servicing
rights (actual mortgage  servicing income will be less, and significant  changes
could require an impairment of the capitalized  mortgage  servicing  rights) and
the interest-only and residual certificates, for which changes in fair value are
recorded in operations.  Conversely,  prepayment  and default  rates,  which are
lower than those estimated,  would increase the servicing income earned over the
life of the loans and  positively  impact  the  value of the  interest-only  and
residual certificates.

   There are  currently  two methods used to calculate  the present value of the
residual interests,  the "cash-in" and "cash-out" methods.  The "cash-in" method
assumes value as the residual cash flow is received by the securitization  trust
even if it is used to create an  overcollateralization  provision.  In contrast,
the  "cash-out"  method  assumes  value at the time the  residual  cash  flow is
actually  received  by  the  residual   certificate   holder  (Delta)  from  the
securitization  trust,  which is only after the  required  overcollateralization
provision  has been met. As the Company 

                                       22


receives residual cash flows from the  securitization  trust,  generally 8 to 15
months  following   the  primary  issuance,  these   two   methods  will  create
dramatically different values. The Company uses the more conservative "cash-out"
method,  which  calculates  value at the time the residual cash flow is actually
received by Delta.

   The Financial  Accounting  Standards  Board  ("FASB") and the  Securities and
Exchange  Commission have issued  proposals  relating to SFAS No. 125 that would
require companies to use the "cash-out" (more  conservative),  not the "cash-in"
(more  aggressive),  method in accounting for the value of the retained interest
(residual)  in  securitizations  and  overcollateralization  assets.  This would
result in one-time  residual asset  write-downs for companies that currently use
the  "cash-in"  method.  The  Company  has  always  used the  more  conservative
"cash-out"  method for accounting and will not be susceptible to a write-down as
a result of this proposed accounting change.

FAIR VALUE ADJUSTMENTS

   During  the second  quarter of 1998,  the  Company  recorded a $15.5  million
reduction in the carrying amount of its interest-only and residual certificates,
and also  recorded  a $1.9  million  reduction  in the  carrying  amount  of its
capitalized mortgage servicing rights to reflect a provision for impairment (the
"fair value adjustments").  Both impairment  provisions resulted from reductions
in the Company's  estimates of the fair value of those assets. The reductions in
the estimated fair value  resulted from a change in the  prepayment  assumptions
used by the  Company to estimate  the future  cash flows to be derived  from the
interest-only and residual certificates and the mortgage servicing rights.

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

   The  fair  values  of  both  interest-only  and  residual   certificates  and
capitalized mortgage servicing rights are significantly affected by, among other
factors,  prepayments  of loans and estimates of future  prepayment  rates.  The
Company continually  reviews its prepayment  assumptions in light of company and
industry  experience  and  makes  adjustments  to those  assumptions  when  such
experience indicates.

   During 1997, the Company made certain changes in its prepayment  assumptions,
principally    increasing   the   estimated   maximum   prepayment   rates   for
adjustable-rate loan pools. The effect of that change in prepayment  assumptions
did not  materially  affect the fair  value of the  interest-only  and  residual
certificates in 1997.

   The Company's review of its prepayment experience and assumptions at June 30,
1998  indicated  that  the  prepayment  rates  during  1998,   particularly  for
adjustable-rate  mortgages ("ARMs"), and in particular during the second quarter
of  1998,  were  higher  than  those  historically  experienced,  or  previously
projected,  by the  Company.  The  Company  believes  that  these  increases  in
prepayment rates were attributable to the continuation, for a longer period than
historically  experienced,  of low interest rates,  together with changes,  to a
flatter or inverted curve, of the relationship  between long-term and short-term
interest rates (the "yield curve").

   As  a  result,  at  June  30,  1998,  the  Company  adjusted  its  prepayment
assumptions, increasing the maximum prepayment rates for all loans, and changing
the rate at which  prepayments  are assumed to increase from the initial rate to
the  maximum  rate from a  straight-line  build-up  to a "vector"  curve.  These
revised  prepayment  assumptions  were used to  estimate  the fair  value of the
interest-only  and residual  certificates  and  capitalized  mortgage  servicing
rights retained by the Company in securitizations  completed prior to the second
quarter of 1998,  requiring the fair value  adjustments  described above.  These
revised prepayment assumptions were also used in initially valuing and recording
the interest-only and residual  certificates and capitalized  mortgage servicing
rights retained by the Company in its  securitizations  completed  subsequent to
the first quarter of 1998.

   The Company assumes prepayment rates and defaults based upon the seasoning of
its existing  securitization  loan  portfolio.  The following table compares the
prepayment  assumptions  used subsequent to the first quarter of 1998 (the "new"
assumptions)  with those used at December 31, 1997 and through the first quarter
of 1998 ( the "old" assumptions):

                                       23


--------------------------------------------------------------------------------
 LOAN TYPE              Curve Description       Month 1 Speed       Peak Speed
--------------------------------------------------------------------------------
                          New       Old         New       Old       New     Old
--------------------------------------------------------------------------------
Fixed Rate Loans         Vector    Ramp         4.8%      4.8%      31%      24%
Six-Month LIBOR ARMs     Vector    Ramp        10.0%      5.6%      50%      28%
Hybrid ARMs              Vector    Ramp         6.0%      5.6%      50%      28%
--------------------------------------------------------------------------------


   In addition,  in the fourth quarter of 1998,  the Company  increased its loss
reserve initially  established for both fixed- and adjustable-rate loans sold to
the  securitizations  trusts  to  approximately  2.00%  of the  issuance  amount
securitized from  approximately  1.90% of the issuance amount.  The Company made
this change to better reflect what management  believes its loss experience will
be, as the  Company  anticipates  slower  prepayment  rates and a flat to slight
moderate  rise in home values as compared to the past few years,  which may have
an adverse effect on the Company's non-performing loans. This change resulted in
approximately  a $2.8 million  reduction in the Company's  value of the residual
and interest-only certificates. An annual discount rate of 12.0% was utilized in
determining  the present value of cash flows from residual  certificates,  using
the "cash-out"  method,  which are the predominant form of retained interests at
both December 31, 1998 and 1997.

   The Company uses the same prepayment assumptions in estimating the fair value
of its mortgage servicing rights.

   To date, aggregate actual cash flows from the Company's securitization trusts
have either met or exceeded management's expectations and the Company determined
that no  further  adjustments  to the  prepayment  or  default  assumptions  was
necessary at December 31, 1998.



RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997

GENERAL

   The  Company's  net  income for the year ended  December  31,  1998 was $11.3
million, or $0.74 per share,  compared to $30.4 million, or $1.98 per share, for
the year ended  December 31, 1997.  Comments  regarding  the  components  of net
income are detailed in the following paragraphs.

REVENUES

   Total  revenues  increased  $5.7  million,  or 4%, to $139.6  million for the
twelve months ended  December 31, 1998,  from $133.9  million for the comparable
period in 1997. The increase in revenue was primarily  attributable to increases
in origination  fees and the net gains recognized on the sale of mortgage loans,
reflecting the growth in the Company's level of loan  originations and purchases
and securitizations. In addition, servicing fees increased due to an increase in
the aggregate size of the Company's loan servicing  portfolio.  These  increases
were  significantly  offset by a decline in interest income primarily due to the
fair  value  adjustments  made  to  the  Company's  interest-only  and  residual
certificates and capitalized  mortgage servicing rights in the second and fourth
quarters of 1998 (see "--Fair Value Adjustments") and a larger than normal hedge
loss  which  was not  offset  by a  higher  gain on  sale  because  asset-backed
investors who purchase the pass-through  certificates  issued by  securitization
trusts demanded wider spreads (see "net gain on sale of mortgage loans").

   The Company  originated and purchased $1.73 billion of mortgage loans for the
twelve months ended  December 31, 1998,  representing  a 38% increase from $1.25
billion of mortgage loans originated and purchased for the comparable  period in
1997. The Company completed four securitizations and loan sales in 1998 totaling
$1.73 billion,  compared to four securitizations totaling $1.24 billion in 1997.
Total loans  serviced  increased  60% to $2.95 billion at December 31, 1998 from
$1.84 billion at December 31, 1997.

                                       24


   NET  GAIN ON SALE OF  MORTGAGE  LOANS.  Net  gain on sale of  mortgage  loans
represents (1) the sum of (a) the fair value of the  interest-only  and residual
certificates retained by the Company in a securitization for each period and the
market value of the  interest-only  certificates  sold in  connection  with each
securitization,  (b) the fair value of  capitalized  mortgage  servicing  rights
associated with loans securitized in each period, and (c) premiums earned on the
sale of whole loans on a  servicing-released  basis,  (2) less the (x)  premiums
paid  to  originate  or  acquire  mortgage  loans,  (y)  costs  associated  with
securitizations  and (z) any hedge  loss  (gain)  associated  with a  particular
securitization.

   Net gain on sale of mortgage loans  increased  $6.2 million,  or 7%, to $92.5
million for the twelve  months ended  December 31, 1998,  from $86.3 million for
the comparable  period in 1997. The increase was primarily due to a 40% increase
in the  amount  of  loans  securitized  or sold on a whole  loan  basis to $1.73
billion in 1998, compared to $1.24 billion of loans securitized in 1997, but was
partially  offset  by a lower  weighted  average  net  gain on sale  ratio.  The
weighted  average  net gain on sale ratio was 5.4% in 1998  compared  to 7.0% in
1997.

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

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

   Interest  income  decreased  $9.9  million,  or 44%, to $12.4 million for the
twelve months ended  December 31, 1998,  from $22.3  million for the  comparable
period in 1997.  The decrease in interest  income was primarily due to the $15.5
million  and $2.8  million  fair value  adjustments  made  during the second and
fourth  quarters  of  1998  to  the  interest-only  and  residual   certificates
previously  discussed  (see  "--Fair  Value  Adjustments").  The  effect of that
adjustment was partially offset by increases in (a)  interest-only  and residual
certificates  income,  (b) interest on loans held for sale due to higher average
balances,  partially  offset by a decline,  from 11.0% to 10.2%, in the weighted
average coupon rate on the mortgage loans, reflecting both a lower interest rate
environment  and the  Company's  shift to higher  credit  quality  loans and (c)
interest  on bank  deposits  resulting  from a higher  average  balance  held in
securitization trust accounts by the Company.

   SERVICING  FEES.  Servicing  fees  represent  all  contractual  and ancillary
servicing  revenue received by the Company less (1) the offsetting  amortization
of the capitalized  mortgage servicing rights,  and any adjustments  recorded to
provide  valuation  allowances for the impairment in mortgage  servicing  rights
(see  "--Certain   Accounting   Considerations"),   and  (2)  prepaid   interest
shortfalls.

   Servicing fees increased $2.3 million, or 32%, to $9.4 million for the twelve
months ended December 31, 1998,  from $7.1 million for the comparable  period in
1997. The increase was primarily due to an increase in the aggregate size of the
Company's  servicing  portfolio,  partially  offset by the recording of the $1.9
million provision for the Company's  capitalized mortgage servicing rights. (See
"--Fair Value  Adjustments").  The average balance of mortgage loans serviced by
the Company  increased 77% to $2.44 billion for the twelve months ended December
31, 1998, from $1.38 billion for the comparable period in 1997.

   ORIGINATION  FEES.  Origination  fees  represent  fees earned on brokered and
retail  originated  loans.  Origination fees increased $7.2 million,  or 40%, to
$25.3 million for the twelve months ended December 31, 1998,  from $18.1 million
for the comparable  period in 1997. The increase was primarily the result of (a)
a 75%  increase  in broker  originated  loans and (b) a 67%  increase  in retail
originated loans.

EXPENSES

   Total expenses  increased  $38.4  million,  or 46%, to $121.1 million for the
twelve months ended  December 31, 1998,  from $82.7  million for the  comparable
period in 1997.  The increase was primarily the result of (1) an

                                       25


increase  in  the  Company's  personnel  to support  its  higher  level  of loan
originations,  (2) an increase in general and  administrative  costs  associated
with the Company's expanded retail,  broker and correspondent  divisions and (3)
an increase in interest expense  associated with (a) the growth in the Company's
loan  originations and (b) the $150 million  aggregate  principal amount of 9.5%
Senior Notes due 2004 issued in July 1997 (the "Senior Notes").

   PAYROLL  AND RELATED  COSTS.  Payroll and  related  costs  include  salaries,
benefits and payroll taxes for all employees.  Payroll and related costs expense
increased  $15.5  million,  or 38%, to $56.7 million for the twelve months ended
December 31, 1998,  from $41.2 million for the  comparable  period in 1997.  The
increase was primarily due to staff increases related to growth in the Company's
loan  originations  and the  costs  associated  with the  Company's  broker  and
Fidelity  Mortgage retail division,  which only reflects  expenses from February
11,  1997.  The Company  employed  1,104  full- and  part-time  employees  as of
December 31, 1998,  compared to 987 full- and part-time employees as of December
31, 1997.

   INTEREST  EXPENSE.  Interest  expense includes the borrowing costs to finance
loan originations and purchases under (1) the Company's credit  facilities,  (2)
the  Senior  Notes,  and  (3)  its  investment  in  interest-only  and  residual
certificates.

   Interest  expense  increased $10.0 million,  or 50%, to $30.0 million for the
twelve months ended  December 31, 1998,  from $20.0  million for the  comparable
period in 1997.  The increase was  primarily  attributable  to (i) the Company's
issuance of Senior Notes in July 1997 and (ii) growth in loan production,  which
increased the level of debt needed  throughout  1998 to finance the inventory of
loans held for sale prior to their securitization.

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

   General and administrative expenses increased $12.9 million, or 60%, to $34.4
million for the twelve  months ended  December 31, 1998,  from $21.5 million for
the comparable period in 1997. The increase was primarily attributable to (1) an
increase in expenses associated with the Company's increase in loan originations
and purchases in 1998,  (2) the expansion  costs  associated  with the Company's
adding  two  additional  Fidelity  Mortgage  retail  branch  offices,   and  (3)
depreciation expense reflecting the Company's ongoing investment in technology.

   INCOME TAXES. Income taxes are accounted for under SFAS No. 109,  "Accounting
for Income  Taxes."  Deferred tax assets and  liabilities  are recognized on the
income  reported in the financial  statements  regardless of when such taxes are
paid. These deferred taxes are measured by applying current enacted tax rates.

   Prior to October 31, 1996,  the Company was an S corporation  pursuant to the
Internal Revenue Code of 1986, as amended, and as such did not incur any federal
income tax expense.  On October 31, 1996, the Company became a C corporation for
federal and state  income tax purposes  and, as such,  is subject to federal and
state income tax on its taxable  income for the period  beginning on November 1,
1996.

   In  connection  with the change in tax status  from an S  corporation  to a C
corporation, the Company incurred deferred income tax expense of $3.9 million as
of October 31, 1996. The remaining deferred income tax expense pertaining to the
change in status from an S corporation  to a C corporation  at December 31, 1998
was approximately $2.3 million.

   The Company recorded tax provisions of $7.2 million and $20.7 million for the
years ended  December 31, 1998 and 1997,  respectively.  Income taxes provided a
38.8%  effective  tax rate for the year ended  December 31, 1998,  compared to a
40.5%  effective tax rate for the year ended December 31, 1997. The reduction in
the effective tax rate is primarily attributable to the Company's expansion into
lower  tax rate  states  and  local  jurisdictions  and to the  benefits  due to
permanent book/tax differences.

                                       26


YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996

GENERAL

   The  Company's  net  income for the year ended  December  31,  1997 was $30.4
million,  or $1.98 per share as compared to $19.1 million (pro forma),  or $1.46
per share (pro forma), for the year ended December 31, 1996.  Comments regarding
the components of net income are detailed in the following paragraphs.

REVENUES

   Total revenues  increased  $60.4  million,  or 82%, to $133.9 million for the
twelve months ended  December 31, 1997,  from $73.5  million for the  comparable
period in 1996.  The  increase  in revenue  was  primarily  attributable  to the
increase in net gains  recognized on the sale of mortgage loans,  reflecting the
growth  in  the  Company's  level  of  loan   originations   and  purchases  and
securitizations.  Revenue  also  increased  in all  other  categories  including
origination fees, servicing fees, and interest income.

   The Company  originated and purchased $1.25 billion of mortgage loans for the
twelve  months ended  December 31, 1997,  representing  a 90% increase from $659
million of mortgage loans originated and purchased for the comparable  period in
1996.   The  Company  issued  four   quarterly   closed-end   home  equity  loan
securitizations   in  1997   totaling   $1.24   billion,   compared   to   three
securitizations  and loan sales of $630  million in 1996.  Total loans  serviced
increased  97% to $1.84  billion  at  December  31,  1997 from $933  million  at
December 31, 1996.

   NET  GAIN ON SALE OF  MORTGAGE  LOANS.  Net  gain on sale of  mortgage  loans
increased  $39.8  million,  or 86%, to $86.3 million for the twelve months ended
December 31, 1997,  from $46.5 million for the  comparable  period in 1996.  The
increase was primarily due to a 97% increase in the amount of loans  securitized
to $1.24 billion in 1997,  compared to $630 million of loans sold or securitized
for the comparable  period in 1996.  Net gains from the sale of loans  increased
less than the overall  increase  in loan  securitizations  primarily  because of
increases in the  pass-through  rates  required by REMIC trust  investors in the
fourth  quarter  of 1997,  which  reduced  the  value of the  interest-only  and
residual  certificates  the Company  received in connection  with that quarter's
securitization.  The weighted  average gain on sale ratio for the twelve  months
ended  December 31, 1997,  and for the  comparable  period in 1996, was 7.0% and
7.4%, respectively.  The weighted average gain on sale ratio is calculated using
the net gain on sale divided by the total amount of loans securitized and sold.

   INTEREST  INCOME.  Interest income  increased $5.9 million,  or 36%, to $22.3
million for the twelve  months ended  December 31, 1997,  from $16.4 million for
the  comparable  period in 1996.  The increase was primarily due to (a) a higher
average  balance of mortgage  loans held for sale during the twelve months ended
December  31, 1997 driven by higher loan  originations  and  purchases  as noted
above,  and (b) an  increase in excess  servicing  received  from the  Company's
interest-only  and  residual  certificates,  partially  offset by the fair value
adjustment to the interest-only and residual certificates,  primarily related to
distributions received from the securitization trusts.

   SERVICING  FEES.  Servicing  fees  increased  $1.7  million,  or 31%, to $7.1
million for he twelve months ended December 31, 1997,  from $5.4 million for the
comparable  period in 1996.  The increase was primarily due to a higher  average
loan servicing portfolio,  which resulted in increased contractual and ancillary
service fees, partially offset by a $2.9 million increase in amortization of the
Company's  capitalized  mortgage servicing rights in 1997, compared to 1996. The
average  balance of mortgage  loans  serviced by the Company  increased  107% to
$1.38 billion for the twelve months ended  December 31, 1997,  from $667 million
for the comparable  period in 1996. The amount of mortgage loans serviced by the
Company increased at a faster rate than the amount of servicing fees,  primarily
as a result of a reduction in the  contractual  servicing fee rate from 0.65% to
0.50% per annum beginning with the 1996-2 securitization in September 1996.

   ORIGINATION FEES. Origination fees increased $12.8 million, or 242%, to $18.1
million for the twelve months ended December 31, 1997, from $5.3 million for the
comparable period in 1996. The increase was primarily the result of (a) the 1997
acquisition  of Fidelity  Mortgage  and the  subsequent  expansion of its retail
network which accounted for $11.4 million of origination fees in 1997, and (b) a
50% increase in broker originated loans and commensurate increase in broker loan
origination fees.

                                       27


EXPENSES

   Total expenses  increased  $42.7  million,  or 107%, to $82.7 million for the
twelve months ended  December 31, 1997,  from $40.0  million for the  comparable
period in 1996.  The  increase  in  expenses  was  primarily  the  result of (i)
increased  interest  expense due to (a) higher  interest costs  generated by the
growth  in  the  Company's  loan  origination  and  purchase  activities,  which
increased  the level of debt needed  throughout  1997 to finance  the  resulting
higher  inventory of loans held for resale,  (b) the Company's  issuance in July
1997 of $150 million aggregate  principal amount of 9.5% Senior Notes due August
1, 2004 and (c) financing the Company's investment in interest-only and residual
certificates (which was subsequently  eliminated using a portion of the proceeds
from the Senior Notes),  (ii) an increase in the Company's  personnel related to
higher loan origination growth, including the Company's Fidelity Mortgage retail
division and (iii) costs associated with the expansion of the Company's  retail,
broker and correspondent divisions.

   PAYROLL AND RELATED COSTS.  Payroll and related costs expense increased $23.6
million,  or 134%,  to $41.2  million for the twelve  months ended  December 31,
1997,  from $17.6 million for the  comparable  period in 1996.  The increase was
primarily  related to staff  increases  associated  with to the  acquisition and
subsequent  expansion of Fidelity Mortgage and the increase in loan originations
and  purchases at the  Company.  The Company  employed  987 full- and  part-time
employees of which 447 were  employees  of Fidelity  Mortgage as of December 31,
1997, compared to 346 full- and part-time employees as of December 31, 1996.

   INTEREST EXPENSE.  Interest expense increased $8.7 million,  or 77%, to $20.0
million for the twelve  months ended  December 31, 1997,  from $11.3 million for
the comparable  period in 1996. The increase was primarily  attributable  to (i)
growth in loan  activity,  which  increased the level of debt needed  throughout
1997  to  finance  the   inventory  of  loans  held  for  sale  prior  to  their
securitization,  (ii) the  Company's  issuance in July 1997 of the Senior Notes,
(iii) financing of the Company's  interest-only and residual certificates (which
was  subsequently  eliminated  using a portion of the  proceeds  from the Senior
Notes), and (iv) a higher cost of funds on the Company's credit facilities which
were tied to one-month  LIBOR. The one-month LIBOR index increased to an average
interest rate of 5.7% in 1997,  compared to an average  interest rate of 5.4% in
1996.

   GENERAL AND  ADMINISTRATIVE  EXPENSES.  General and  administrative  expenses
increased  $10.4  million,  or 94%, to $21.5 million for the twelve months ended
December 31, 1997,  from $11.1 for the  comparable  period in 1996. The increase
was  primarily  attributable  to  (i)  the  amortization  of  acquisition  costs
(goodwill) associated with the Company's purchase of Fidelity Mortgage; (ii) the
expansion costs associated with the Company's  increasing the number of Fidelity
Mortgage  retail branch offices from five to thirteen  during 1997, and (iii) an
increase in expenses  associated with the Company's increase in loan origination
and purchases in 1997.

   INCOME TAXES.  The Company recorded a tax provision of $20.7 million and $9.5
million (which  included a $3.9 million  deferred tax charge in connection  with
its change in status from an S corporation  to a C corporation  in 1996) for the
years ended December 31, 1997 and 1996, respectively.

   Income taxes provided a 40.5%  effective tax rate for the year ended December
31,  1997,  compared to a 42.5%  assumed  effective  tax rate for the year ended
December 31, 1996 if the Company would have been a C corporation  for the entire
period. The reduction in the effective tax rate is primarily attributable to the
Company's expansion into lower taxing state and local jurisdictions.

FINANCIAL CONDITION

DECEMBER 31, 1998 COMPARED TO DECEMBER 31, 1997

   Cash and interest-bearing  deposits increased $16.3 million, or 50%, to $49.2
million at December  31,  1998 from $32.9  million at December  31,  1997.  This
increase was primarily the result of  additional  monies held in  securitization
trust accounts by the Company, acting as servicer for its ongoing securitization
program.

   Accounts  receivable  decreased  $8.7  million,  or 28%, to $22.5  million at
December  31, 1998 from $31.2  million at December  31,  1997.  The decrease was
primarily attributable to the receipt of a federal tax refund,  partially offset
by an increase in reimbursable servicing advances made by the Company, acting as
servicer  on  its  securitizations,

                                       28


related  to  a  higher  average  servicing  portfolio. The  Company's  servicing
portfolio  increased  60% to $2.95  billion as of  December  31, 1998 from $1.84
billion as of December 31, 1997.

   Loans held for sale  increased  $8.0  million,  or 10%,  to $87.2  million at
December 31, 1998 from $79.2  million at December 31,  1997.  This  increase was
primarily  due to  the  net  difference  between  loan  originations  and  loans
securitized during 1998.

   Accrued interest and late charges receivable increased $17.3 million, or 58%,
to $46.9  million at December 31, 1998 from $29.6  million at December 31, 1997.
This  increase was  primarily due to a larger loan  servicing  portfolio,  which
resulted in increased reimbursable interest advances made by the Company, acting
as servicer on its securitizations.

      Capitalized  mortgage servicing rights increased $10.6 million, or 46%, to
$33.5 million at December 31, 1998 from $22.9 million at December 31, 1997. This
increase was directly attributable to the Company's capitalizing the fair market
value of the  servicing  assets,  totaling  $19.8  million,  resulting  from the
Company's  completion of four  securitizations  during 1998, partially offset by
the  amortization of capitalized  mortgage  servicing  rights and the fair value
adjustment  to the  capitalized  mortgage  servicing  rights (see "--Fair  Value
Adjustments").

   Interest-only and residual  certificates  increased $36.0 million, or 21%, to
$203.8  million at December  31, 1998 from $167.8  million at December 31, 1997.
This increase is primarily  attributable  to the  Company's  receipt of residual
certificates  valued and  recorded  at $85.1  million  from its  securitizations
during the year ended  December 31, 1998.  The increase was offset by the effect
of the fair  value  adjustment  (see  "--Fair  Value  Adjustments")  and  normal
amortization due to cash distributions.

   Equipment,  net, increased $5.8 million, or 52%, to $17.0 million at December
31, 1998 from $11.2 million at December 31, 1997. The increase was primarily due
to capital expenditures related to new technology and expansion.

   Cash held for  advance  payments  increased  $3.7  million,  or 59%, to $10.0
million at  December  31,  1998 from $6.3  million at December  31,  1997.  This
increase  was  primarily  due  to a  higher  average  loan  servicing  portfolio
resulting in  additional  monies held in escrow  trust  accounts by the Company,
acting as servicer.

   Warehouse financing and other borrowings increased $52.1 million, or 185%, to
$80.3 million at December 31, 1998 from $28.2 million at December 31, 1997. This
increase was  primarily  related to the  operating  cash deficit and to a lesser
extent, the funding of the Company's investment in technology.

   The aggregate  principal balance of the Senior Notes, net of unamortized bond
discount  totaled $149.4 million at December 31, 1998 compared to $149.3 million
at December  31, 1997.  The Senior  Notes accrue  interest at a rate of 9.5% per
annum, payable semi-annually on February 1 and August 1.

   Accounts  payable and accrued  expenses  increased  $5.5 million,  or 35%, to
$21.0 million at December 31, 1998 from $15.5 million at December 31, 1997. This
increase  was  primarily  attributable  to an increase in current  income  taxes
payable,  various  operating  accruals  and an  increase  in the  provision  for
recourse loans.

   Investor  payable  increased  $22.9  million,  or 56%,  to $63.8  million  at
December 31, 1998 from $40.9  million at December 31,  1997.  This  increase was
primarily due to the 60% increase in the Company's  portfolio of serviced  loans
to $2.95  billion at December 31, 1998 from $1.84  billion at December 31, 1997.
Investor  payable is comprised of all principal  collected on mortgage loans and
accrued interest.  Variability in this account is primarily due to the principal
payments collected within a given collection period.

   Advance payments by borrowers for taxes and insurance increased $3.8 million,
or 66%, to $9.6  million at December  31, 1998 from $5.8 million at December 31,
1997.  This  increase  is  primarily  due to a  higher  average  loan  servicing
portfolio  and the timing of  payments  collected  and  disbursed  resulting  in
additional  monies held in escrow  trust  accounts  by the  Company  acting as a
servicer.

   Stockholders'  equity  increased  $11.2  million, or 9%, to $137.7 million at
December 31, 1998 from $126.5  million at December 31,  1997.  This  increase is
primarily  due to net income for the twelve month period of $11.3  million,  the
issuance of $1.2  million of the  Company's  common stock paid to the sellers of
Fidelity Mortgage in August 1998,  partially offset by the Company's  repurchase
of 116,800 shares of its common stock for $1.3 million.

                                       29


LIQUIDITY AND CAPITAL RESOURCES

   The Company has historically operated on a negative cash flow basis primarily
due to increases in the volume of loan purchases and originations and the growth
of its securitization program. In recent quarters,  however, the Company reduced
its  negative  cash flow and  achieved  a positive  cash flow  during the fourth
quarter of 1998. The Company's focus is to maintain a neutral cash flow position
for the  foreseeable  future,  as a result of aggregate  annual  increased  cash
inflows from the Company's  retained  interest-only  and residual  certificates,
advantageous changes in the securitizations  structures the Company has used and
a greater  concentration on less cash-intensive  broker and retail originations.
Since the second quarter of 1997, the Company has sold the senior  interest-only
certificates  in each of its  securitizations  and, in the  Company's  four most
recent  securitizations,  it has  successfully  increased  the  amount of senior
interest-only   certifcates   offered   to   investors,    compared   to   prior
securitizations.

   For the years ended  December  31, 1998 and 1997,  the Company had  operating
cash deficits of $24.6 million and $53.5 million,  respectively. The improvement
in the Company's operating cash deficit in 1998, compared to 1997, was primarily
due to increased  cash inflows from the  Company's  retained  interest-only  and
residual certificates, changes in the securitization structures that the Company
has  utilized,   an  increase  in  the  Company's   restricted   cash  held  for
securitization  trust  accounts and a lower  percentage  of  correspondent  loan
purchases and lower purchased  premiums,  a tax refund,  partially offset by the
semi-annual Senior Note interest payments made in February 1998 and August 1998.

   Currently, the Company's primary cash requirements include the funding of (i)
mortgage  originations  and purchases  pending their pooling and sale,  (ii) the
points and expenses paid in connection  with the  acquisition  of  correspondent
loans,  (iii)  interest  expense on its  Senior  Notes and  warehouse  and other
financings, (iv) fees, expenses and tax payments incurred in connection with its
securitization  program  and (v)  ongoing  administrative  and  other  operating
expenses.  The  Company  has relied  upon a few  lenders to provide  the primary
credit facilities for its loan  originations and purchases.  The Company must be
able to sell loans and obtain  adequate  credit  facilities and other sources of
funding in order to continue to originate and purchase loans.

   Historically,  the Company has utilized various  financing  facilities and an
equity  financing  to offset  negative  operating  cash  flows and  support  the
continued  growth of its loan  originations and purchases,  securitizations  and
general operating expenses. On July 23, 1997, the Company completed its offering
of the Senior  Notes.  A portion of the Senior Notes  proceeds  were used to pay
down various financing  facilities with the remainder used to fund the Company's
growth  in  loan  originations  and  purchases  and its  ongoing  securitization
program. The Company's primary sources of liquidity continue to be warehouse and
other financing  facilities,  securitizations and, subject to market conditions,
sales of whole loans and additional debt and equity securities.

   To  accumulate  loans for  securitization,  the  Company  borrows  money on a
short-term basis through  warehouse lines of credit.  The Company  currently has
three warehouse  facilities for this purpose.  One warehouse  facility is a $200
million  committed  credit line with a variable  rate of interest and a maturity
date of March  2000.  This  facility  was  converted  from an  uncommitted  to a
committed  line during the three  months  ended March 31, 1997 and the  maturity
date was extended from February 1999 to March 2000 during the three months ended
March 31, 1999. The Company's  second  warehouse  facility is a syndicated  $150
million committed revolving line with a variable rate of interest and a maturity
date of June 1999. This facility was increased from $140 million to $150 million
during the three months  ended June 30,  1998.  The  Company's  third  warehouse
facility is a $200 million  committed  commercial  paper conduit with a variable
rate of  interest  and a maturity  date of  September  1999.  Additionally,  the
Company obtained a fourth warehouse  facility - a $200 million  committed credit
facility  with a variable  rate of interest and a maturity  date of March 2000 -
during the three months ended March 31, 1999.  The  outstanding  balances on the
$200 million,  $150 million, and $200 million facilities as of December 31, 1998
were $58.7 million, $10.7 million, and $0 million, respectively.

   The Company has in the past obtained  financing  facilities for interest-only
and residual certificates acquired as part of its securitizations. In July 1997,
all outstanding  balances were  eliminated  using a portion of the proceeds from
the  Senior  Notes.  In  addition,  the  Company  is limited by the terms of the
indenture  governing  the Senior  Notes as to the amount of future  indebtedness
permitted to be secured by interest-only and residual certificates.

   The  Company is  required  to comply with  various  operating  and  financial
covenants as provided in the agreements  described above which are customary for
agreements  of their  type.  The  Company  does not  believe  that

                                       30


its existing  financial  covenants  will  restrict  its  operations  or  growth.
The  continued  availability  of  funds  provided  to the  Company  under  these
agreements  is  subject  to  the  Company's  continued   compliance  with  these
covenants.  Management  believes that the Company is in compliance with all such
covenants under these agreements as of December 31, 1998.

   The Company  purchased a total of 116,800  shares of its common  stock during
the year ended December 31, 1998, under the Company's stock repurchase  program,
at a total cost of $1.3 million. All of the repurchased shares were purchased in
open market transactions at then prevailing market prices.

INTEREST RATE RISK

    Among the  Company's  primary  market risk  exposure is interest  rate risk.
Profitability  may be  directly  affected by the level of, and  fluctuation  in,
interest  rates,  which affect the  Company's  ability to earn a spread  between
interest  received on its loans and the costs of its borrowings,  which are tied
to various United States  Treasury  maturities,  commercial  paper rates and the
London  Inter-Bank  Offered Rate ("LIBOR").  The profitability of the Company is
likely to be adversely affected during any period of unexpected or rapid changes
in interest rates. A substantial and sustained  increase in interest rates could
adversely  affect the  Company's  ability to purchase  and  originate  loans.  A
significant  decline  in  interest  rates  could  increase  the  level  of  loan
prepayments  thereby  decreasing  the  size  of  the  Company's  loan  servicing
portfolio. To the extent servicing rights and interest-only and residual classes
of certificates  have been capitalized on the books of the Company,  higher than
anticipated  rates of loan  prepayments  or losses could  require the Company to
write down the value of such  servicing  rights and  interest-only  and residual
certificates,  adversely impacting earnings. As previously  discussed,  the fair
value  adjustments  that the Company recorded in the second quarter of 1998 were
primarily  attributable  to the Company's  change in prepayment  assumptions  to
reflect higher than  originally  anticipated  rates of prepayments  (see "--Fair
Value Adjustments").  In an effort to mitigate the effect of interest rate risk,
the Company has reviewed its various  mortgage  products and has  identified and
modified those that have proven  historically  more  susceptible to prepayments.
However,  there can be no assurance that such  modifications to its product line
will effectively mitigate interest rate risk in the future.

   Fluctuating  interest rates also may affect the net interest income earned by
the Company  resulting from the  difference  between the yield to the Company on
loans held pending sales and the interest paid by the Company for funds borrowed
under the Company's  warehouse  facilities,  although the Company  undertakes to
hedge its  exposure to this risk by using  treasury  rate lock  contracts.  (See
"--Hedging" below).


HEDGING

   The  Company  originates  and  purchases  mortgage  loans and then sells them
primarily through securitizations. At the time of securitization and delivery of
the  loans,  the  Company  recognizes  gain on sale based on a number of factors
including the  difference,  or "spread,"  between the interest rate on the loans
and the interest rate paid to asset-backed  investors who purchase  pass-through
certificates issued by securitization  trusts,  which historically was generally
related  to  the  interest   rate  on  treasury   securities   with   maturities
corresponding  to the  anticipated  life of the loans.  If  interest  rates rise
between the time the Company  originates or purchases the loans and the time the
loans are sold at securitization, the excess spread narrows, resulting in a loss
in value of the loans. The Company has implemented a strategy to protect against
such losses and to reduce  interest rate risk on loans  originated and purchased
that  have  not yet been  securitized  through  the use of  treasury  rate  lock
contracts with various  durations (which are similar to selling a combination of
United States Treasury  securities),  which equate to a similar  duration of the
underlying loans. The nature and quantity of hedging transactions are determined
by the Company based upon various factors including, without limitation,  market
conditions and the expected volume of mortgage  originations and purchases.  The
Company  will  enter  into  treasury  rate  lock  contracts  through  one of its
warehouse  lenders  and/or one of the  investment  bankers which  underwrite the
Company's  securitizations.  These  contracts  are  designated  as hedges in the
Company's  records and are closed out when the associated loans are sold through
securitization.

   If the value of the hedges  decrease,  offsetting an increase in the value of
the loans,  the Company,  upon  settlement with its  counterparty,  will pay the
hedge loss in cash and  realize the  corresponding  increase in the value 


                                       31


of the  loans  as  part  of its  net  gain  on sale of  mortgage  loans  and its
corresponding interest-only and residual certificates.  Conversely, if the value
of the hedges  increase,  offsetting  a decrease in the value of the loans,  the
Company,  upon settlement with its counterparty,  will receive the hedge gain in
cash and realize the corresponding  decrease in the value of the loans through a
reduction  in  the  value  of  the  corresponding   interest-only  and  residual
certificates.

   Up to and including the second quarter of 1998, the Company believed that its
hedging  strategy of using  treasury rate lock  contracts was the most effective
way to manage its interest rate risk on loans prior to securitization.  However,
in the  third  quarter  of 1998,  asset-backed  investors,  responding  to lower
treasury yields and global financial market volatility,  demanded  substantially
wider spreads over  treasuries  than  historically  experienced for newly issued
asset-backed securities.  As a result, Delta's $8.8 million hedge loss resulting
from lower interest rates was not offset by a higher gain on sale as the Company
has historically seen.

   Given the Company's belief that the volatile market  experienced in the third
quarter would likely  continue well into the fourth  quarter - and, as a result,
that the amount of the spreads demanded by asset-backed securitization investors
would be difficult to predict,  as  asset-backed  securitization  investors were
more  interested in absolute  yields,  instead of spreads over  treasuries - the
Company did not hedge any of its warehoused loans pending  securitization in the
fourth quarter; believing that its historical hedging strategy would continue to
be largely ineffective in such an environment.

The  Company  has  continued  to review its  hedging  strategy  in order to best
mitigate risk pending securitization.  As the asset-backed securitization market
improved  in the first  quarter of 1999,  and  spreads  over  treasuries  became
largely more  predictable,  the Company resumed its hedging  strategy of selling
treasury  rate-lock  contracts  to  mitigate  its  interest  rate  risk  pending
securitization.

INFLATION

   Inflation  affects  the  Company  most  significantly  in the  area  of  loan
originations and can have a substantial effect on interest rates. Interest rates
normally  increase  during periods of high inflation and decrease during periods
of low inflation. (See "--Interest Rate Risk.")

IMPACT OF NEW ACCOUNTING STANDARDS

   For  discussion  regarding the impact of new accounting  standards,  refer to
Note 1 of Notes to the Consolidated Financial Statements.


RISK FACTORS

   Except for historical information contained herein, certain matters discussed
in this Form 10-K are  "forward-looking  statements"  as defined in the  Private
Securities  Litigation  Reform  Act  (PSLRA)  of 1995,  which  involve  risk and
uncertainties that exist in the Company's  operations and business  environment,
and are subject to change on various  important  factors.  The Company wishes to
take  advantage  of the "safe  harbor"  provisions  of the  PSLRA by  cautioning
readers that numerous  important factors discussed below,  among others, in some
cases have caused, and in the future could cause the Company's actual results to
differ  materially from those expressed in any  forward-looking  statements made
by, or on behalf of, the Company.  The following  include some,  but not all, of
the  factors or  uncertainties  that could cause  actual  results to differ from
projections:

      *  The  Company's  ability  or  inability  to continue to access  lines of
         credit,  including  without  limitation,  warehouse  and  other  credit
         facilities  used to finance newly  originated  mortgage  loans held for
         sale.

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

      *  A general economic slowdown. Periods  of economic slowdown or recession
         may  be  accompanied  by  decreased  demand  for  consumer  credit  and
         declining  real  estate  values.  Because  of the  Company's  focus  on
         credit-impaired   borrowers,   the   actual   rate  of   delinquencies,
         foreclosures  and losses on loans 

                                       32


         affected by the borrowers reduced ability to use home equity to support
         borrowings  could  be  higher  than  those generally experienced in the
         mortgage   lending  industry.   Any  sustained   period  of   increased
         delinquencies, foreclosure, losses or increased costs  could  adversely
         affect  the  Company's  ability to  securitize  or  sell  loans  in the
         secondary market.

      *  The effects  of interest rate fluctuations and the Company's ability or
         inability to hedge  effectively  against such  fluctuations in interest
         rates; the effect of changes in monetary and fiscal policies,  laws and
         regulations,  other  activities of governments,  agencies,  and similar
         organizations,  social and economic conditions, unforeseen inflationary
         pressures and monetary fluctuation.

      *  Rapid  or unforeseen  escalation  of the cost of regulatory  compliance
         and/or  litigation,   including  but  not  limited  to,   environmental
         compliance, licenses, adoption of new, or changes in accounting polices
         and  practices  and the  application  of such  polices  and  practices.
         Failure to comply with various  federal,  state and local  regulations,
         accounting policies,  and environmental  compliance can lead to loss of
         approved status, certain rights of rescission for mortgage loans, class
         action lawsuits and administrative enforcement action.

      *  Increased  competition  within  the Company's markets has taken on many
         forms,  such as  convenience  in  obtaining a loan,  customer  service,
         marketing and distribution channels, loan origination fees and interest
         rates. The Company is currently  competing with large finance companies
         and  conforming   mortgage   originators  many  of  whom  have  greater
         financial, technological and marketing resources.

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

      *  Unpredictable  delays or  difficulties   in  development of new product
         programs.

      *  Year  2000  Compliance  and  Technology  Enhancements.  The  Company is
         utilizing  both internal and external  resources to identify,  correct,
         reprogram  or replace,  and test its systems for year 2000  compliance.
         Although  to date,  the  Company  has  been  completing  its Year  2000
         compliance  efforts on time, there can be no assurance that the Company
         will not  experience  unexpected  delay There can also be no  assurance
         that the systems of other companies on which the Company's systems rely
         will be timely reprogrammed for year 2000 compliance.

INFORMATION SERVICES YEAR 2000 PROJECT

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

STATE OF READINESS

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

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

                                       33


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

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

COST TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES

   The Company's costs to resolve the Year 2000 issue are not expected to have a
material  financial  impact on the Company and are expected to be less than $1.0
million, which the Company intends to fund from its current operations. To date,
the Company has paid and expensed $0.6 million.  However, as stated above, there
can be no assurance that all such costs have been identified,  or that there may
not be some  unforeseen  cost  which may have a material  adverse  effect on the
Company's financial condition and results of operations.

RISK OF YEAR 2000 ISSUES

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

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

CONTINGENCY PLANS

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

                                       34

<PAGE>


ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

   The primary  market  risk to which the  Company is exposed is  interest  rate
risk, which is highly sensitive to many factors, including governmental monetary
and  tax   policies,   domestic  and   international   economic  and   political
considerations  and other factors beyond the control of the Company.  Changes in
the general level of interest  rates between the time the Company  originates or
purchases  mortgage  loans and the time the Company sells such mortgage loans at
securitization  can affect the value of the  Company's  mortgage  loans held for
sale and, consequently,  the Company's net gain on sale revenue by affecting the
"excess spread" between the interest rate on the mortgage loans and the interest
rate paid to  asset-backed  investors  who  purchase  pass-through  certificates
issued by the securirzation  trusts. If interest rates rise between the time the
Company  originates  or  purchases  the loans and the time the loans are sold at
securitization,  the excess  spread  generally  narrows,  resulting in a loss in
value of the loans and a lower net gain on sale.

   A hypothetical 10 basis point increase in interest rates,  which historically
has resulted in  approximately  a 10 basis point  decrease in the excess spread,
would be expected to reduce the Company's net gain on sale by  approximately  25
basis  points.  Many  factors,  however,  can  affect the  sensitivity  analysis
described  above  including,   without  limitation,  the  structure  and  credit
enhancement used in a particular securitization,  the Company's prepayment, loss
and  discount  rate  assumptions,  and the spread  over  treasuries  demanded by
asset-backed investors who purchase the Company's asset-backed securities.

   To reduce its financial  exposure to changes in interest  rates,  the Company
generally hedges its mortgage loans held for sale by entering into treasury rate
lock contracts (see "Item 7 - Management's  Discussion and Analysis of Financial
Condition and Results of Operations - Hedging").  The Company's hedging strategy
has largely been an effective tool to manage the Company's interest rate risk on
loans prior to  securitization,  by  providing  the Company with a cash gain (or
loss) to largely  offset the reduced  (increased) excess  spread (and  resultant
lower (or  higher)  net gain on sale) from an  increase  (decrease)  in interest
rates.  A hedge may not,  however,  perform its intended  purpose of  offsetting
changes  in net gain on sale.  This was the case in the third  quarter  of 1998,
when  asset-backed  investors,  responding to lower  treasury  yields and global
financial  market  volatility,   demanded   substantially   wider  spreads  over
treasuries  than   historically   experienced  for  newly  issued   asset-backed
securities.  As a result,  Delta's $8.8 million hedge loss  resulting from lower
interest  rates  was not  offset  by a higher  gain on sale as the  Company  has
historically seen.

   Changes in interest rates could also adversely  affect the Company's  ability
to  purchase  and  originate  loans  and/or  could  affect  the  level  of  loan
prepayments thereby impacting the size of the Company's loan servicing portfolio
and the value of the  Company's  interest  only and  residual  certificates  and
capitalized mortgage servicing rights. (See "Item 7 Management's  Discussion and
Analysis of  Financial  Condition  and  Results of  Operations  - Interest  Rate
Risk").

                                       35

<PAGE>


   ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.


                          INDEPENDENT AUDITORS' REPORT

The Board of Directors
Delta Financial Corporation:

We have audited the accompanying  consolidated balance sheets of Delta Financial
Corporation and  subsidiaries  (the "Company") as of December 31, 1998 and 1997,
and the related  consolidated  statements  of income,  changes in  stockholders'
equity,  and cash  flows for each of the years in the  three-year  period  ended
December  31,   1998.   These   consolidated   financial   statements   are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable  assurance about whether the  consolidated  financial  statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence supporting the amounts and disclosures in the financial statements.  An
audit also includes  assessing the accounting  principles  used and  significant
estimates  made by  management,  as well as  evaluating  the  overall  financial
statement  presentation.  We believe that our audits provide a reasonable  basis
for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of the Company as of
December 31, 1998 and 1997,  and the results of their  operations and their cash
flows for each of the years in the three-year  period ended December 31, 1998 in
conformity with generally accepted accounting principles.


/s/  KPMG LLP


Melville, New York
February 16, 1999


                                       36

<PAGE>
<TABLE>
<CAPTION>
DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------

CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997

(DOLLARS IN THOUSANDS)                                    1998          1997
--------------------------------------------------------------------------------
<S>                                                     <C>         <C>
ASSETS
Cash and interest-bearing deposits.................... $  49,152    $  32,858
Accounts receivable...................................    22,549       31,209
Loans held for sale, net..............................    87,170       79,247
Accrued interest and late charges receivable..........    46,897       29,598
Capitalized mortgage servicing rights.................    33,490       22,862
Interest-only and residual certificates...............   203,803      167,809
Equipment, net........................................    16,962       11,211
Cash held for advance payments........................    10,031        6,325
Prepaid and other assets..............................     5,839        6,224
Goodwill .............................................     6,014        5,889
--------------------------------------------------------------------------------
        Total assets.................................. $ 481,907      393,232
================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Bank payable.......................................... $   1,396        2,222
Warehouse financing and other borrowings..............    80,273       28,233
Senior Notes..........................................   149,387      149,307
Accounts payable and accrued expenses.................    20,966       15,503
Investor payable......................................    63,790       40,852
Advance payment by borrowers for taxes and insurance..     9,559        5,750
Deferred tax liability................................    18,848       24,912
--------------------------------------------------------------------------------
        Total liabilities.............................   344,219      266,779
--------------------------------------------------------------------------------
Stockholders' Equity:
Capital stock, $.01 par value.  Authorized 
  49,000,000 shares; 15,475,549 shares
   issued and 15,358,749 shares outstanding
   at December 31, 1998, and 15,372,688
   shares issued and
   outstanding at December 31, 1997...................       155          154
Additional paid-in capital............................    94,700       93,476
Retained earnings.....................................    44,151       32,823
Treasury stock, at cost (116,800 shares)..............    (1,318)           -
--------------------------------------------------------------------------------
        Total stockholders' equity....................   137,688      126,453
--------------------------------------------------------------------------------
        Total liabilities and stockholders' equity.... $ 481,907    $ 393,232
================================================================================

See accompanying notes to consolidated financial statements.

                                       37
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
-----------------------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1998, 1997 and 1996


(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)                  1998        1997          1996
-----------------------------------------------------------------------------------------------
<S>                                                       <C>            <C>          <C>
Revenues:
    Net gain on sale of mortgage loans                       $ 92,452       86,307       46,525
    Interest.........................                          12,458       22,341       16,372
    Servicing fees...................                           9,392        7,094        5,368
    Origination fees.................                          25,273       18,108        5,266
-----------------------------------------------------------------------------------------------
     Total revenues..................                         139,575      133,850       73,531
-----------------------------------------------------------------------------------------------
Expenses:                                                                           
    Payroll and related costs........                          56,684       41,204       17,633
    Interest expense.................                          30,019       19,972       11,298
    General and administrative.......                          34,376       21,524       11,112
-----------------------------------------------------------------------------------------------
     Total expenses..................                         121,079       82,700       40,043
-----------------------------------------------------------------------------------------------
                                                                                    
Income before income taxes and extraordinary item              18,496       51,150       33,488
Provision for income taxes...........                           7,168       20,739        9,466
-----------------------------------------------------------------------------------------------
Income before extraordinary item.....                          11,328       30,411       24,022
Extraordinary item:                                                                 
    Gain on extinguishment of debt...                              --           --        3,168
-----------------------------------------------------------------------------------------------
     Net income......................                      $   11,328       30,411       27,190
===============================================================================================
                                                                                    
Unaudited pro forma information:                                                    
    Provision for pro forma income taxes                                            
         before extraordinary item...                      $      N/A          N/A       14,400
-----------------------------------------------------------------------------------------------
     Pro forma income before extraordinary item            $   11,328       30,411       19,088
===============================================================================================                                     
                                                                                    
Per share data (1):                                                                 
    Earnings per common share - basic and diluted          $     0.74         1.98         1.46
                                                                                    
    Weighted average number of shares outstanding          15,382,161   15,359,280   13,066,485
===============================================================================================

(1) Unaudited pro forma presentation for the year ended 1996.


See accompanying notes to consolidated financial statements.

                                       38
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------------------------------------------------------------------------------------

CONSOLIDATED  STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY 
Years ended December 31, 1998, 1997 and 1996

                                                             ADDITIONAL
                                                               PAID-IN        RETAINED      TREASURY
(DOLLARS IN THOUSANDS)                        CAPITAL STOCK    CAPITAL        EARNINGS        STOCK        TOTAL
------------------------------------------------------------------------------------------------------------------
<S>                                           <C>            <C>            <C>             <C>          <C>    
Balance at December 31, 1995................   $    107          3,225         26,501           --         29,833
Proceeds from initial public offering of                                   
     Common stock...........................         46         69,656             --           --         69,702
Reclassification of undistributed S                                        
     corporation earnings...................         --         18,072        (18,072)          --             --
Net income..................................         --             --         27,190           --         27,190
Distributions...............................         --             --        (33,207)          --        (33,207)
------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996................        153         90,953          2,412           --         93,518
Issuance of common stock to acquire                                        
         Fidelity Mortgage..................          1          2,516             --           --          2,517
Proceeds from exercise of stock options.....         --              7             --           --              7
Net income..................................         --             --         30,411           --         30,411
------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997................        154         93,476         32,823           --        126,453
Issuance of common stock related to                                        
         Fidelity Mortgage..................          1          1,199             --           --          1,200
Purchase of Treasury Stock (116,800 shares)          --             --             --       (1,318)        (1,318)
Proceeds from exercise of stock options.....         --             25             --           --             25
Net income..................................         --             --         11,328           --         11,328
------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998................   $    155         94,700         44,151       (1,318)       137,688
==================================================================================================================
                                                                          
See accompanying notes to consolidated financial statements.

                                       39
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------------------------------------------------------------------------

CONSOLIDATED  STATEMENTS OF CASH FLOWS 
Years ended  December 31, 1998,  1997 and 1996


(DOLLARS IN THOUSANDS)                                              1998           1997           1996
-------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>            <C>             <C> 
Cash flows from operating activities:
   Net income..............................................     $  11,328         30,411         27,190
   Adjustments to reconcile net income to net cash used in
      Operating activities:
      Provision for loan and recourse losses                          750            100            101
      Depreciation and amortization........................         4,386          2,603            997
      Deferred tax (benefit) expense.......................        (6,064)        19,901          5,011
      Capitalized mortgage servicing rights, net
        of amortization....................................       (10,628)       (11,451)        (7,581)
      Deferred origination costs (fees)....................         1,840            (88)        (2,399)
      Interest-only and residual certificates received in
        securitization transactions, net...................       (35,994)       (84,736)       (57,763)
   Changes in operating assets and liabilities:
      Decrease (increase) in accounts receivable, net......         5,755        (20,677)        (1,654)
      (Increase) decrease in loans held for sale, net......        (9,793)         3,222        (17,719)
      Increase in accrued interest and late
        charges receivable.................................       (17,299)       (11,139)        (3,340)
      (Increase) decrease in cash held for advance payments        (3,706)        (3,836)           631
      Decrease in real estate owned........................            --            135            116
      Decrease (increase) in prepaid and other assets......           385         (4,630)          (244)
      Decrease in due from stockholders....................            --             --            990
      Increase in accounts payable and accrued expenses....         7,648          3,211          6,764
      Increase in investor payable.........................        22,938         19,984          7,427
      Increase (decrease) in advance payment by borrowers
        for taxes and insurance                                     3,809          3,482           (552)
-------------------------------------------------------------------------------------------------------------------
   Net cash used in operating activities...................       (24,645)       (53,508)       (42,025)
-------------------------------------------------------------------------------------------------------------------
   Cash flows from investing activities:
      Acquisition of Fidelity Mortgage.....................            --         (4,150)            --
      Purchase of equipment................................        (8,982)        (9,933)        (2,283)
-------------------------------------------------------------------------------------------------------------------
   Net cash used in investing activities:..................        (8,982)       (14,083)        (2,283)
-------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
   Net proceeds from initial public offering...............            --             --         69,701
   Proceeds from (repayments of) warehouse
      financing and other borrowings, net..................        52,040        (67,481)        12,725
   Proceeds from Senior Notes..............................            --        149,307             --
   Decrease in bank payable, net...........................          (826)          (125)        (2,805)
   Proceeds from exercise of stock options.................            25              7             --
   Distributions...........................................            --             --        (33,207)
   Purchase of treasury stock..............................        (1,318)            --             --
-------------------------------------------------------------------------------------------------------------------
   Net cash provided by financing activities...............        49,921         81,708         46,414
-------------------------------------------------------------------------------------------------------------------
   Net increase in cash and interest-bearing deposits......        16,294         14,117          2,106
Cash and interest-bearing deposits at beginning of year....        32,858         18,741         16,635
-------------------------------------------------------------------------------------------------------------------
Cash and interest-bearing deposits at end of year..........   $    49,152         32,858         18,741
===================================================================================================================

Supplemental Information:
Cash paid during the year for:
   Interest ...............................................   $    29,576         14,314         10,453
   Income taxes ...........................................         7,241         19,972            202
===================================================================================================================

See accompanying notes to consolidated financial statements.

                                       40
</TABLE>
<PAGE>

                 DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      DECEMBER 31, 1998, 1997, AND 1996

 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(A) ORGANIZATION
   Delta  Financial  Corporation  (the  "Company"  or  "Delta")  is  a  Delaware
corporation which was organized in August 1996. On October 31, 1996, the Company
acquired  all of the  outstanding  common  stock  of Delta  Funding  Corporation
("Delta Funding"), a New York corporation which had been organized on January 8,
1982 for the  purpose  of  originating,  selling,  servicing  and  investing  in
residential  first and  second  mortgages.  On  November  1, 1996,  the  Company
completed an initial public offering of 4,600,000  shares of common stock,  $.01
par value (see note 2).

   On February  11,  1997,  the Company  acquired  Fidelity  Mortgage  Inc.  and
Fidelity  Mortgage  (Florida),  Inc.  (together  referred to herein as "Fidelity
Mortgage"), retail residential mortgage origination companies, for a combination
of  cash  and  stock  with a value  of $6.3  million.  These  transactions  were
accounted for under the purchase method of accounting.  Accordingly, the results
of operations of Fidelity  Mortgage from February 11, 1997 have been included in
the  Company's  consolidated  financial  statements.  In  connection  with these
acquisitions the Company recorded goodwill of approximately $6.3 million,  which
is being  amortized on a  straight-line  basis over seven  years.  On October 1,
1997,  the  acquired  operations  were merged and have  continued  to operate as
Fidelity  Mortgage.  As a result of meeting certain  production  targets for the
twelve month period  ended June 30,  1998,  the sellers were paid an  additional
$1.2  million of purchase  price in the form of, and at a fair value  equivalent
to,  101,361  shares of the  Company's  stock in  August  1998.  The  additional
consideration  has been  recorded as  goodwill  and will be  amortized  over the
remaining life of the goodwill.

(B) PRINCIPLES OF CONSOLIDATION
   The  accompanying  consolidated  financial  statements  are  prepared  on the
accrual  basis of  accounting  and include  the  accounts of the Company and its
wholly-owned   subsidiaries.   All   significant   intercompany   accounts   and
transactions have been eliminated.

(C) USE OF ESTIMATES
   The preparation of financial statements in conformity with generally accepted
accounting  principles  requires management of the Company to make estimates and
assumptions  that affect the reported  amounts of assets and liabilities and the
disclosure of contingent liabilities at the date of the financial statements and
the  reported  amounts of revenues and expenses  during the  reporting  periods.
Actual results could differ from those estimates.

(D) LOAN ORIGINATION FEES AND COSTS
   In accordance with Statement of Financial  Accounting  Standards ("SFAS") No.
91,  "Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases,"  origination  fees received
net of direct costs of originating or acquiring  mortgage loans, are recorded as
adjustments to the initial  investment in the loan.  Such fees are  subsequently
amortized  over the life of the  loan,  using the level  yield  method,  and are
eliminated together with the loan at the time a loan is securitized or sold.

(E) LOANS HELD FOR SALE, NET
   Loans  held for  sale are  accounted  for at the  lower of cost or  estimated
market value,  determined on a net aggregate  basis.  Cost includes  unamortized
loan  origination  fees and costs.  Net unrealized  losses are provided for in a
valuation  allowance  created  through  a  charge  to  operations.   Losses  are
recognized when the market value is less than cost.

(F) SECURITIZATION AND SALE OF MORTGAGE LOANS
   In  accounting  for the  securitization  of its loans with the  retention  of
mortgage  servicing rights,  the Company adopted the provisions of SFAS No. 125,
"Accounting for Transfers and Servicing of Financial  Assets and  Extinguishment
of Liabilities" effective January 1, 1997. Previously,  the Company followed the
requirements of SFAS No. 122,  "Accounting for Mortgage  Servicing  Rights." The
adoption of SFAS No. 125 did not have a material impact on the Company's results
of operations or financial position.

                                       41

   The  Company  sells loans to a loan  securitization  trust and  receives  the
excess value of the loans' economic interests for (i) the difference between the
interest  payments due on the loans sold to the trust and the interest  payments
due, at the pass-through rates, to the holders of the pass-through certificates,
less the  Company's  contractual  servicing  fee and other costs and expenses of
administering the trust, represented by interest-only and residual certificates,
and (b) the  right to  service  the  loans on  behalf  of the  trust  and earn a
contractual  servicing fee, as well as other  ancillary  servicing  related fees
directly from the borrowers on the underlying loans.

   Upon  the  securitization  of a pool of  loans,  the  Company  recognizes  as
origination fees any then unamortized  origination fees which had initially been
recorded  as  adjustments  to the  investment  in the  loans,  and  additionally
allocates portions of the remaining  investment in the loans sold to each of (i)
the  servicing  rights  retained by the Company and (ii) the  interest-only  and
residual certificates received from the trust. The retained servicing rights and
interest-only and residual  certificates are initially recorded based upon their
fair value,  which is  estimated  based on the stated  terms of the  transferred
loans  adjusted for  estimates  of future  prepayments  or defaults  among those
loans. The Company  recognizes a gain for the difference  between the investment
in the loans remaining after this allocation and the cash payment  received from
the trust (see notes 5 and 6).

(G) CAPITALIZED MORTGAGE SERVICING RIGHTS
   Effective January 1, 1997, the Company adopted SFAS No. 125, which supersedes
SFAS No. 122 and SFAS No.  65,"Accounting  for Certain  Banking  Activities"  to
require that a mortgage  banking  enterprise  recognize  as separate  assets the
rights to service mortgage loans for others,  however those servicing rights are
acquired.   The  Statement  requires  the  assessment  of  capitalized  mortgage
servicing  rights for  impairment.  Mortgage  servicing  rights are amortized in
proportion to and over the period of the  estimated  net  servicing  income (see
note 5).

(H) INTEREST-ONLY AND RESIDUAL CERTIFICATES
   The interest-only and residual certificates, received by the Company upon the
securitization of a pool of loans to the securitization trust, are accounted for
as trading securities under SFAS No. 115, "Accounting for Certain Investments in
Debt and  Equity  Securities."  In  accordance  with SFAS No.  115,  the  amount
initially  allocated to the interest-only and residual  certificates at the date
of a  securitization  reflects  the fair  value of those  interests.  The amount
recorded for the  certificates  is reduced for  distributions  thereon which the
Company  receives  from the related  trust,  and is adjusted for the  subsequent
changes  in the fair  value of these  certificates  which are  reflected  in the
statement of income.  The fair value of interest-only and residual  certificates
is  determined  using the same  prepayment  and  default  estimates  utilized in
valuing  servicing  rights,  together with the  consideration  of the geographic
location  and value of loan  collateral,  the value of which  would  affect  the
credit  loss  sustained  by a trust upon the default of a loan (see note 6). The
Company  has  consistently  applied  the more  conservative  cash-out  method in
valuing the future cash flows of residual certificates.

 (I) FAIR VALUE OF FINANCIAL INSTRUMENTS
   SFAS  No.  107,  "Disclosure  About  Fair  Value of  Financial  Instruments,"
requires  the Company to disclose the fair value of  financial  instruments  for
which it is  practicable  to estimate  fair value.  Fair value is defined as the
amount  at  which  a  financial  instrument  could  be  exchanged  in a  current
transaction between willing parties, other than in a forced sale or liquidation,
and is best  evidenced by a quoted market price.  Other than  interest-only  and
residual certificates which are reported at fair value, and capitalized mortgage
servicing rights,  substantially all the Company's assets and liabilities deemed
to be financial  instruments are carried at cost, which  approximates their fair
value. The fair value of capitalized  mortgage  servicing rights  represents the
Company's  estimate of the expected future net servicing revenue based on common
industry assumptions, as well as on the Company's historical experience.

(J) GOODWILL
   Goodwill,  which  represents  the excess of the purchase  price over the fair
value of the net assets acquired from Fidelity Mortgage, is being amortized on a
straight-line basis over seven years.

(K) REAL ESTATE OWNED
   Properties  acquired through foreclosure or a deed in lieu of foreclosure are
recorded at the lower of the unpaid loan balance,  or fair value, at the date of
acquisition.  The carrying  value of the individual  properties is  subsequently
adjusted to the extent it exceeds  estimated  fair value less costs to sell,  at
which time a provision for losses on such real estate is charged to operations.

                                       42


(L) EQUIPMENT, NET
   Equipment,   including  leasehold  improvements,  is  stated  at  cost,  less
accumulated depreciation and amortization. Depreciation of equipment is computed
using the straight-line or accelerated method over the estimated useful lives of
three to seven years.  Leasehold  improvements  are amortized over the lesser of
the  terms  of the  lease or the  estimated  useful  lives of the  improvements.
Expenditures  for  betterments  and major renewals are  capitalized and ordinary
maintenance and repairs are charged to operations as incurred.

(M) SERVICING FEES
   Servicing  fees  includes  servicing  income,  prepayment  penalties and late
payment charges earned for servicing mortgage loans owned by investors. All fees
and charges are recognized into income when earned.

(N) INCOME TAXES
   The  Company  accounts  for income  taxes in  conformity  with SFAS No.  109,
"Accounting  for Income Taxes," under which deferred tax assets and  liabilities
are recognized  for the future tax effects of differences  between the financial
reporting  and tax bases of assets and  liabilities.  These  deferred  taxes are
measured by applying current enacted tax rates.

   Through  October 31, 1996,  the Company was an S corporation  pursuant to the
Internal  Revenue Code of 1986,  as amended.  On October 31,  1996,  the Company
became a C corporation  for Federal and state income tax purposes and as such is
subject to Federal  and state  income tax on its  taxable  income for the period
beginning on November 1, 1996.

   In order to provide  information on results of operations  comparable to that
for the periods  during  which the  Company  has been taxed as a C  corporation,
unaudited pro forma income taxes, which were computed at an assumed rate of 43%,
and  unaudited   pro  forma  net  income  are  presented  on  the   accompanying
consolidated statement of income.

(O) EARNINGS PER SHARE
   Effective  December 15, 1997, the Company adopted SFAS No. 128, "Earnings Per
Share" and  restated  all prior  period EPS data  presented.  Basic EPS excludes
dilution and is computed by dividing income available to common  stockholders by
the weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the  potential  dilution  that could occur if  securities  or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity (see note 17).

   EPS data for the period  November 1, 1996 to  December  31, 1996 has not been
presented  in  the  accompanying   consolidated   financial  statements  because
management  believes that such data would not be meaningful given the relatively
short period and the impact of the  recognition of the deferred tax liability in
connection with the change in tax status.

(P) STOCK OPTION PLAN
   During 1996, the Company  adopted SFAS No. 123,  "Accounting  for Stock-Based
Compensation,"  which  permits  entities to continue to apply  provisions of the
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and provide pro forma net income and pro forma earnings per share
disclosures  for employee stock option grants as if the fair-value  based method
defined in SFAS No. 123 had been  applied.  The  Company  elected to continue to
apply the provisions of APB Opinion No. 25 and provide the pro forma  disclosure
provisions of SFAS No. 123 (see note 15).

(Q) RECLASSIFICATIONS
   Certain prior period amounts in the financial  statements and notes have been
reclassified to conform with the current year presentation.

(R) SEGMENT REPORTING
   The  Company  operates  as  one  reporting  segment,  as  such,  the  segment
disclosure  requirements  under SFAS No. 131,  "Disclosures about Segments of an
Enterprise and Related Information", are not applicable to the Company.

                                       43


(S) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

SFAS NO. 133

   In June 1998, SFAS No. 133 was issued, "Accounting for Derivative Instruments
and Hedging  Activities."  SFAS No. 133 is effective for fiscal years that begin
after June 15,  1999,  and in  general  requires  that  entities  recognize  all
derivative  financial  instruments  as assets or  liabilities,  measured at fair
value,  and include in earnings the changes in the fair value of such assets and
liabilities. SFAS No. 133 also provides that changes in the fair value of assets
or liabilities being hedged with recognized derivative instruments be recognized
and included in earnings.  Management of the Company believes the implementation
of SFAS No.  133 will not have a  material  impact  on the  Company's  financial
condition or results of operations.

SFAS No. 134

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



(2) REORGANIZATION AND INITIAL PUBLIC OFFERING

   On October 31, 1996,  the Company  acquired all of the  outstanding  stock of
Delta Funding  Corporation in exchange for 10,653,000  shares of common stock of
the Company.  Prior to the exchange,  Delta Funding  Corporation was treated for
Federal  income tax  purposes  as an S  corporation  under  Subchapter  S of the
Internal Revenue Code of 1986, as amended,  and as such, the historical earnings
of Delta Funding Corporation through October 31, 1996 were taxed directly to the
stockholders  of Delta Funding  Corporation.  As a result of the  exchange,  the
Company and Delta Funding Corporation, which became a wholly-owned subsidiary of
the  Company,  became  subject to Federal and state income taxes and the Company
recorded a deferred  tax  liability  on its  balance  sheet  relating to the tax
effect of temporary  differences  between book and tax  accounting,  principally
relating to recognition of gain on sale of mortgage loans.

   On November 1, 1996, the Company  completed an initial public  offering (IPO)
of 4,600,000  shares of common  stock at an offering  price of $16.50 per share.
The net  proceeds of the  offering to the  Company,  exclusive  of  underwriting
discounts and  commissions and other  expenses,  was $69.7 million.  In November
1996,  $32.6 million of the proceeds raised in the offering were  distributed to
the former S corporation  shareholders with respect to declared distributions of
undistributed  S corporation  earnings.  Remaining  undistributed  S corporation
earnings of $18.1 million were reclassified as additional paid-in capital.



 (3) LOANS HELD FOR SALE, NET

   The Company's  inventory  consists of first and second  mortgages which had a
weighted  average  interest rate of 10.5% at December 31, 1998.  These mortgages
are being held, at the lower of cost or estimated market value, for future sale.
Certain  of these  mortgages  are  pledged  as  collateral  for a portion of the
warehouse financing and other borrowings.

   Included in loans held for sale are  deferred  origination  fees and purchase
premiums in the amount of $1.7 million and $3.5 million at December 31, 1998 and
1997,  respectively and an allowance for loan losses of $0.3 million at December
31, 1998 and 1997.  Mortgages are payable in monthly  installments  of principal
and interest and have terms varying from five to thirty years.

                                       44



   Activity in the allowance for loan losses for the years ended December 31, is
as follows:

(DOLLARS IN THOUSANDS)              1998           1997           1996
--------------------------------------------------------------------------------
Balance at beginning of year        $300            270            240
Provisions                            30             30             31
Charge-offs                            -              -             (1)
--------------------------------------------------------------------------------
Balance at end of year              $330            300            270
--------------------------------------------------------------------------------

   The Company also maintained an allowance for recourse losses of $1.4 million,
$0.7 million and $0.6 million at December 31, 1998, 1997 and 1996, respectively,
which is included in accounts payable and accrued expenses (see note 14).

(4) ACCOUNTS RECEIVABLE

   Accounts receivable as of December 31, consist of the following:

(DOLLARS IN THOUSANDS)                1998                1997

--------------------------------------------------------------------------------
Securitization advances            $ 17,058              12,090
Prepaid insurance premiums            1,691               1,478
Current tax assets                      904              14,803
Other                                 2,896               2,838
--------------------------------------------------------------------------------
Total accounts receivable           $22,549              31,209
--------------------------------------------------------------------------------


(5) CAPITALIZED MORTGAGE SERVICING RIGHTS

   The Company  sells  mortgage  loans and retains the  servicing  rights  which
generate  servicing  income and  provide  funds for  additional  investment  and
lending activities. Effective January 1, 1997, the Company adopted SFAS No. 125,
which  superseded  SFAS No.  122 and SFAS No.  65.  SFAS No.  125  prospectively
changed  the  methodology  for  capitalized  mortgage  servicing  rights and the
methodology  used to measure  impairment of its capitalized  mortgage  servicing
rights asset. These Statements require that upon the sale or securitization of a
loan,  an asset be  recognized  for any retained  servicing  rights based on the
present  value of the  future  servicing  cash  flows.  The  cash  flow has been
computed  over  the  average  estimated  life  of the  mortgages,  adjusted  for
prepayments and recorded as capitalized mortgage servicing rights.

   Capitalized mortgage servicing rights are assessed  periodically to determine
if there has been any  impairment  of the asset,  based on the fair value of the
rights at the date of the  assessment.  The Company  performs this assessment on
the basis of the  Company's  historical  experience,  and updated  estimates  of
prepayment  and  default  rates for  servicing  rights  relating  to loan groups
comprised of loans of similar types,  terms,  credit quality and interest rates,
which represent the predominant risk  characteristics  affecting  prepayment and
default rates. A valuation  allowance is provided for the capitalized  servicing
rights relating to any loan group for which the recorded  investment exceeds the
fair value.  At December  31, 1998 and 1997,  the fair value of the  capitalized
mortgage servicing rights approximated their recorded amounts and,  accordingly,
no valuation  allowance was  recorded.  During the second  quarter of 1998,  the
Company  recorded  a $1.9  million  reduction  in  the  carrying  amount  of its
capitalized mortgage servicing rights to reflect a provision for impairment.

                                       45

   The activity related to the Company's  capitalized  mortgage servicing rights
for the years ended December 31, is as follows:

(DOLLARS IN THOUSANDS)                 1998           1997           1996
--------------------------------------------------------------------------------
Balance, beginning of year           $22,862         11,412          3,831
Additions                             19,833         15,118          8,336
Amortization and FV adjustments       (9,205)        (3,668)          (755)
--------------------------------------------------------------------------------
Balance, end of year                 $33,490         22,862         11,412
--------------------------------------------------------------------------------


(6) INTEREST-ONLY AND RESIDUAL CERTIFICATES

   The interest that the Company receives upon sales through  securitizations is
in the  form  of  interest-only  and  residual  mortgage  securities  which  are
classified as interest-only and residual certificates.

   In accordance with SFAS No. 125, upon the sale or securitization of a loan, a
gain on sale and a corresponding  asset is recognized for any  interest-only and
residual certificates.  This asset is classified as "trading securities" and, as
such,  they are recorded at their fair value.  Fair value of these  certificates
has been determined by the Company based on various economic factors,  including
loan type,  sizes,  interest rates,  dates of origination,  terms and geographic
locations,  using the more conservative  cash-out method.  The Company also uses
other available information such as reports on prepayment rates, interest rates,
collateral value, economic forecasts and historical default and prepayment rates
of the portfolio  under review.  In accordance with SFAS No. 115, any fair value
adjustment of the interest-only  and residual  certificates is recognized in the
statement of income and is reflected as a component of interest income.

   Although the Company  believes it has made  reasonable  estimates of the fair
value of the interest-only and residual certificates likely to be realized,  the
rate of  prepayments  and the amount of  defaults  utilized  by the  Company are
estimates and actual experience may vary. The gain on securitization  recognized
by the Company upon the sale of loans through securitizations will be overstated
if prepayments or losses are greater than  anticipated.  Higher than anticipated
rates of loan  prepayments or losses would require the Company to write down the
fair value of the interest-only and residual  certificates,  adversely impacting
earnings. Similarly, if delinquencies, liquidations or interest rates were to be
greater than was  initially  assumed,  the fair value of the  interest-only  and
residual certificates would be negatively impacted,  which would have an adverse
effect on income  for the  period in which  such  events  occurred.  Should  the
estimated  loan life  assumed for this  purpose be shorter than the actual life,
the amount of cash  actually  received  over the lives of the loans would exceed
the  gain  previously  recognized  at the  time  the  loans  were  sold  through
securitizations and would result in additional income.

   The Company assumes prepayment rates and defaults based upon the seasoning of
its existing  securitization  loan portfolio.  As of December 31, 1998 and 1997,
the Company's  underlying  assumptions used in determining the fair value of its
interest-only and residual certificates are as follows:

   (a)The following  table compares the prepayment  assumptions  used subsequent
      to the first  quarter of 1998 (the "new"  assumptions)  with those used at
      December  31,  1997 and  through  the first  quarter  of 1998  (the  "old"
      assumptions):

--------------------------------------------------------------------------------
  LOAN TYPE              Curve Description     Month 1 Speed        Peak Speed
--------------------------------------------------------------------------------
                           New       Old       New       Old        New      Old
--------------------------------------------------------------------------------
Fixed Rate Loans          Vector    Ramp       4.8%      4.8%       31%      24%
Six-Month LIBOR ARMs      Vector    Ramp      10.0%      5.6%       50%      28%
Hybrid ARMs               Vector    Ramp       6.0%      5.6%       50%      28%
--------------------------------------------------------------------------------

   (b)A default  reserve for both fixed- and  adjustable-rate  loans sold to the
      securitization  trusts of 2.00% of the  amount  initially  securitized  at
      December 31, 1998 compared to 1.90% at December 31, 1997;

                                       46


   (c)Under the "cash-out"  method, an annual discount rate of 12.0% was used in
      determining  the present value of cash flows from  residual  certificates,
      which represent the predominant form of retained interest.

   The changes in prepayment  assumptions from December 31, 1997 to December 31,
1998 were made at June 30, 1998, based upon the Company's  on-going  analysis of
industry  and Company pool  trends,  and resulted in a $15.5  million fair value
adjustment  charged to income during the second  quarter of 1998. A further fair
value adjustment of $2.8 million was charged to income during the fourth quarter
of 1998 related to a change in default assumptions.

   To date, aggregate actual cash flows from the Company's securitization trusts
have either met or exceeded management's expectations.

   The activity related to the Company's interest-only and residual certificates
for the years ended December 31, is as follows:

(DOLLARS IN THOUSANDS)            1998           1997          1996
--------------------------------------------------------------------------------
Balance, beginning of year     $ 167,809         83,073       25,310
Additions                         85,092        102,072       57,456
Cash remittances, accretion
    of discount and FV
    adjustments, net             (49,098)       (17,336)         307
--------------------------------------------------------------------------------
Balance, end of year           $ 203,803        167,809       83,073
--------------------------------------------------------------------------------


(7) HEDGING TRANSACTIONS

   The Company  regularly  securitizes and sells  fixed-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 through the use of treasury  lock  contracts
which function  similar to a short-sale of US Treasury  securities.  The Company
accounts for these contracts as hedges of specific loans held for sale. The gain
or loss derived from these contracts is deferred and recognized as an adjustment
to the carrying  amounts of the loans for which the contracts were interest rate
hedges.

   As of  December  31,  1998 and 1996,  the  Company  did not have  open  hedge
positions. As of December 31, 1997, the Company had open hedge loss positions of
$0.5 million.  The Company  included  losses of $10.2 million,  $2.0 million and
$0.5 million on the treasury lock contracts as part of gains on sale of loans in
1998, 1997 and 1996, respectively.



 (8) WAREHOUSE FINANCING AND OTHER BORROWINGS

   The Company has three  warehouse  credit  facilities for a combined amount of
$750.0  million as of  December  31,  1998.  These lines are  collateralized  by
specific  mortgage  receivables,   which  are  equal  to  or  greater  than  the
outstanding balances under the line at any point in time.

   The  following  table  summarizes  certain  information  regarding  warehouse
financing and other borrowings at December 31, (DOLLARS IN MILLIONS):
<TABLE>
<CAPTION>

                                                            Balance
                            Facility                        -------               Expiration
Facility Description        Amount          Rate          1998   1997                Date
------------------------------------------------------------------------------------------------
<S>                         <C>        <C>               <C>     <C>       <C>
Warehouse line of credit    $400.0     Libor + 0.75%     $58.7   $23.9             February 1999
Warehouse line of credit     200.0      CP + 0.05%          --      --            September 1999
Warehouse line of credit     150.0     Libor + 0.75%      10.7      --                 June 1999
Term loan                    n/a       Prime + 1.00%       0.2     0.2     Apr. 1999 - June 1999
Capital leases               n/a       6.63% - 8.97%      10.7     4.1      Mar 1999 - Dec. 2003
------------------------------------------------------------------------------------------------
Balance at December 31,     $750.0                       $80.3   $28.2
------------------------------------------------------------------------------------------------
</TABLE>

                                       47

   Subsequent  to year end,  the first  warehouse  line of credit  ("line")  was
renewed at  similar  terms for $200  million  for a period of one year and a new
$200.0 million line, maturing March 2000, was secured by the Company.


(9) SENIOR NOTES

   9.5% Senior Notes due 2004 (the "notes")  totaled  $149.4 million at December
31,  1998,  and $149.3  million at  December  31, 1997 net of  unamortized  bond
discount.  The  notes  bear  interest  at a rate  of  9.5%  per  annum,  payable
semi-annually  commencing on February 1, 1998. The notes were issued on July 23,
1997, and mature on August 1, 2004 when all outstanding  principal is due. On or
after August 1, 2001, the notes are redeemable at the option of the Company,  in
whole or in part, at the redemption price set forth in the Indenture, dated July
23, 1997,  governing the issuance of the notes (the  "Indenture"),  plus accrued
and unpaid interest through the date of redemption.

   The  Company is  required  to comply with  various  operating  and  financial
covenants in the  Indenture.  These  covenants  limit or  restrict,  among other
things,  the ability of the Company to consummate  assets sales,  pay dividends,
incur additional  indebtedness and incur additional  liens.  Costs incurred with
the issuance of the notes, in the amount of $4.8 million, have been deferred and
are being  amortized  over the seven year term using a method that  approximates
level-yield. The unamortized debt issuance cost was $4.1 million at December 31,
1998 and $4.6 million at December 31, 1997.


(10) BANK PAYABLE

   In  order  to  maximize  its  cash  management  practices,  the  Company  has
instituted a procedure  whereby checks written against its operating account are
covered as they are  presented to the bank for  payment,  either by drawing down
its lines of credit or from subsequent  deposits of operating cash. Bank payable
represents  the checks  outstanding at December 31, 1998 and 1997, to be paid in
this manner.

(11) INVESTOR PAYABLE

   Investor  payable  represents  the  collection  of  mortgage  payments by the
Company as servicer,  from  mortgagors,  which are due to the  investors.  These
funds, when collected, are placed in segregated bank accounts as provided by the
related servicing agreements and are reflected on the Company's balance sheet as
a component of cash and interest-bearing deposits.


(12) RELATED PARTY TRANSACTIONS

   Miller  Planning  Corporation,  a company which is  wholly-owned by Sidney A.
Miller,  Chairman of the Company,  acts as the Company's  agent in procuring the
Company's group health,  disability and life insurance policies from independent
insurance carriers and receives  commissions from the insurance companies on the
same  which,  in  1998,  totaled   approximately  $3,000  and  in  1997  totaled
approximately  $13,000.  Miller Planning Corporation previously offered life and
disability  credit  insurance to the  Company's  borrowers for which it received
commissions.

   Long Island  Closing  Corporation,  a company wholly owned by Rona V. Miller,
spouse of Sidney A.  Miller,  was hired by title  abstract  companies as closing
agent to clear  titles  on  substantially  all of the  Company's  brokered  loan
closings held at the Company's headquarters until approximately August 1997. All
fees for these  services were paid by the  borrowers,  which totaled $0 for 1998
and approximately $84,000 for 1997. In or about August 1997, Long Island Closing
ceased acting as closing agent for abstract  companies on the Company's brokered
loan closings.

                                       48



(13) EMPLOYEE BENEFIT PLANS

   The  Company  had an employee  profit  sharing  plan  covering  all  eligible
employees,  as  defined,  with at  least  30  months  of  service.  The  Company
contributed  $0.2  million to the plan for the year  ended  December  31,  1996.
Effective  January 1, 1997, the employee profit sharing plan was merged with the
Company's 401(k) Retirement Savings Plan.

   The Company  sponsors a 401(k)  Retirement  Savings Plan.  Substantially  all
employees  of the  Company  who  are at  least  21  years  old are  eligible  to
participate in the plan after completing one year of service.  Contributions are
made from  employees'  elected  salary  deferrals.  The Company  elected to make
discretionary  contributions  to the Plan of $0.5  million and $0.3  million for
1998 and 1997, respectively.  During 1996, the Company made contributions to the
Profit  Sharing Plan noted in the preceding  paragraph and no  contributions  to
this plan.



(14) COMMITMENTS AND CONTINGENCIES

   The Company has repurchase  agreements with certain of the institutions  that
have purchased  mortgages.  Currently,  some of the  agreements  provide for the
repurchase  by the Company of any of the mortgage  loans that go to  foreclosure
sale. At the  foreclosure  sale, the Company will  repurchase  the mortgage,  if
necessary, and make the institution whole. The dollar amount of loans which were
sold with  recourse is $10.1  million at December 31, 1998 and $13.6  million at
December 31, 1997.

   Included  in  accounts  payable and  accrued  expenses  is an  allowance  for
recourse  losses of $1.4 million,  $0.7 million and $0.6 million at December 31,
1998,  1997 and  1996,  respectively.  The  Company  recognized,  as a charge to
operations, a provision for recourse losses of $720,000, $70,000 and $70,000 for
the years 1998, 1997 and 1996, respectively. Additions to the allowance for loan
losses are provided by charges to income based upon various  factors,  which, in
management's  judgment,  deserve  current  recognition  in  estimating  probable
losses.  The loss factors are determined by management  based upon an evaluation
of historical loss experience, delinquency trends, loan volume and the impact of
economic conditions in our market area.

   The Company  previously  subleased  it Woodbury  offices  from an  affiliated
company.  In August  1996,  the lease was  assigned to the  Company.  This lease
provides for rent to be paid on a month-to-month  basis. Rental expense,  net of
sublease  income,  for the years ended December 31, 1998, 1997 and 1996 amounted
to $5.4 million, $2.6 million and $1.0 million, respectively.

   Minimum future rentals under  non-cancelable  operating leases as of December
31, 1998 are as follows:

(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------
              Year                               Amount
--------------------------------------------------------------------------------
              1999                           $    4,812
              2000                                4,859
              2001                                4,808
              2002                                4,005
              2003                                3,054
           Thereafter                            13,345
--------------------------------------------------------------------------------
             Total                           $   34,883
--------------------------------------------------------------------------------

   Because the nature of the  Company's  business  involves  the  collection  of
numerous  accounts,  the validity of liens and compliance with various state and
federal lending laws, the Company is subject,  in the normal course of business,
to  numerous  legal  proceedings  and claims,  including  several  class  action
lawsuits.  The resolution of these lawsuits,  in management's  opinion, will not
have a  material  adverse  effect  on  the  financial  position  or  results  of
operations of the Company.

                                       49





(15) STOCK OPTION PLAN

   On October 4, 1996,  the Board of  Directors  ratified  the 1996 Stock Option
Plan (the "Plan") and authorized  the reserve of 2,200,000  shares of authorized
but unissued common stock for issuance  pursuant to the Plan.  Substantially all
of the options  issued  vest over a five-year  period at 20% per year and expire
seven years from the grant date.

   The following  table  summarizes  certain  information  regarding the Plan at
December 31:

<TABLE>
<CAPTION>
 
                                       1998                                1997
-----------------------------------------------------------------------------------------------
                              Number       Weighted-Average       Number       Weighted-Average
                              of Shares    Exercise Price         of Shares    Exercise Price
-----------------------------------------------------------------------------------------------
<S>                           <C>          <C>                    <C>          <C>
Balance, beginning of year     848,760          $17.01             464,850          $16.50
Options granted                 77,000           17.35             426,610           17.67
Options exercised                1,500           16.50                 400           16.50
Options canceled               129,200           17.54              42,300           18.06
-----------------------------------------------------------------------------------------------
Balance at end of year         795,060          $17.00             848,760          $17.01
-----------------------------------------------------------------------------------------------
Options exercisable            242,862          $16.77              96,510          $16.50
-----------------------------------------------------------------------------------------------
</TABLE>

   The  Company  applies APB  Opinion  No. 25, and  related  Interpretations  in
accounting for the Plan. There was no intrinsic value of the options granted, as
the  exercise  price was equal to the  quoted  market  price at the grant  date.
Accordingly,  no  compensation  cost has been  recognized  for the  years  ended
December 31, 1998 and 1997.

   Had compensation cost for the Plan been determined based on the fair value at
the grant dates for awards under the Plan consistent with the method of SFAS No.
123, the  Company's  net income would have been $10.8  million and $30.1 million
for 1998 and 1997, respectively. Earnings per share for 1998 and 1997 would have
been $0.71 and $1.96, respectively.

   The  weighted-average  fair value of options granted during 1998 and 1997 was
$9.14 and $3.54,  respectively.  For purposes of the pro forma calculation under
SFAS No.  123,  the fair value of the  options  granted is  estimated  using the
Black-Scholes   option-pricing   model  with  the   following   weighted-average
assumptions used for the 1998 and 1997 grants:


                                    1998               1997
--------------------------------------------------------------------------------
Dividend yield                        0%                 0%
Expected volatility                  55%                45%
Risk-free interest rate            4.54%              5.71%
Expected life                    5 years            5 years


 (16) INCOME TAXES

   The  provision for income taxes for the years ended  December 31, 1998,  1997
and 1996 is as follows:

(DOLLARS IN THOUSANDS)            1998            1997           1996
--------------------------------------------------------------------------------
Current: Federal             $  11,291              75          3,305
         State                   1,941             763          1,150
--------------------------------------------------------------------------------
Total current income taxes   $  13,232             838          4,455
--------------------------------------------------------------------------------

Deferred:Federal             $  (4,586)         16,982          3,727
         State                  (1,478)          2,919          1,284
--------------------------------------------------------------------------------
Total deferred income taxes  $  (6,064)         19,901          5,011
--------------------------------------------------------------------------------
Total tax provision          $   7,168          20,739          9,466
--------------------------------------------------------------------------------

                                       50


   As discussed in Note 1, the Company was an S corporation  through October 31,
1996 pursuant to the Internal Revenue Code of 1986, as amended,  and as such did
not incur any Federal income tax expense.

   On October 31, 1996, the Company became a C corporation for Federal and state
income tax  purposes  and as such was subject to federal and state income tax on
its taxable  income for the period  beginning on November 1, 1996. In connection
with the change in its tax status from an S corporation to a C corporation,  the
Company  incurred  deferred income tax expense of $3.9 million as of October 31,
1996.  The  remaining  deferred  income tax expense  pertaining to the change in
status  from an S  corporation  to a C  corporation  at  December  31,  1998 was
approximately $2.3 million.

   Significant  components  (temporary  differences and carryforwards) that give
rise to the  Company's  net deferred  tax  liability as of December 31, 1998 and
1997 were as follows (DOLLARS IN THOUSANDS):

<TABLE>
<CAPTION>

DEFERRED TAX LIABILITIES:                                           1998           1997
-------------------------                                           ----           ----
<S>                                                             <C>             <C>                                                 
Capitalized cost of future servicing income                     $ 14,149          9,631
Book/tax difference in interest-only and residual certificate
     carrying amount                                              17,359         16,784
Tax over book depreciation                                           791            259
Capitalized origination fees and related cost                        702          1,507
-------------------------------------------------------------------------------------------
Total deferred tax liabilities                                  $ 33,001         28,181
-------------------------------------------------------------------------------------------

DEFERRED TAX ASSETS:
Book over tax basis in mortgage servicing asset                 $    158            278
Loss reserves                                                      1,918          1,270
U.S. net operating loss carryforwards                             12,077          1,721
-------------------------------------------------------------------------------------------
Total deferred tax assets                                       $ 14,153          3,269
-------------------------------------------------------------------------------------------
Net deferred tax liabilities                                    $ 18,848         24,912
-------------------------------------------------------------------------------------------
</TABLE>

   Under SFAS No. 109, "Accounting for Income Taxes," the Company is required to
recognize all or a portion of its net deferred tax assets if it believed that it
was more likely than not, given the weight of all available  evidence,  that all
or a portion of the benefits of the  carryforward  losses and other deferred tax
assets would be  realized.  Management  believes  that,  based on the  available
evidence,  it is more likely than not that the Company  will realize the benefit
from its net deferred tax assets.

   A  reconciliation  of the  statutory  income tax  provision to the  effective
income tax  provision,  as applied to income for the years  ended  December  31,
1998, 1997 and 1996 is as follows:

                                                1998        1997        1996
--------------------------------------------------------------------------------
Tax at statutory rate                           35.0%       35.0%       35.0%
Income earned as S corporation                   n/a         n/a       (22.6)
Change in tax status                             n/a         n/a        11.6
State & local taxes, net of Federal benefit      1.7         4.7         3.0
Non-deductible expenses and other                2.1         0.8         1.3
--------------------------------------------------------------------------------
Total provision                                 38.8%       40.5%       28.3%
--------------------------------------------------------------------------------

                                       51

(17) EARNINGS PER SHARE

   The  following  is  a  reconciliation   of  the  denominators   used  in  the
computations of basic and diluted EPS. The numerator for calculating  both basic
and diluted EPS is net income.
  
For the years ended December 31:                                      Pro forma
                                                                     (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT EPS DATA)    1998           1997           1996
--------------------------------------------------------------------------------
Net income                              $ 11,328         30,411         19,088
Weighted-average shares                   15,382         15,359         13,066
Basic EPS                               $   0.74           1.98           1.46
Weighted-average shares                   15,382         15,359         13,066
Incremental shares-options                    23             32             10
--------------------------------------------------------------------------------
                                          15,405         15,391         13,076
Diluted EPS                             $   0.74           1.98           1.46
--------------------------------------------------------------------------------


(18) QUARTERLY FINANCIAL DATA (UNAUDITED)

   The following  table is a summary of financial  data by quarter for the years
ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
For the quarters ended

(Dollars in thousands, except per share data)           March 31,   June 30,   Sept. 30,  Dec. 31,
--------------------------------------------------------------------------------------------------
<S>                                                     <C>         <C>        <C>        <C>    
1998
  Revenues                                               $41,154     20,682     38,086     39,653
  Expenses                                                28,053     28,718     32,993     31,315
  Net income (loss)                                        8,251     (4,902)     3,106      4,873
  Earnings (loss) per common share-basic and diluted        0.54      (0.32)      0.20       0.32
                                                                                          
1997                                                                                      
  Revenues                                               $27,305     30,467     37,414     38,664
  Expenses                                                15,064     17,848     23,735     26,053
  Net income                                               6,990      7,225      7,883      8,313
  Earnings per common share-basic and diluted               0.45       0.47       0.51       0.54
</TABLE>

                                       52
<PAGE>
                                    
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

      None.


                                    PART III

ITEMS 10-13

   Registrant   incorporates  by  reference  herein  information  in  its  proxy
statement which complies with the information  called for by Items 10-13 of Form
10-K. The proxy will be filed at a later date with the Commission.


                                     PART IV

ITEM 14.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

  (a)(1) FINANCIAL STATEMENTS
                                                                         PAGE(S)
                                                                         -------
         The following Consolidated Financial Statements of Delta               
         Financial Corporation and Subsidiaries are included in              
         Part II, Item 8 of this report                                      
         Independent Auditors' Report........................................ 30
         Consolidated Balance Sheets--December 31, 1998 and 1997............. 31
         Consolidated Statements of Income--Years ended December 31,         
         1998, 1997 and 1996................................................. 32
         Consolidated Statement of Changes in Stockholders' Equity--         
         Years ended December 31, 1998, 1997 and 1996........................ 33
         Consolidated Statements of Cash Flows--Years ended December 31,
         1998, 1997 and 1996................................................. 34
         Notes to Consolidated Financial Statements.......................... 35
                                                                       
  (a)(2) FINANCIAL STATEMENT SCHEDULES
         Exhibits 11.1 and 27  (See - Exhibit List)

  (A)(3) EXHIBITS:

EXHIBIT
NUMBER      DESCRIPTION
-------     -----------
   *3.1 -- Certificate of Incorporation of Delta Financial Corporation 
 +++3.2 -- Second Amended Bylaws of Delta Financial Corporation
  **4.1 -- Indenture dated July 23, 1997, between Delta Financial Corporation,
             its subsidiary  guarantors and The Bank of New York, as Trustee
  *10.1 -- Employment Agreement dated October 1, 1996 between the Registrant and
             Sidney A. Miller
  *10.2 -- Employment Agreement dated October 1, 1996 between the Registrant and
             Hugh Miller
  *10.3 -- Employment Agreement dated October 1, 1996 between the Registrant and
             Christopher Donnelly
  *10.4 -- Employment Agreement dated October 1, 1996 between the Registrant and
             Randall F. Michaels
***10.5 -- Employment Agreement dated March 4, 1997 between  the  Registrant and
             Richard Blass
  *10.6 -- Lease Agreement between Delta Funding Corporation and the Tilles
             Investment Company
  +10.7 -- Fifth, Sixth and Seventh Amendments to Lease Agreement between Delta
             Funding Corporation and the Tilles Investment Company
 ++10.8 -- Eighth Amendment to Lease Agreement between Delta Funding Corporation
             and the Tilles Investment Company
  *10.9 -- 1996 Stock Option Plan of Delta Financial Corporation
+++11.1 -- Statement re: Computation of Per Share Earnings
+++21.1 -- Subsidiaries of Registrant
+++27   -- Financial Data Schedule
---------------
*   Incorporated  by reference  from the  Company's  Registration  Statement on
    Form S-1 (No. 333-11289) filed with the Commission on October 9, 1996.
**  Incorporated by reference from the Company's Current Report on Form 8-K
    (No. 001-12109) filed with the Commission on July 30, 1997.
*** Incorporated  by reference from the Company's Quarterly  Report on Form 10-Q
    for the  quarter  ended  March 31,  1997  (File No.  1-12109)
                     
                                       53


    filed with the Commission on May 15, 1997.
+   Incorporated  by reference from the Company's Annual Report on Form 10-K for
    the year ended December 31, 1997 (File No. 1-12109) filed with the 
    Commission on March 31, 1998.
++  Incorporated by reference from the Company's  Quarterly  Report on Form 10-Q
    for the quarter  ended  March 31,  1998  (File No.  1-12109)  filed with the
    Commission on May 12, 1998.

+++ Filed herewith

  (B) REPORTS ON FORM 8-K.   None.


                                       54 

<PAGE>
                                   SIGNATURES

   Pursuant  to the  requirements  of  Section  13 or  15(d)  of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.

                             DELTA FINANCIAL CORPORATION             
                            
                             (Registrant)
                            
Dated: March 30, 1999     By:  /S/ HUGH MILLER 
                             ------------------------------
                             Hugh Miller
                             President and Chief Executive Officer
                            
   Pursuant to the  requirements  of the Securities  Exchange Act of 1934,  this
Report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant and in the capacities and on the dates indicated.

     SIGNATURE                 CAPACITY IN WHICH SIGNED                DATE
---------------------    -----------------------------------      --------------


/S/ SIDNEY A. MILLER     Chairman of the Board of Directors       March 30, 1999
-----------------------
Sidney A. Miller


/S/ HUGH MILLER          Chief Executive Officer, President 
-----------------------    and Director                           March 30, 1999
Hugh Miller              (Principal Executive Officer)


/S/ RICHARD BLASS        Senior Vice President, Chief Financial 
-----------------------    Officer and Director                   March 30, 1999
Richard Blass            (Principal Financial Officer)


/S/ MARTIN D. PAYSON     Director                                 March 30, 1999
-----------------------
Martin D. Payson


/S/ ARNOLD B. POLLARD    Director                                 March 30, 1999
-----------------------
Arnold B. Pollard


                                       55