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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, 1997

                           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 24, 1998, the aggregate  market value of the voting stock held by
non-affiliates  of the  Registrant,  based on the closing  price of $18.50,  was
approximately $90,172,830.

   As of March 24, 1998, the  Registrant  had 15,372,688  shares of Common Stock
outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE:

   Part III,  items 10, 11, 12 and 13 are  incorporated  by  reference  to 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, 1997.
--------------------------------------------------------------------------------
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<PAGE>

                                     PART I
ITEM 1.  BUSINESS

   Delta Financial  Corporation,  together with its subsidiaries ( the "Company"
or "Delta"),  is a consumer  finance  company  that has engaged in  originating,
acquiring,  selling and servicing  non-conforming  home equity loans since 1982.
Throughout  its 16 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 and  typically  have  substantial  equity in their homes.
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 Corporation,  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  Corporation  currently  originates and
purchases  the  majority  of its loans in 22  states,  through  its  network  of
approximately 1,150 brokers and correspondents.

   In  February  1997,  in an effort 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.

   For the year ended  December 31, 1997,  the Company  originated and purchased
approximately  $1.25 billion of loans, of which  approximately $482 million were
originated through its network of brokers,  $633 million were purchased from its
network of correspondents  and $140 million were originated through its Fidelity
Mortgage retail 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,  1997,  Delta sold a
total of $1.24  billion of loans  through four real estate  mortgage  investment
conduit  ("REMIC")  securitizations.  Each of these  four  securitizations  were
credit-enhanced,  by either an  insurance  policy  provided  through a  monoline
insurance company 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 enhance 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 payment while retaining (i) the right to service the loans, and receive its
contractual  servicing fee and (ii)  interest-only and residual  certificates in
the trust,  which entitle the Company to receive the "Excess  Servicing" income,
consisting of any 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  securitizating  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 and the investment in the
loans  remaining  after the allocation of portions of that  investment to record
the 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

                                        1


servicing   rights  and  interest-only  and   residual  certificates,  and   the
stated  terms  of  the  transferred  loans  adjusted  for  estimates  of  future
prepayments 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, 1997, the Company has a loan servicing portfolio of $1.84 billion.

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

   Cash flows from the  interest-only  and residual  certificates  retained upon
securitization  generally begin eight to twelve months after the securitization,
with the specific  period  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.

   In  addition  to  the  income  and  cash  flows  earned  from  the  Company's
securitizations, the Company also earns income and generates cash flows from 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  profitably the volume of its
loan  originations and purchases and the size of its servicing  portfolio by (i)
continuing  to  provide  top  quality  service to its  network  of  brokers  and
correspondents,  as  well  as  to  its  retail  clients,  (ii)  maintaining  its
underwriting   standards,   (iii)  further   penetrating   its  established  and
recently-entered  markets  and  expanding  into  new  geographic  markets,  (iv)
expanding its retail origination capabilities; (v) leveraging and continuing its
investment in information and processing  technologies,  and (vi)  strengthening
its loan production capabilities through acquisitions.

   Delta Financial  Corporation  was  incorporated in 1996 to acquire all of the
outstanding stock of Delta Funding Corporation, which has operated since 1982.


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 portfolio through a securitization. Delta retains the right to service
the loans that it securitizes.

   The Company focuses on providing 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.   However,   as  the  Company  has  expanded
geographically, it has expanded its product offerings to include adjustable-rate
mortgages and fixed/adjustable-rate mortgages.

   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 begun opening regional branch offices, which
include loan processing,  underwriting and business  development  functions,  to
bring it in closer

                                       2


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 the 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), which is
staffed by two members of Delta's senior management,  including a Vice President
of  Underwriting,   is  the  only  "full  service"  regional  branch  with  full
underwriting  authority.  Delta's  Midwest  (Chicago,  Illinois) and New England
(Warwick,   Rhode  Island)  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 further  strengthen their operations by delegating full  underwriting
authority,  thereby  increasing the Company's  long-term growth  potential.  The
Fidelity Mortgage offices have full underwriting authority.

LOAN ORIGINATION AND PURCHASES

   The Company  increased  its loan  originations  and purchases by 90% to $1.25
billion in 1997 from $659  million in 1996,  which was an  increase of 129% over
1995 production of $288 million.

   Delta  currently  originates  and  purchases  the majority of its loans in 22
states through its network of  approximately  1,150 brokers and  correspondents,
and its network of 15 retail branches.

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

                                                    YEAR ENDED DECEMBER 31,
                                                 1997         1996        1995
                                                 ----         ----        ----
                                                    (DOLLARS IN THOUSANDS)
Broker:
    Principal balance......................  $ 481,586    $ 321,733    $ 175,738
    Average principal balance per loan.....  $      87    $      85    $      76
    Combined weighted average initial loan-
      to-value ratio(1)....................      69.9%        67.7%        62.3%
    Weighted average interest rate.........      10.8%        11.1%        11.4%
Correspondent:
    Principal balance......................  $ 632,639    $ 337,033    $ 112,065
    Average principal balance per loan.....  $      77    $      73    $      70
    Combined weighted average initial loan-
      to-value ratio(1)....................      72.8%        69.8%        64.5%
    Weighted average interest rate.........      11.3%        11.7%        12.4%
Retail:
    Principal balance......................  $ 140,386    $     n/a    $     n/a
    Average principal balance per loan.....  $      69    $     n/a    $     n/a
    Combined weighted average initial loan-
      to-value ratio(1)....................      80.1%          n/a          n/a
    Weighted average interest rate.........      10.1%          n/a          n/a
Total loan purchases and originations:
    Principal balance...................... $1,254,611    $ 658,766    $ 287,803
    Average principal balance per loan.....  $      80    $      78    $      74
    Combined weighted average initial loan-
      to-value ratio(1)....................      72.5%        68.8%        63.2%
    Weighted average interest rate.........      11.0%        11.4%        11.8%
Percentage of loans secured by:
    First mortgage.........................      94.0%        93.8%        89.6%
---------------
 (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.

                                       3
<PAGE>


     The following table shows the channels of loan  originations  and purchases
on a quarterly basis for 1997:

<TABLE>
<CAPTION>
                                                                               THREE MONTHS ENDED
                                                             ---------------------------------------------------------
                                                             DECEMBER 31,  SEPTEMBER 30,     JUNE 30,       MARCH 31,
                                                                 1997          1997            1997           1997
                                                             ------------  -------------  -------------  -------------
<S>                                                          <C>           <C>            <C>            <C>
                                                                             (DOLLARS IN THOUSANDS)

Broker:
Number of Brokered Loans ...............................          1,562          1,506          1,247          1,205
Principal balance ......................................       $138,339       $133,965       $103,276       $106,006
Average principal balance per loan .....................       $     89       $     89       $     83       $     88
Combined weighted average initial loan-
to-value ratio(1) ......................................          70.7%          70.5%          68.6%          69.4%
Weighted average interest rate .........................          10.4%          10.7%          11.2%          11.1%

Correspondent:
Number of Correspondent Loans ..........................          2,594          2,190          1,817          1,615
Principal balance ......................................       $200,883       $170,840       $138,237       $122,679
Average principal balance per loan .....................       $     77       $     78       $     76       $     76
Combined weighted average initial loan-
to-value ratio(1) ......................................          73.5%          73.3%          72.0%          71.9%
Weighted average interest rate .........................          11.0%          11.2%          11.6%          11.6%

Retail:
Number of retail loans .................................            825            738            367            111
Principal balance ......................................       $ 57,239       $ 51,187       $ 23,903       $  8,057
Average principal balance per loan .....................       $     69       $     69       $     65       $     73
Combined weighted average initial loan-
to-value ratio(1) ......................................          79.8%          80.7%          79.9%          79.7%
Weighted average interest rate .........................          10.0%          10.1%          10.1%           9.9%

Total loan purchases and originations:
Total number of loans ..................................          4,981          4,434          3,431          2,931
Principal balance ......................................       $396,461       $355,992       $265,416       $236,742
Average principal balance per loan .....................       $     80       $     80       $     77       $     81
Combined weighted average initial loan-
to-value ratio(1) ......................................          73.5%          73.3%          71.4%          71.0%
Weighted average interest rate .........................          10.7%          10.9%          11.3%          11.3%
---------------
<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>

                                       4
<PAGE>


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

                                                       YEAR ENDED DECEMBER 31,
                                                       -----------------------
                                                       1997      1996     1995
                                                       ----      ----     ----
First mortgage:
    Percentage of total purchases and originations     94.0%     93.8%    89.6%
    Weighted average interest rate........             11.0%     11.4%    11.8%
    Weighted average initial loan-to-value ratio(1)    72.6%     68.9%    63.2%

Second mortgage:
    Percentage of total purchases and originations      6.0%      6.2%    10.4%
    Weighted average interest rate........             11.3%     11.5%    11.9%
    Weighted average initial loan-to-value ratio(1)    71.1%     66.6%    62.9%
---------------
(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,
                                               -----------------------------------------------------------------------------
                                                        1997                      1996                      1995
                                               ------------------------  ------------------------  ------------------------
REGION                                         PERCENTAGE  DOLLAR VALUE  PERCENTAGE  DOLLAR VALUE  PERCENTAGE  DOLLAR VALUE
------                                         ----------  ------------  ----------  ------------  ----------  ------------
<S>                                            <C>         <C>           <C>         <C>           <C>         <C>
                                                                          (DOLLARS IN MILLIONS)

NY, NJ and PA .........................            52.9%     $  664.3       66.3%      $  436.9       86.2%      $  248.0
Midwest ...............................            23.8         298.2       17.0          112.0        5.4           15.7
Southeast .............................             9.7         121.4        4.2           27.6        0.8            2.2
New England ...........................             7.1          89.3        5.9           38.6        2.2            6.2
Mid-Atlantic* .........................             6.5          81.3        6.6           43.7        5.4           15.7
------------
*  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, and
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 27 business development
representatives  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.

   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.

                                       5


   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.

   BROKERS.  For the year ended December 31, 1997, the Company's  broker network
accounted for $481.6 million, or 38%, of Delta's loan purchases and originations
compared to $321.7 million,  or 49%, of Delta's loan purchases and  originations
for the year ended December 31, 1996 and $175.7 million, or 61%, of Delta's loan
purchases  and  originations  for the year ended  December 31,  1995.  No single
broker  contributed  more than 5.8%, 11.4% or 6.2% of Delta's total purchases or
originations in the years ended December 31, 1997, 1996 and 1995, 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.

   CORRESPONDENTS.  For the year ended December 31, 1997, Delta's  correspondent
network  accounted for $632.6  million,  or 51%, of Delta's loans  purchases and
originations  compared to $337.0 million,  or 51%, of Delta's loan purchases and
originations for the year ended December 31, 1996 and $112.1 million, or 39%, of
Delta's loan purchases and originations for the year ended December 31, 1995. No
single  correspondent  contributed more than 6.5%, 6.3% or 6.3% of Delta's total
loan purchases and originations in 1997, 1996 or 1995, 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 will typically 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 for any items needed
to complete the package in adherence to Delta's  underwriting  guidelines.  On a
block sale, a correspondent will offer a group of loans, generally 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 began retail  origination of loans in 1997 with its
acquisition of Fidelity Mortgage, and for the year ended December 31, 1997, this
channel  accounted  for $140.4  million,  or 11%, of Delta's loan

                                       6


purchases  and  originations. Fidelity  Mortgage is able, through its  marketing
efforts,  to  identify,  locate  and  focus on  individuals  who, based  on  its
historic customer profiles, are  likely  customers for  the Company's  products.
Fidelity Mortgage's telemarketing  representatives identify interested customers
and refer these 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:  condition  and location of the
collateral, credit history of the applicant, ability to pay, 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:

                                       7
<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.

   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.

                                       8
<PAGE>


                                     PERCENT
YEAR    CREDIT           TOTAL       OF TOTAL     WAC(1)      WLTV(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%
                     ==========       =====        ====        ====
1995       A         $   89,830        31.3%       10.7%       66.8%
           B            124,954        43.4        11.6        64.5
           C             37,190        12.9        12.8        59.6
           D             35,831        12.4        14.5        53.2
                     ----------       -----        ----        ----
      Totals           $287,805       100.0%       11.8%       63.2%
                     ==========       =====        ====        ====
---------------
(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 has a staff of 70  underwriters,  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.

   Delta's  underwriting of every loan submitted consists not only of a thorough
credit review,  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

                                       9


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 of pass-through  mortgage-backed 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 $2.4 billion of
the loans it  originated  or purchased  through  securitization  and $54 million
through whole loan sales.

   SECURITIZATIONS.  During 1997,  Delta  completed 4  securitizations  totaling
$1.24 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.

                                                    INITIAL
                               OFFERING SIZE   WEIGHTED AVERAGE      CREDIT
SECURITIZATION      COMPLETED    (MILLIONS)    PASS-THROUGH RATE  ENHANCEMENT
--------------      ---------  -------------   -----------------  -----------
1997-1............  03/27/97       $235.0             6.72%       Insurance Wrap
1997-2............  06/26/97       $260.0             6.72%       Senior/Sub
1997-3............  09/23/97       $340.0             6.71%       Senior/Sub
1997-4............  12/08/97       $400.0             6.62%       Senior/Sub

   When Delta  securitizes  loans, it sells a portfolio of loans to a trust (the
"Home Equity Loan Trust") and issues  classes of  certificates  representing  an
undivided ownership interest in the 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
payments  to  certificateholders.  For each of the 1997  securitizations,  Delta
retained 100% of the  interests in the residual  classes of  certificates  while
selling an interest-only  certificate in each of the last three  securitizations
for cash. Management  contemplates continuing to retain residual certificates in
the future as long as, in management's opinion, this practice maximizes earnings
while

                                       10


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-subordination
securitization  structure,  which insures the timely payment of interest and the
ultimate payment of principal of the credit-enhanced  investor  certificate.  In
"senior-subordination"  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 is initially applied
as an  additional  payment of principal of 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.  The Company has in the past  determined
from time to time that some of its "A"  loans  and  higher  loan-to-value  ratio
loans receive better execution by being sold on a whole loan, non-recourse basis
to third party  institutions.  In 1997,  the Company did not sell any loans on a
whole loan basis as management deemed it to be more profitable to securitize all
of its loans.  For the years ended December 31, 1996 and 1995,  Delta sold $15.3
million and $17.6 million of loans, respectively,  on a whole loan, non-recourse
basis,  which  represents 2.3% and 6.1%,  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 delinquent payments,  instituting foreclosure
and liquidating the 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,  which servicing fees are collected 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 stream
that is less cyclical than the business of originating and purchasing  loans. As
of December 31, 1997, Delta had a loan servicing portfolio of $1.84 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

                                       11


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,  LSAMS
automatically  places  the loan in the  assigned  collector's  "auto  queue" 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.  LSAMS  automatically  queues up each loan in the
assigned  collector's  "auto-queue"  at one of  these  two  dates  based  upon a
particular  borrower's  payment  history  over the prior 12 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  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  Delta's
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 REO  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.

                                       12


   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"):

<TABLE>
<CAPTION>
                                                                                  YEAR ENDED DECEMBER 31,
                                                                         ------------------------------------------
                                                                         1997               1996               1995
                                                                         ----               ----               ----
<S>                                                               <C>                  <C>                <C>
Total Outstanding Principal Balance
    (at period end).............................................  $ 1,840,150,403      $ 932,958,188      $ 468,846,079
Average Outstanding(1)..........................................  $ 1,376,108,923      $ 686,465,257      $ 373,384,417
DELINQUENCY (at period end)
30-59 Days:
    Principal Balance...........................................  $    90,052,724      $ 54,582,550       $  35,052,951
    Percent of Delinquency(2)...................................            4.89%              5.85%              7.48%
60-89 Days:
    Principal Balance...........................................  $    28,864,099      $  14,272,587      $   8,086,230
    Percent of Delinquency(2)...................................            1.57%              1.53%              1.72%
90 Days or More:
    Principal Balance...........................................  $    17,695,594      $  9,224,525       $   6,748,061
    Percent of Delinquency(2)...................................            0.96%              0.99%              1.44%
Total Delinquencies:
    Principal Balance...........................................  $   136,612,417      $  78,079,663      $  49,887,242
    Percent of Delinquency(2)...................................            7.42%              8.37%             10.64%
FORECLOSURES
    Principal Balance...........................................  $    85,500,439      $  34,765,628      $  23,506,751
    Percent of Foreclosures by Dollar(2)........................            4.65%              3.73%              5.01%
REO (at end of period)..........................................  $    10,292,208      $   5,672,811      $   4,020,295
Net Gains/(Losses) on liquidated loans..........................  $    (4,985,539)     $  (2,866,204)     $  (2,142,099)
Percentage of Net Gains/(Losses) on liquidated
    loans (based on Average Outstanding Balance)................           (0.36%)            (0.42%)            (0.57%)
---------------
<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 current  level of
gains  realized by the Company  and its  competitors  on the sale of the type of
loans  originated and purchased is attracting  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,  greater  investor  acceptance of securities
backed  by  loans  comparable  to  the  Company's  mortgage  loans  and  greater
availability of information  regarding the prepayment and default

                                       13


experience of  such  loans  creates  greater  efficiencies  in  the  market  for
such  securities.  Such  efficiencies  may  create  a  desire  for  even  larger
transactions giving companies with greater volumes of originations a competitive
advantage.  In addition,  a more efficient  market for such  securities may lead
certain  investors to purchase  securities backed by other types of assets where
potential returns may be greater. 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 announced their intention to adapt their conforming origination
programs and allocate  resources to the origination of non-conforming  loans. In
addition,  certain of these larger mortgage  companies and commercial banks have
begun to offer  products  similar  to those  offered by the  Company,  targeting
customers  similar to those of the Company.  The  entrance of these  competitors
into the Company's  market could 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, 1997 Delta had a total of 987  employees  (full-time  and
part-time).  None of Delta's  employees  is covered by a  collective  bargaining
agreement. Delta considers its relations with its employees to be good.

                                       14


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 2007.

   Delta  also  maintains  a full  service  office  in  Atlanta,  Georgia,  full
processing offices in Chicago,  Illinois and Warwick,  Rhode Island,  processing
offices  in  Deerfield  Beach,   Florida  and  Cleveland,   Ohio,  and  business
development  offices in Delaware,  Michigan  (2),  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 hub in
Ohio;  and two  corporate  offices in Ohio and Florida.  The terms of the leases
vary as to duration and escalation provisions, with the latest expiring in 2001.

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 state and federal
lending laws, the Company is subject to numerous claims and legal actions in the
ordinary  course  of its  business.  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 would have a material  adverse effect
on the financial condition or results of operations of the Company.

   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. On March 18, 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,  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.
Management  believes the Company has meritorious  defenses and intends to defend
this suit, but the Company cannot estimate with any certainty its ultimate legal
or financial liability, if any, with respect to the alleged claims.

   On or about February 10, 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  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  damages  (including  attorney's  fees).   Management
believes the Company has  meritorious  defenses and intends to defend this suit,
but the Company has not yet answered the complaint and 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 29, 1997. At the meeting,
Richard Blass and Arnold B. Pollard were elected as Class I Directors for a term
of three years.  Hugh Miller,  Sidney A. Miller and Martin D. Payson continue to
serve as members of the Board of Directors.

            Votes cast in favor of Mr. Blass' election totaled  14,363,632 while
            12,468 votes were withheld.

            Votes cast in favor of Mr.  Pollard's  election  totaled  14,363,682
            while 12,418 votes were withheld.

   The  stockholders  also voted to ratify the  appointment of KPMG Peat Marwick
LLP as the Company's  independent  public accountants for the fiscal year ending
December 31, 1997.  Votes cast in favor of this  ratification  were  14,371,038,
while votes cast against were 2,914 and abstentions totaled 2,148.

                                       15
<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.

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

1996                                                  HIGH        LOW
----                                                  ----        ----
Fourth Quarter (from 11/1/96).............            $25.25     $18.00

   On March 24, 1998, the Company had  approximately  78 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 in
excess of 2,500.

DIVIDEND POLICY

   The Company did not pay any  dividends  in 1997 and, in  accordance  with its
present general policy, has no present intention to pay cash dividends.

                                       16

<PAGE>
<TABLE>
<CAPTION>

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

                                                                               YEAR ENDED DECEMBER 31,
                                                            -----------------------------------------------------------
                                                            1997          1996         1995          1994          1993
                                                            ----          ----         ----          ----          ----
<S>                                                     <C>           <C>           <C>          <C>           <C>
Income Statement Data:                                          (DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
  Revenues:
      Net gain on sale of mortgage loans.............   $   86,307    $   46,525    $   15,383   $    6,661    $    7,639
      Interest.......................................       22,341        16,372        13,588        9,839         9,156
      Servicing fees.................................        7,094         5,368         2,855        2,183         2,101
      Origination fees (1) ..........................       18,108         5,266         4,309        3,114         3,617
                                                        ----------    ----------    ----------   ----------    ----------
            Total revenues...........................   $  133,850    $   73,531    $   36,135   $   21,797    $   22,513
                                                        ----------    ----------    ----------   ----------    ----------
  Expenses:
      Payroll and related costs (1)..................   $   38,991    $   16,509    $   12,876   $    8,815    $    9,268
      Interest.......................................       19,972        11,298         7,964        3,735         2,915
      General & administrative (1)...................       23,737        12,236        10,709        7,238         6,670
                                                        ----------    ----------    ----------   ----------    ----------
            Total expenses...........................   $   82,700    $   40,043    $   31,549   $   19,788    $   18,853
                                                        ----------    ----------    ----------   ----------    ----------
  Income before income taxes and
      extraordinary item.............................       51,150        33,488         4,586        2,009         3,660
  Provision for income taxes(1)......................       20,739         9,466            --           --            --
                                                        ----------    ----------    ----------   ----------    ----------
  Income before extraordinary item...................       30,411        24,022         4,586        2,009         3,660
  Extraordinary item:................................
      Gain on extinguishment of debt.................           --         3,168            --           --            --
                                                        ----------    ----------    ----------   ----------    ----------
  Net income.........................................   $   30,411    $   27,190    $    4,586   $    2,009    $    3,660
                                                        ==========    ==========    ==========   ==========    ==========
Pro forma information (2)(3):
  Provision for pro forma income taxes
      before extraordinary item......................   $      n/a    $   14,400    $    1,972   $      864    $    1,574
                                                        ----------    ----------    ----------   ----------    ----------
  Pro forma income before
      extraordinary item.............................   $   30,411    $   19,088    $    2,614   $    1,145    $    2,086
                                                        ==========    ==========    ==========   ==========    ==========
  Per share data(2)(4)
      Earnings per common share -
            basic and diluted........................   $     1.98    $     1.46    $     0.21   $     0.09    $     0.17

      Weighted average number of
            shares outstanding.......................   15,359,280    13,066,485    12,629,182   12,629,182    12,629,182

Selected Balance Sheet Data:
  Loans held for sale................................   $   79,247    $   82,411    $   63,324   $   48,833    $   41,703
  Interest-only and residual certificates............      167,809        83,073        25,310        7,514         2,204
  Capitalized mortgage servicing rights..............       22,862        11,412         3,831        2,421         3,491
  Total assets.......................................      393,232       231,616       139,293       98,589        81,143
                                                        ----------    ----------    ----------   ----------    ----------
  Senior notes, warehouse financing and
      other borrowings...............................   $  177,540    $   95,482    $   82,756   $   52,491    $   36,780
  Investor payable...................................       40,852        20,869        13,444       11,091         8,687
  Total liabilities..................................      266,779       138,098       109,460       70,425        52,793
                                                        ----------    ----------    ----------   ----------    ----------
  Stockholders' equity...............................   $  126,453    $   93,518    $   29,833   $   28,164    $   28,350
                                                        ==========    ==========    ==========   ==========    ==========
---------------
<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, 1997 are actual; pro  forma presentation  for the
      years 1996, 1995, 1994 and 1993.
(3)   Prior to October 31,  1996,  Delta  Funding  Corporation  (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 Delta  Financial
      Corporation  common stock received by the former  shareholders in exchange
      for their shares of Delta Funding  Corporation,  and (b) the effect of the
      issuance  of  1,976,182   shares  of  common  stock  of  Delta   Financial
      Corporation  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>

                                       17
<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.

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 price.  The trust, in
turn,  finances  the pool of  loans it has  acquired  by  issuing  "pass-through
certificates," or bonds, which represent  undivided  ownership  interests in the
trust.  The 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 the  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  contractual  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 sold loans at the date of the
securitization represents the amount originally paid to originate or acquire the
loan adjusted for (i) 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 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 for
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 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.

                                       18


   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
change  from the  requirements  of SFAS No. 122 to those of SFAS No. 125 did not
have a  material  impact on the  Company's  result of  operations  or  financial
position.

   In accordance  with SFAS No. 125, and previously  SFAS No. 122, 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 rights,  which 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.  This amount,  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
asset, based on the fair value of the rights at the date of the assessment.  The
Company  performs  this  assessment  based on the same  prepayment  and  default
estimates  utilized  in  valuing  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.

   The Company assumes prepayment rates and defaults based upon the seasoning of
its existing  securitization  loan portfolio.  As of December 31, 1997 and 1996,
the Company's  underlying  assumptions used in determining the fair value of its
interest-only and residual certificates are as follows:

   (a)      Estimated annual prepayment rates:

      (i) for  fixed-rate  loan pools of 4.8%  beginning  in the first  month of
seasoning and  increasing  in equal  increments to 24.0% by the twelfth month of
seasoning and thereafter;

      (ii) for  adjustable-rate  loan pools of 5.6% beginning in the first month
of seasoning and increasing in equal increments to 28.0% by the twelfth month of
seasoning  and  thereafter  at December  31,  1997,  compared to 5.0% and 25.0%,
respectively, at December 31, 1996;

   (b) A default reserve for both fixed- and  adjustable-rate  loans sold to the
securitizations trusts of 1.90% of the amount initially securitized; and

   (c) An annual discount rate of 12.0% in determining the present value of cash
flows from residual  certificates,  which are the  predominant  form of retained
interests.

                                       19


   The Company uses the same prepayment assumptions in estimating the fair value
of its mortgage  servicing rights. To date, actual cash flows from the Company's
securitization trusts have either met or exceeded management's expectations.

   The  Company  has,  from  time to time,  sold its  economic  interest  in the
interest-only  certificates  for cash proceeds  including,  most  recently,  the
interest-only certificates on three of its 1997 securitization transactions. The
Company did not sell any of its interest-only certificates in 1996.

   The Company has also,  from time to time,  sold whole loans on a non-recourse
basis, without retaining servicing rights,  generally in private transactions to
individual or  institutional  investors.  Upon the sale of loans on a whole-loan
basis, the Company recognizes a gain or loss for the difference between the cash
proceeds  received  for the loans and the  investment  in the  loans,  including
unamortized loan origination fees and costs.

INTEREST RATE RISK

   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 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.  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.")

RECENT GROWTH

   The Company has experienced  significant loan origination and purchase growth
in the last few years,  particularly since January 1, 1995.  Management believes
that this growth is  primarily  attributable  to the  Company's  (i)  geographic
expansion of its  operations,  (ii)  further  penetration  into its  established
markets,  (iii)  increased  access to capital  and  additional  funding  sources
through (a) the  capital  markets and (b) larger  warehouse  finance  agreements
which have  enabled the Company to  accumulate  larger  pools of loans for sales
through  securitizations,  and (iv) recent expansion of its production  channels
through the acquisition of the Fidelity Mortgage, retail operations.

   In connection  with its  geographic  expansion,  the Company has continued to
focus  on  developing  loan  production  from  brokers  and  correspondents.  In
addition,  the Company is also  committed to developing and growing the Fidelity
Mortgage retail origination network.  There can be no assurance that the Company
will  continue to grow  significantly  in the future.  Any future growth will be
limited  by,  among other  things,  the  Company's  need for  continued  funding
sources, access to capital markets,  sensitivity to economic slowdowns,  ability
to attract and retain  qualified  personnel,  fluctuations in interest rates and
competition from other consumer finance  companies and from new market entrants.
To date, the Company has not experienced any significant  seasonal variations in
loan originations and purchases.

   The Company's recent and rapid growth may have a somewhat  distortive  impact
on  certain  of the  Company's  ratios  and  financial  statistics  and may make
period-to-period  comparisons  difficult.  In  light  of the  Company's  growth,
historical  performance of the Company's earnings may be of limited relevance in
predicting future performance.  Furthermore,  the Company's financial statistics
may not be indicative of the Company's results in

                                       20


future periods. Any credit or other problems associated with the large number of
loans  originated and purchased in the recent past may not become apparent until
sometime in the future.

   The  comparability  of the results of operations for the twelve months ended,
and financial position as of, December 31, 1997 and 1996 may also be affected by
the Company's  acquisition of Fidelity Mortgage.  Fidelity Mortgage was acquired
on February 11, 1997 for a combination of cash and stock,  with the  acquisition
accounted for using the purchase method of accounting.

RESULTS OF OPERATIONS

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

REVENUES

   Total revenues for the twelve months ended December 31, 1997 increased  $60.4
million,  or 82%, to $133.9 million 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.

   For the twelve months ended  December 31, 1997,  the Company  originated  and
purchased $1.25 billion of mortgage loans, representing a 90% increase from $659
million of mortgage  loans  originated and purchased for the twelve months ended
December 31, 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 at
December 31, 1997  increased  97% to $1.84 billion from $933 million at December
31, 1996.

   NET  GAIN ON SALE OF  MORTGAGE  LOANS.  Net  gain on sale of  mortgage  loans
represents (i) the sum of (a) the fair value of the  interest-only  and residual
certificates  associated  with loans  securitized  in each period,  (b) the fair
value of 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,  (ii)  less the (x)  premiums  paid to  originate  or
acquire mortgage loans, (y) costs  associated with  securitizations  and (z) any
hedge loss (gain).

   For the twelve months ended  December 31, 1997,  net gain on sale of mortgage
loans increased  $39.8 million,  or 86%, to $86.3 million from $46.5 million for
the twelve months ended December 31, 1996. This increase was primarily due to an
increase in loans securitized in 1997 of $1.24 billion, or 97%, compared to $630
million of loans sold or securitized for the same 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.  As previously  noted above, the
Company changed its prepayment assumptions on adjustable-rate  mortgage loans in
the third  quarter of 1997.  This  change,  which  affects the  valuation of the
Company's  existing  interest-only  and residual  certificates  and  capitalized
mortgage  servicing  rights,  as well as the  valuation  of those  assets in all
future  securitizations,  was made based upon the Company's on-going analysis of
industry and Company  prepayment  trends.  The change in this assumption did not
have a material  effect on net gain on sale.  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 primarily represents the sum of (i) interest
earned on loans held for sale, (ii) interest earned on cash collection balances,
and (iii) the difference  between the  distributions the Company receives on its
interest-only and residual  certificates and the adjustments recorded to reflect
the change in the fair value in the interest-only and residual certificates.

                                       21


   Interest  income for the twelve months ended December 31, 1997 increased $5.9
million, or 36%, to $22.3 million from $16.4 million in the comparable period in
1996. The increase in interest  income 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.  The Company  changed its  prepayment
assumptions on adjustable rate mortgages in the third quarter of 1997, which did
not have a material effect on interest income.

   SERVICING  FEES.  Servicing  fees  represent  all  contractual  and ancillary
servicing  revenue received by the Company less (a) 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 - "Accounting Considerations"), and (b) prepaid interest shortfalls.

   Servicing  fees for the twelve months ended  December 31, 1997 increased $1.7
million,  or 31%, to $7.1 million from $5.4 million in the comparable  period in
1996.  This  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.  During the
twelve months ended  December 31, 1997,  the average  balance of mortgage  loans
serviced by the Company increased 107% to $1.38 billion from $667 million during
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  represent  fees earned on brokered and
retail originated  loans.  Origination fees for the twelve months ended December
31, 1997 increased $12.8 million, or 242%, to $18.1 million from $5.3 million in
the  comparable  period in 1996. The increase is 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.

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 (the "Senior  Notes") 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  include  salaries,
benefits  and  payroll  taxes for all  employees.  For the twelve  months  ended
December 31, 1997, payroll and related costs expense increased $22.5 million, or
136%,  to $39.0 million from $16.5  million for the  comparable  period in 1996.
This increase is primarily related to staff increases related to the acquisition
and  subsequent  expansion  of  Fidelity  Mortgage  and  the  increase  in  loan
originations and purchases at the Company.  As of December 31, 1997, the Company
employed  987 full- and  part-time  employees,  447 of which  are  employees  of
Fidelity Mortgage,  compared to 346 full- and part-time employees as of December
31, 1996.

                                       22


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

   For the twelve months ended  December 31, 1997,  interest  expense  increased
$8.7 million,  or 77%, to $20.0  million from $11.3  million for the  comparable
period in 1996. The increase in interest  expense was 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
consist primarily of office rent, insurance, telephone,  depreciation,  goodwill
amortization,  real estate owned  expenses,  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.

   For the twelve  months ended  December 31, 1997,  general and  administrative
expenses  increased  $11.5 million,  or 94%, to $23.7 million from $12.2 million
for the comparable  period in 1996. This 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. 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.

   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.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995

  REVENUES

   Total revenues  increased  $37.4  million,  or 104%, to $73.5 million in 1996
from $36.1  million in 1995.  The increase in revenues was  primarily due to the
increase in loan originations and purchases and a corresponding  increase in the
amount of loans sold through securitizations.

   NET  GAIN ON SALE OF  MORTGAGE  LOANS.  Net  gain on sale of  mortgage  loans
increased $31.1 million, or 202%, to $46.5 million in 1996 from $15.4 million in
1995.  This increase was the result of higher loan  originations  and purchases,
resulting in an increased  amount of loans sold through  securitizations.  Total
loan  originations and

                                       23


purchases  increased  $371.0  million,  or  129%, to  $658.8  million  in   1996
from $287.8 million in 1995.  The Company sold or securitized  $630.4 million of
loans in 1996 compared to $247.6  million in 1995,  with a weighted  average net
gain on sale ratio of 7.4% and 6.2%, respectively.

   INTEREST  INCOME.  Interest income  increased $2.8 million,  or 21%, to $16.4
million in 1996 from $13.6 million in 1995. The increase in interest  income was
primarily  due to a higher  average  balance of loans held for sale  during 1996
resulting  from  the  increases  in loan  originations  and  purchases,  but was
partially  offset by the  shorter  holding  period in which the  mortgage  loans
remained in inventory during 1996. The Company  completed three  securitizations
during 1996 compared to two securitizations in 1995.

   SERVICING  FEES.  Servicing  fees  increased  $2.5  million,  or 86%, to $5.4
million in 1996 from $2.9 million in 1995.  This  increase was  primarily due to
higher loan  servicing  volume,  which  resulted in  increased  contractual  and
ancillary  service  fees.  During 1996,  the average  balance of mortgage  loans
serviced by the Company  increased  79% to $667.4  million  from $373.4  million
during 1995.

   ORIGINATION  FEES.  Origination fees increased $1.0 million,  or 23%, to $5.3
million in 1996 from $4.3 million in 1995. This increase was primarily due to an
83%  increase in broker loan  originations  to $321.7  million in the year ended
1996 from $175.7 million in comparable  period of 1995.  Loan  origination  fees
increased at a slower rate than broker loan  originations  primarily because the
Company earned lower average origination fees per loan.

EXPENSES

   Total expenses increased $8.5 million, or 27%, to $40.0 million for 1996 from
$31.5  million in 1995.  The  increase in expenses was  primarily  the result of
increased  interest expense on loans held for sale and higher operating expenses
associated with the additional  personnel required to process the greater number
of loan  originations and purchases.  Total expenses  increased at a slower rate
than total revenues,  primarily due to efficiencies  realized from the Company's
investment in technology, experienced staff and economies of scale.

   PAYROLL AND RELATED COSTS.  Payroll and related costs increased $3.6 million,
or 28%, to $16.5 million for 1996 from $12.9 million for 1995.  The increase was
primarily  due  to  increased  staffing  in  the  Company's   originations  area
associated with the increase in loan originations and purchases,  as well as the
Company's  expansion into new and existing markets. As of December 31, 1996, the
Company  employed 346 full- and  part-time  persons as compared to 255 full- and
part-time persons as of December 31, 1995.

   INTEREST EXPENSE.  Interest expense increased $3.3 million,  or 41%, to $11.3
million in 1996 from $8.0 million in 1995. The increase in interest  expense was
attributable  to the interest  costs  associated  with both a higher  balance of
loans pending sale during 1996,  resulting from  increases in loan  originations
and  purchases  during the  period,  and an  increase  in the  excess  servicing
receivable  financing  during  1996.  The  Company  had  financings  against its
interest-only and residual certificates of $47.0 million as of December 31, 1996
compared  to $16.2  million  as of  December  31,  1995.  Interest  expense  was
partially  offset  by  lower  cost  of  funds  on  the  Company's  floating-rate
borrowings  which are based on  one-month  LIBOR.  The average  one-month  LIBOR
decreased  to an average  rate of 5.4% in 1996,  compared to an average  rate of
5.9% in 1995.

   GENERAL AND ADMINISTRATIVE  EXPENSES.  General and  administrative  expenses,
which consist primarily of office and administration,  rent, and health care and
insurance,  increased $1.5 million,  or 14%, to $12.2 million in 1996 from $10.7
million  in 1995.  The  increase  in general  and  administrative  expenses  was
primarily  due to expenses  incurred in  connection  with the  increases in loan
originations and purchases, and increased employee benefit expenses.

   EXTRAORDINARY  GAIN. In May 1996, the Company closed out its long-term  $31.7
million  warehouse  facility  with a  European  financial  institution  at a 10%
discount.  As a result,  the  Company  realized an  extraordinary  gain of $3.17
million for the year ended December 31, 1996.

   INCOME  TAXES.  Prior to October 31,  1996,  Delta  Funding  Corporation  was
treated as an S  corporation  for

                                       24


Federal  and  state  income  tax purposes. As a result, the Company's historical
earnings  prior to such date had been taxed  directly to the former shareholders
of Delta Funding and not to the Company.

   On October 31, 1996, Delta Funding  Corporation's  status as an S corporation
was  terminated  and 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 months of November and December  1996.  During 1996,
the Company  recorded a tax  provision  of $9.5  million.  This  includes a $4.2
million  provision for November and December  earnings at the statutory  rate of
42% and a deferred tax expense of $3.9 million in connection  with the change in
tax status from an S corporation to a C corporation.

FINANCIAL CONDITION

DECEMBER 31, 1997 COMPARED TO DECEMBER 31, 1996

   Cash and interest-bearing  deposits increased $14.2 million, or 76%, to $32.9
million at  December  31,  1997 from $18.7  million at December  31,  1996.  The
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  increased  $20.7 million,  or 197%, to $31.2 million at
December  31, 1997 from $10.5  million at December  31,  1996.  The increase was
attributable to (i) a higher average loan servicing portfolio, which resulted in
increased  reimbursable  servicing  advances  made  by the  Company,  acting  as
servicer on its securitizations,  and (ii) a $14.8 million income tax receivable
related to current tax assets.

   Loans held for sale  decreased  $3.2  million,  or 3.9%,  to $79.2 million at
December 31, 1997 from $82.4  million at December 31,  1996.  This  decrease was
primarily the result of a larger  percentage of loans  securitized,  compared to
loans originated and purchased, in 1997.

   Accrued interest and late charges receivable increased $11.1 million, or 60%,
to $29.6  million at December 31, 1997 from $18.5  million at December 31, 1996.
This  increase was primarily due to a higher  average loan  servicing  portfolio
which resulted in increased  reimbursable interest advances made by the Company,
acting as servicer  on its  securitizations.  The  Company's  average  servicing
portfolio  increased  107% to $1.38  billion as of  December  31, 1997 from $667
million as of December 31, 1996.

   Capitalized  mortgage  servicing rights increased $11.5 million,  or 101%, to
$22.9  million at December  31, 1997,  from $11.4  million at December 31, 1996.
This increase was directly  attributable to the Company's  capitalizing the fair
market value of the servicing assets, totaling $15.1 million, resulting from the
Company's  completion of four  securitizations  during 1997, partially offset by
the amortization of capitalized mortgage servicing rights.

   Interest-only and residual certificates  increased $84.7 million, or 102%, to
$167.8 million at December 31, 1997 from $83.1 million at December 31, 1996. The
Company received  interest-only and residual  certificates  initially valued and
recorded  at $102.1  million  in its four  securitizations  in 1997.  Offsetting
adjustments to reflect  distributions,  and changes in fair value, totaled $17.4
million.

   Prepaid and other assets increased $4.6 million,  or 288%, to $6.2 million at
December  31, 1997 from $1.6  million at December  31,  1996.  The  increase was
primarily due to the  capitalized  issuance  costs related to the Company's $150
million  Senior  Note  offering  in the  third  quarter  of 1997  which is being
amortized over the seven year life of the Senior Notes.

   Warehouse financing and other borrowings  decreased $67.3 million, or 70%, to
$28.2  million at December  31, 1997 from $95.5  million at December  31,  1996.
During the third  quarter of 1997,  the Company used the net  proceeds  from its
Senior Notes offering to pay down its warehouse  facility and  interest-only and
residual financings.

   The aggregate principal balance of the Senior Notes totaled $149.3 million at
December 31, 1997,  net of unamortized  bond  discount.  The Senior Notes accrue
interest at a rate of 9.5% per annum,  payable  semi-annually

                                       25


on February 1 and  August 1, commencing on February 1, 1998. The Company did not
have any Senior Notes outstanding prior to July 1997.

   Investor  payable  increased  $20.0  million,  or 96%,  to $40.9  million  at
December 31, 1997 from $20.9  million at December 31,  1996.  This  increase was
primarily due to the 97% increase in the Company's  portfolio of serviced  loans
to $1.84  billion at December  31, 1997 from $933  million at December 31, 1996.
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.

   Stockholders'  equity  increased $33.0 million,  or 35%, to $126.5 million at
December 31, 1997 from $93.5 million at December 31, 1996.  This increase is due
to net income for the twelve month  period of $30.4  million and the issuance of
119,288  additional  shares of common stock valued at $2.5 million in connection
with the Company's acquisition of Fidelity Mortgage.

LIQUIDITY AND CAPITAL RESOURCES

   The  Company has  operated,  and expects to continue to operate on a negative
cash  flow  basis  due  to  increases  in  the  volume  of  loan  purchases  and
originations,   the  growth  of  its  securitization   program,   and  potential
acquisitions.  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.  As a  result  of  increased  loan  originations  and  purchases  and the
expansion of its  securitization  program,  the Company,  during 1997,  1996 and
1995, had an operating cash flow deficit of approximately  $53.5 million,  $42.0
million and $23.9 million, respectively.

   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 an offering
of the Senior  Notes.  A portion of the Senior Notes  proceeds  were used to pay
down  various  financing  facilities  with the  remainder to be 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  has three
warehouse  facilities for this purpose. One warehouse facility is a $400 million
committed  credit line with a variable  rate of interest and a maturity  date of
February  1999.  This facility was converted  from an uncommitted to a committed
line during the three  months ended March 31, 1997 and,  subsequent  to December
31, 1997,  the maturity date was extended  from February 1998 to February  1999.
The Company's second warehouse  facility is a $200 million  committed  revolving
line with a variable rate of interest and a maturity  date of February  1998. In
February 1998,  management  elected not to renew this line. The Company's  third
warehouse facility is a syndicated $140 million committed  revolving line with a
variable  rate of interest and a maturity  date of June 1998.  This facility was
increased from $100 million to $140 million subsequent to December 31, 1997. The
outstanding  balances on the $400 million  facility,  $250 million  facility and
$140  million  facility as of December 31, 1997 were $23.9  million,  $0 and $0,
respectively.

   In February 1998, a new $250 million committed revolving line with a variable
rate of interest  was secured by the  Company to replace  the  Company's  second
warehouse  facility  which  expired in February  1998.  This new  facility has a
maturity date of February 1999.

                                       26


   The Company has in the past obtained  financing  facilities for interest-only
and  residual  certificates  acquired  as  part  of its  securitizations.  As of
December  31,  1997,  the  Company  did not have  any  indebtedness  secured  by
interest-only and residual certificates.  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 had a $1.0 million line of credit with a financial institution to
support  its daily  operating  requirements,  which it  elected to let expire in
September 1997.

   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 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, 1997.

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 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 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.

   The Company believes that its current hedging strategy of using treasury rate
lock  contracts is the most  effective  way to manage its interest  rate risk on
loans  prior  to  securitization.   As  of  December  31,  1997,  the  Company's
mark-to-market unrealized hedge loss was $0.5 million.

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.")

                                       27


OTHER ACCOUNTING CONSIDERATIONS

SFAS NO. 130

   SFAS No. 130, "Reporting on Comprehensive Income" was issued in June 1997 and
is effective for fiscal years  beginning  after December 15, 1997.  SFAS No. 130
establishes  standards for reporting and display of comprehensive income and its
components   (revenues,   expenses,   gains  and   losses)  in  a  full  set  of
general-purpose financial statements.  The Statement requires all items that are
required  to  be  recognized  under   accounting   standards  as  components  of
comprehensive  income to be reported in a financial  statement that is displayed
with the same  prominence  as other  financial  statements.  The Company has not
completed its analysis of this Statement.  However,  the  implementation  of the
requirements of SFAS No.130 will not affect the Company's net income, cash flows
or financial position.

SFAS NO. 131

   SFAS No.  131  "Disclosures  about  Segments  of an  Enterprise  and  Related
Information" was issued in June 1997 and is effective for fiscal years beginning
after  December 15, 1997.  SFAS No. 131  establishes  standards for the way that
public business  enterprises  report  information  about  operating  segments in
annual financial  statements and requires that those enterprises report selected
information  about  operating  segments in interim  financial  reports issued to
shareholders.  The Statement  requires a public business  enterprise to report a
measure of segment profit or loss,  certain  specific  revenue and expense items
and  segment  assets.  The  Company  has  not  completed  its  analysis  of this
Statement.  However, the implementation of the requirements of SFAS No. 131 will
not affect the Company's net income, cash flows or financial position.

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:

      *     A general economic slowdown.

      *     The effects of interest rate  fluctuations and the Company's ability
            or  inability to hedge  effectively  against  such  fluctuations  in
            interest  rates;  the  effects  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.

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

      *     Increased competition within the Company's markets.

      *     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  the  development of  new
            product programs.

                                       28


      *     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
            policies and  practices  and the  application  of such  policies and
            practices.

YEAR 2000

   In 1997, the Company  developed a plan to address the ability of its computer
systems  to process  Year 2000  transactions  and data and began the  process of
making its systems Year 2000  compliant.  The plan  provides for the  conversion
efforts to be completed by the end of 1998,  and is currently  estimated to cost
approximately  $200,000.  The Company is expensing the costs as incurred;  costs
incurred in 1997 were not material.

                                       29
<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, 1997 and 1996,
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,   1997.   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, 1997 and 1996, and the results of its operations and its cash flows
for each of the  years in the  three-year  period  ended  December  31,  1997 in
conformity with generally accepted accounting principles.


/s/  KPMG Peat Marwick LLP


New York, New York
February 18, 1998

                                       30

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

CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996

(DOLLARS IN THOUSANDS)                                    1997        1996
--------------------------------------------------------------------------------
<S>                                                    <C>         <C>
ASSETS
Cash and interest bearing deposits..................   $  32,858   $  18,741
Accounts receivable.................................      31,209      10,501
Loans held for sale.................................      79,247      82,411
Accrued interest and late charges receivable........      29,598      18,459
Capitalized mortgage servicing rights...............      22,862      11,412
Interest-only and residual certificates.............     167,809      83,073
Equipment, net......................................      11,211       2,836
Cash held for advance payments......................       6,325       2,488
Real estate owned...................................          --         135
Prepaid and other assets............................       6,224       1,560
Goodwill ...........................................       5,889          --
--------------------------------------------------------------------------------
     Total assets...................................   $ 393,232   $ 231,616
================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
Bank payable........................................   $   2,222   $   2,295
Warehouse financing and other borrowings............      28,233      95,482
Senior Notes........................................     149,307          --
Accounts payable and accrued expenses...............      15,503       7,781
Investor payable....................................      40,852      20,869
Advance payment by borrowers for taxes and insurance       5,750       2,255
Income taxes payable................................      24,912       9,416
--------------------------------------------------------------------------------
     Total liabilities..............................   $ 266,779   $ 138,098
--------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
  Capital stock, $.01 par value. Authorized
    49,000,000 shares; issued and outstanding
    15,372,688 shares and 15,253,000 shares in 1997
    and 1996, respectively.                            $     154   $     153
  Additional paid-in capital........................      93,476      90,953
  Retained earnings.................................      32,823       2,412
--------------------------------------------------------------------------------
     Total stockholders' equity.....................     126,453      93,518
--------------------------------------------------------------------------------
     Total liabilities and stockholders' equity.....   $ 393,232   $ 231,616
================================================================================

See accompanying notes to consolidated financial statements.

                                       31
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997, 1996 and 1995

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)                 1997         1996         1995
-------------------------------------------------------------------------------------------------
<S>                                                        <C>          <C>          <C>
REVENUES:
    Net gain on sale of mortgage loans................     $ 86,307     $ 46,525     $ 15,383
    Interest..........................................       22,341       16,372       13,588
    Servicing fees....................................        7,094        5,368        2,855
    Origination fees..................................       18,108        5,266        4,309
-------------------------------------------------------------------------------------------------
       Total revenues.................................      133,850       73,531       36,135
-------------------------------------------------------------------------------------------------
EXPENSES:
    Payroll and related costs.........................       38,991       16,509       12,876
    Interest expense..................................       19,972       11,298        7,964
    General and administrative........................       23,737       12,236       10,709
-------------------------------------------------------------------------------------------------
       Total expenses.................................       82,700       40,043       31,549
-------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary item.....       51,150       33,488        4,586
Provision for income taxes............................       20,739        9,466           --
-------------------------------------------------------------------------------------------------
Income before extraordinary item......................       30,411       24,022        4,586
Extraordinary item:
    Gain on extinguishment of debt....................           --        3,168           --
-------------------------------------------------------------------------------------------------
       Net income.....................................     $ 30,411     $ 27,190     $  4,586
=================================================================================================

Unaudited pro forma information:
    Provision for pro forma income taxes
         before extraordinary item....................     $    n/a     $ 14,400     $  1,972
-------------------------------------------------------------------------------------------------
       Pro forma income before extraordinary item.....       30,411     $ 19,088     $  2,614
=================================================================================================

Per share data (1):
    Earnings per common share - basic and diluted ....     $   1.98     $   1.46     $   0.21

    Weighted average number of shares outstanding.....   15,359,280   13,066,485   12,629,182
=================================================================================================
(1)  Unaudited pro forma presentation for the years ended 1996 and 1995

See accompanying notes to consolidated financial statements.

                                       32
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------------------------------------------------------

CONSOLIDATED  STATEMENT OF CHANGES IN STOCKHOLDERS'
EQUITY
Years ended December 31, 1997, 1996 and 1995

                                                              ADDITIONAL
                                                                PAID-IN    RETAINED
(DOLLARS IN THOUSANDS)                         CAPITAL STOCK    CAPITAL    EARNINGS      TOTAL
-------------------------------------------------------------------------------------------------
<S>                                            <C>            <C>         <C>         <C>
Balance at December 31, 1994..................    $    107    $  3,225    $  24,831   $  28,163
    Net income................................          --          --        4,586       4,586
    Distributions.............................          --          --       (2,916)     (2,916)
-------------------------------------------------------------------------------------------------
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
=================================================================================================

See accompanying notes to consolidated financial statements.

                                       33
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------------------------

CONSOLIDATED  STATEMENTS OF CASH FLOWS
Years ended  December 31, 1997,  1996 and 1995

(DOLLARS IN THOUSANDS)                                             1997        1996        1995
--------------------------------------------------------------------------------------------------
<S>                                                             <C>         <C>         <C>
Cash flows from operating activities:
 Net income..................................................   $ 30,411    $ 27,190    $  4,586
 Adjustments to reconcile net income to net cash used in
    operating activities:
    Provision for loan and recourse losses...................        100         101         100
    Depreciation and amortization............................      2,603         997         564
    Capitalized mortgage servicing rights, net
      of amortization........................................    (11,451)     (7,581)     (1,410)
    Deferred origination fees................................        (88)     (2,399)        (61)
    Interest only and residual certificates received in
      securitization transactions, net.......................    (84,736)    (57,763)    (17,796)
    Changes in operating assets and liabilities:
       Increase in accounts receivable, net..................    (20,677)     (1,654)     (3,138)
       Decrease (increase) in loans held for sale, net.......      3,222     (17,719)    (13,459)
       Increase in accrued interest and late
         charges receivable..................................    (11,139)     (3,340)     (2,397)
       (Increase) decrease in cash held for advance payments      (3,836)        631         167
       Decrease in real estate owned.........................        135         116         449
       (Increase) decrease in prepaid and other assets.......     (4,630)       (244)      1,754
       Decrease in due from stockholders.....................         --         990       2,165
       Increase in accounts payable and accrued expenses           7,574       2,359       2,341
       Increase in investor payable..........................     19,984       7,427       2,353
       Increase (decrease) in advance payment by borrowers
         for taxes and insurance.............................      3,482        (552)       (120)
       Increase in income taxes payable......................     15,538       9,416          --
---------------------------------------------------------------------------------------------------
Net cash used in operating activities........................    (53,508)    (42,025)    (23,902)
---------------------------------------------------------------------------------------------------
Cash flows from investing activities:
  Acquisition of Fidelity Mortgage...........................     (4,150)         --          --
  Purchase of equipment......................................     (9,933)     (2,283)     (1,208)
---------------------------------------------------------------------------------------------------
Net cash used in investing activities:.......................    (14,083)     (2,283)     (1,208)
---------------------------------------------------------------------------------------------------
Cash flows from financing activities:
  Net proceeds from initial public offering..................         --      69,701          --
  Proceeds from (repayments of) warehouse
     financing and other borrowings, net.....................    (67,481)     12,725      30,266
  Proceeds from Senior Notes.................................    149,307          --          --
  (Decrease) increase in bank payable, net...................       (125)     (2,805)      4,124
  Proceeds from exercise of stock options....................          7          --          --
  Distributions..............................................         --     (33,207)     (2,916)
  Payments received from affiliates..........................         --          --         914
---------------------------------------------------------------------------------------------------
Net cash provided by financing activities....................     81,708      46,414      32,388
---------------------------------------------------------------------------------------------------
Net increase in cash and interest-bearing deposits...........     14,117       2,106       7,278
Cash and interest-bearing deposits at beginning of year......     18,741      16,635       9,357
---------------------------------------------------------------------------------------------------
Cash and interest-bearing deposits at end of year............  $  32,858   $  18,741   $  16,635
===================================================================================================

Supplemental Information:
Cash paid during the year for:
 Interest ...................................................  $  14,314   $  10,453   $   7,659
 Income taxes ...............................................     19,972         202          --
===================================================================================================
See accompanying notes to consolidated financial statements.

                                       34
</TABLE>
<PAGE>


                 DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996, AND 1995

 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(A) ORGANIZATION
Delta Financial  Corporation (the "Company") 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 will  continue  to  operate  as  Fidelity
Mortgage Inc. going forward.

(B) PRINCIPLES OF CONSOLIDATION
The consolidated  financial  statements  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
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.

                                       35


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 sold loans 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.

Prior to January 1, 1997, the Company sold whole loans with servicing  retained.
Gains or losses on such sales were  recognized  at the time of the sale and were
determined  by the  differences  between  net  sales  proceeds  and  the  unpaid
principal  balance of the loans sold as adjusted for by the present value of any
yield differential.

(G) 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.

(H) 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).

 (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.

                                       36


(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.

(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." SFAS No. 128 establishes standards for computing and presenting earnings
per share (EPS) and  applies to  entities  with  publicly  held common  stock or
potential common stock.  SFAS No. 128 simplifies the standards for computing EPS
previously  found in Accounting  Principles  Board Opinion No. 15, "Earnings Per
Share" and makes them comparable to  international  EPS standards.  SFAS No. 128
replaces the  presentation  of primary EPS with a presentation  of basic EPS and
replaces  fully  diluted  EPS with  diluted  EPS.  SFAS No.  128  requires  dual
presentation  of basic and diluted EPS on the face of the income  statement  for
all entities with complex capital  structures and requires a  reconciliation  of
the numerator and  denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation (see note 17).

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. Diluted EPS is completed similar to fully diluted
EPS  pursuant  to Opinion  No.  15.  SFAS No. 128  requires  restatement  of all
prior-period EPS data presented.

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

                                       37


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 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.

(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 was  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

The Company  originates  and purchases  first and second  mortgages  which had a
weighted  average  interest rate of 10.79% at December 31, 1997. These mortgages
are being held as inventory, 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 $3.5 million and $3.4 million at December 31, 1997 and
1996,  respectively and an allowance for loan losses of $0.3 million at December
31, 1997 and 1996.  Mortgages are payable in monthly  installments  of principal
and interest and have terms varying from five to thirty years.

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

(DOLLARS IN THOUSANDS)                  1997        1996         1995
--------------------------------------------------------------------------------
Balance at beginning of year            $270        $240         $260
Provisions                                30          31           30
Charge-offs                                -          (1)         (50)
--------------------------------------------------------------------------------
Balance at end of year                  $300        $270         $240
--------------------------------------------------------------------------------

                                       38


The Company  also  maintained  an  allowance  for  recourse  losses of $650,000,
$580,000 and $510,000 at December 31, 1997, 1996 and 1995,  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)               1997              1996
--------------------------------------------------------------------------------
Securitization advances            $ 6,747           $ 6,237
Escrow receivable                    1,765               764
Prepaid insurance premiums           1,478             1,244
Current tax assets                  14,803                 -
Other                                6,416             2,256
--------------------------------------------------------------------------------
Total accounts receivable          $31,209           $10,501
--------------------------------------------------------------------------------

(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, 1997 and 1996,  the fair value of the  capitalized
mortgage servicing rights approximated their recorded amounts and,  accordingly,
no valuation allowance was recorded.

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

(DOLLARS IN THOUSANDS)              1997           1996           1995
--------------------------------------------------------------------------------
Balance, beginning of year        $11,412         $3,831         $2,421
Additions                          15,118          8,336          2,118
Amortization                       (3,668)          (755)          (708)
--------------------------------------------------------------------------------
Balance, end of year              $22,862        $11,412         $3,831
--------------------------------------------------------------------------------

(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

                                       39


geographic  locations.  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, 1997 and 1996,
the Company's  underlying  assumptions used in determining the fair value of its
interest-only and residual certificates are as follows:

   (a)      Estimated annual prepayment rates:

      (i) for  fixed-rate  loan pools of 4.8%  beginning  in the first  month of
seasoning  and  increasing  in equal  increments  to 24.0% by the 12th  month of
seasoning and thereafter;

      (ii) for  adjustable-rate  loan pools of 5.6% beginning in the first month
of seasoning and  increasing  in equal  increments to 28.0% by the 12th month of
seasoning  and  thereafter  at December  31,  1997,  compared to 5.0% and 25.0%,
respectively,  at December 31, 1996.  This change in assumptions  was based upon
the Company's on-going analysis of industry and Company prepayment trends;

   (b) A default reserve for both fixed- and  adjustable-rate  loans sold to the
securitization trusts of 1.90% of the amount initially securitized;

   (c) An annual discount rate of 12.0% in determining the present value of cash
flows from  residual  certificates,  which  represent  the  predominant  form of
retained interest.

To date, 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)            1997           1996          1995
--------------------------------------------------------------------------------
Balance, beginning of year     $  83,073       $ 25,310      $ 7,514
Additions                        102,072         57,456       16,750
Cash remittances, accretion
    of discount and FMV
    adjustments, net             (17,336)           307        1,046
--------------------------------------------------------------------------------
Balance, end of year            $167,809        $83,073      $25,310
--------------------------------------------------------------------------------

                                       40


(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,  1997,  the Company  had open hedge loss  positions  of $0.5
million.  As of December 31, 1996 and 1995,  the Company did not have open hedge
positions.  The Company  included losses of $2.0 million,  $0.5 million and $1.7
million  on the  treasury  lock  contracts  as part of gains on sale of loans in
1997, 1996 and 1995, respectively.

(8) WAREHOUSE FINANCING AND OTHER BORROWINGS

The Company  has three  warehouse  credit  facilities  for a combined  amount of
$700.0  million as of  December  31,  1997.  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>

                             Facility                      Balance           Expiration
Facility Description          Amount       Rate         1997    1996            Date
---------------------------------------------------------------------------------------------
<S>                          <C>       <C>             <C>     <C>      <C>
Warehouse line of credit      $400.0   LIBOR + 0.75%   $23.9   $45.8            February 1998
Warehouse line of credit       200.0   LIBOR + 0.75%       -       -            February 1998
Warehouse line of credit       100.0   LIBOR + 0.63%       -       -                June 1998
Term loan                       n/a    Prime + 1.00%     0.2     0.5    Apr. 1998 - June 1998
Capital leases                  n/a    7.11% - 8.97%     4.1     2.2   Sept. 1998 - Dec. 2001
I/O and residual financing      n/a    6.44% - 7.75%       -    47.0    Oct. 1997 - Dec. 1999
---------------------------------------------------------------------------------------------
Balance at December 31,      $ 700.0                   $28.2   $95.5
---------------------------------------------------------------------------------------------
</TABLE>

Subsequent  to  year  end,  the  combined  amount  of  the  Company's  warehouse
facilities  was increased to $790.0  million and certain  expiration  dates were
extended.  In February  1998, the first  warehouse  line of credit  ("line") was
renewed at similar  terms for a period of one year,  management  elected  not to
renew the second line and the third line was  increased to $140.0  million under
similar terms. A new $250.0 million committed line,  maturing February 1999 with
an interest rate of 0.70% above LIBOR, was secured by the Company to replace the
second line.

The Company had an additional  line in the aggregate  amount of $45.0 million in
1996. This line was collateralized by specific mortgage receivables,  which were
equal to or greater than the outstanding balances under the line at any point in
time.  The terms  provided for interest at a rate of 2.00% above LIBOR.  In May,
1996,  the  Company  extinguished  this  line  of  credit  at  a  discount.   An
extraordinary  gain of  $3.2  million  was  recorded  in  connection  with  this
extinguishment of debt.

During  1996,  the Company had lines of credit in the  aggregate  amount of $3.5
million with separate banks.  The individual  lines available and their interest
rates, were as follows:  $2.5 million at 0.50% above the prime rate its and $1.0
million at 2.90% above the 30-day dealer commercial paper rate. During 1996, the
$2.5  million  line of credit  expired  and, at the  Company's  option,  was not
renewed. At December 31, 1996, the Company had approximately  $5,000 outstanding
on the $1.0 million line of credit.

In the past, the Company had obtained financing facilities for its interest-only
and residual  certificates.  These  facilities were paid down with proceeds from
the Senior Note offering (see note 9).

                                       41


(9) SENIOR NOTES

9.5% Senior Notes due 2004 (the "notes")  totaled $149.3 million at December 31,
1997,  net of unamortized  bond  discount.  The notes bear interest at a rate of
9.50% 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.  At December 31, 1997, the unamortized  debt issuance cost was $4.6
million.

(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, 1997 and 1996 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  1997,  totaled  approximately  $13,000  and  in  1996  totaled
approximately  $25,000.  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 approximately
$84,000 for 1997 and  approximately  $127,000 for 1996. In or about August 1997,
Long Island Closing ceased acting as closing agent for abstract companies on the
Company's brokered loan closings.

In 1996 the  Company had notes due from  stockholders  in the amount of $990,000
which were repaid prior to December 31, 1996.

(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 and $0.1  million to the plan for the years ended

                                       42


December 31,  1996  and  1995,  respectively.   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.  During 1997, the Company elected
to make a discretionary  contribution  to the Plan of $0.3 million.  During 1995
and 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 $13.6  million at December 31, 1997 and $20.0  million at
December 31, 1996.

Included in accounts  payable and accrued  expenses is an allowance for recourse
losses of $650,000,  $580,000 and $510,000 at December 31, 1997,  1996 and 1995,
respectively. During each of the three years then ended, the Company recognized,
as a charge to  operations,  a provision for recourse  losses of $70,000.  There
were no  charge-offs  made to the  allowance  for recourse  losses  during these
periods.

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, 1997,  1996 and 1995 amounted to $2.6
million, $1.0 million and $0.5 million, respectively.

Minimum future rentals under non-cancelable  operating leases as of December 31,
1997 are as follows:

(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------
              Year                               Amount
--------------------------------------------------------------------------------
              1998                           $    4,269
              1999                                4,563
              2000                                4,617
              2001                                4,578
              2002                                3,800

           Thereafter                            16,309
--------------------------------------------------------------------------------
              Total                           $  38,136
--------------------------------------------------------------------------------

In the normal  course of  business,  the  Company  is  subject to various  legal
proceedings and claims, the resolution of which, in management's  opinion,  will
not have a material  adverse effect on the financial  position or the results of
operations of the Company.

(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.

                                       43


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

                                    1997                        1996
--------------------------------------------------------------------------------
                            Number   Weighted-Average  Number   Weighted-Average
                          of Shares   Exercise Price  of Shares  Exercise Price
--------------------------------------------------------------------------------
Balance, beginning of year  464,850      $16.50           n/a            n/a
Options granted             424,110      $17.67        466,850         $16.50
Options exercised               400      $16.50            --             --
Options canceled             42,300      $18.06          2,000         $16.50
--------------------------------------------------------------------------------
Balance at end of year      846,260      $17.01        464,850         $16.50
--------------------------------------------------------------------------------
Options exercisable          96,510      $16.50          6,000         $16.50
--------------------------------------------------------------------------------

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, 1997 and 1996.

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 $30.1  million and $27.2 million
for 1997 and 1996,  respectively.  Earnings  per share for 1997  would have been
$1.96.

The  weighted-average  fair value of options  granted  during  1997 and 1996 was
$3.54 and $3.69,  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 1997 and 1996 grants:

                                    1997               1996
--------------------------------------------------------------------------------
Dividend yield                        0%                 0%
Expected volatility                  45%                51%
Risk-free interest rate            5.71%              6.00%
Expected life                    5 years            5 years

 (16) INCOME TAXES

The provision for income taxes for the years ended  December 31, 1997,  1996 and
1995 is as follows:

(DOLLARS IN THOUSANDS)               1997           1996           1995
--------------------------------------------------------------------------------
Current: Federal                   $   75         $3,305              -
         State                        763          1,150              -
--------------------------------------------------------------------------------
Total current income taxes         $  838         $4,455              -
--------------------------------------------------------------------------------
Deferred: Federal                 $16,982         $3,727              -
          State                     2,919          1,284              -
--------------------------------------------------------------------------------
Total deferred income taxes       $19,901         $5,011              -
--------------------------------------------------------------------------------
Total tax provision               $20,739        $ 9,466              -
--------------------------------------------------------------------------------

As discussed  in Note 1, the Company was an S  corporation  through  October 30,
1996 pursuant to the Internal Revenue Code of 1986, as amended,  and as such did
not incur any  Federal  income tax  expense.  The  Company  was liable for state
minimum  taxes  and  that  provision  is  included  above  under  current  state
provision.

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

                                       44


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 temporary differences in the financial reporting and tax bases of assets and
liabilities, and loss carryforward, that give rise to the Company's net deferred
tax  liabilities  at  December  31,  1997 and 1996 were as follows  (DOLLARS  IN
THOUSANDS):


DEFERRED TAX LIABILITIES:                                         1997      1996
                                                                  ----      ----
Capitalized mortgage servicing rights                          $ 9,631   $ 4,814
Basis in residual and interest-only certificates                16,784       967
Equipment                                                          259         -
Capitalized (loans held for sale) origination fees and costs     1,507         -
--------------------------------------------------------------------------------
Total deferred tax liabilities                                 $28,181   $ 5,781
--------------------------------------------------------------------------------


DEFERRED TAX ASSETS:                                              1997      1996
                                                                  ----      ----
Capitalized mortgage servicing rights                          $   278   $   327
Credit loss reserves                                             1,270       357
Equipment                                                            -        86
Federal net operating loss carryforwards                         1,721         -
--------------------------------------------------------------------------------
Total deferred tax assets                                      $ 3,269   $   770
--------------------------------------------------------------------------------

Net deferred tax liabilities                                   $24,912   $ 5,011
--------------------------------------------------------------------------------

Under SFAS No. 109,  the  Company is required to maintain a valuation  allowance
for 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  not 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 and, therefore,  no such valuation allowance is
required.

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

                                                                    Rate
                                                               1997       1996
--------------------------------------------------------------------------------
Federal statutory tax rate                                     35.0%      35.0%
Income earned as S corporation                                   n/a     (22.6%)
Change in tax status                                             n/a      11.6%
State and local taxes, net of Federal income tax benefit        4.7%       3.0%
Non-deductible expenses and other                               0.8%       1.3%
--------------------------------------------------------------------------------
Effective income tax rate                                      40.5%      28.3%
--------------------------------------------------------------------------------

                                       45


(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)    1997           1996           1995
--------------------------------------------------------------------------------
Net income                               $30,411        $19,088         $2,614
Weighted-average shares                   15,359         13,066         12,629
Basic EPS                                  $1.98          $1.46          $0.21
Weighted-average shares                   15,359         13,066         12,629
Incremental shares-options                    32             10              -
--------------------------------------------------------------------------------
                                          15,391         13,076         12,629
Diluted EPS                                $1.98          $1.46          $0.21
--------------------------------------------------------------------------------

(18) QUARTERLY FINANCIAL DATA (UNAUDITED)

The  following  table is a summary of  financial  data by quarter  for the years
ended December 31, 1997 and 1996:
<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>
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

1996
  Revenues                                          $5,303    $25,027    $20,717    $22,484
  Expenses                                           5,616     12,303     10,788     11,336
  Net income/(loss)                                   (357)    15,617     10,032      1,898
  Earnings per common share-basic and diluted          n/a        n/a        n/a        n/a
</TABLE>

                                       46
<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, 1997 and 1996................ 31
      Consolidated Statements of Income--Years ended December 31, 1997,
        1996 and 1995........................................................ 32
      Consolidated Statement of Changes in Stockholders' Equity--Years
        ended December 31, 1997, 1996 and 1995............................... 33
      Consolidated Statements of Cash Flows--Years ended December 31,
        1997, 1996 and 1995.................................................. 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 -- 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 -- 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
---------------
+   Filed herewith
*   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)  filed with the
    Commission on May 15, 1997.

                                       47

  (B) REPORTS ON FORM 8-K

      On July 28, 1997,  the Company filed a Current Report on Form 8-K in which
      it  reported  the  completion  of the  public  issuance  and  offering  of
      $150,000,000 aggregate principal amount of its 9.5% Senior Notes due 2004,
      and  filed as  exhibits  various  documents,  including  the  Underwriting
      Agreement,  dated  July  18,  1997  among  the  Company  and  the  various
      underwriters  named therein and the  Indenture  dated as of July 23, 1997,
      among the Company,  the Subsidiary  Guarantors and the Trustee relating to
      the Senior Note offering.

                                       48


<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, 1998     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, 1998
-----------------------
Sidney A. Miller


/S/ HUGH MILLER          Chief Executive Officer, President
-----------------------    and Director                           March 30, 1998
Hugh Miller              (Principal Executive Officer)


/S/ RICHARD BLASS        Senior Vice President, Chief Financial
-----------------------    Officer and Director                   March 30, 1998
Richard Blass            (Principal Financial Officer)


/S/ MARTIN D. PAYSON     Director                                 March 30, 1998
-----------------------
Martin D. Payson


/S/ ARNOLD B. POLLARD    Director                                 March 30, 1998
-----------------------
Arnold B. Pollard


                                       49


<PAGE>


                                  EXHIBIT INDEX

EXHIBIT
NUMBER     DESCRIPTION
-------    -----------
   *3.1 -- Certificate of  Incorporation  of Delta  Financial  Corporation
   *3.2 -- 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 -- 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
---------------
+   Filed herewith
*   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)  filed with the
   Commission on May 15, 1997.