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, 2001

                           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:
                                      NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                     COMMON STOCK, PAR VALUE $.01 PER SHARE

   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. [X]

   As of March 19, 2002, the aggregate  market value of the voting stock held by
non-affiliates  of the  Registrant,  based on the  closing  price of $1.12,  was
approximately $6,032,830.

   As of March 31, 2002, the  Registrant  had 15,883,749  shares of Common Stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

   Part III,  Items 10, 11, 12 and 13 are  incorporated  by reference from Delta
Financial Corporation's definitive proxy statement to stockholders which will be
filed with the Securities  and Exchange  Commission no later than 120 days after
December 31, 2001.
<PAGE>

PART I
ITEM 1.  BUSINESS

BUSINESS OVERVIEW

   Delta Financial  Corporation (together with its subsidiaries "Delta" or "we")
is a specialty  consumer finance company that originates,  securitizes and sells
non-conforming mortgage loans, which are primarily secured by first mortgages on
one- to four-family  residential  properties.  Throughout our 20-year  operating
history,  we have focused on lending to individuals who generally do not satisfy
the  credit,   documentation  or  other  underwriting   standards  set  by  more
traditional sources of mortgage credit, including those entities that make loans
in compliance  with  conventional  mortgage  lending  guidelines  established by
Fannie Mae and Freddie Mac. We make loans to these  borrowers  for such purposes
as debt consolidation, refinancing, education and home improvement.

   Our mortgage business has two principal  components.  First, we make mortgage
loans,  which is a cash expense  outlay for us,  because our cost to originate a
loan exceeds the fees we collect at the time we originate that loan. At the time
we  originate a loan,  and prior to the time we sell that loan,  we finance that
loan by  borrowing  under a  warehouse  line of credit.  Second,  we sell loans,
either  through  securitization  or on a whole  loan  basis,  to  generate  cash
revenues.  We use the proceeds from these loan sales to repay our warehouse line
of credit and for working capital, recording the premiums received from the loan
sales and securitizations as revenue.

   ORIGINATION OF MORTGAGE  LOANS.  We currently make mortgage loans through two
distribution  channels -  wholesale  (or broker)  and  retail.  We receive  loan
applications  both directly from borrowers and from licensed  independent  third
party  mortgage  brokers who submit  applications  on a  borrower's  behalf.  We
process  and  underwrite  the  submission  and,  if the loan  comports  with our
underwriting  criteria,  approve  the loan and lend the  money to the  borrower.
While we generally collect points and fees from the borrower when a loan closes,
our cost to originate a loan  typically  far  outweighs  any fees we may collect
from the borrower.

   Through our  wholesale  distribution  channel,  we originate  mortgage  loans
indirectly through licensed mortgage brokers and other real estate professionals
who submit loan applications on behalf of borrowers ("brokered loans"). Prior to
July 2000, we also purchased loans from mortgage  bankers and smaller  financial
institutions that satisfied our underwriting guidelines ("correspondent loans"),
but discontinued our correspondent  operations in July 2000 to focus on our less
cash intensive broker and retail channels.  We currently  originate the majority
of our brokered loans in 20 states,  through our network of approximately  1,500
brokers.

   Through  our  retail  distribution  channel,  we  develop  retail  loan leads
("retail loans") primarily  through our telemarketing  system and our network of
11  retail   offices   located  in  seven  states.   In  2001,  we  closed  four
under-performing retail offices - two in Florida, one in Ohio and one in Indiana
- and opened our second retail call center, in Pittsburgh, Pennsylvania.

   In  2001,  we  originated  approximately  $622  million  of  loans,  of which
approximately  $346  million  were  brokered  loans and $276 million were retail
loans,  compared to 2000,  when we  originated or purchased  approximately  $933
million of loans, of which $604 million were brokered  loans,  $260 million were
retail loans and $69 million were correspondent loans.

   POOLING OF LOANS PRIOR TO SALE.  After we close or fund a loan,  we typically
pledge  the loan as  collateral  under a  warehouse  line of  credit  to  obtain
financing against the loan. By doing so, we replenish our capital so we can make
new loans. Typically,  loans are financed through a warehouse line of credit for
only a limited time - generally  not more than three months - until such time as
we  can  pool  enough  loans  and  sell  the  pool  of  loans   either   through
securitization or on a whole-loan basis. During this time, we earn interest paid
by the borrower as income,  but this income is offset in part by the interest we
pay to the warehouse creditor for providing us with financing.

   SALE OF  LOANS.  We  derive  the  majority  of our  revenues  and cash  flows
primarily from selling mortgage loans (through securitization or on a whole loan
basis) and selling securitization  servicing rights on newly-originated pools of
home-equity  loans.  We  generally  sell  loans in one of two  manners  - either
through securitization or on a whole loan basis.

   We securitized the majority of our loans in two securitizations (completed in
the second and fourth quarters of 2001) totaling $345 million. We also sold $261
million of loans in 2001 for a cash premium, on a whole loan


servicing-released  basis (without retaining the right to service the loans). We
plan to continue to utilize a combination of securitization and whole loan sales
for the foreseeable future.

   SECURITIZATION. Securitizations effectively provide us with a source of long-
term financing.

   In a securitization, we pool together loans, typically each quarter, and sell
these loans to a  securitization  trust,  which is a qualified  special  purpose
entity.  The  securitization  trust raises money to purchase the mortgage  loans
from us by selling securities to the public -known as asset-backed  pass-through
securities  that  are  secured  by  the  pool  of  mortgage  loans  held  by the
securitization  trust.  These  asset-backed  securities or senior  certificates,
which are usually  purchased by insurance  companies,  mutual funds and/or other
institutional  investors,  represent senior interests in the cash flows from the
mortgage  loans in the trust.  Following  the  securitization,  holders of these
senior certificates  receive the principal collected,  including  prepayments of
principal,  on the mortgage loans in the trust.  In addition,  holders receive a
portion  of the  interest  on the loans in the trust  equal to the  pass-through
interest rate on the remaining principal balance. These securities are typically
sold  for a par  purchase  price,  or a  slight  discount  to  par  -  with  par
representing the aggregate  principal  balance of the mortgage loans backing the
asset-backed  securities.  For  example,  if  a  securitization  trust  contains
collateral of $100 million of mortgage loans, we typically receive close to $100
million  in  proceeds  from the sales of these  securities,  depending  upon the
structure we utilize for the securitization.

   In each of the  two  securitizations  we  issued  in  2001,  we  derived  the
following economic interests:

     o   we  received a cash  purchase  price from the sale of an  interest-only
         certificate sold in connection with a securitization.  This certificate
         entitles the holder to a recurring  interest  payment over a guaranteed
         period of 36 months,  and  reduces  the cash  flows we would  otherwise
         receive as owner of the excess cashflow certificates;

     o   we received a cash  premium from selling the right to service the loans
         being  securitized.  This right  entitles the  contractual  servicer to
         service  the loans on behalf of the  securitization  trust,  and earn a
         contractual  servicing  fee,  and  ancillary  servicing  fees  in  such
         capacity;

     o   we retained an excess cashflow  certificate.  This certificate entitles
         us to receive the difference  between the interest  payments due on the
         mortgage  loans  sold to the  securitization  trust  and  the  interest
         payments  due,  at  the  pass-through  rates,  to  the  holders  of the
         pass-through  securities,  less the contractual servicing fee and other
         costs and expenses of administering the  securitization  trust. For any
         monthly  distribution,   we,  as  the  holder  of  an  excess  cashflow
         certificate, receive payments only after payments have been made on all
         the other securities  issued by the  securitization  trust.  These cash
         flows are received over time, but under existing  accounting  rules, we
         must  report at the time of the  securitization  as income the  present
         value of all  projected  cash  flows we expect to receive in the future
         from these excess cashflow  certificates based upon an assumed discount
         rate. Our valuation of these excess cashflow  certificates is primarily
         based on (1) our estimate of the amount of expected  losses or defaults
         that will take place on the underlying  mortgage loans over the life of
         the  mortgage  loans  because  the  excess  cashflow  certificates  are
         subordinate in right of payment to all other  securities  issued by the
         securitization  trust.  Consequently,  any losses sustained on mortgage
         loans comprising a particular  securitization  trust are first absorbed
         by the excess  cashflow  certificates,  and (2) the expected  amount of
         prepayments on the mortgage  loans due to the  underlying  borrowers of
         the mortgage  loans paying off their  mortgage loan prior to the loan's
         stated maturity.

   At the time we completed the 2001  securitizations,  we recognized as revenue
each of the three economic interests  described above, which was recorded as net
gain on sale of mortgage loans on our consolidated statement of operations.

   Our  net   investment  in  the  pool  of  loans  sold  at  the  date  of  the
securitization  represents  the amount  originally  paid to originate the loans,
adjusted for the following:

     o   any direct loan  origination  costs  incurred  (an  increase)  and loan
         origination  fees received (a decrease) in  connection  with the loans,
         which are treated as a component of the initial investment in loans;

     o   the principal payments  received,  and the amortization of the net loan
         fees or costs,  during  the  period  we held the  loans  prior to their
         securitization; and

                                       2

     o   any gains (a decrease in the  investment) or losses (an increase in the
         investment)  we  incur  on any  hedging  instruments  that we may  have
         utilized to hedge  against  the  effects of changes in  interest  rates
         during the period we hold the loans prior to their securitization. (See
         "-Hedging," beginning on page 39).

   We allocate our basis in the mortgage  loans and residual  interests  between
the portion of the mortgage loans sold through the pass-through certificates and
the portion  retained (the excess cashflow  certificates)  based on the relative
fair values of those  portions on the date of sale.  We may  recognize  gains or
losses  attributable  to the  changes  in  fair  value  of the  excess  cashflow
certificates,  which are recorded at estimated  fair value and  accounted for as
"trading"  securities.  Since there is no active market for such excess cashflow
certificates,  we  determine  the  estimated  fair value of the excess  cashflow
certificates by discounting the future expected cash flows.

   Although we recognize income from retaining  excess cashflow  certificates at
the time in which we complete  our  securitization,  we receive  cash flows from
these excess cashflow  certificates  over the life of the loans  underlying such
certificates.  In each of our two securitizations in 2001, we expect to begin to
receive cash flows from the excess cashflow certificates approximately twelve to
twenty months after each respective  securitization  issuance, with the specific
timing  depending  on the  structure  and  performance  of  the  securitization.
Initially, securitization trusts utilize the cash flows from the excess cashflow
certificate  to make  additional  payments  of  principal  to the holders of 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 1.5% and 3.0% of the initial
securitization principal amount securitized (known as the "overcollateralization
limit")  is  established,  the  cash  flows  generated  by the  excess  cashflow
certificates  are  distributed  to us as  the  holder  of  the  excess  cashflow
certificates.

   WHOLE LOAN SALES. We also sell loans,  without retaining the right to service
the loans, in exchange for a cash premium.  This is recorded as income under net
gain on sale of mortgage  loans at the time of sale.  The cash  premiums  ranged
between 3.5% to 6.3% of the principal amount of mortgage loans sold in 2001.

   OTHER. In addition to the income and cash flows we earn from  securitizations
and whole loan sales, we also earn income and generate cash flows from:

     o   the net  interest  spread  earned on  mortgage  loans while we hold the
         mortgage loans for sale; (the  difference  between the interest rate on
         the mortgage  loan paid by the  underlying  borrower less the financing
         costs we pay to our warehouse lender to fund our loans);

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

     o   retained  excess cashflow  certificates  and  distributions  from Delta
         Funding  Residual  Exchange  Company  LLC  (described  below in  "-Debt
         Modification and Debt Restructuring").

BUSINESS STRATEGY

   Our business  strategy is to increase our overall loan production to generate
sufficient cash revenues to become cash flow neutral to positive.  We believe we
have the infrastructure in place to expand loan production significantly in both
the wholesale and retail channels, without having to invest significantly in our
infrastructure. We plan to increase loan production by:

     o   increasing  the  number  of   commissioned-based   account   executives
         responsible for generating new business;

     o   continuing to provide top quality service to our network of brokers and
         retail clients;

     o   maintaining our loan underwriting standards;

     o   penetrating  further our established and  recently-entered  markets and
         expanding into new geographic markets;

     o   expanding our retail loan origination  capabilities through larger call
         centers; and

     o   continuing  to leverage off of our  proprietary  web-based and workflow
         technology platform.

                                       3

CORPORATE RESTRUCTURING, DEBT MODIFICATION AND DEBT RESTRUCTURING

   In 2000, we began a corporate  restructuring  - by reducing our workforce and
modifying  the terms of the  indenture  governing our senior notes due 2004 (the
"senior  notes")  - as part  of our  continuing  efforts  to  improve  operating
efficiencies  and to address our negative  cash flow from  operations.  Entering
2001,  management  still had several  concerns,  which we believed  needed to be
addressed for us to remain a viable company. Our principal concerns were:

     o   the cash drain created by our ongoing monthly delinquency and servicing
         advance  requirements as servicer for  securitization  trusts (known as
         "securitization advances");

     o   the high cost of servicing a seasoned  loan  portfolio,  including  the
         capital charges associated with making securitization advances;

     o   our ability to make timely  interest  payments on our senior  notes and
         senior secured notes due 2004 (the "senior secured notes"); and

     o   our  ability  to  effectuate  a  successful  business  model  given the
         overhang of corporate ratings of "Caa2" by Moody's and "CC" by Fitch.

   Therefore  in the first  quarter of 2001,  we embarked  upon a business  plan
aimed at alleviating some of these concerns and issues.

   CORPORATE RESTRUCTURING

   In January  2001,  we announced  that we had entered  into an agreement  with
Ocwen  Financial  Corporation  ("Ocwen") to transfer our servicing  portfolio to
Ocwen. In May 2001, we physically  transferred our entire servicing portfolio to
Ocwen,  and  laid-off  the  majority  of our  servicing  staff - a total  of 128
employees.   We  recorded  a  $0.5  million   pre-tax  charge  related  to  this
restructuring,  which is  included in the line item  called  "restructuring  and
other special charges" on our consolidated statements of operations. This charge
relates to employee severance associated with closing our servicing  operations.
We no longer service loans nor do we have a servicing operation.

   DEBT MODIFICATION AND DEBT RESTRUCTURING

   In  August  2000,  we  announced  an  agreement  to  modify  the terms of the
indenture governing our senior notes (the "Debt Modification"). With the consent
of the holders of greater than fifty percent of our senior notes,  we modified a
negative  pledge  covenant in the senior notes  indenture,  which had previously
prevented us from selling or otherwise  obtaining  financing by using our excess
cashflow   certificates  as  collateral.   In   consideration   for  the  senior
noteholders'  consent,  we agreed,  in an exchange  offer (the  "First  Exchange
Offer"),  to offer then current  holders the  opportunity to exchange their then
existing senior notes for (a) new senior secured notes and (b) ten-year warrants
to buy  approximately 1.6 million shares of common stock, at an initial exercise
price of $9.10 per share,  subject to upward or downward  adjustment  in certain
circumstances.  The senior  secured notes have the same coupon,  face amount and
maturity  date as the senior  notes and, up until the Second Debt  Restructuring
(see  below)  were  secured  by at least $165  million  of our  excess  cashflow
certificates.  The First Exchange Offer was  consummated in December 2000,  with
holders of greater than $148 million (of $150 million) of senior notes tendering
in the exchange.

   In February  2001,  we entered  into a letter of intent  with the  beneficial
holders of over fifty percent of our senior  secured notes to  restructure,  and
ultimately   extinguish,   the   senior   secured   notes  (the   "Second   Debt
Restructuring").  In  March  2001,  we  obtained  the  formal  consent  of these
beneficial  holders of the senior  secured notes through a consent  solicitation
that modified certain provisions of the senior secured notes indenture to, among
other things,  allow for the release of two excess  cashflow  certificates  then
securing the senior secured notes.  We were able to first finance and ultimately
sell the excess cashflow certificates underlying five securitizations (including
two excess cashflow  certificates  that were released as part of the Second Debt
Restructuring) for a $15 million cash purchase price to provide working capital.

   In  consideration  for their  consent,  we agreed to offer the holders of the
senior  secured notes (and the senior  notes,  collectively,  the  "notes"),  an
opportunity  to exchange their notes for new  securities  described  immediately
below (the "Second Exchange  Offer").  The Second Exchange Offer was consummated
on August 29, 2001,  pursuant to which holders of  approximately  $138.1 million
(of $148.2  million) in principal  amount of our senior

                                       4

secured  notes and $1.1  million (of $1.8  million) in  principal  amount of our
senior notes, exchanged their notes for commensurate interests in:

     o   voting membership  interests in Delta Funding Residual Exchange Company
         LLC (the "LLC"), a newly-formed limited liability company (unaffiliated
         with  us),  to  which  we  transferred  all  of  the   mortgage-related
         securities  previously  securing the senior  secured  notes  (primarily
         comprised of excess cashflow certificates);

     o   shares of common stock of a newly-formed  management  corporation  that
         will manage the LLC's assets; and

     o   shares  of  our  newly-issued   preferred  stock  having  an  aggregate
         preference amount of $13.9 million.

   The LLC is controlled by the former  noteholders that now hold all the voting
membership  interests  in the LLC.  As part of the  transaction,  we  obtained a
non-voting  membership  interest in the LLC, which entitles us to receive 15% of
the net cash flows from the LLC for the first  three years  (through  June 2004)
and, thereafter, 10% of the net cash flows from the LLC. The net cash flows from
the LLC are equal to the total cash flows  generated  by the assets  held by the
LLC for a  particular  period,  less (a) all  expenses  of the LLC,  (b) certain
related income tax payments,  and (c) the New York State Banking Department (the
"NYSBD") subsidy payments (See "Regulations").  We began receiving distributions
from  the  LLC  in  the  first  quarter  of  2002  from a  fourth  quarter  2001
distribution.

   As part of the Second Exchange Offer, all tendering  noteholders waived their
right to receive  any future  interest  coupon  payments on the  tendered  notes
beginning with the August 2001 interest coupon payment.  With the closing of the
Second  Exchange  Offer,  we paid the August 2001 interest coupon payment on the
approximately  $10.8 million of notes that did not tender in the Second Exchange
Offer.  The  notes  bear  interest  at  a  rate  of  9.5%  per  annum,   payable
semi-annually  (on February 1st and August 1st) and a maturity date of August 1,
2004 when all outstanding principal is due.

   By extinguishing substantially all of our long-term debt, the rating agencies
that  previously  rated us and our long-term debt have withdrawn their corporate
ratings.

HOME EQUITY LENDING OPERATIONS

OVERVIEW

   Our consumer finance activities consist of originating, securitizing, selling
(and, prior to May 2001, 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,  we typically  package the loans in a portfolio  and
sell the loan portfolio through a securitization  or on a whole loan,  servicing
released basis.

   We provide  our  customers  with an array of loan  products  designed to meet
their needs, using a risk-based pricing strategy to develop products for various
risk categories.  Historically, we have offered fixed-rate loan products and, to
date,  the majority of our loan  production is  fixed-rate.  As we have expanded
geographically,   we  have   expanded   our   product   offerings   to   include
adjustable-rate mortgages and fixed/adjustable-rate mortgages.

   We primarily conduct our broker lending  operations out of our Woodbury,  New
York  headquarters  and  a  regional  branch  office  in  the  Southeast.  Final
underwriting  approval for brokered loans is  centralized  and required from the
Woodbury,  New York  headquarters.  We conduct our retail  operations  out of 11
retail  offices  and  a  telemarketing  hub,  located  in  seven  states.  Final
underwriting  approval  for  retail  loans is  required  from  either our retail
underwriting office in Cincinnati,  Ohio, which has full underwriting  authority
or from our Woodbury, New York headquarters.

   We  adhere  to our  Best  Practice  Lending  Program  aimed at  ensuring  the
origination of quality loans and helping to better protect consumers.  This Best
Practice Lending Program includes:

     o   fair lending  initiatives  aimed at ensuring all  borrowers are treated
         fairly  and  similarly  regardless  of race,  color,  creed,  religion,
         national  origin,  sex,  sexual   orientation,   marital  status,  age,
         disability,  and the applicant's  exercise, in good faith, of any right
         under the Consumer Credit Protection Act;

                                       5

     o   increased oversight of mortgage brokers and closing agents;

     o   enhanced fraud detection and protection;

     o   enhanced plain English disclosures; and

     o   other  originations and underwriting  initiatives which we believe help
         protect consumers.

LOAN ORIGINATIONS AND PURCHASES

   Our loan originations and purchases  decreased by 33% to $622 million in 2001
from $933 million in 2000.  The decrease in loan  production  was  primarily the
result of  management  continuing  to devote much of its attention to completing
the Second Debt  Restructuring/Second  Exchange  Offer through the end of August
2001, and  completing  the servicing  transfer to Ocwen during the first half of
2001. In addition, our production for the second half of the year was negatively
impacted by the events of September 11th.

   The  following  table shows certain data  regarding  our loans,  presented by
channel of loan originations, for the years shown:
<TABLE>
<S>                                                    <C>                 <C>               <C>
                                                                     YEAR ENDED DECEMBER 31,
                                                             1999              2000              2001
                                                             ----              ----              ----
                                                                      (DOLLARS IN THOUSANDS)
Broker:
   Principal balance................................    $  890,822          $ 603,616         $ 345,916
    Average principal balance per loan..............    $       85          $      74         $      79
    Combined weighted average initial loan-
      to-value ratio(1).............................         72.8%              71.1%             71.7%
    Weighted average interest rate..................         10.4%              11.7%             11.1%
Retail:
    Principal balance...............................    $  319,227          $ 260,388         $ 275,799
    Average principal balance per loan..............    $       68          $      67         $      82
    Combined weighted average initial loan-
      to-value ratio(1).............................         77.6%              76.9%             77.4%
    Weighted average interest rate..................          9.8%              10.6%              9.8%
Correspondent (2):
    Principal balance...............................    $  261,289          $  69,434                --
    Average principal balance per loan..............    $       77          $      75                --
    Combined weighted average initial loan-
      to-value ratio(1).............................         72.0%              70.5%                --
    Weighted average interest rate..................         11.0%              11.5%                --
Total loan purchases and originations:
    Principal balance...............................    $1,471,338          $ 933,438         $ 621,715
    Average principal balance per loan..............    $       79          $      72         $      81
    Combined weighted average initial loan-
      to-value ratio(1).............................         73.7%              72.7%             74.2%
    Weighted average interest rate..................         10.4%              11.4%             10.5%
Percentage of loans secured by:
    First mortgage..................................         94.6%              90.9%             94.1%
---------------
(1)We  determine  the weighted  average  initial  loan-to-value  ratio of a loan
   secured by a first  mortgage by dividing the amount of the loan by the lesser
   of the purchase  price or the  appraised  value of the  mortgage  property at
   origination. We determine the weighted average initial loan-to-value ratio of
   a loan secured by a second  mortgage 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.

(2)We discontinued  our  correspondent  operations in  July 2000 to focus on our
   less cash  intensive broker and retail channels.
</TABLE>
                                       6

    The  following  table shows certain  data  regarding our loans, presented by
channel of loan originations, on a quarterly basis for 2001:
<TABLE>
<S>                                                 <C>          <C>          <C>           <C>

                                                                     THREE MONTHS ENDED
                                                          ----------------------------------------
                                                       MARCH 31,    JUNE 30,   SEPTEMBER 30, DECEMBER 31,
                                                         2001         2001         2001          2001
                                                       --------     --------     --------      --------
                                                                   (DOLLARS IN THOUSANDS)
Broker:
    Number of Brokered Loans......................       1,470        1,077          985           833
    Principal balance.............................   $ 105,116    $  82,605    $  83,406     $  74,789
    Average principal balance per loan............        $ 72         $ 77         $ 85          $ 90
    Combined weighted average initial loan-
      to-value ratio(1)...........................       70.6%        71.6%        72.0%         73.0%
    Weighted average interest rate................       11.9%        11.2%        10.7%         10.3%
Retail:
    Number of retail loans........................         866          961          770           753
    Principal balance.............................   $  65,624    $  82,541    $  63,206     $  64,428
    Average principal balance per loan............         $76          $86          $82           $86
    Combined weighted average initial loan-
      to-value ratio(1)...........................       77.2%        76.9%        77.8%         78.0%
    Weighted average interest rate................       10.2%         9.7%         9.8%          9.5%


Total loan originations:
    Total number of loans.........................       2,336        2,038        1,755         1,586
    Principal balance.............................   $ 170,740    $ 165,146    $ 146,612     $ 139,217
    Average principal balance per loan............         $73          $81          $84           $88
    Combined weighted average initial loan-
      to-value ratio(1)...........................       73.2%        74.2%        74.5%         75.3%
    Weighted average interest rate................       11.2%        10.4%        10.3%          9.9%
---------------
(1)We  determine  the weighted  average  initial  loan-to-value  ratio of a loan
   secured by a first  mortgage by dividing the amount of the loan by the lesser
   of the purchase  price or the  appraised  value of the  mortgage  property at
   origination. We determine the weighted average initial loan-to-value ratio of
   a loan secured by a second  mortgage 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.
</TABLE>

   The following table shows lien position,  weighted average interest rates and
loan-to-value ratios for the years shown:
<TABLE>
<S>                                                            <C>         <C>        <C>
                                                                   YEAR ENDED DECEMBER 31,
                                                                1999        2000       2001
                                                                ----        ----       ----
FIRST MORTGAGE:
    Percentage of total purchases and originations...........   94.6%       90.9%       94.1%
    Weighted average interest rate...........................   10.3%       11.4%       10.5%
    Weighted average initial loan-to-value ratio(1)..........   74.1%       73.1%       74.2%
SECOND MORTGAGE:
    Percentage of total purchases and originations...........    5.4%        9.1%        5.9%
    Weighted average interest rate...........................   10.8%       11.5%       11.1%
    Weighted average initial loan-to-value ratio(1)..........   66.6%       71.1%       75.4%
---------------
(1)We  determine  the weighted  average  initial  loan-to-value  ratio of a loan
   secured by a first  mortgage by dividing the amount of the loan by the lesser
   of the purchase  price or the  appraised  value of the  mortgage  property at
   origination. We determine the weighted average initial loan-to-value ratio of
   a loan secured by a second  mortgage 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.
</TABLE>
                                       7

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

                                                      YEAR ENDED DECEMBER 31,
                              ------------------------------------------------------------------------
                                     1999                      2000                     2001
REGION                       PERCENTAGE  DOLLAR VALUE  PERCENTAGE DOLLAR VALUE  PERCENTAGE DOLLAR VALUE
------                        -------      ---------     -------    --------      -------    --------
                                                       (DOLLARS IN MILLIONS)

NY, NJ and PA.............       50.8%     $ 747.9        43.9%     $ 409.7       40.0%       $248.4
Midwest...................       26.4        388.2        29.1        272.0       35.1         218.5
Mid-Atlantic*.............        8.6        126.7        10.5         97.6       11.8          73.1
Southeast.................        8.4        123.5         9.4         87.5        7.5          46.8
New England...............        5.8         85.1         7.1         66.6        5.6          34.9
------------
* Excluding New York (NY), New Jersey (NJ) and Pennsylvania (PA).
</TABLE>

   WHOLESALE  MARKETING.   Throughout  our  history,  we  have  established  and
maintained relationships with brokers (and, prior to July 2000,  correspondents)
offering non-conforming mortgage products.

   Typically, we initiate contact with a broker through our Business Development
Department,  supervised  by a senior  officer  with  over ten years of sales and
marketing  experience  in the  industry.  We usually hire  business  development
representatives  who have  contacts with brokers that  originate  non-conforming
mortgage  loans  within their  geographic  territory.  The business  development
representatives  are  responsible  for  developing  and  maintaining  our broker
network  within their  geographic  territory by frequently  visiting the broker,
communicating our 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 us about the products and
pricing being offered by competitors and new market  entrants.  This information
assists us in refining  our  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 as a result of
their efforts.

     APPROVAL PROCESS.  Before a broker becomes part of our network,  it must go
through  an  approval  process.  Once  approved,  brokers  may begin  submitting
applications and/or loans to us.

     To be approved, a broker must:

     o   demonstrate that it is properly licensed and registered in the state in
         which it seeks to transact business;

     o   submit to and pass a credit check; and

     o   sign a standard  broker  agreement  with us that  requires  brokers to,
         among other things:

         >>    abide by our fair lending policy;

         >>    follow    the  National  Association  of  Mortgage  Brokers  Best
               Practices Policies;

         >>    comply with all state and federal laws; and

         >>    submit only true and accurate documents and disclosures.

   We also perform searches on all new brokers using a third party database that
contains public and nonpublic information on individuals and companies that have
incidents of potential fraud and  misrepresentation.  In addition,  we regularly
review the performance of loans originated through our brokers.

   BROKERED  LOANS.  For the year ended  December 31, 2001,  our broker  network
accounted  for $345.9  million,  or 56%, of our loan  originations,  compared to
$603.6  million,  or 65%, of our loan  purchases and  originations  for the year
ended  December 31, 2000 and $890.8  million,  or 60%, of our loan purchases and
originations for the year ended December 31, 1999. No single broker  contributed
more than 1.3%,  2.0% or 3.1% of our total loan  production  in the years  ended
December 31, 2001, 2000 and 1999, respectively.

   Once  approved,  a  broker  may  submit  loan  applications  for  prospective
borrowers.  To process broker submissions,  our broker  originations  channel is
organized  by  geographic  regions and into teams,  each  consisting  of

                                       8

account  executives,  account  managers  and  processors,  which  are  generally
assigned  to  specific  brokers.  Because  we  operate  in a highly  competitive
environment  where  brokers  may  submit  the same loan  application  to several
prospective  lenders  simultaneously,  we strive to provide brokers with a rapid
and informed  response.  Account  executives 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 our 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 account executive,  account manager and processor
team will then work directly with the submitting broker to collect the requested
information and meet all underwriting conditions.  In most cases, we funds loans
within 14 to 21 days after preliminary approval of the loan application.  In the
case of a denial,  we 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.

   We  compensate  our  account  executives,  who are the  primary  relationship
contacts  with the  brokers,  predominantly  on a commission  basis.  All of our
account  executives  maintain the level of knowledge and experience  integral to
our commitment to providing the highest quality service for brokers.  We believe
that by  maintaining  an  efficient,  trained  and  experienced  staff,  we have
addressed four central factors that determine where a broker sends its business:

     o   the service and support a lender provides;

     o   product offerings and pricing

     o   the turn-around time, or speed with which a lender closes loans; and

     o   the lender's knowledge concerning the broker and his business.

   RETAIL LOANS.  We develop retail loan leads  primarily  through our automated
telemarketing  system  and our  network  of 11 retail  offices  located in seven
states.  For the year ended December 31, 2001, the retail channel  accounted for
$275.8 million, or 44%, of our loan originations, compared to $260.4 million, or
28%, of our loan purchases and originations for the year ended December 31, 2000
and $319.2 million,  or 22%, of our loan purchases and originations for the year
ended December 31, 1999. Through our marketing efforts,  the retail loan channel
is able to  identify,  locate and focus on  individuals  who,  based on historic
customer  profiles,  are likely  customers for our products.  Our  telemarketing
representatives  identify interested customers and refer these customers to loan
officers  at the retail  branch  offices and call  centers  who then  proceed to
determine the applicant's  qualifications for our loan products,  negotiate loan
terms with the borrower and process the loan through completion.

   CORRESPONDENT  LOANS. We decided to discontinue our correspondent  operations
in July 2000 to focus on our less cash intensive broker and retail channels.  As
such, we had no correspondent purchases in 2001. For the year ended December 31,
2000, our correspondent  network accounted for $69.4 million, or 7%, of our loan
purchases  and  originations,  compared to $261.3  million,  or 18%, of our loan
purchases  and  originations  for the year ended  December 31,  1999.  No single
correspondent  contributed  more than 1.5% and 1.9% of our total loan production
in 2000 and 1999, respectively.

LOAN UNDERWRITING

   We provide all of the brokers from whom we accept loan  applications with our
underwriting guidelines.  Loan applications received from brokers are classified
according to particular characteristics, including but not limited to:
     o   ability to pay;
     o   credit  history of the  applicant  (with  emphasis  on the  applicant's
         existing mortgage payment history);
     o   credit score;
     o   loan-to-value ratio; and
     o   general stability of the applicant in terms of employment history, time
         in residence, occupancy and condition and location of the collateral.

   We have 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 that we make, as
well as maximum  loan-to-value ratios and debt-to-income  ratios, vary depending
on the  classification  of the applicant and the borrower's  credit score.  Loan
applicants  with less  favorable  credit  ratings and/or lower credit

                                       9

scores  are  generally  offered  loans  with  higher  interest  rates  and lower
loan-to-value  ratios than applicants with more favorable  credit ratings and/or
higher  credit  scores.  The general  criteria  our  underwriting  staff uses in
classifying loan applicants are set forth below.






               REST OF PAGE INTENTIONALLY LEFT BLANK


                                       10

<PAGE>
<TABLE>

<S>                    <C>         <C>              <C>             <C>              <C>              <C>

                                                       LTD DOC/                                          LTD DOC/
                                      FULL DOC           NIV           FULL DOC         STATED             NIV
  CREDIT PROGRAM/     MINIMUM            OO               OO              NOO          INCOME-OO           NOO
  MAX LOAN AMOUNT   CREDIT SCORE        (1)              (2)              (3)             (4)              (5)
---------------------------------------------------------------------------------------------------------------------
        A+              625         95% 1st Mtg      90% 1st Mtg     85% 1st Mtg      85% 1st Mtg      75% 1st Mtg
 TO $500,000++          550         90% 1st Mtg      85% 1st Mtg     80% 1st Mtg      80% 1st Mtg      75% 1st Mtg
                        525         85% 1st Mtg      80% 1st Mtg     80% 1st Mtg      80% 1st Mtg      70% 1st Mtg
                        500         80% 1st Mtg      75% 1st Mtg     75% 1st Mtg      75% 1st Mtg      65% 1st Mtg
---------------------------------------------------------------------------------------------------------------------
        A1              625         95% 1st Mtg      90% 1st Mtg     85% 1st Mtg      85% 1st Mtg      75% 1st Mtg
  UP TO $500,000++      550         90% 1st Mtg      85% 1st Mtg     80% 1st Mtg      80% 1st Mtg      75% 1st Mtg
                        525         85% 1st Mtg      75% 1st Mtg     75% 1st mtg      75% 1st Mtg      65% 1st Mtg
                        500         80% 1st Mtg      70% 1st Mtg     70% 1st Mtg      70% 1st Mtg      60% 1st Mtg
---------------------------------------------------------------------------------------------------------------------
        A2              575         90% 1st Mtg      85% 1st Mtg     80% 1st Mtg      80% 1st Mtg      75% 1st Mtg
  UP TO $500,000++      550         85% 1st Mtg      80% 1st Mtg     80% 1st Mtg      80% 1st Mtg      70% 1st Mtg
                        525         80% 1st Mtg      75% 1st Mtg     75% 1st Mtg      75% 1st Mtg      65% 1st Mtg
                        500         75% 1st Mtg      70% 1st Mtg     70% 1st Mtg      70% 1st Mtg      60% 1st Mtg
---------------------------------------------------------------------------------------------------------------------
        B1              600         90% 1st Mtg      80% 1st Mtg     80% 1st Mtg      75% 1st Mtg      70% 1st Mtg
  UP TO $450,000++      575         85% 1st Mtg      80% 1st Mtg     80% 1st Mtg      75% 1st Mtg      70% 1st Mtg
                        550         85% 1st Mtg      75% 1st Mtg     75% 1st Mtg      70% 1st Mtg      65% 1st Mtg
                        525         80% 1st Mtg      70% 1st Mtg     70% 1st Mtg      65% 1st Mtg      60% 1st Mtg
                        500         75% 1st Mtg      65% 1st Mtg     65% 1st Mtg      60% 1st Mtg      55% 1st Mtg
---------------------------------------------------------------------------------------------------------------------
        B2              575         85% 1st Mtg      75% 1st Mtg     75% 1st Mtg      70% 1st Mtg
  UP TO $450,000++      550         80% 1st Mtg      70% 1st Mtg     70% 1st Mtg      70% 1st Mtg
                        525         75% 1st Mtg      65% 1st Mtg     65% 1st Mtg      65% 1st Mtg
                        500         70 % 1st Mtg     60% 1st Mtg     60% 1st Mtg      60% 1st Mtg
---------------------------------------------------------------------------------------------------------------------
        C1              575         80% 1st Mtg      75% 1st Mtg     75% 1st Mtg
  UP TO $300,000++      550         80% 1st Mtg      70% 1st Mtg     70% 1st Mtg
                        525         75% 1st Mtg      65% 1st Mtg     65% 1st Mtg
                        500         70% 1st Mtg      60% 1st Mtg     60% 1st Mtg
---------------------------------------------------------------------------------------------------------------------
        C2              550         75% 1st Mtg
  UP TO $300,000++      525         70% 1st Mtg
                        500         65% 1st Mtg
---------------------------------------------------------------------------------------------------------------------
        D1              550         70% 1st Mtg
  UP TO $250,000++      500         65% 1st Mtg
---------------------------------------------------------------------------------------------------------------------
       D2***            525         65% 1st Mtg
  UP TO $250,000++      500         60% 1st Mtg
---------------------------------------------------------------------------------------------------------------------
       D3***            525         60% 1st Mtg
  UP TO $250,000++      500         55% 1st Mtg
---------------------------------------------------------------------------------------------------------------------
(Chart continued on next page
</TABLE>
                                      11a
<TABLE>
<S>                    <C>             <C>         <C>              <C>             <C>              <C>              <C>
                           STATED
 CREDIT PROGRAM/         INCOME-NOO
 MAX LOAN AMOUNT            (6)         DTI              MORTGAGE PAYMENT HISTORY                    BANKRUPTCY INFORMATION
------------------------------------------------------------------------------------------------------------------------------------
       A+               70% 1st Mtg     55%**           EXCELLENT MORTGAGE HISTORY                    **** MIN 3 YEARS OLD:
                                                        --------------------------
 UP TO $500,000++       70% 1st Mtg              0x30 on mortgages within last 12 months.          Ch 7 disc or Ch 13 filing.
                        70% 1st Mtg             *For extended LTV's, 0x60 13 to 24 months    Ch 13 disc must be 1 yr old at closing.
                        65% 1st Mtg                   No foreclosures last 3 years.
------------------------------------------------------------------------------------------------------------------------------------
       A1               70% 1st Mtg     55%**           EXCELLENT MORTGAGE HISTORY                    **** MIN 3 YEARS OLD:
                                                        --------------------------
 UP TO $500,000++       70% 1st Mtg              1x30 on mortgages within last 12 months.          Ch 7 disc or Ch 13 filing.
                        65% 1st Mtg              *For extended LTV's, 0x60 13 to 24 mos.     Ch 13 disc must be 1 yr old at closing.
                        60% 1st Mtg                   No foreclosures last 3 years.
------------------------------------------------------------------------------------------------------------------------------------
       A2               70% 1st Mtg     55%**           EXCELLENT MORTGAGE HISTORY                    **** MIN 2 YEARS OLD:
                                                        --------------------------
 UP TO $500,000++       70% 1st Mtg              2x30 on mortgages within last 12 months.          Ch 7 disc or Ch 13 filing.
                        65% 1st Mtg             *For extended LTV's, 0x90 13 to 24 months.     Ch 13 must be disc before closing.
                        60% 1st Mtg                   No foreclosures last 2 years.
------------------------------------------------------------------------------------------------------------------------------------
       B1               65% 1st Mtg     55%**             GOOD MORTGAGE HISTORY                       **** MIN 2 YEARS OLD:
                                                          ---------------------
 UP TO $450,000++       65% 1st Mtg              3x30 on mortgages within last 12 months.          Ch 7 disc or Ch 13 filing.
                        65% 1st Mtg            *For extended LTV's, 0x120 13 to 24 months.     Ch 13 must be disc before closing.
                        60% 1st Mtg                   No foreclosures last 2 years.
                        55% 1st Mtg
------------------------------------------------------------------------------------------------------------------------------------
       B2                               55%**             GOOD MORTGAGE HISTORY                      **** MIN 18 MONTHS OLD:
                                                          ---------------------
 UP TO $450,000++                                    0x60 or 2x30, 1x60 on mortgages.              Ch 7 disc or Ch 13 filing.
                                                          within last 12 months.                 Open Ch 13 considered. Mortgage
                                                *For extended LTVs, 0x120 13 to 18 months.    Must be paid as agreed since filing.
                                                     No foreclosures last 18 months.
------------------------------------------------------------------------------------------------------------------------------------
       C1                               55%**             FAIR MORTGAGE HISTORY                        **** MIN 1YEAR OLD:
                                                          ---------------------
 UP TO $300,000++                                      0x90 within last 12 months.            Ch 7 disc or Ch 13 filing. No derogs
                                                      No worse than D-30 at closing.            since Ch 7 disc or Ch 13 filing.
                                                     No foreclosures last 12 months.
------------------------------------------------------------------------------------------------------------------------------------
       C2                               55%**             FAIR MORTGAGE HISTORY                 Ch 7 must be discharged by close.
                                                          ---------------------
 UP TO $300,000++                                1x90 on mortgages within last 12 months.        Open Ch 13 considered with good
                                                      No worse than D-60 at closing.                 re-established credit.
------------------------------------------------------------------------------------------------------------------------------------
       D1                               55%**             POOR MORTGAGE HISTORY
                                                          ---------------------
 UP TO $250,000++                               1x120 on mortgages within last 12 months.

                                                     No worse than D-90 at closing.
------------------------------------------------------------------------------------------------------------------------------------
      D2***                             55%**             POOR MORTGAGE HISTORY
                                                          ---------------------
 UP TO $250,000++                                    No worse than D-119 at closing.
                                                       Mortgage NOT in foreclosure.
------------------------------------------------------------------------------------------------------------------------------------
      D3***                             55%**             POOR MORTGAGE HISTORY
                                                          ---------------------
 UP TO $250,000++                                    Open foreclosures case-by-case.
------------------------------------------------------------------------------------------------------------------------------------

+ Minimum credit score  requirement  for all loans is 500.  Minimum credit score
for all 2nd mortgages is 550.  Minimum  credit score for 90% LTV A+ & A1 of 625.
Consult guidelines for maximum LTV's.

++ Maximum loan amounts available are subject to LTV, income  classification and
occupancy requirements.

Note: Minimum 2 years employment history for programs A+ through B2.

                                     11b
</TABLE>
<PAGE>

*     Extended LTV's are  defined as: FIC, 00> 80%,  NIC/LIC > 75% &  NOO > 75%.
**    For LTV's  above 80% and/or  income  under  25K/yr,  maximum DTI = 50% for
      programs A+ through D3.
***   Lower LTV by 5% for  programs  D2 & D3 in: CT, ID, IL, IA, ME, MA, NJ, NY,
      OK VT & WI.
****  Chapter 13  dismissal date follows same guidelines as Chapter 7 discharge.
--------------------------------------------------------------------------------
(1)  Full documentation/owner occupied
(2)  Limited  documentation/no  income  verification/owner occupied
(3)  Fulldocumentation/non-owner occupied
(4)  Stated  income/owner  occupied
(5)  Limited documentation/no income verification/non-owner occupied
(6)  Stated income/non-owner occupied
--------------------------------------------------------------------------------
   We  use  these  categories  and  characteristics  as  guidelines  only.  On a
case-by-case  basis, we may determine that the prospective  borrower warrants an
exception  from  the  guidelines,  if  sufficient  compensating  factors  exist.
Examples of compensating factors we consider are:

     o   low debt ratio;
     o   long-term stability of employment and/or residence;
     o   excellent payment history on past mortgages;
     o   a significant reduction in monthly expenses; or
     o   low loan-to-value ratio.

   The  following  table  sets forth  certain  information  with  respect to our
originations  and  purchases  of first and  second  mortgage  loans by  borrower
classification,  along with weighted average coupons,  for the periods shown and
highlights the improved credit quality of our originations and purchases.
<TABLE>
<S> <C>         <C>             <C>         <C>       <C>
(DOLLARS IN THOUSANDS)
                                 PERCENT
YEAR   CREDIT         TOTAL     OF TOTAL   WAC(1)    WLTV(2)
----    ----          ----       ------     -----    ------
2001      A      $   478,485      77.0%      10.0%     76.7%
          B           59,729       9.6       11.5      68.6
          C           61,498       9.9       12.2      66.7
          D           22,003       3.5       13.2      57.4
                    ---------     ----       ----      ----
     Totals      $   621,715     100.0%      10.5%     74.2%
                    =========     ====       ====      ====

2000      A      $   596,946      63.9%      10.8%     75.7%
          B          164,024      17.6       11.7      70.2
          C          127,041      13.6       12.6      67.3
          D           45,427       4.9       13.8      56.9
                    ---------     ----       ----      ----
     Totals      $   933,438     100.0%      11.4%     72.7%
                    =========     ====       ====      ====

1999      A      $   859,935      58.4%       9.8%     76.4%
          B          298,253      20.3       10.7      72.9
          C          245,862      16.7       11.3      69.5
          D           67,288       4.6       13.0      57.3
                   ---------      ----       ----      ----
     Totals      $ 1,471,338     100.0%      10.4%     73.7%
                   =========      ====       ====      ====
------------------
(1)   Weighted Average Coupon ("WAC").
(2)   Weighted Average Initial Loan-to-Value Ratio ("WLTV").
</TABLE>
                                       12

   The mortgage loans we originate have  amortization  schedules  ranging from 5
years to 30 years,  generally  bear  interest at fixed  rates and require  equal
monthly  payments  which are due as of a  scheduled  day of each month  which is
fixed  at  origination.  Substantially  all  of our  mortgage  loans  are  fully
amortizing loans. We primarily originate fixed rate loans, which amortize over a
period not to exceed 30 years.  The principal  amounts of the loans we originate
generally range from a minimum of $25,000 to a maximum of $500,000. We generally
do not originate any mortgage  loans where the combined  loan-to-value  ratio on
the loan  exceeds 90%. Our loans are  generally  secured by one- to  four-family
residences,  including condominiums and town-houses, and these properties may or
may not be  occupied  by the owner.  It is our  policy not to accept  commercial
properties or unimproved land as collateral.  However,  we will accept mixed-use
properties,  such as a  property  where a portion  of the  property  is used for
residential purposes and the balance is used for commercial  purposes,  and will
accept  small  multifamily   properties  of  5  to  8  units,  both  at  reduced
loan-to-value  ratios.  We do not  originate  loans  where any  senior  mortgage
contains  open-end  advance,   negative   amortization  or  shared  appreciation
provisions - all of which could have the effect of increasing  the amount of the
senior mortgage,  thereby  increasing the combined LTV, and making the loan more
risky for us.

   Our mortgage loan program includes:

     o   a full documentation program for salaried borrowers;
     o   a limited documentation program;
     o   a no income verification program for self-employed borrowers; and
     o   a stated income program.

   We generally limit total monthly debt  obligations - which include  principal
and interest on the new loan and all other mortgages, loans, charge accounts and
scheduled  indebtedness - to 50% or less of the borrower's monthly gross income.
For loans to borrowers who are salaried employees, we require current employment
information in addition to employment  history.  We verify this  information for
salaried  borrowers based on written  confirmation  from employers,  one or more
recent  pay-stubs,  recent  W-2 tax  forms,  recent  tax  returns  or  telephone
confirmation  from the  employer.  For our  limited  documentation  program,  we
require a job  letter to be  submitted  which  contains  substantially  the same
information  one would  find on a  standard  verification  of  employment  form,
including:

     o   job position;
     o   length of time on job;
     o   current salary; and
     o   the job letter should appear on the  employer's  letterhead and include
         the telephone  number and signature of the  individual  completing  the
         letter on behalf of the employer.

   For our no income  verification  program, we require proof of self-employment
in the same business plus proof of current  self-employed  status. We only offer
our stated  income  program,  which  represents a very small  percentage  of our
loans,  for better credit quality  borrowers  where a telephone  verification is
done by an  underwriter  to verify  that the  borrower is  employed.  We usually
require  lower  combined  loan-to-value  ratios with respect to loans made under
programs other than the full documentation program.

   We assess an applicant's  ability and willingness to pay, which is one of the
principal elements in distinguishing our lending specialty 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.
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.  In
contrast, we employ experienced non-conforming 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.  An applicant's
credit  record  will  often be  impaired  by  personal  circumstances  including
divorce,  family  illnesses or deaths and  temporary job loss due to layoffs and
corporate downsizing.

   We  have  a  staff  of  45  underwriters  with  an  average  of 10  years  of
non-conforming  lending experience.  With the exception of our Atlanta,  Georgia
office,  all underwriting  functions for broker  originations are centralized in
our  Woodbury,  New York  headquarters.  All  underwriting  functions for retail
originations  are  centralized  in our  retail

                                       13

underwriting  "hub",  located in Cincinnati,  Ohio,  and our Woodbury,  New York
headquarters.  We do not  delegate  underwriting  authority  to any broker.  Our
underwriting  department functions independently of our business development and
sales departments and does not report to any individual directly involved in the
sales  origination  process.  None of our  underwriters  are  compensated  on an
incentive or commission basis.

   We have  instituted  underwriting  checks and  balances  that are designed to
ensure  that  every  loan  is  reviewed   and  approved  by  a  minimum  of  two
underwriters,  with some higher loan  amounts  requiring  a third  approval.  We
believe that by requiring each loan to be seen by a minimum of two underwriters,
a high  degree of  accuracy  and  quality  control  is  ensured  throughout  the
underwriting process and before funding.

   We underwrite every loan submitted by not only thoroughly  reviewing  credit,
but also by performing the following:

     o   a  separate   appraisal   review  conducted  by  our  appraisal  review
         department; and
     o   a full  compliance  review,  to  ensure  that all  documents  have been
         properly  prepared,  all  applicable  disclosures  given  in  a  timely
         fashion, and proper compliance with all federal and state regulations.

   We require appraisals to be performed by third party, fee-based appraisers or
by our approved  appraisers  and to conform  generally to current Fannie Mae and
Freddie Mac secondary market requirements for residential  property  appraisals.
Each appraisal includes,  among other things, an inspection of both the exterior
and interior of the subject property and data from sales within the preceding 12
months of similar  properties  within the same  general  location as the subject
property.  We perform an appraisal  review on each loan prior to closing.  We do
not believe that the general  quality  control  practices  of many  conventional
mortgage lenders,  which is to perform only drive-by  appraisals after closings,
provides sufficient protection. As such, in addition to reviewing each appraisal
for  accuracy,  we  access  alternate  sources  to  validate  sales  used in the
appraisal to determine market value. These sources include:

     o   Multiple Listing Services in eight states;
     o   assessment and sales services,  such as Comps, Inc., Pace, 1st American
         and Transamerica;
     o   on-line internet services such as Realtor.com; and
     o   other sources for  verification,  including  broker price  opinions and
         market analyses by local real estate agents.

   We actively  track and grade (based upon criteria that we have developed over
time)  all  appraisers  from  which we accept  appraisals  for  quality  control
purposes and do not accept work from  appraisers  who have not  conformed to our
review standards.

   After  completing  the  underwriting  and  processing of a brokered  loan, we
schedule the closing of the loan with an approved closing attorney or settlement
agent.  We hold  the  closing  attorney  or  settlement  agent  responsible  for
completing the loan closing  transaction in accordance  with  applicable law and
our  operating  procedures.  We also require  title  insurance  that insures our
interest as mortgagee and evidence of adequate  homeowner's  insurance naming us
as an additional insured party on all loans.

   We perform a post-funding  quality control review to monitor and evaluate our
loan  origination  policies and procedures.  The quality  control  department is
separate from the underwriting  department,  and reports directly to a member of
senior management.

   We subject at least 10% of all loan  originations  to a full quality  control
re-underwriting  and  review,  the  results  of which  are  reported  to  senior
management on a monthly basis. We analyze  discrepancies  noted by the audit and
institute  corrective  actions.  A  typical  quality  control  review  currently
includes:

     o   obtaining a new drive-by appraisal for each property;
     o   running a new credit report from a different credit report agency;
     o   reviewing  loan  applications  for  completeness,  signatures,  and for
         consistency with other processing documents;
     o   obtaining new written verification of income and employment;
     o   obtaining  new  written  verification  of  mortgage  to  re-verify  any
         outstanding mortgages; and

                                       14

     o   analyzing the underwriting and program selection decisions.

   We update the quality  control  process from time to time as our policies and
procedures change.

LOAN SALES

   We sell virtually all the loans we originate through one of two methods:  (i)
securitizations,  which involve the public offering by a securitization trust of
asset-backed  pass-through securities;  and (ii) whole loan sales, which include
the sale of pools of individual  loans to  institutional  investors,  banks, and
consumer  finance-related  companies on a servicing  released basis. In 2001, we
securitized  approximately  56% of our loan originations and sold whole loans of
approximately 42% of our loan originations. Going forward, we expect to continue
to use a combination of  securitizations  and whole loan sales, with the amounts
of each dependent upon the marketplace  and our goal of maximizing  earnings and
liquidity.

   SECURITIZATIONS.  During 2001, we completed two securitizations totaling $345
million.  The following table sets forth certain information with respect to our
securitizations  (both of which were rated AAA/Aaa by S&P Fitch, and/or Moody's,
respectively)  by offering size,  which includes  pre-funded  amounts,  duration
weighted average pass-through rate and type of credit enhancement.
<TABLE>
<S>                       <C>             <C>               <C>             <C>
                                                        INITIAL DURATION
                                       OFFERING SIZE    WEIGHTED AVERAGE     CREDIT
SECURITIZATION             COMPLETED    (MILLIONS)      PASS-THROUGH RATE  ENHANCEMENT
---------                  --------     ----------         -----------     ----------
2001-1...................  05/31/01        $165.0            6.15%           Hybrid *
2001-2...................  10/16/01        $180.0            4.66%           Hybrid*
</TABLE>

* SENIOR/SUB  STRUCTURE WITH A "AAA" RATED MONOLINE  INSURER INSURING THE SENIOR
  OR "AAA" RATED PASS-THROUGH CERTIFICATES

   When we  securitize  loans,  we sell a portfolio of loans to a trust (a "Home
Equity Loan Trust"),  which is a qualified  special purpose  entity,  for a cash
payment and the Home Equity Loan Trust  sells  various  classes of  pass-through
certificates representing undivided ownership interests in such Home Equity Loan
Trust. The servicer of each  securitization will collect and remit principal and
interest  payments to the  appropriate  Home Equity Loan Trust  which,  in turn,
passes  through  such  payments  to  certificateholders.  For  each of the  2001
securitizations,  we  retained  100% of the  interests  in the  excess  cashflow
certificates  while  selling  interest-only  certificates  for an up-front  cash
premium. We contemplate continuing to retain excess cashflow certificates in the
future as long as, in management's  opinion,  this practice  maximizes  earnings
while satisfying our liquidity objectives.

   Each Home Equity  Loan Trust has the  benefit of either a financial  guaranty
insurance  policy  from a monoline  insurance  company or a  senior-subordinated
securitization  structure,  which insures the timely payment of interest and the
ultimate payment of principal of the credit-enhanced  investor  certificate,  or
both (known as a  "hybrid").  In  "senior-subordinated"  structures,  the senior
certificate  holders are  protected  from losses by  subordinated  certificates,
which absorb any such losses first. In addition to such credit enhancement,  the
excess  cash flows that  would  otherwise  be paid to us as holder of the excess
cashflow  certificate is initially  applied as additional  payments of principal
for the investor certificates, thereby accelerating amortization of the investor
certificates   relative  to  the   amortization   of  the  loans  and   creating
overcollateralization.  Once the overcollateralization limit is reached, the use
of  excess  cash  flows  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.  We have found  that,  at times,  we can
receive better  economic  results by selling  certain  mortgage loans on a whole
loan,  non-recourse  basis,  without retaining  servicing  rights,  generally in
private transactions to financial institutions or consumer finance companies. We
recognize  a gain or loss when we sell loans on a whole loan basis  equal to the
difference  between the cash proceeds  received for the loans and our investment
in the loans, including any unamortized loan origination fees and costs.

                                       15

   In 2001 and 2000, we sold whole loans on a servicing-released basis of $261.1
million and $58.3  million,  respectively.  In 1999,  we did not sell loans on a
whole loan basis.

LOAN SERVICING

   Prior  to May  2001,  we  serviced  substantially  all of the  loans  that we
originated and purchased since our inception in 1982.

   In January  2001,  we announced  that we had entered  into an agreement  with
Ocwen to transfer our servicing  portfolio to Ocwen.  In May 2001, we physically
transferred our entire servicing  portfolio to Ocwen, and laid-off our servicing
staff. We no longer service loans nor do we have a servicing  operation.  We do,
however, maintain a handful of employees to assist third parties with delinquent
and defaulted loans, as well as portfolio retention.

COMPETITION

   As an originator of mortgage  loans, we face intense  competition,  primarily
from diversified  consumer financial  companies and other diversified  financial
institutions,  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 we do.  Competition  can take many forms,
including interest rates and costs of the loan, convenience in obtaining a loan,
service,  marketing and distribution channels.  Furthermore,  the level of gains
realized by us and our  competitors on the sale of the type of loans  originated
has  attracted  additional  competitors  into  this  market  with the  effect of
lowering the gains that may be realized by us on future loan sales. In addition,
efficiencies in the asset-backed market have generally created a desire for even
larger  transactions  giving  companies with greater  volumes of  originations a
competitive advantage.

   Competition  may be affected by  fluctuations  in interest  rates and general
economic  conditions.  During  periods of rising rates,  competitors  which have
"locked in" low borrowing costs may have a competitive advantage. During periods
of declining  rates,  competitors  may solicit  borrowers  underlying our excess
cashflow  certificates  to refinance their loans.  During economic  slowdowns or
recessions,  these  borrowers  may have new  financial  difficulties  and may be
receptive to offers by our competitors.

   Over  the  past  several  years,  many of the  independent  mortgage  banking
companies, which previously were among our most intense competitors, have either
gone out of  business  or been  acquired by larger,  more  diversified  national
financial  institutions.  At the  same  time,  many  larger  finance  companies,
financial  institutions and conforming  mortgage  originators have adapted their
conforming  origination  programs and allocated  resources to the origination of
non-conforming  loans and/or have otherwise  begun to offer products  similar to
those offered by us, targeting  customers similar to those we do. Fannie Mae and
Freddie Mac also have  expressed  interest in adapting their programs to include
products  similar to those offered by us and have begun to expand their programs
and  presence  into the  subprime  market.  The  entrance  of these  larger  and
better-capitalized  competitors  into our  market  may have a  material  adverse
effect on our results of operations and financial condition.

REGULATION

   Our 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 our operations.  Our consumer  lending  activities are subject
to, among other laws and regulations:

     o   the Federal  Truth-in-Lending  Act and Regulation Z (including the Home
         Ownership and Equity Protection Act of 1994);

     o   the Equal Credit Opportunity Act of 1974, as amended (ECOA);

     o   the Fair Credit Reporting Act of 1970, as amended;

     o   the Real Estate Settlement Procedures Act (RESPA), and Regulation X;

     o   the Home Mortgage Disclosure Act;

                                       16

     o   the Federal Debt Collection Practices Act; and

     o   other federal,  state and local statutes and regulations  affecting our
         activities.

   We also are subject to the rules and regulations of, and  examinations by the
Department  of  Housing  and Urban  Development  ("HUD")  and  state  regulatory
authorities with respect to originating,  processing and underwriting loans (and
servicing  loans prior to May 2001).  These rules and  regulations,  among other
things:

     o   impose licensing obligations on us;

     o   establish eligibility criteria for mortgage loans;

     o   prohibit discrimination;

     o   provide for inspections and appraisals of properties;

     o   require credit reports on loan applicants;

     o   regulate  assessment,  collection,  foreclosure  and  claims  handling,
         investment  and  interest  payments  on  escrow  balances  and  payment
         features;

     o   mandate certain disclosures and notices to borrowers; and

     o   in some cases,  fix maximum  interest  rates,  fees and  mortgage  loan
         amounts.

   Failure to comply with these  requirements  can lead to, among other  things,
loss  of  approved  status,   demands  for  indemnification  or  mortgage  loans
repurchases,  certain rights of rescission for mortgage loans,  class action and
other lawsuits, and administrative enforcement actions.

   Several  federal,  state and local laws and  regulations  are currently under
consideration, with more likely to be proposed on the horizon, that are intended
to further  regulate our industry.  Many of these laws and  regulations  seek to
impose  broad  restrictions  on certain  commonly  accepted  lending  practices,
including some of our  practices.  There can be no assurance that these proposed
laws, rules and regulations,  or other similar laws, rules or regulations,  will
not be adopted in the  future.  Adoption of these  laws,  rules and  regulations
could have a material adverse impact on our business by:

     o   substantially  increasing  the costs of  compliance  with a variety  of
         potentially inconsistent federal, state and local laws;

     o   substantially  increasing  the  risk of  litigation  or  administrative
         action associated with complying with these proposed federal, state and
         local  laws,  particularly  those  aspects of such  proposed  laws that
         contain subjective (as opposed to objective) requirements,  among other
         things; or

     o   restricting our ability to charge rates and fees adequate to compensate
         us for the risk associated with certain loans.

   In September  1999, we settled  allegations by the NYSBD and a lawsuit by the
New York State Office of the Attorney General (the "NYOAG") alleging that we had
violated  various state and federal  lending  laws.  The global  settlement  was
evidenced by (a) a  Remediation  Agreement by and between  Delta Funding and the
NYSBD,  dated as of September 17, 1999 and (b) a Stipulated  Order on Consent by
and among Delta Funding,  Delta  Financial and the NYOAG,  dated as of September
17, 1999. As part of the Settlement,  we, among other things, implemented agreed
upon changes to our lending  practices;  are  providing  reduced  loan  payments
aggregating $7.25 million to certain borrowers identified by the NYSBD; and have
created a fund managed by the NYSBD and financed by the grant of 525,000  shares
of Delta Financial's common stock.

   Each month,  on behalf of borrowers  designated by the NYSBD, we make subsidy
payments to the related  securitization  trusts. These subsidy payments fund the
differential  between the original loan payments and the reduced loan  payments.
As part of the Second  Exchange  Offer (see "-Note No. 2 "Summary of  Regulatory
Settlement" and Note No. 3 "Corporate Restructuring,  Debt Modification and Debt
Restructuring" to Notes to the Consolidated  Financial  Statements" ), the LLC -
an unaffiliated,  newly-formed  entity, the voting membership interests of which
are owned by the former  holders of our notes - is  obligated  to satisfy  these
payment  subsidies  out of the cash  flows  generated  by the  mortgage  related
securities  (primarily  from the excess cashflow  certificates)  it

                                       17

owns. If the LLC's cash flows are insufficient to pay this obligation, we remain
responsible to satisfy our obligations under the Remediation Agreement.

   The proceeds of the stock fund will be used to pay borrowers and to finance a
variety of consumer  educational and counseling  programs.  We do not manage the
fund created for this purpose. The number of shares of common stock deposited in
the fund does not adjust to account for  fluctuations in the market price of our
common  stock.  Changes  to the  market  price of these  shares of common  stock
deposited in the fund do not have any impact on our financial statements. We did
not make any additional  financial  commitments  between the settlement date and
March 2000.

   In March 2000, we finalized an agreement with the U.S. Department of Justice,
the Federal Trade  Commission and HUD, to complete the global  settlement we had
reached with the NYSBD and NYOAG. The Federal agreement mandates some additional
compliance  efforts  for us, but it does not require  any  additional  financial
commitment by us.

   We believe we are in  compliance  in all material  respects  with  applicable
federal and state laws and regulations.

ENVIRONMENTAL MATTERS

   To date, we have not been required to perform any  investigation  or clean up
activities,  nor have we been subject to any environmental  claims. There can be
no assurance, however, that this will remain the case in the future. Although we
primarily  lend to  owners  of  residential  properties,  in the  course  of our
business, we may acquire properties securing loans that are in default. There is
a risk that we could be required to investigate and clean-up  hazardous or toxic
substances or chemical releases at such properties,  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,  2001,  we had a total of 609  employees  (full-time  and
part-time).  None  of our  employees  are  covered  by a  collective  bargaining
agreement. We consider our relations with our employees to be good.

ITEM 2.  PROPERTIES

   Our executive and  administrative  offices are located at 1000 Woodbury Road,
Woodbury,  New York 11797, where we lease  approximately  107,000 square feet of
office space at an aggregate  annual rent of  approximately  $2.1  million.  The
lease provides for certain scheduled rent increases and expires in 2008.

   We also  maintain a full  service  office in Atlanta,  Georgia  and  business
development offices in New Jersey, Ohio,  Pennsylvania and Virginia.  Our retail
operation  currently  maintains  nine  retail  mortgage  origination  offices in
Illinois, Missouri, North Carolina, Ohio (3), Pennsylvania (2) and Tennessee and
two retail call centers one at our  headquarters  in Woodbury,  New York and the
second in Pittsburgh,  Pennsylvania.  We also maintain one  telemarketing hub in
Ohio. The terms of these leases vary as to duration and  escalation  provisions,
with the latest expiring in 2004.

ITEM 3.  LEGAL PROCEEDINGS

   Because  the nature of our  business  involves  the  collection  of  numerous
accounts,  the validity of liens and  compliance  with various state and federal
lending  laws,  we are subject,  in the normal  course of business,  to numerous
claims and legal  proceedings.  Our lending  practices  have been the subject of
several  lawsuits  styled as class  actions  and of  investigations  by  various
regulatory  agencies  including  the  NYSBD,  the  NYOAG and the  United  States
Department  of Justice  (the  "DOJ").  The  current  status of these  actions is
summarized below.

     o   In or about November 1998, we received notice that we had been named in
         a lawsuit  filed in the United  States  District  Court for the Eastern
         District of New York.  In December  1998,  plaintiffs  filed an amended
         complaint  alleging that we had violated the Home  Ownership and Equity
         Protection  Act  ("HOEPA"),  the

                                       18

         Truth in  Lending  Act  ("TILA")  and New York State  General  Business
         Lawss.349.  The  complaint  seeks  (a)  certification  of  a  class  of
         plaintiffs,   (b)  declaratory  judgment  permitting  rescission,   (c)
         unspecified actual,  statutory,  treble and punitive damages (including
         attorneys' fees), (d) certain  injunctive  relief,  and (e) declaratory
         judgment declaring the loan transactions as void and unconscionable. On
         December  7,  1998,  plaintiff  filed  a  motion  seeking  a  temporary
         restraining  order  and  preliminary  injunction,   enjoining  us  from
         conducting foreclosure sales on 11 properties. The District Court Judge
         ruled that in order to consider such a motion,  plaintiff  must move to
         intervene on behalf of these 11 borrowers.  Thereafter, plaintiff moved
         to intervene on behalf of 3 of these 11 borrowers and sought injunctive
         relief on their behalf.  We opposed the motions.  On December 14, 1998,
         the  District  Court  Judge  granted  the  motion to  intervene  and on
         December  23,  1998,  the  District  Court Judge  issued a  preliminary
         injunction that enjoined us from proceeding with the foreclosure  sales
         of  the  three   intervenors'   properties.   We  filed  a  motion  for
         reconsideration  of the December 23, 1998 order.  In January  1999,  we
         filed an answer to plaintiffs' first amended  complaint.  In July 1999,
         plaintiffs  were granted  leave,  on consent,  to file a second amended
         complaint.  In August 1999, plaintiffs filed a second amended complaint
         that, among other things,  added  additional  parties but contained the
         same  causes  of action  alleged  in the first  amended  complaint.  In
         September  1999, we filed a motion to dismiss the complaint,  which was
         opposed by plaintiffs and, in June 2000, was denied in part and granted
         in part by the Court.  In or about  October  1999,  plaintiffs  filed a
         motion seeking an order  preventing us, our attorneys  and/or the NYSBD
         from issuing notices to certain of our borrowers,  in accordance with a
         settlement  agreement  entered into by and between Delta and the NYSBD.
         In or about October 1999 and November  1999,  respectively,  we and the
         NYSBD submitted  opposition to plaintiffs'  motion.  In March 2000, the
         Court issued an order that  permitted  us to issue an approved  form of
         the notice.  In  September  1999,  plaintiffs  filed a motion for class
         certification,  which we opposed in February  2000,  and was ultimately
         withdrawn  without prejudice by plaintiffs in January 2001. In February
         2002, we executed a settlement  agreement with plaintiffs,  pursuant to
         which we denied all wrongdoing, but agreed to resolve the litigation on
         a class-wide basis. A fairness hearing has been scheduled for May 2002,
         at  which  point,  we  anticipate  that  the  Court  will  approve  the
         settlement.  If the settlement is not approved, we believe that we have
         meritorious  defenses  and  intend  to defend  this  suit,  but  cannot
         estimate with any certainty our ultimate legal or financial  liability,
         if any, with respect to the alleged claims.


     o   In or about March 1999, we received  notice that we had been named in a
         lawsuit filed in the Supreme  Court of the State of New York,  New York
         County,  alleging  that we had  improperly  charged  certain  borrowers
         processing  fees. The complaint seeks (a)  certification  of a class of
         plaintiffs,  (b) an accounting,  and (c) unspecified  compensatory  and
         punitive damages  (including  attorneys' fees),  based upon alleged (i)
         unjust enrichment,  (ii) fraud, and (iii) deceptive trade practices. In
         April 1999, we filed an answer to the complaint.  In September 1999, we
         filed  a  motion  to  dismiss  the  complaint,  which  was  opposed  by
         plaintiffs,  and in  February  2000,  the Court  denied  the  motion to
         dismiss.  In  April  1999,  we  filed a  motion  to  change  venue  and
         plaintiffs  opposed  the  motion.  In July 1999,  the Court  denied the
         motion to change  venue.  We appealed and in March 2000,  the Appellate
         Court granted our appeal to change venue from New York County to Nassau
         County.   In  August  1999,   plaintiffs   filed  a  motion  for  class
         certification,  which we opposed in July  2000.  In or about  September
         2000,  the Court granted  plaintiffs'  motion for class  certification,
         from which we filed a Notice of Appeal. In or about June 2001, we filed
         a motion for  summary  judgment  to dismiss  the  complaint,  which was
         denied by the Court in October  2001. We have appealed that decision as
         well,  and the trial court agreed to stay the action pending the result
         of that appeal. We believe that we have meritorious defenses and intend
         to defend  this  suit,  but  cannot  estimate  with any  certainty  our
         ultimate  legal or  financial  liability,  if any,  with respect to the
         alleged claims.

     o   In or about July 1999,  we received  notice that we had been named in a
         lawsuit  filed in the  United  States  District  Court for the  Western
         District of New York, alleging that amounts collected and maintained by
         us in certain  borrowers' tax and insurance  escrow  accounts  exceeded
         certain statutory (RESPA) and/or contractual (the respective borrowers'
         mortgage agreements) ceilings. The complaint seeks (a) certification of
         a  class  of  plaintiffs,  (b)  declaratory  relief  finding  that  our
         practices violated applicable statutes and/or the mortgage  agreements,
         (c) injunctive  relief,  and (d) unspecified  compensatory and punitive
         damages (including attorneys' fees). In October 1999, we filed a motion
         to dismiss  the  complaint.
                                       19

         In or about  November  1999,  the  case was  transferred  to the United
         States  District  Court  for the  Northern  District  of  Illinois.  In
         February  2000, the plaintiff  opposed our motion to dismiss.  In March
         2000, the Court granted our motion to dismiss in part, and denied it in
         part.  In  February  2002,  we  executed a  settlement  agreement  with
         plaintiffs  pursuant to which we denied all  wrongdoing,  but agreed to
         resolve the litigation on a class-wide  basis.  A fairness  hearing has
         been  scheduled for June 2002,  at which point we  anticipate  that the
         Court will approve the  settlement.  If the settlement is not approved,
         we believe that we have meritorious  defenses and intend to defend this
         suit,  but cannot  estimate with any  certainty  our ultimate  legal or
         financial liability, if any, with respect to the alleged claims.

     o   In or about August 1999, the NYOAG filed a lawsuit  against us alleging
         violations  of (a) RESPA (by paying yield spread  premiums),  (b) HOEPA
         and TILA, (c) ECOA, (d) New York Executive  Lawss.  296-a,  and (e) New
         York Executive Lawss. 63(12). In September 1999, we settled the lawsuit
         with the  NYOAG,  as part of a global  settlement  by and among us, the
         NYOAG  and  the  NYSBD,  evidenced  by  that  certain  (a)  Remediation
         Agreement by and between us and the NYSBD,  dated as of  September  17,
         1999 and (b) Stipulated Order on Consent by and among us and the NYOAG,
         dated as of September  17, 1999. As part of the  Settlement,  we, among
         other  things,  have  implemented  agreed  upon  changes to our lending
         practices;  are  providing  reduced  loan  payments  aggregating  $7.25
         million to certain borrowers  identified by the NYSBD; and have created
         a fund financed by the grant of 525,000 shares of our common stock, the
         proceeds  of  which  will be  used,  for  among  other  things,  to pay
         borrowers  and for a variety of  consumer  educational  and  counseling
         programs.  As a result, the NYOAG lawsuit has been dismissed as against
         us. The Remediation Agreement and Stipulated Order on Consent supersede
         our previously  announced  settlements with the NYSBD and the NYOAG. In
         March 2000, we finalized a settlement  agreement with the United States
         Department of Justice,  the Federal Trade Commission and the Department
         of Housing and Urban Renewal,  to complete the global settlement it had
         reached with the NYSBD and NYOAG. The federal  agreement  mandates some
         additional  compliance efforts,  but it does not require any additional
         financial commitment.

     o   In  November  1999,  we  received  notice  that we had been  named in a
         lawsuit  filed in the  United  States  District  Court for the  Eastern
         District  of New York,  seeking  certification  as a class  action  and
         alleging  violations of the federal  securities laws in connection with
         our initial public offering in 1996 and our reports  subsequently filed
         with the Securities and Exchange Commission. The complaint alleges that
         the  scope of the  violations  alleged  in the  consumer  lawsuits  and
         regulatory  actions  brought in or around  1999  indicate  a  pervasive
         pattern  of action  and risk  that  should  have  been more  thoroughly
         disclosed  to  investors in our common  stock.  In May 2000,  the Court
         consolidated  this case and several  other  lawsuits  that  purportedly
         contain the same or similar  allegations  against us and in August 2000
         plaintiffs filed their Consolidated Amended Complaint. In October 2000,
         we filed a motion to dismiss the Complaint in its  entirety,  which was
         opposed by  plaintiffs  in  November  2000,  and denied by the Court in
         September 2001. We believe that we have meritorious defenses and intend
         to defend  this  suit,  but  cannot  estimate  with any  certainty  our
         ultimate  legal or  financial  liability,  if any,  with respect to the
         alleged claims.

     o   In or about April 2000, we received  notice that we had been named in a
         lawsuit  filed in the  Supreme  Court of the State of New York,  Nassau
         County,  alleging that we had  improperly  charged and  collected  from
         borrowers certain fees when they paid off their mortgage loans with us.
         The complaint  seeks (a)  certification  of a class of plaintiffs,  (b)
         declaratory  relief  finding  that the payoff  statements  used include
         unauthorized  charges  and are  deceptive  and unfair,  (c)  injunctive
         relief,  and  (d)  unspecified  compensatory,  statutory  and  punitive
         damages  (including legal fees),  based upon alleged violations of Real
         Property  Law 274-a,  unfair  and  deceptive  practices,  money had and
         received  and  unjust  enrichment,  and  conversion.  We  answered  the
         complaint  in June 2000.  In March 2001,  we filed a motion for summary
         judgment,  which was opposed by plaintiffs in March 2001,  and we filed
         reply  papers in April  2001.  In June 2001,  our  motion  for  summary
         judgment   dismissing  the  complaint  was  granted.  In  August  2001,
         plaintiffs  appealed the decision.  We believe that we have meritorious
         defenses and intend to defend this suit,  but cannot  estimate with any
         certainty  our ultimate  legal or  financial  liability,  if any,  with
         respect to the alleged claims.

                                       20

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

   None.

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

PRICE RANGE OF COMMON STOCK

   Our common  stock trades on the  Over-The-Counter  Bulletin  Board  ("OTCBB")
under the  symbol  "DLTO".  The  following  table  sets  forth  for the  periods
indicated  the range of the high and low  closing  sales  prices  for our common
stock.
<TABLE>
  <S>                                   <C>         <C>

   2001                                       HIGH        LOW
   ----                                       ----       ----
   First Quarter ...................     $   0.63    $   0.36
   Second Quarter ..................         0.43        0.24
   Third Quarter....................         0.51        0.28
   Fourth Quarter ..................         1.06        0.38

   2000                                       HIGH        LOW
   ----                                       ----       ----
   First Quarter ...................     $   4.13    $   2.00
   Second Quarter ..................         2.31        1.25
   Third Quarter....................         1.63        0.50
   Fourth Quarter ..................         0.69        0.22
</TABLE>

   Our common stock  previously  was listed on the New York Stock  Exchange (the
"NYSE") under the symbol "DFC",  but in May 2001,  the NYSE de-listed our common
stock.  The NYSE stated that it took this action  because we were unable to meet
the NYSE's continued  listing  standards of maintaining a minimum of $15 million
in market  capitalization  and a minimum share price of $1 over a 30-day trading
period. When our common stock was de-listed in May 2001, it began trading on the
OTCBB under the ticker symbol "DLTO".

   On December 31, 2001, we had  approximately  74 stockholders of record.  This
number does not include  beneficial  owners holding  shares  through  nominee or
"street"   names.   We  believe  the  number  of  beneficial   stockholders   is
approximately 1,900.

DIVIDEND POLICY

   We did not pay any  dividends  in 2001 and,  in  accordance  with our present
general policy, we have no present intention to pay cash dividends on our common
stock.  Under the terms of our Certificate of Designations  for our newly-issued
preferred stock, we are obligated to commence paying dividends to holders of our
Series A  preferred  stock in July 2003,  and are  limited in our ability to pay
dividends to holders of our common stock.

                                       21
<PAGE>
<TABLE>
<S>                                                  <C>             <C>          <C>           <C>         <C>

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA
                                                                             YEAR ENDED DECEMBER 31,
                                                                    -----------------------------------------
                                                           2001          2000         1999          1998         1997
                                                           ----          ----         ----          ----         ----
Income Statement Data:                                            (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA)
  Revenues:
      Net gain on sale of mortgage loans............  $  38,638        51,031       84,010        98,396        89,687
      Interest......................................    (22,146)       32,287       31,041        12,458        22,341
      Servicing fees................................      2,983        14,190       16,341        10,464         7,511
      Net origination fees and other income.........     13,450        21,463       23,427        18,257        14,311
                                                      ---------------------------------------------------------------------
           Total revenues...........................     32,925       118,971      154,819       139,575       133,850
                                                      ---------------------------------------------------------------------
 Expenses
      Payroll and related costs ....................     42,896        56,525       65,116        56,709        41,214
      Interest......................................     16,132        30,386       26,656        30,019        19,964
      General & administrative                           48,878        45,066       55,318        34,351        21,522
      Capitalized mortgage servicing impairment ....         --        38,237           --            --            --
      Restructuring and other special charges.......      2,678        11,382           --            --            --
                                                      -------------------------------------------------------------------
            Total expenses..........................    110,584       181,596      147,090       121,079        82,700
                                                      -------------------------------------------------------------------

 Income (loss) before income tax expense (benefit)
      and extraordinary item........................    (77,659)      (62,625)       7,729        18,496        51,150
  Provision for income tax expense (benefit) .......      2,876       (13,208)       3,053         7,168        20,739
                                                      -------------------------------------------------------------------

  Income (loss) before extraordinary item...........    (80,535)      (49,417)       4,676        11,328        30,411
  Extraordinary item, net of tax loss on early
      extinguishment of debt........................    (19,255)           --           --            --            --
                                                      -------------------------------------------------------------------
  Net income (loss).................................  $ (99,790)      (49,417)       4,676        11,328        30,411
                                                      ------------------------------------------------------------------

BASIC AND DILUTED EARNINGS PER SHARE:
    Income (loss) before extraordinary item.........  $   (5.07)        (3.11)        0.30          0.74          1.98
    Extraordinary item, net of tax..................      (1.21)           --           --            --            --
Net income (loss) per share.........................  $   (6.28)        (3.11)        0.30          0.74          1.98

      Weighted average number of
            shares outstanding...................... 15,883,749    15,883,749   15,511,214    15,382,161    15,359,280


Selected Balance Sheet Data:
  Loans held for sale, net..........................  $  94,407        82,698       89,036        87,170        79,247
  Capitalized mortgage servicing rights.............         --            --       45,927        33,490        22,862
  Excess cashflow certificates, net.................     16,765       216,907      224,659       203,803       167,809
  Total assets......................................    132,398       451,245      555,395       480,537       393,232
   Senior notes, warehouse financing and
      other borrowings..............................    100,472       238,203      258,493       229,660       177,540
  Investor payable..................................         --        69,489       82,204        63,790        40,852
  Total liabilities.................................    120,548       353,521      408,254       342,849       266,779
  Stockholders' equity..............................     11,850        97,724      147,141       137,688       126,453
</TABLE>
                                       22
<PAGE>

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

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

GENERAL

   As discussed in more detail in the "Business  Overview" in Part I,  beginning
on  page  1,  Delta  Financial   Corporation  ("Delta"  or  "we"),  through  its
wholly-owned subsidiaries,  originates, securitizes and sells (and, prior to May
2001, serviced) non-conforming home equity loans, which are primarily secured by
first mortgages on one- to four-family residential properties. Throughout our 20
years of  operating  history,  we have  focused on lending  to  individuals  who
generally  have  impaired or limited  credit  profiles or higher  debt-to-income
ratios for such  purposes  as debt  consolidation,  home  improvement,  mortgage
refinancing or education.  These borrowers  generally do not satisfy the credit,
documentation or other underwriting standards set by more traditional sources of
mortgage credit, including those that make loans in compliance with conventional
mortgage lending  guidelines  established by Fannie Mae and Freddie Mac. We make
loans to these individuals for such purposes as debt consolidation, refinancing,
education or home improvements.

   Our mortgage business has two principal  components.  First, we make mortgage
loans  to  individual  borrowers,  which is a cash and  expense  outlay  for us,
because our cost to  originate a loan exceeds the fees we collect at the time we
originate  that loan. At the time we originate a loan,  and prior to the time we
sell that loan,  we finance  that loan by  borrowing  under a warehouse  line of
credit.  Second, we sell loans, either through securitization or on a whole loan
basis,  to generate cash and non-cash  revenues.  We use the proceeds from these
sales to repay our warehouse line of credit and for working  capital,  recording
the premiums we receive from the loan sales and securitizations as revenue.

   CORPORATE  RESTRUCTURING,   DEBT  MODIFICATION  AND  DEBT  RESTRUCTURING.  As
discussed in more detail in "Corporate Restructuring, Debt Modification and Debt
Restructuring"  in Part I,  beginning  on page 4,  we  engaged  in a  series  of
transactions  beginning in 2000,  and  concluding  in the third quarter of 2001,
aimed at improving  operating  efficiencies and reducing our negative cash flow.
We spent much of the year working on two  transactions  in particular,  which we
believe were of  tantamount  importance  in this regard - selling our  servicing
portfolio and extinguishing most of our long term debt.

     o   In May 2001,  we completed  our  transfer of servicing to Ocwen,  which
         freed  us from  the  significant  cash  drain  associated  with  making
         securitization  advances (and the capital costs  associated with making
         such advances),  and of servicing a highly seasoned portfolio following
         three  successive  quarters  of selling  the  securitization  servicing
         rights associated with newly originated mortgage loans;

     o   In  August  2001,  we  completed  our  Second  Exchange  Offer,   which
         extinguished   substantially   all  of  our  long-term  debt,   leaving
         approximately  $10  million  out of $150  million  of our  notes  still
         outstanding.  This debt extinguishment  helped us threefold.  First, it
         eliminated  nearly $140 million of principal  which we otherwise  would
         have had to repay in 2004.  Second, it eliminated more than $13 million
         of yearly interest  expense that we would have had to pay to the former
         noteholders  had they  still  held  their  notes.  Third,  the  ratings
         agencies that  previously  rated us and our notes have withdrawn  their
         corporate ratings.

   We believe that our  transfer of  servicing to Ocwen and the Second  Exchange
Offer  were  essential  steps  in  our  continuing  effort  to  restructure  our
operations  and reduce our negative  cash flow  previously  associated  with our
servicing  operations and the notes. There can be no assurances,  however,  that
these or other factors  described herein will not have a material adverse effect
on our results of  operations  and  financial  condition.  (See  "-Competition,"
"-Regulation"  and "-Forward  Looking  Statements and Risk Factors," among other
sections).

   OTHER. In May 2001, the NYSE de-listed our Common Stock.  The Exchange stated
that it took this  action  because we were  unable to meet the NYSE's  continued
listing   standards  of   maintaining   a  minimum  of  $15  million  in  market
capitalization  and a minimum  share price of $1 over a 30-day  trading  period.
When our Common Stock was  de-listed in May, it began trading on the OTCBB under
the ticker symbol "DLTO".

                                       23

EXCESS CASHFLOW CERTIFICATES

   We  classify   excess  cashflow   certificates   that  we  receive  upon  the
securitization of a pool of loans as "trading  securities." The amount initially
allocated to the excess cashflow  certificates  at the date of a  securitization
reflects  their  fair  value.  The  amount  recorded  for  the  excess  cashflow
certificates  is  reduced  for  distributions  which we receive as the holder of
these excess cashflow certificates and is adjusted for subsequent changes in the
fair value of the excess cashflow certificates we hold.

   At the time each securitization  transaction closes, we determine the present
value of the related excess cashflow  certificates using certain  assumptions we
make regarding the underlying mortgage loans. The excess cashflow certificate is
then recorded on our  consolidated  financial  statements  at an estimated  fair
value. Our estimates primarily include the following:

     o   future rate of prepayment of the mortgage loans;

     o   credit losses on the mortgage loans;

     o   a discount rate used to calculate present value; and

     o   the London  Inter-Bank  Offered  Rate  ("LIBOR")  forward  curve (using
         current LIBOR as the floor rate).

   The value of each excess  cashflow  certificate  represents  the cash flow we
expect to  receive  in the  future  from such  certificate  based  upon our best
estimate.  We  monitor  the  performance  of the loans  underlying  each  excess
cashflow  certificate,  and any changes in our estimates (and consequent changes
in value of the excess  cashflow  certificates)  is  reflected  in the line item
called "interest  income" in the quarter in which we make any such change in our
estimate. Although we believe that the assumptions we use are reasonable,  there
can be no assurance as to the accuracy of the assumptions or estimates.

   In determining the fair value of each of the excess cashflow certificates, we
make the following underlying  assumptions  regarding mortgage loan prepayments,
mortgage loan default rates and discount rates:

 (A) PREPAYMENTS.  We  base  our  prepayment rate  assumptions upon our on-going
     analysis of the  performance of mortgage  pools we previously  securitized,
     and the  performance  of similar  pools of mortgage  loans  securitized  by
     others in the industry.  We apply different prepayment speed assumptions to
     different  loan  product  types  because  it has been our  experience  that
     different  loan  product  types  exhibit  different   prepayment  patterns.
     Generally,  our loans can be  grouped  into two loan  products - fixed rate
     loans and  adjustable  rate  loans.  With fixed rate loans,  an  underlying
     borrower's interest rate remains fixed throughout the life of the loan. Our
     adjustable  rate loans are really a "hybrid"  between fixed and  adjustable
     rate loans,  in that the rate  generally  remains  fixed  typically for the
     first three years of the loan, and then adjusts  typically every six months
     thereafter.  Within each product type, other factors can affect  prepayment
     rate assumptions. Some of these factors, for instance, include:

     o   whether or not a loan contains a prepayment  penalty - an amount that a
         borrower must pay to a lender if the borrower prepays the loan within a
         certain  time  after  the  loan  was  originated.  Loans  containing  a
         prepayment  penalty typically do not prepay as quickly as those without
         such a penalty;

     o   as is customary with adjustable rate mortgage loans,  the  introductory
         interest rate charged to the borrower is  artificially  lower,  between
         one and two  full  percentage  points,  than the  rate  for  which  the
         borrower would have otherwise qualified. Generally, once the adjustable
         rate  mortgage  begins  adjusting  on the first  adjustment  date,  the
         interest  rate  payable  on  that  loan  increases,   at  times  fairly
         substantially.  This interest rate increase can be exacerbated if there
         is an  absolute  increase  in  interest  rates.  As a  result  of these
         increases  and the  potential  for future  increases,  adjustable  rate
         mortgage loans typically are more susceptible to early prepayments.

     There are several  reasons why a loan will prepay  prior  to its  maturity,
     including (but not limited to):

     o   a decrease in interest rates;

                                       24

     o   improvement in the borrower's  credit profile,  which may allow them to
         qualify for a lower interest rate loan;

     o   competition in the mortgage market,  which may result in lower interest
         rates being offered;

     o   the borrower's sale of his or her home; and

     o   a default by the borrower, resulting in foreclosure by the lender.

     It is unusual  for a borrower  to prepay  a  mortgage loan during the first
     few months because of the following:

     o   it typically takes at least several months after the mortgage loans are
         originated for any of the above events to occur;

     o   there are costs involved with refinancing a loan; and

     o   the borrower does not want to incur prepayment penalties.

     Thereafter,  we have found that the rate at which loans  prepay will slowly
     increase  and   stabilize,   then  decrease  and   eventually   level  off.
     Historically, we used a "ramp" prepayment curve, in which we projected that
     a loan would  initially  begin  prepaying at a certain rate,  and that rate
     would  incrementally  increase (or "ramp up") over its first 12 months, and
     level off thereafter.  Commencing in 1998, we began using a "vector" curve,
     which is similar to a "ramp curve" in that prepayment  rates  incrementally
     increase  over a longer  period  of time and then  stabilize.  However,  as
     opposed  to  a  ramp  curve  (which  remains   constant  once   prepayments
     stabilize),  we  believe  that a  vector  curve is more  representative  of
     projected future loan prepayment experience, as it thereafter decreases and
     then eventually levels off.

     The  following  table  shows  our most  recent  changes  to our  prepayment
     assumptions - in the third quarter of 2001 and, prior to that, in the third
     quarter 2000:
<TABLE>
<S>  <C>                 <C>                      <C>

     LOAN TYPE     AT SEPTEMBER 30, 2001    AT  SEPTEMBER 30, 2000
     -------------------------------------------------------------

      Fixed Rate:
        At Month           4.00%                     4.00%
        Peak Speed        30.00%                    23.00%
      Adjustable Rate:
        At Month           4.00%                     4.00%
        Peak Speed        75.00%                    50.00%
</TABLE>

 (B) DEFAULT  RATE.  A default  reserve for both  fixed- and  adjustable-rate
     loans sold to the  securitization  trusts of 5.00% of the amount  initially
     securitized at December 31, 2001 compared to 3.50% at December 31, 2000.

     Our loan loss assumption reflects our belief that:

     o   prepayment  speeds  generally  will be slower in the future than in the
         past;

     o   the rise in home values  will be flat or slightly  moderate as compared
         to the past few years; and

     o   borrowers will therefore be less able to refinance  their  mortgages to
         avoid  default which may have an adverse  effect on the  non-performing
         loans in the  securitizations  trusts  underlying  our excess  cashflow
         certificates.

 (C) DISCOUNT RATE. We use a discount rate that we believe reflects the risks
     associated  with our excess  cashflow  certificates.  While  quoted  market
     prices on comparable  excess cashflow  certificates  are not available,  we
     compare  our  valuation  assumptions  and  performance  experience  to  our
     competitors' in the  non-conforming  mortgage  industry.  Our discount rate
     takes into account the asset quality and the performance of our securitized
     mortgage loans  compared to that of the industry and other  characteristics
     of our securitized  loans. We quantify the risks associated with our excess
     cashflow  certificates  by comparing the asset quality and payment and loss
     performance  experience of the  underlying  securitized  mortgage  pools to
     comparable  industry  performance.  We believe  that the  practice  of many
     companies  in the  non-conventional  mortgage  industry  has  been to add a
     spread for risk to the all-in cost of  securitizations  to

                                       25

     determine their discount rate. From these comparisons, we have identified a
     spread that we add to the all-in cost of our mortgage  loan  securitization
     trusts'  investor  certificates.  The discount rate we use to determine the
     present  value of cash flows from  excess  cashflow  certificates  reflects
     increased  uncertainty  surrounding  current and future market  conditions,
     including without limitation,  uncertainty concerning inflation, recession,
     home prices, interest rates and equity markets.

     We utilized a discount  rate of 15% at December 31, 2001 compared to 13% at
     December 31, 2000 on "senior" excess  cashflow  certificates  (I.E.,  those
     excess  cashflow  certificates  that  were not  subject  to a Net  Interest
     Margin, or "NIM,"  transaction).  Prior to the quarter ending September 30,
     2001,  some of our  excess  cashflow  certificates  were  subject  to a NIM
     transaction,  for which we applied  an 18%  discount  rate.  As part of the
     Second Exchange Offer, all of the excess cashflow  certificates  subject to
     the NIM transaction  were  transferred to the LLC. As such, at December 31,
     2001, we retain only "senior" excess cashflow certificates.

     In the third  quarter of 2000,  we increased  the discount  rate we used on
     those excess cashflow  certificates  included in the NIM transaction to 18%
     (from  12%)  and  recorded  an  $8.8  million  valuation  adjustment.   The
     adjustment  reflected a  reduction  in the  present  value of those  excess
     cashflow certificates sold in connection with our NIM transaction completed
     in the fourth  quarter of 2000.  We increased  the  discount  rate on these
     excess  cashflow  certificates  during  the  period  that  the  senior  NIM
     securities remain  outstanding,  to account for the potentially higher risk
     associated  with the  residual  cash flows  expected  to be received by the
     holder of the certificated interest in the NIM trust, which is subordinated
     to the multiple senior securities sold in the NIM transaction.

     In the fourth  quarter of 2000,  we increased  the discount rate we used in
     determining the present value of our "senior" excess cashflow  certificates
     to 13% from 12%,  and  recorded a $7.1 million  valuation  adjustment.  The
     adjustment  reflected  an  increase  in  volatility  concerning  the  other
     underlying assumptions used in estimating expected future cash flows due to
     greater  uncertainty  surrounding  current  and future  market  conditions,
     including without limitation,  inflation,  recession, home prices, interest
     rates and equity markets.

   At September 30, 2001,  we recorded a charge to interest  income to reflect a
fair value  adjustment to our remaining  excess cashflow  certificates  totaling
$19.7  million.  Our change in  assumptions  at September  30,  2001,  primarily
reflect recent  unforeseen  market events  relating to the terrorist  attacks on
September 11, 2001,  that further  accelerated an economic  downturn in the U.S.
economy,  and which we  believe  may have a  significant  adverse  impact on the
economy for the foreseeable future.

   Our current  prepayment rate and default rate assumptions  primarily  reflect
our current and future expectation for:

     o   a continuing relatively low interest rate environment based upon, among
         other things,  the  Eurodollar  futures  curve.  At June 30, 2001,  the
         Eurodollar  futures  market,  an  indicator of future  interest  rates,
         projected  that 1-month  LIBOR and 6-month  LIBOR rates at December 31,
         2001 would be 4.13% and 4.41%,  respectively.  However,  as a result of
         the unexpected  events of September 11, 2001,  actual 1-month LIBOR and
         6-month LIBOR for December 31, 2001 were  significantly  lower at 1.87%
         and 1.98%, respectively.

     o   a  potential  for an adverse  economic  environment.  According  to the
         Mortgage Bankers Association,  the percentage of U.S. homeowners behind
         on their  mortgages  in the third  quarter of 2001 rose to the  highest
         levels since the last recession in the early 1990s,  citing a shrinking
         economy and higher  unemployment as among the causes. In addition,  the
         National  Bureau  of  Economic  research,  the  unofficial  arbiter  of
         expansions and contractions, reported in November 2001, its belief that
         the United States economy had officially  entered into a recession back
         in March 2001.  Lastly, we revised our discount rate to reflect current
         market  conditions  and the rate of return  management  believes  to be
         appropriate given the significant uncertainty regarding future economic
         events,  thus increasing the inherent risk and volatility of our excess
         cashflow certificates.

                                       26

   For 2000, we recorded a non-cash  increase of $9.6 million to interest income
for a fair value  adjustment  to our excess  cashflow  certificates,  due to the
decrease in one-month  LIBOR.  Some of the our excess cashflow  certificates are
backed by floating rate securities,  which are susceptible to interest rate risk
(positive or negative) associated with a movement in short-term interest rates.

DEFERRED TAX ASSET

   As of December 31, 2001, we carried a deferred tax asset, net of $5.6 million
on our  consolidated  financial  statements - comprised of federal and state net
operating losses or "NOLs" less the tax impact and a valuation allowance.

   As of December 31, 2001, we have a gross  deferred tax asset of $52.3 million
and a valuation  allowance of $46.7 million.  Following two successive  years of
posting  significant  losses,  and the modest amount of earnings we project over
the next two  years,  it was  appropriate  for us to  establish  this  valuation
allowance under Accounting Principals Generally Accepted in the United States of
America  (refer to as  "GAAP").  In the event we are able to  continue to record
earnings in upcoming years, we expect to:

     o   utilize a larger  amount of the gross  deferred tax asset to offset the
         majority of such earnings; and

     o   potentially  decrease the amount of,  and/or  eliminate,  the valuation
         allowance in accordance with GAAP.

     As of December 31, 2001, Federal and State net operating loss carryforwards
("NOLs")  totaled  $107.2  million,  with $1.1 million  expiring in 2018,  $21.1
million  expiring in 2019,  $12.4  million  expiring in 2020,  and $72.6 million
expiring in 2021. (See "Notes to the  Consolidated  Financial  Statements - Note
No. 16 Income Taxes").

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2001, COMPARED TO THE YEAR ENDED DECEMBER 31, 2000

GENERAL

   Our loss before  extraordinary  item for the year ended December 31, 2001 was
$80.5 million, or $5.07 per share (basic and diluted), compared to a net loss of
$49.4  million,  or $3.11 per share  (basic  and  diluted),  for the year  ended
December 31, 2000. The extraordinary  loss on early  extinguishment of debt, net
of tax, in 2001 totaled $19.3  million,  or $1.21 per share (basic and diluted).
For the year ended December 31, 2001, the net loss included:

     o   a $25.4 million, or $1.60 per share (basic and diluted),  write down of
         excess  cashflow  certificates  relating to a sale agreement we entered
         into in the first quarter of 2001 (that closed in May 2001), for a cash
         purchase price of $15 million,  which reflected a significant  discount
         to our carrying value of such excess cashflow certificates;

     o   a charge (loss) to interest income of $19.7 million, or $1.24 per share
         (basic and  diluted),  in the third  quarter,  reflecting  a fair value
         adjustment to our remaining  excess cashflow  certificates,  due to our
         changing the valuation  assumptions  we use to estimate fair value (see
         "-Notes to the  Consolidated  Financial  Statements  - Excess  Cashflow
         Certificates, Net");

     o   a charge of $10.7  million,  or $0.67 per share  (basic  and  diluted),
         relating to our  disposition  and  transfer  to Ocwen of our  servicing
         platform in May 2001;

     o   a charge of $3.6 million,  or $0.23 per share (basic and  diluted),  in
         the  second  quarter  relating  to a  change  in  accounting  estimates
         regarding the life expectancy of our computer-related equipment;

     o   a charge of $1.4 million, or $0.09 per share (basic and diluted) in the
         third quarter relating to professional fees incurred in connection with
         the Second Exchange Offer; and

     o   a charge of $1.5 million,  or $0.09 per share (basic and  diluted),  in
         the  second  quarter  for  establishing  a reserve  for  non-performing
         mortgage loans.

                                       27

   Results for the year ended December 31, 2001 were also negatively impacted by
(a) our not executing a  securitization  in either the first or third  quarters,
which  significantly  reduced our revenues for the year ended  December 31, 2001
and (b) a lower level of originations, compared to 2000.

   For the  year  ended  December  31,  2000,  we  reported  a net loss of $49.4
million,  or $3.11 per share (basic and  diluted).  The majority of the net loss
incurred related to:

     o   the write-down of our capitalized  mortgage  servicing  rights of $31.4
         million;

     o   restructuring and debt modification charges of $7.7 million;

     o   a reduction in the carrying  value of a portion of our excess  cashflow
         certificates  related  to an  increase  in the  discount  rate  of such
         certificates included in our NIM transaction, totaling $6.9 million;

     o   costs  associated  with our NIM  transaction  in November 2000 totaling
         $3.2 million; and

     o   the  write-down  of goodwill  relating to our 1997 purchase of Fidelity
         Mortgage totaling $1.4 million

     This was  partially offset by income associated with the sale of one of our
     domain names for $1.7 million.

REVENUES

   Total revenues decreased $86.1 million, or 72%, to $32.9 million for the year
ended  December 31, 2001,  from $119.0  million for the year ended  December 31,
2000. The decrease in revenue was primarily attributable to:

     o   a decrease in interest income due to:

         (1) a $25.4  million  write-down  in the first  quarter  of five excess
             cashflow certificates, and

         (2) a $19.7  million  charge  in the third  quarter  reflecting  a fair
             value adjustment to our remaining excess cashflow certificates, due
             to our changing the  valuation  assumptions we use to estimate fair
             value (See "-Notes to the Consolidated Financial  Statements - Note
             No. 7 - Excess Cashflow Certificates, net");

     o  a lower net gain recognized on the sale of mortgage loans;

     o   lower  origination  fees and interest income due to a decrease in total
         loan production; and

     o   lower  servicing  fees due to our agreement in January 2001 to transfer
         our servicing  portfolio to Ocwen,  pursuant to which Ocwen immediately
         began  receiving  all servicing  related fees and, in turn,  paid us an
         interim  servicing  fee,  until the servicing  portfolio was physically
         transferred to Ocwen in May 2001.

   We originated  $621.7  million of mortgage  loans for the year ended December
31, 2001,  representing  a 33% decrease  from $933.4  million of mortgage  loans
originated  and  purchased  for year ended  December 31,  2000.  The decrease in
mortgage  loans  originated in 2001,  was  primarily due to senior  management's
attention  being  diverted  to  completing  our  necessary  corporate  and  debt
restructuring (See "-Notes to the Consolidated Financial Statements - Note No. 3
Corporate  Restructuring,   Debt  Modification  and  Debt  Restructuring").   We
securitized  $345.0  million of loans  during the year ended  December 31, 2001,
representing  a 61%  decrease  from the $880.0  million of loans we  securitized
during 2000.  Our whole loan sales  amounted to $261.1  million  during the year
ended December 31, 2001,  representing a 348% increase from the $58.3 million of
whole loans sold for the year ended  December 31, 2000.  This  increase in whole
loan sales  reflects  our present  strategy  to  diversify  our funding  sources
between securitizations and whole loan sales, in order to maximize cash flow and
profitability.

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

 (1) the sum of

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

     (b) the cash premium  purchase price we receive in connection  with selling
         an interest-only certificate in a securitization for each period;

                                       28

     (c) the cash premium  received from selling  mortgage  servicing  rights in
         connection  with  each  securitization,  and/or  the fair  value of the
         non-cash  capitalized  mortgage  servicing rights associated with loans
         securitized in each period (if we retain  mortgage  servicing  rights ,
         which  we  do  not  anticipate   doing  in  the   foreseeable   future,
         particularly  considering that we no longer have a servicing platform);
         and

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

 (2) less the (i) costs associated with securitizations  and (ii) any hedge loss
     (gain) associated with a particular securitization.

  Net gain on  sale of mortgage loans decreased $12.4 million,  or 24%, to $38.6
million for the year ended  December 31, 2001,  from $51.0  million for the year
ended  December 31, 2000.  This  decrease was primarily due to a 35% decrease in
the amount of loans  securitized or sold to $606.1 million in 2001,  compared to
$938.3  million of loans  securitized  or sold in 2000.  The  decrease  in loans
securitized or sold was due to an overall 33% decrease in total loan  production
in 2001,  compared to 2000.  The  decrease  in net gain on sale on a  comparable
basis was partially  offset by (1) a higher gross profit margin  recorded on our
securitizations in 2001 versus 2000, and (2) no correspondent premiums (negative
revenue) to acquire loans in 2001 - because we closed our correspondent  channel
in June 2000 - compared  to the $1.6  million  we paid  during the first half of
2000.  The  weighted  average net gain on sale ratio was 6.4% for the year ended
December 31, 2001 compared to 5.4% for the year ended December 31, 2000.

   INTEREST INCOME. Interest primarily represents the sum of:

        (1)   the gross cash interest we earn on loans held for sale;

        (2)   the cash we receive from our excess cashflow certificates;

        (3)   the non-cash  mark-to-market or non-cash valuation  adjustments to
              our excess cashflow certificates to reflect changes in fair value;
              and

        (4)   cash interest earned on bank accounts.

    Interest income decreased $54.4 million, or 168%, to $(22.1) million for the
year ended December 31, 2001, from $32.3 million for the year ended December 31,
2000. The decrease in interest income was primarily due to:

     o   our $25.4 million write down of excess  cashflow  certificates  that we
         sold for a cash purchase price of $15 million under a sale agreement we
         entered into in the first quarter of 2001;

     o   a charge to  interest  income of $19.7  million  in the third  quarter,
         reflecting a fair value  adjustment  to our remaining  excess  cashflow
         certificates,  due to the changes we made to the valuation  assumptions
         we use to estimate  fair value (see "-Notes to  Financial  Statements -
         Note No. 7-Excess Cashflow Certificates, Net");

     o   a 33% decrease in loan production for the year ended December 31, 2001,
         compared to the year ended December 31, 2000, which resulted in a lower
         amount of mortgage  loans  generating  interest  income  while held for
         sale;

     o   a lower average  mortgage  coupon rate charged to the borrower of 10.5%
         from 11.4% reflecting a lower economic interest rate environment; and

     o   a decrease in  interest  earned on interest  bearing  accounts  that we
         received as servicer on our  securitizations.  We will continue to earn
         less interest income on our interest  bearing  accounts on a go-forward
         basis because  substantially  all of those accounts were transferred to
         Ocwen in connection  with the sale of our servicing  portfolio to Ocwen
         in May 2001.

   SERVICING  FEES.  Servicing  fees  represent  all  contractual  and ancillary
servicing  revenue  we  receive,   less  the  offsetting   amortization  of  the
capitalized  mortgage servicing rights, and any adjustments  recorded to reflect
valuation allowances for the impairment in mortgage servicing rights.

   Servicing fees decreased $11.2 million,  or 79%, to $3.0 million for the year
ended  December 31,  2001,  from $14.2  million for the year ended  December 31,
2000.  This  decrease was the result of our  agreement to transfer our

                                       29

servicing   portfolio  to  Ocwen  in  January  2001,  pursuant  to  which  Ocwen
immediately  began receiving all servicing related fees and, in turn, paid us an
interim servicing fee, until the servicing portfolio was physically  transferred
to Ocwen in May 2001. As a result of this transfer, we do not expect to earn any
servicing fees in 2002, or thereafter.

   NET ORIGINATION  FEES AND OTHER INCOME.  Origination  fees represent (1) fees
earned on broker and retail  originated  loans,  (2) premiums  paid to originate
mortgage loans and (3) other miscellaneous income, if any.

   Net  origination  fees and other income  decreased  $8.0 million,  or 37%, to
$13.4 million for the year ended  December 31, 2001,  from $21.4 million for the
year ended  December 31, 2000.  The decrease was  primarily  the result of a 33%
decrease in loan originations and our sale of a domain name in July 2000.

EXPENSES

   Total expenses decreased by $71.0 million,  or 39%, to $110.6 million for the
year ended  December 31, 2001,  from $181.6  million for the year ended December
31, 2000. The decrease was primarily due to a decrease in personnel costs due to
our  restructuring  and our sale of our  servicing  portfolio  and a decrease in
interest expense.  The decrease in expenses was also the result of our incurring
higher  expenses for the year ended 2000 relating to charges  associated  with a
corporate  restructuring and debt modification in the third quarter of 2000. The
decrease in expenses was  partially  offset by charges  principally  incurred in
connection with:

     o   our disposition and transfer of our servicing  platform to Ocwen in May
         2001;

     o   a change in our accounting  estimates  regarding the life expectancy of
         computer-related equipment in the second quarter of 2001; and

     o   our recording a reserve for non-performing mortgage loans in the second
         quarter of 2001.

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

   Payroll  and  related  costs  decreased  by $13.6  million,  or 24%, to $42.9
million for the year ended  December 31, 2001,  from $56.5  million for the year
ended  December 31,  2000.  The  decrease  was  primarily  the result of (1) the
downsizing  we  effectuated  as  part  of our  overall  corporate  restructuring
beginning in the second half of 2000 and culminating with the physical  transfer
of our servicing  operation in May 2001;  and (2) a lower amount of  commissions
paid due to the decrease in  originations.  We employed 609 full- and  part-time
employees as of December 31, 2001, compared to 851 full- and part-time employees
as of December 2000.

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

   Interest expense decreased by $14.3 million, or 47%, to $16.1 million for the
year ended  December 31, 2001 from $30.4 million for the year ended December 31,
2000. The decrease was primarily  attributable  to the $12.1 million of interest
expense we saved in 2001 by extinguishing $139.2 million of notes in August 2001
and, to a lesser extent, to our lower loan production in 2001, which resulted in
lower warehouse  financing,  and lower financing  costs.  The average  one-month
LIBOR rate, which is the benchmark used to determine our cost of borrowed funds,
decreased on average to 3.9% for the year ended  December 31, 2001,  compared to
an average of 6.4% for the year ended December 31, 2000.

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

   General and administrative  expenses increased $3.8 million,  or 8%, to $48.9
million for the year ended  December 31, 2001,  from $45.1  million for the year
ended December 31, 2000. The increase primarily resulted from:

     o   the cost of maintaining  an  unprofitable  servicing  platform until we
         physically  transferred  it to Ocwen in May 2001,  plus the  associated
         costs of transferring our servicing portfolio to Ocwen;

                                       30

     o   a change in the useful  life of  computer-related  equipment  from five
         years to three years;

     o   a fair value  adjustment to a pool of  non-performing  loans,  which we
         ultimately sold in July 2001;

     o   partially   offset  by  the  cost  savings  related  to  our  corporate
         restructuring,  including the disposition of our servicing portfolio to
         Ocwen in May 2001 and  elimination of capital  charges  associated with
         making  securitization  advances  prior  to the  sale of the  servicing
         portfolio.

   RESTRUCTURING   AND  OTHER  SPECIAL   CHARGES.   We  recorded  the  following
restructuring and other special charges in 2001 and 2000:

     o   In 2001,  $2.7  million  of  restructuring  and other  special  charges
         relating to our disposition of branches and severance costs  associated
         with closing our servicing operation.

     o   In the  fourth  quarter  of 2000,  a $38.2  million  write-down  of our
         capitalized  mortgage  servicing  rights  coupled  with a $1.6  million
         write-down of other servicing receivable assets.

     o   In the third quarter of 2000, $3.1 million of debt modification charges
         primarily related to legal fees, and the noteholders' financial advisor
         fees associated with the Debt  Modification and Exchange  Offering.  We
         also recorded $6.7 million of charges related to our  restructuring  of
         our operations, primarily related to employee severance associated with
         the layoffs, a reduction to goodwill and office equipment write-offs.

   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.

   We  recorded a tax  provision  of $2.9  million  primarily  related to excess
inclusion income generated by our excess cashflow certificates and a tax benefit
of $13.2  million for the year ended  December 31, 2001 and 2000,  respectively.
Excess  inclusion income cannot be offset by our NOL's under the REMIC tax laws.
In 2001, it was primarily  caused by the REMIC  securitization  trust  utilizing
cash, that otherwise would have been paid to us as holder of the excess cashflow
certificate, to make payments to other security holders:

     o   to create and/or maintain  overcollateralization by artificially paying
         down the principal balance of the asset-backed securities; and

     o   in connection with our NIM  transaction,  executed in November 2000, to
         pay down the debt collateralized by our excess cashflow certificates.

   Going  forward,  we expect  to  continue  to incur a modest  amount of excess
inclusion income, which we will be unable to offset using our NOL's.

YEAR ENDED  DECEMBER 31, 2000,  COMPARED TO THE YEAR ENDED DECEMBER 31, 1999

GENERAL

   We reported a net loss for the year ended December 31, 2000 of $49.4 million,
or $3.11 per share (basic and diluted),  compared to net income of $4.7 million,
or $0.30 per share (basic and  diluted),  for the year ended  December 31, 1999.
The net loss for 2000 included the following  items totaling $46.9 million on an
after-tax basis:

     o   a $31.4 million write-down or our capitalized mortgage servicing rights
         based upon our realization, in connection with the bidding process that
         led to our  agreement  with  Ocwen,  that we  could  not  sell our then
         existing loan servicing portfolio for a premium;

     o   $7.7 million of restructuring and debt modification charges;

     o   a $4.9 million  reduction in the carrying value of the excess  cashflow
         certificates due to an increase in the discount rate assumption used to
         present value the future expected excess cash flows. This was partially
         offset by an  increase  to the  carrying  value of the excess  cashflow
         certificates  due to a decrease in the variable  interest  rate paid to
         the pass-through  investor in the  securitization  which is tied to the
         one-month LIBOR index;
                                       31

     o   $3.2 million of costs  associated  with our NIM transaction in November
         2000;

     o   a $1.4 million write-down of our goodwill relating to the 1997 purchase
         of Fidelity Mortgage;

     o   a $1.7 million gain from the sale of one of our domain names.

   The net loss for the year ended  December 31, 1999  included a $12.0  million
charge  relating to our  settlement  with the NYSBD and the NYOAG  totaling $7.3
million on an after-tax basis.  Comments  regarding the components of net income
are detailed in the following paragraphs.

REVENUES

   Total revenues  decreased  $35.8  million,  or 23%, to $119.0 million for the
year ended  December 31, 2000,  from $154.8  million for the year ended December
31, 1999.  The decrease in revenue was primarily  attributable  to a decrease in
the net gain on sale of mortgage loans and, to a lesser  extent,  servicing fees
and  origination  fees.  This  decrease was  partially  offset by an increase in
interest income.

   We originated and purchased $933 million of mortgage loans for the year ended
December 31, 2000,  representing  a 37% decrease  from $1.47 billion of mortgage
loans  originated  and  purchased  for the year  ended  December  31,  1999.  We
securitized $880 million in loans (and sold the related  servicing rights on our
second, third and fourth quarter 2000 securitizations,  respectively) during the
year  ended   December  31,  2000,   representing  a  40%  decrease  from  three
securitizations  and a loan  sale  through  a conduit  facility  totaling  $1.46
billion  during the year ended  December 31, 1999. We also sold $58.3 million of
loans on a whole loan  servicing  released basis for the year December 31, 2000,
after having not sold any whole loans in 1999. Total loans serviced decreased 9%
to $ 3.31 billion at December 31, 2000 from $3.63 billion at December 31, 1999.

   Net gain on sale of mortgage loans decreased $33.0 million,  or 39%, to $51.0
million for the year ended  December 31, 2000,  from $84.0  million for the year
ended  December 31, 1999.  This decrease was primarily due to (1) a 40% decrease
in the amount of loans  securitized  or sold and (2)  revisions to our loan loss
reserve and discount rate  assumptions  in the fourth quarter of 1999 and fourth
quarter  of  2000,  respectively  (see  "-Notes  to the  Consolidated  Financial
Statements - Note No. 7 - Excess Cashflow Certificates,  Net"). The decrease was
partially offset by:

     o   a higher gross excess spread expected to be earned over the life of the
         loans as  calculated  by the  weighted  average  coupon  on the pool of
         mortgage  loans  securitized  less  the  total  cost  of  funds  on the
         securitization;

     o   our not  executing a  securitization  in the third  quarter of 1999 and
         instead  opting to sell our loan  production  into a conduit  facility,
         where  the net gain on sale was  lower  than if we would  have sold our
         loans through securitization; and

     o   lower aggregate  premiums paid to acquire loans,  resulting from both a
         decrease in amount of loans purchased through the correspondent channel
         and lower average premiums paid to correspondents.

   We also lowered our  prepayment  speed  assumptions  in the third  quarter of
2000,  while at the same time increased our loss reserve  initially  established
for both fixed and adjustable-rate loans sold to the securitizations trusts (see
"-Notes to the Consolidated  Financial Statements - Note No. 7 - Excess Cashflow
Certificates,  Net"). The changes largely offset each other and, therefore,  did
not materially  affect net gain on sale of mortgage loans.  The weighted average
net gain on sale ratio was 5.1% for the year ended December 31, 2000 compared to
5.4% for the year ended December 31, 1999.

    Interest income increased $1.3 million, or 4%, to $32.3 million for the year
ended  December 31,  2000,  from $31.0  million for the year ended  December 31,
1999.  The increase was  primarily  due to our utilizing a mortgage loan conduit
(special purpose vehicle) prior to  securitization  in 1999 (a short-term credit
facility  - similar to our other  warehouse  finance  facilities)  - in which we
earned and recorded the net interest  margin between the interest rate earned on
the pool of mortgage  loans sold to the  mortgage  loan  conduit and the conduit
financing  rate,  less  administrative  expenses - that we did not use at all in
2000.

   Servicing fees decreased $2.1 million,  or 13%, to $14.2 million for the year
ended  December 31,  2000,  from $16.3  million for the year ended  December 31,
1999. The decrease in servicing  income was primarily due to (1)

                                       32

lower ancillary fees collected (primarily  prepayment penalties as mortgage loan
prepayments  were  comparably  lower  in  2000)  and (2)  lower  servicing  fees
collected due to a more seasoned (I.E., more delinquent)  portfolio in 2000, due
in part to our selling  servicing  rights on $590 million of newly originated or
purchased mortgage loans securitized in 2000.

    Net  origination  fees and other income  decreased  $2.0 million,  or 9%, to
$21.4 million for the year ended  December 31, 2000,  from $23.4 million for the
year ended  December 31, 1999.  The decrease was  primarily  the result of a 32%
decrease in broker  originated  loans and an 18%  decrease in retail  originated
loans.  This was partially offset by the sale of one of our domain names in July
2000.

EXPENSES

   Total expenses increased by $34.5 million,  or 23%, to $181.6 million for the
year ended  December 31, 2000,  from $147.1  million for the year ended December
31, 1999, primarily resulting from:

     o   the complete write down of our capitalized mortgage servicing rights of
         $38.2 million;

     o   corporate  restructuring  and debt  modification  charges  in the third
         quarter of 2000, totaling $6.7 million and $3.1 million,  respectively;
         and

     o   a write-down of goodwill in the fourth quarter of 2000 of $1.8 million;

     o   partially offset by:

        >> a decrease in general and administrative costs, primarily relating to
           the $12  million we expensed  in 1999 for the  settlement  we entered
           into with the NYSBD, NYOAG and DOJ; and

        >> a decrease in personnel costs attributable to our initiative to lower
           costs through a corporate  restructuring in the third quarter of 2000
           that included a workforce reduction.

   Payroll and related costs decreased by $8.6 million, or 13%, to $56.5 million
for the year ended  December  31,  2000,  from $65.1  million for the year ended
December 31, 1999.  The decrease was  primarily the result of (1) a lower number
of employees in 2000 compared to 1999 relating to our restructuring in the third
quarter  of 2000 (see  "-Corporate  Restructuring,  Debt  Modification  and Debt
Restructuring"),  and (2) a lower amount of commissions  paid because of a lower
amount of loan  originations  in 2000 compared to 1999. As of December 31, 2000,
we  employed  851 full- and  part-time  employees,  compared  to 1,134 full- and
part-time employees as of December 31, 1999.

   Interest expense increased by $3.8 million,  or 14%, to $30.4 million for the
year ended  December 31, 2000 from $26.6 million for the year ended December 31,
1999. The increase was primarily  attributable  to the accounting for loans sold
through a mortgage  loan conduit prior to their  securitization  during the year
ended December 31, 1999, in which we earned and recorded the net interest margin
between  the  interest  rate  earned on the pool of  mortgage  loans sold to the
mortgage  loan  conduit  and the conduit  financing  rate,  less  administrative
expenses.  Typically,  interest expense related to our other warehouse financing
and borrowings are recorded  directly to interest expense and we did not utilize
our mortgage  loan conduit  during 2000.  In addition,  the cost of funds on our
credit  facilities  (which  were tied to the  one-month  LIBOR)  increased.  The
one-month LIBOR index increased to an average  interest rate of 6.4% in the year
ended  December 31, 2000,  compared to an average  interest rate of 5.2% for the
year ended December 31, 1999.

   General and administrative expenses decreased $10.2 million, or 18%, to $45.1
million for the year ended  December 31, 2000,  from $55.3  million for the year
ended  December 31,  1999.  The  decrease  was  primarily  the result of the $12
million  settlement  we  expensed  in the  year  ended  December  31,  1999,  in
connection with our settlement with the NYSBD, NYOAG and DOJ.

    We recorded the following restructuring and other special charges in 2000:

     o   In the  fourth  quarter  of 2000,  a $38.2  million  write-down  of our
         capitalized  mortgage  servicing  rights,  coupled  with a $1.6 million
         write-down of other servicing receivable assets;

                                       33

     o   In the third quarter of 2000, $3.1 million of debt modification charges
         primarily related to legal fees, and the noteholders' financial advisor
         fees  associated  with  the Debt  Modification  and  proposed  Exchange
         Offering.  We also  recorded  $6.7  million of  charges  related to the
         restructuring  of  our  operations,   primarily   related  to  employee
         severance  associated  with the  layoffs,  a reduction  to goodwill and
         office  equipment  write-offs  (see  "-Corporate  Restructuring,   Debt
         Modification and Debt Restructuring").

    We recorded a tax benefit of $13.2 million for the period ended December 31,
2000 and a tax provision of $3.1 million for the period ended December 31, 1999.
Income taxes provided a 21.1% effective tax rate for the year ended December 31,
2000,  compared to a 39.5%  effective  tax rate for the year ended  December 31,
1999.

FINANCIAL CONDITION

DECEMBER 31, 2001 COMPARED TO DECEMBER 31, 2000

   Cash and  interest-bearing  deposits decreased $55.9 million, or 90%, to $6.4
million at December 31,  2001,  from $62.3  million at December  31, 2000.  This
decrease was primarily related to the transfer of our servicing portfolio, which
resulted in the transfer of all the securitization  trusts' collection  accounts
to Ocwen.

   Accounts  receivable  decreased  $17.8  million,  or 87%, to $2.7  million at
December 31, 2001,  from $20.5  million at December 31, 2000.  This decrease was
primarily due to the sale of some of our servicing advance receivables to Ocwen,
and  the  write-down  of  any  servicing  advance  receivable  determined  to be
non-recoverable, in connection with our transfer of servicing to Ocwen.

   Loans held for sale, net,  increased $11.7 million,  or 14%, to $94.4 million
at December 31, 2001, from $82.7 million at December 31, 2000. This increase was
primarily due to the net difference  between loan originations and loans sold or
securitized during 2001.

   Accrued interest  receivable  decreased $9.6 million, or 92%, to $0.8 million
at December 31, 2001, from $10.4 million at December 31, 2000. This decrease was
primarily due to the sale of the interest receivable asset (monthly  delinquency
advances) to Ocwen, in connection with our transfer of servicing.

   Excess cashflow certificates,  net decreased $200.1 million, or 92%, to $16.8
million at December 31,  2001,  from $216.9  million at December 31, 2000.  This
decrease was primarily due to:

     o   the transfer of $153.1 million of excess  cashflow  certificates to the
         LLC in connection with the Second Exchange Offer;

     o   our sale of five excess cashflow  certificates with a carrying value of
         $40.4 million,  pursuant to a sale agreement  entered into in the first
         half  of  2001,  for a  cash  purchase  price  of  $15  million  (which
         represented a $25.4 million write-down that was recorded as a reduction
         in interest in our consolidated statement of operations); and

     o   a $19.7  million fair value  adjustment in the third quarter of 2001 to
         our remaining excess cashflow certificates, as we changed the valuation
         assumptions  we  use  to  estimate  fair  value  (see  "-Notes  to  the
         Consolidated  Financial  Statements  - Note  No.  7 -  Excess  Cashflow
         Certificates, Net").

     The decrease was partially offset by:

     o   a $2.0  million  fair  value  mark-to-market  adjustment  of our excess
         cashflow  certificates,  reflecting  the  change in fair  value of such
         excess cashflow  certificates  (which  incorporates any change in value
         (accretion or reduction) in the carrying  value of the excess  cashflow
         certificates  and the cash  distributions  we received from such excess
         cashflow certificates);

     o   an  $11.1  million   increase  from   recording  new  excess   cashflow
         certificates from loans securitized in 2001.

   Equipment,  net, decreased $10.0 million, or 67%, to $5.0 million at December
31,  2001,  from $15.0  million at December 31, 2000.  This  decrease  primarily
reflects our  changing  the  estimated  life on our  computer-related  equipment
during  the  second  quarter  of  2001,  the  disposition  of  servicing-related
equipment relating to our transfer of servicing,  and the closing of some retail
loan origination centers.

                                       34

   Prepaid and other assets decreased $37.1 million,  or 98%, to $0.7 million at
December 31, 2001,  from $37.8  million at December 31, 2000.  This decrease was
primarily attributable to:

     o   the  extinguishment  of our wholly-owned  special purpose entities (and
         the  equity  (capital)  in such  special  purpose  entity)  used as the
         issuers for  delinquency  and  servicing  advance  securitizations,  in
         connection with the sale of servicing to Ocwen,  upon our repurchase of
         such  securitizations  using the proceeds we received  from selling the
         underlying delinquency and servicing advance receivables to Ocwen;

     o   our payment of the notes interest  coupon in February  2001,  which was
         held in escrow, and therefore  reflected as a prepaid asset at December
         31, 2000;

     o   the transfer of a non-performing loan trust to the LLC (an unaffiliated
         entity to us) as part of the Second Exchange Offer; and

     o   our  recognizing   previously   capitalized  notes  issuance  costs  in
         connection with the Second Exchange Offer.

   We have a deferred  tax asset,  net, of $5.6 million at December 31, 2001 and
2000,  which was primarily  attributable to the net operating losses we incurred
in 2000.  Embedded in the  deferred  tax asset,  net,  is a valuation  allowance
established in 2000 and increased in 2001. (See "-Notes to Financial  Statements
- Note No. 16 - Income Taxes").

   Warehouse  financing and other borrowings  increased $1.0 million,  or 1%, to
$89.6  million at December  31,  2001,  from $88.6 at  December  31,  2000.  The
increase was primarily  attributable  to our borrowing a higher amount under our
warehouse credit facility.

   Senior notes decreased  $138.8 million,  or 93%, to $10.8 million at December
31, 2001 from $149.6  million at December 31, 2000.  This decrease was primarily
attributable to the  extinguishment of substantially all our notes in the Second
Exchange  Offer (see  "-Corporate  Restructuring,  Debt  Modification,  and Debt
Restructuring").

   Accounts  payable and accrued  expenses  decreased $13.2 million,  or 41%, to
$18.8 million at December 31, 2001 from $32.0 million at December 31, 2000. This
decrease was primarily  attributable to (1) our reversing a previously  recorded
accrual  for the August  2001  semi-annual  interest  coupon  payment due on the
notes. As part of the Second Exchange Offer, all tendering noteholders agreed to
waive the August 2001 interest payment for all notes being tendered, and (2) the
LLC's becoming obligated to satisfy our NYSBD subsidy payments from the proceeds
of the mortgage-related  securities transferred to the LLC as part of the Second
Exchange Offer.

   Investor payable  decreased to $0 at December 31, 2001, from $69.5 million at
December 31, 2000. The decrease was the result of our transferring our servicing
portfolio  to  Ocwen.  Investor  payable  previously  reflected  the  amount  of
principal  collected at the end of a reporting  period and the accrued  interest
that  was  due  the  securitization  trusts  in the  following  period  by us as
servicer.

   Advance  payments by  borrowers  for taxes and  insurance  decreased to $0 at
December 31, 2001, from $12.9 million at December 31, 2000. The decrease was the
result of our  transferring our servicing  portfolio to Ocwen.  Advance payments
previously reflected the payments collected and held in escrow trust accounts by
us, as servicer, before distribution to third parties.

   Stockholders'  equity  decreased  $85.9 million,  or 88%, to $11.8 million at
December 31, 2001 from $97.7  million at December 31,  2000.  This  decrease was
primarily  due to the net loss for 2001 of  $99.8  million.  This was  partially
offset by our issuance of Series A Preferred Stock in connection with the Second
Exchange Offer having an aggregate preference amount of $13.9 million.

LIQUIDITY AND CAPITAL RESOURCES

   We  require  substantial  amounts  of  cash to fund  our  loan  originations,
securitization  activities  and  operations.  In  the  past,  we  have  operated
generally on a negative cash flow basis.  Embedded in our current cost structure
are many fixed  costs,  which are not likely to be  significantly  affected by a
relatively  substantial  increase in loan  originations.  If we can increase our
loan   production   to  generate   sufficient   additional   revenues  from  our
securitizations and sales of such loans to offset our current cost structure and
negative  cash flow,  we believe we can

                                       35

generate positive cash flow within the foreseeable future. However, there can be
no assurance we will be  successful  in this regard.  To do so, we must generate
sufficient cash from:

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

     o   the premiums we receive from selling whole loans, servicing released;

     o   origination fees on newly closed loans;

     o   excess   cashflow   certificates  we  retain  in  connection  with  our
         securitizations; and

     o   distributions from the LLC.

There can be no assurance,  however, that we will begin generating positive cash
flow within the foreseeable future or at all.

     Currently, our primary cash requirements include the funding of:

        o  loan  originations  pending  their pooling and sale, net of warehouse
           financing;

        o  interest  expense  on warehouse  lines of credit, the remaining notes
           and other financing;

        o  fees, expenses, and tax payments on excess inclusion income  incurred
           in connection with our securitization program; and

        o  general ongoing administrative and operating expenses.

   Historically,  we have  financed our  operations  utilizing  various  secured
credit financing  facilities,  issuance of corporate debt (I.E.,  senior notes),
issuance  of  equity,  and  the  sale of  interest-only  certificates  (sold  in
conjunction  with each of our  securizations)  to offset our negative  operating
cash flow and support our originations, securitizations, servicing (prior to May
2001) and general operating  expenses.  Over the past few years, we have engaged
in a series of transactions to further address our negative cash flow, including
the following:

     o   in 2000, completing three securitizations of interest (delinquency) and
         servicing  advances,  in which we sold our rights to be reimbursed  for
         our  outstanding  delinquency  and  servicing  advances that we made as
         servicer for a cash  purchase  price.  We used the proceeds  from these
         securitizations  to (1) repay a $25 million working capital sub-line of
         our former bank syndicate warehouse facility that expired in June 2000,
         which was secured by our delinquency and servicing advance receivables,
         and (2) for working  capital to finance our  operations,  including the
         funding  of new  delinquency  and  servicing  advances.  We  ultimately
         repurchased these  securitizations in 2001, in connection with the sale
         of servicing to Ocwen,  using the proceeds we received from selling the
         underlying delinquency and servicing advance receivables to Ocwen;

     o   modifying  our  senior  notes in 2000 as part of the Debt  Modification
         (see   "-Corporate   Restructuring,    Debt   Modification   and   Debt
         Restructuring"),  which  enabled us to monetize a portion of our excess
         cashflow  certificates,  first by  obtaining  $17  million in  residual
         financing  in  August  2000,  secured  by some of our  excess  cashflow
         certificates.  Shortly thereafter, in November 2000, we sold six excess
         cashflow certificates through a private placement NIM transaction to an
         owner trust that issued senior certificates to institutional  investors
         for a cash  purchase.  The net proceeds of the NIM  transaction,  after
         expenses,  was used  entirely  to repay  the $17  million  of  residual
         financing  we borrowed  in August  2000 and to create a $7.125  million
         cash escrow account to be used to pay the semi-annual  interest payment
         due on the notes in February 2001;

     o   as part of our Second Debt Restructuring, at the time of the signing of
         the Letter of Intent in February 2001, we obtained  approximately  $2.5
         million of residual financing secured by several of our excess cashflow
         certificates.  We received  approximately  $7.1  million of  additional
         residual  financing  secured  primarily by additional  excess  cashflow
         certificates following the consummation of the consent solicitation and
         the execution of the third  supplemental  indenture in March 2001. Also
         in March 2001,  we entered  into a sale  agreement  to sell five excess
         cashflow  certificates  for a  $15  million  cash  purchase  price.  As
         customary  with sales of similar  assets,  the cash  settlement did not
         occur  until the pools of  mortgage  loans

                                       36

         underlying the six  excess cashflow certificates were transferred to an
         agreed upon  servicer  to service  the pool of  mortgage  loans for the
         benefit of the purchaser.  The purchaser of these five excess  cashflow
         certificates  provided  bridge  financing,  in  the  form  of  residual
         financing described above, until the transfer of servicing in May 2001.
         We used these  proceeds to repay the residual  financing  and have been
         using the balance of the proceeds,  together with the initial  residual
         financing,   for  working   capital.   Because  these  excess  cashflow
         certificates were sold at a significant  discount to our book value for
         such excess  cashflow  certificates,  we recorded $25.4 million pre-tax
         non-cash charge in the first quarter of 2001.

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

         o on-balance  sheet  warehouse  financing  and  other secured financing
           facilities (e.g., capital leasing);

         o securitizations of mortgage  loans  and  our  corresponding  sale  of
           interest-only  certificates (or NIM certificates, depending  upon the
           securitization structure) and mortgage servicing rights;

         o sales of whole loans;

         o cash flows from retained excess cashflow certificates;

         o distributions from the LLC (an  unaffiliated  entity  to us)  (see "-
           Corporate Restructuring,  Debt Modification and Debt Restructuring");
           and

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

   If we are not able to obtain financing,  we will not be able to originate new
loans  and our  business  and  results  of  operations  will be  materially  and
adversely affected.

   To  accumulate  loans  for  securitization  or  sale,  we  borrow  money on a
short-term  basis through  warehouse lines of credit.  We have relied upon a few
lenders to provide the primary credit  facilities for our loan  originations and
currently have one warehouse  facility as of December 31, 2001 for this purpose.
The  warehouse  facility is a $200 million  credit  facility that has a variable
rate of interest and expires on April 30, 2002.  There can be no assurance  that
we will be able to  renew  this  warehouse  facility  at its  maturity  at terms
satisfactory  to us or at  all.  We are  currently  in the  process  of  seeking
additional warehouse lines of credit, but there can be no assurance that we will
be successful in our attempt to secure an additional warehouse line of credit on
terms reasonably satisfactory to us, if at all.

   We are required to comply with various  operating and financial  covenants as
provided in our warehouse agreement, which are customary for agreements of their
type. The continued availability of funds provided to us under this agreement is
subject  to,  among  other  conditions,  our  continued  compliance  with  these
covenants. Additionally, we are required to comply with restrictive covenants in
connection with our Series A preferred stock and our warrants. We believe we are
in compliance with such covenants as of December 31, 2001.

   We have  repurchase  agreements  with certain of the  institutions  that have
purchased  mortgages.   Currently,  some  of  the  agreements  provide  for  the
repurchase by us of any of the mortgage  loans that go to  foreclosure  sale. At
the foreclosure  sale, we will repurchase the mortgage,  if necessary,  and make
the  institution  whole.  The  dollar  amount  of  loans,  which  were sold with
recourse,  is $3.5 million at December 31, 2001 and $6.2 million at December 31,
2000.  Included in accounts  receivable is an allowance  for recourse  losses of
$1.4  million at  December  31,  2001 and $1.5  million at  December  31,  2000,
respectively.

   Future  contractual  obligations  related to  principal  balances for capital
leases as of December 31, 2001 are as follows:

(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------
   Period                                 Amount
--------------------------------------------------------------------------------
   Less than 1 year                    $  4,704
   1-3 years                              2,033
--------------------------------------------------------------------------------
   Total                                $ 6,737
--------------------------------------------------------------------------------

                                       37

We  may,  from  time  to  time,  if  opportunities  arise  that  we  deem  to be
appropriate,  repurchase  in the open market some of our  outstanding  preferred
stock and senior notes. The funds for any such repurchases  would be expected to
come from our existing cash.  There is no assurance that we will  effectuate any
such repurchases or the terms thereof.

Subject to our  ability to execute  our  business  strategy  and the  various
uncertainties described above (and described in more detail in "-Forward Looking
Statements and Risk Factors" below),  we anticipate that we will have sufficient
cash  flows,  short-term  funding and capital  resources  to meet our  liquidity
obligations for the foreseeable future.

INTEREST RATE RISK

    Our primary market risk exposure is interest rate risk. Profitability may be
directly  affected by the level of, and fluctuation  in,  interest rates,  which
affect our ability to earn a spread between  interest  received on our loans and
the  costs of our  borrowings,  which  are tied to  various  interest  rate swap
maturities,  commercial paper rates and LIBOR. Our profitability is likely to be
adversely  affected during any period of unexpected or rapid changes in interest
rates. A substantial  and sustained  increase in interest rates could  adversely
affect our ability to originate  loans. A significant  decline in interest rates
could increase the level of loan prepayments  thereby decreasing the size of the
loan servicing portfolio  underlying our  securitizations.  To the extent excess
cashflow certificates have been capitalized on our financial statements,  higher
than  anticipated  rates of loan prepayments or losses could require us to write
down the value of such excess  cashflow  certificates,  adversely  impacting our
earnings.  In an  effort to  mitigate  the  effect of  interest  rate  risk,  we
periodically  review our various mortgage products and identify and modify those
that have proven  historically more susceptible to prepayments.  However,  there
can be no assurance that these  modifications  to our product line will mitigate
effectively interest rate risk in the future.

   Periods of  unexpected  or rapid  changes in  interest  rates,  and/or  other
volatility or uncertainty regarding interest rates, also can affect adversely us
by increasing  the  likelihood  that  asset-backed  investors will demand higher
spreads than normal to offset the volatility and/or uncertainty, which decreases
the value of the excess  cashflow  certificates  we receive in connection with a
securitization.

   Fluctuating  interest rates also may affect the net interest  income we earn,
resulting from the difference between the yield we receive on loans held pending
sales  and the  interest  paid by us for  funds  borrowed  under  our  warehouse
facility. We do, however,  undertake to hedge our exposure to this risk by using
various hedging strategies,  including Fannie Mae mortgage securities,  treasury
rate lock contracts and/or interest rate swaps. (See  "--Hedging").  Fluctuating
interest  rates  also  may  affect  net  interest   income  as  certain  of  our
asset-backed  securities are priced based on one-month LIBOR, but the collateral
underlying  such  securities  are comprised of mortgage  loans with either fixed
interest  rates or "hybrid"  interest rates - fixed for the initial two or three
years of the mortgage  loan, and adjusting  thereafter  every six months - which
creates basis risk (See "--Notes to the Consolidated Financial Statements - Note
No. 7 - Excess Cashflow Certificates, Net").

HEDGING

   We adopted SFAS No. 133,  "Accounting for Derivative  Instruments and Hedging
Activities,"  as of January 1, 2001.  The Standard  requires that all derivative
instruments  be  recorded  in the  balance  sheet at fair  value.  However,  the
accounting  for changes in fair value of the  derivative  instrument  depends on
whether  the  derivative  instrument  qualifies  as a hedge.  If the  derivative
instrument  does not qualify as a hedge,  changes in fair value are  reported in
earnings when they occur. If the derivative instrument qualifies as a hedge, the
accounting treatment varies based on the type of risk being hedged. There was no
impact on our financial  condition or results of operations upon the adoption of
SFAS No. 133, as amended.

   We originate mortgage loans and then sell them through a combination of whole
loan sales and  securitizations.  Between the time we originate the mortgage and
sell it in the  secondary  market,  we may  hedge  the risk of  fluctuations  in
interest  rates.  Our risk begins  subsequent to originating  mortgage loans and
prior to selling or  securitizing  such mortgage  loans.  Since we have a closed
(and funded) mortgage loan at a specified interest rate with an expected gain at
time of sale,  our  exposure is to a higher  interest  rate  environment  due to
market  conditions.  A higher  interest rate market  implies that we will have a
higher cost of funds,  which  decreases the net spread we

                                       38

would earn between the mortgage  interest  rate on each  mortgage  loan less the
cost of funds. As a result, we may experience a lower gain on sale.

   The cost of funds is generally composed of two components,  the interest rate
swap with a similar  duration  and average  life and the swaps  spread or profit
margin required by the investors.  We had previously used a "Treasury Rate Lock"
and 15-year Fannie Mae mortgage securities ("FNMA Securities") to hedge our cost
of funds  exposure.  However  recently,  the  securitizations  are priced to the
investor using the interest rate swaps curve. As such, our cost of funds is more
closely tied to interest  rate swaps and we will likely use interest  rate swaps
to hedge our mortgage loans in inventory pending  securitization  pricing. While
none of the above are  perfect  hedges,  we  believe  interest  rate  swaps will
demonstrate the highest  correlation to our cost of funds on a go-forward basis.
We determine the nature and quantity of hedging  transactions based upon various
factors including, without limitation, market conditions and the expected volume
of mortgage  originations.  We will enter into these hedging  strategies through
one  of  our  warehouse  lenders  and/or  one of  the  investment  bankers  that
underwrite our securitizations. These strategies are designated as hedges on our
financial statements and are closed out when we sell the associated loans.

   If the value of the hedges  decrease,  offsetting an increase in the value of
the loans,  upon settlement with our hedge  counterparty,  we will pay the hedge
loss in cash and then  realize  the  corresponding  increase in the value of the
loans as part of our net  gain on sale of  mortgage  loans  through  either  the
excess cashflow  certificates we retain from  securitization  or from whole loan
premiums. Conversely, if the value of the hedges increase, offsetting a decrease
in the value of the loans, upon settlement with our hedge counterparty,  we will
receive  the hedge gain in cash and realize  the  corresponding  decrease in the
value of the loans through a reduction in either the value of the  corresponding
excess cashflow certificates or whole loan premiums.

   We believe our hedging  strategy has largely been an effective tool to manage
our interest rate risk on loans prior to securitization,  by providing us with a
cash gain (or loss) to largely offset the reduced (increased) excess spread (and
resultant  lower (or  higher) net gain on sale from an  increase  (decrease)  in
interest  rates.  A hedge may not,  however,  perform  its  intended  purpose of
offsetting changes in net gain on sale.

   We make  decisions  concerning the nature of our hedging  transactions  based
upon various factors including,  without  limitation,  market conditions and the
expected  volume of  mortgage  originations.  We may enter  into  these  hedging
strategies  through one of our warehouse  lenders and/or an investment bank that
underwrites our  securitizations.  We will review  continually the frequency and
effectiveness  of our hedging strategy to mitigate risk pending a securitization
or loan sale.

   If a hedging  transaction  is deemed to be  appropriate,  and can be properly
documented  and  mathematically  shown  to meet  the  appropriate  effectiveness
criteria,  we will account for these  hedges as fair value hedges in  accordance
with SFAS No. 133, as amended.

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

   We did not hedge during the year ended  December 31, 2001. For the year ended
December 31, 2000 and 1999, we recorded a hedge loss of $2.1 million and a hedge
gain of $3.3 million respectively, which largely offset a change in the value of
mortgage loans being hedged, as part of our net gain on sale of loans.

INFLATION

   Inflation most significantly  affects our loan originations and values of our
excess cashflow  certificates,  because of the substantial  effect inflation can
have on interest rates.  Interest rates normally increase during periods of high
inflation and decrease during periods of low inflation.  (See  "--Interest  Rate
Risk").

IMPACT OF NEW ACCOUNTING STANDARDS

   For  discussion regarding the impact of new  accounting  standards,  refer to
Note No. 1 and Note No. 8 of Notes to the Consolidated Financial Statements.

                                       39

FORWARD-LOOKING STATEMENTS AND 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 our  operations and business  environment,  and are
subject to change on various  important  factors.  We wishe 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 our actual  results to differ  materially  from those
expressed in any forward- looking statements made by us, or on our  behalf.  The
following include some, but not all,  of the factors or uncertainties that could
cause actual results to differ from projections:

     o   Our ability or inability to increase our loan originations to specified
         levels (and subsequent sale or  securitization of such loans) to offset
         our current cost structure and negative cash flow;

     o   Our  ability or  inability  to  continue  to access  lines of credit at
         favorable terms and conditions, including without limitation, warehouse
         and other credit facilities used to finance  newly-originated  mortgage
         loans held for sale;

     o   Our ability or  inability  to  continue  our  practice of  securitizing
         mortgage loans held for sale, as well as our ability to utilize optimal
         securitization  structures  (including the sale of interest-only or NIM
         certificates,  and  the  sale  of  servicing  rights,  at the  time  of
         securitization) at terms favorable to us;

     o   Our ability or inability  to continue  monetizing  our excess  cashflow
         certificates,  including  without  limitation,  selling,  financing  or
         securitizing (through NIM transactions) such assets;

     o   Costs associated with litigation, compliance with the NYSBD Remediation
         Agreement  and  NYOAG  Stipulated  Order  on  Consent,   and  rapid  or
         unforeseen escalation of the cost of regulatory  compliance,  generally
         including  but not limited to,  adoption of new, or changes in federal,
         state or local lending laws and regulations and the application of such
         laws and regulations,  licenses,  environmental compliance, adoption of
         new,  or  changes  in   accounting   policies  and  practices  and  the
         application  of such  polices  and  practices.  Failure to comply  with
         various  federal,  state and local  regulations,  accounting  policies,
         environmental compliance, and compliance with the Remediation Agreement
         and  Stipulated  Order on Consent can lead to loss of approved  status,
         certain rights of rescission for mortgage loans,  class action lawsuits
         and administrative enforcement action against us;

     o   A general economic slowdown.  Periods of economic slowdown or recession
         may  be  accompanied  by  decreased  demand  for  consumer  credit  and
         declining real estate values.  Because of our focus on  credit-impaired
         borrowers, the actual rate of delinquencies, foreclosures and losses on
         loans affected by the borrowers  reduced  ability to use home equity to
         support borrowings could be higher than those generally  experienced in
         the  mortgage  lending  industry.  Any  sustained  period of  increased
         delinquencies,  foreclosure,  losses or increased costs could adversely
         affect our ability to securitize or sell loans in the secondary market;

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

     o   Increased  competition within our markets has taken on many forms, such
         as convenience  in obtaining a loan,  customer  service,  marketing and
         distribution channels, loan origination fees and interest rates. We are
         currently   competing  with  large  finance  companies  and  conforming
         mortgage originators many of whom have greater financial, technological
         and marketing resources;

     o   Unpredictable  delays or  difficulties  in  development  of new product
         programs; and

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

                                       40

<PAGE>

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

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

     o   governmental monetary and tax policies;

     o   domestic and international economic and political considerations; and

     o   other factors beyond our control.

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

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

                       10 BASIS POINT DECREASE IN                 10 BASIS POINT INCREASE IN
DESCRIPTION                  INTEREST RATES           BASE              INTEREST RATES
--------------------------------------------------------------------------------------------

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

   The table below  demonstrates the  sensitivity,  at December 31, 2001, of the
estimated fair value of our excess cashflow  certificates caused by an immediate
10% and 20%,  respectively,  adverse  change  in the key  assumptions  we use to
estimate fair value:
<TABLE>
<S>                                           <C>                    <C>
                                       Fair value of excess        Impact to
(Dollars in thousands)                 cashflow certificates       earnings
--------------------------------------------------------------------------------
Fair value as of 12/31/01:                     $ 16,765
10% increase in prepayment speed                 13,838               $2,927
20% increase in prepayment speed                 11,293                5,472

10% increase in credit losses                    13,547                3,218
20% increase in credit losses                    10,476                6,289

10% increase in discount rates                   15,860                  905
20% increase in discount rates                   15,048                1,717
</TABLE>
                                       41

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

   To reduce our financial  exposure to changes in interest  rates, we generally
hedge  our  mortgage  loans  held for sale  through  hedging  products  that are
correlated  to the  pass-though  certificates  issued  in  connection  with  the
securitization   of  our  mortgage  loans  (I.E.,   interest  rate  swaps)  (See
-"Hedging").  We believe our hedging strategy has largely been an effective tool
to manage our interest rate risk on loans prior to securitization,  by providing
us with a cash gain (or loss) to largely offset the reduced  (increased)  excess
spread  and  resultant  lower  (or  higher)  net gain on sale  from an  increase
(decrease) in interest  rates.  A hedge may not,  however,  perform its intended
purpose of offsetting changes in net gain on sale.

   We make  decisions  concerning the nature of our hedging  transactions  based
upon various factors including,  without  limitation,  market conditions and the
expected  volume of  mortgage  originations.  We may enter  into  these  hedging
strategies  through one of our warehouse  lenders and/or an investment bank that
underwrites our  securitizations.  We will review  continually the frequency and
effectiveness  of our hedging strategy to mitigate risk pending a securitization
or loan sale.

   If a hedging  transaction  is deemed to be  appropriate,  and can be properly
documented  and  mathematically  shown  to meet  the  appropriate  effectiveness
criteria,  we will account for these  hedges as fair value hedges in  accordance
with SFAS No. 133,  as amended.  Under SFAS No. 133 changes in the fair value of
both  the  derivative  and  hedged  mortgage  loans  will  be  recorded  through
earnings-offsetting  each other for the  effectiveness  of the  hedge,  with the
ineffective  portion of the fair value  changes  recorded  in  earnings  with no
corresponding  offset.  We adopted SFAS No. 133 as of January 1, 2001. There was
no impact on our financial  condition or results of operations upon the adoption
of SFAS No. 133, as amended.

   For the year ended  December 31, 2001,  we did not have a hedge gain or loss.
During 2000, we recorded a hedge loss of $2.1 million.  As of December 31, 2001,
we  had  no  derivative   instruments  or  hedging  relationships  of  any  kind
outstanding.

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

                                       42
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.


                          INDEPENDENT AUDITORS' REPORT

To The Board of Directors and Stockholders of
Delta Financial Corporation:

We have audited the accompanying  consolidated balance sheets of Delta Financial
Corporation  and  subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for each of the years in the  three-year  period ended  December 31, 2001.
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 auditing standards generally accepted
in the  United  States of  America.  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 Delta  Financial
Corporation  and  subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the years in the three-year
period  ended  December  31,  2001  in  conformity  with  accounting  principles
generally accepted in the United States of America.


/s/  KPMG LLP


Melville, New York
February 27, 2002

                                       43
<PAGE>
<TABLE>
<S>                                                                       <C>                   <C>

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

CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000


(DOLLARS IN THOUSANDS)                                                            2001             2000
---------------------------------------------------------------------------------------------------------
ASSETS
Cash and interest-bearing deposits....................................     $      6,410           62,270
Accounts receivable....................................................           2,654           20,502
Loans held for sale, net...............................................          94,407           82,698
Accrued interest receivable............................................             812           10,388
Excess cashflow certificates, net......................................          16,765          216,907
Equipment, net.........................................................           4,998           15,034
Prepaid and other assets...............................................             752           37,846
Deferred tax asset, net................................................           5,600            5,600
----------------------------------------------------------------------------------------------------------
       Total assets....................................................    $    132,398          451,245
----------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Bank payable...........................................................    $      1,267              927
Warehouse financing and other borrowings...............................          89,628           88,632
Senior notes...........................................................          10,844          149,571
Accounts payable and accrued expenses..................................          18,809           31,962
Investor payable.......................................................              --           69,489
Advance payment by borrowers for taxes and insurance...................              --           12,940

----------------------------------------------------------------------------------------------------------
       Total liabilities...............................................         120,548          353,521
----------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Preferred stock,  Series A, $.01 par value.  Authorized 150,000 shares,
   139,156 shares outstanding and 0 shares authorized and outstanding
   at December 31, 2001 and December 31, 2000, respectively............          13,916               --
Common stock, $.01 par value. Authorized 49,000,000 shares;
16,000,549 shares issued and 15,883,749 shares outstanding at
December 31, 2001 and December 31, 2000, respectively..................             160              160
Additional paid-in capital.............................................          99,472           99,472
Retained deficit.......................................................        (100,380)            (590)
Treasury stock, at cost (116,800 shares)...............................          (1,318)          (1,318)
----------------------------------------------------------------------------------------------------------
       Total stockholders' equity......................................          11,850           97,724
----------------------------------------------------------------------------------------------------------
       Total liabilities and stockholders' equity......................    $    132,398          451,245
----------------------------------------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.
</TABLE>
                                       44
<PAGE>
<TABLE>
<S>                                                         <C>                 <C>              <C>
DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2001, 2000 and 1999


(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)                   2001             2000             1999
-------------------------------------------------------------------------------------------------------------------
REVENUES:
    Net gain on sale of mortgage loans................       $   38,638          51,031           84,010
    Interest..........................................          (22,146)         32,287           31,041
    Servicing fees....................................            2,983          14,190           16,341
    Net origination fees and other income.............           13,450          21,463           23,427
-------------------------------------------------------------------------------------------------------------------
       Total revenues                                            32,925         118,971          154,819
-------------------------------------------------------------------------------------------------------------------
EXPENSES:
    Payroll and related costs.........................           42,896          56,525           65,116
    Interest expense..................................           16,132          30,386           26,656
    General and administrative........................           48,878          45,066           55,318
    Capitalized mortgage servicing impairment.........               --          38,237               --
   Restructuring and other special charges............            2,678          11,382               --
-------------------------------------------------------------------------------------------------------------------
       Total expenses                                           110,584         181,596          147,090
-------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax expense (benefit)
and extraordinary item................................          (77,659)        (62,625)           7,729
Income taxes expense (benefit)........................            2,876         (13,208)           3,053
-------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item...............          (80,535)        (49,417)           4,676
Extraordinary item, net of tax on early
extinguishment of debt................................          (19,255)             --               --
-------------------------------------------------------------------------------------------------------------------
       Net income (loss)..............................     $    (99,790)        (49,417)           4,676
-------------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED EARNINGS PER SHARE:
    Income (loss) before extraordinary item...........     $      (5.07)          (3.11)            0.30
    Extraordinary item, net of tax....................            (1.21)              --              --
-------------------------------------------------------------------------------------------------------------------
    Net income (loss) per share......................      $      (6.28)          (3.11)            0.30
-------------------------------------------------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.
</TABLE>
                                       45
<PAGE>
<TABLE>
<S>                                         <C>           <C>       <C>          <C>       <C>          <C>

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

CONSOLIDATED  STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 2001, 2000 and 1999

                                                                    ADDITIONAL
                                               PREFERRED  CAPITAL    PAID-IN      RETAINED    TREASURY
(DOLLARS IN THOUSANDS)                           STOCK     STOCK     CAPITAL      EARNINGS      STOCK      TOTAL
-------------------------------------------------------------------------------------------------------------------

Balance at December 31, 1998...............  $      --      155      94,700       44,151     (1,318)      137,688
Issuance of common stock related to
   legal settlement........................         --        5       4,772           --          --        4,777
Net income.................................         --       --          --        4,676          --        4,676
-------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999...............         --   $  160      99,472       48,827     (1,318)      147,141
Net loss...................................         --       --          --     (49,417)          --     (49,417)
-------------------------------------------------------------------------------------------------------------------

Balance at December 31, 2000...............         --   $  160      99,472        (590)     (1,318)       97,724
Issuance of preferred stock related to
debt exchange..............................      13,916      --          --          --           --       13,916
Net loss...................................         --       --          --     (99,790)          --     (99,790)
-------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001...............  $   13,916     160      99,472    (100,380)     (1,318)       11,850
-------------------------------------------------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.
</TABLE>
                                       46
<PAGE>
<TABLE>
<S>                                                                      <C>                 <C>             <C>
DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
-------------------------------------------------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended  December 31, 2001,  2000 and 1999


(DOLLARS IN THOUSANDS)                                                         2001              2000             1999
-------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
   Net income (loss)................................................       $ (99,790)         (49,417)            4,676
   Adjustments to reconcile net income (loss) to net cash used in
       operating activities:
       Provision for loan and recourse losses........................           2,431              670              100
       Depreciation and amortization.................................           8,361           12,912            5,841
       Extraordinary loss on early extinguishment of debt............          19,255               --               --
       Issuance of common stock related to legal settlement..........              --               --            4,777
       Deferred tax benefit..........................................              --         (16,011)          (8,437)
       Capitalized mortgage servicing rights, net
         of amortization.............................................              --           45,927         (12,437)
       Deferred origination costs ...................................             578              174              114
       Excess cashflow certificates received in
         securitization transactions, net............................          47,052            7,752         (20,856)
   Changes in operating assets and liabilities:
       Decrease (increase)in accounts receivable, net................          17,188           10,413          (9,818)
       (Increase) decrease in loans held for sale, net...............        (14,263)            6,159          (2,010)
       Decrease (increase) in accrued interest receivable............           9,576           52,921         (16,412)
       Decrease (increase) in prepaid and other assets...............          32,551         (33,071)              411
       Increase (decrease) in accounts payable
        and accrued expenses.........................................             559         (10,205)           22,571
       (Decrease) increase in investor payable.......................        (69,489)         (12,715)           18,414
       (Decrease) increase in advance payment by borrowers
          ....................................for taxes and insurance        (12,940)            (844)            4,225
-------------------------------------------------------------------------------------------------------------------------
   Net cash (used in) provided by operating activities...............        (58,931)           14,665          (8,841)
-------------------------------------------------------------------------------------------------------------------------
   Cash flows from investing activities:
       DISPOSITION (PURCHASE) OF EQUIPMENT...........................           1,735          (1,297)          (9,330)
-------------------------------------------------------------------------------------------------------------------------
   Net cash provided by (used in) investing activities...............           1,735          (1,297)          (9,330)
-------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
   Proceeds from (repayment of) warehouse
       financing and other borrowings, net...........................             996         (20,387)           28,746
       Increase (decrease) in bank payable, net......................             340            (268)            (201)
-------------------------------------------------------------------------------------------------------------------------
   Net cash provided by (used in) financing activities...............           1,336         (20,655)           28,545
-------------------------------------------------------------------------------------------------------------------------
   Net (decrease) increase in cash and interest-bearing deposits             (55,860)          (7,287)           10,374
Cash and interest-bearing deposits at beginning of year..............          62,270           69,557           59,183
-------------------------------------------------------------------------------------------------------------------------
Cash and interest-bearing deposits at end of year...................       $    6,410           62,270           69,557
-------------------------------------------------------------------------------------------------------------------------
Supplemental Information:
Cash paid during the year for:
   Interest .........................................................      $   14,605           29,974           24,085
   Income taxes .....................................................             888            2,010           11,489
-------------------------------------------------------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.
</TABLE>
                                       47
<PAGE>


                  DELTA FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2001, 2000, AND 1999

(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(A) ORGANIZATION
   Delta  Financial  Corporation  ("Delta"  or "we") is a Delaware  corporation,
which was  organized in August 1996. On October 31, 1996, we 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,  we  completed  an initial  public  offering of
4,600,000 shares of common stock, $.01 par value.

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

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

(C) USE OF ESTIMATES
   The  preparation  of  financial  statements  in  conformity  with  accounting
principles  generally  accepted  in the United  States of America  requires  our
management 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
and assumptions.

(D) LOAN ORIGINATION FEES AND COSTS
   Loan  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 deferred until the loans are securitized or sold.

(E) LOANS HELD FOR SALE, NET
   Loans held for sale are accounted for at the lower of cost or estimated  fair
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 fair value is less than cost.

(F) SECURITIZATION AND SALE OF MORTGAGE LOANS
   In a securitization, we pool together loans, typically each quarter, and sell
these loans to a  securitization  trust,  which is a qualified  special  purpose
entity.  The  securitization  trust raises money to purchase the mortgage  loans
from us by selling securities to the public - known as asset-backed pass-through
securities  that  are  secured  by  the  pool  of  mortgage  loans  held  by the
securitization  trust.  These  asset-backed  securities or senior  certificates,
which are usually  purchased by insurance  companies,  mutual funds and/or other
institutional  investors represent senior interests in the mortgage loans in the
trust.  Following  the  securitization,  holders  of these  senior  certificates
receive the principal  collected,  including  prepayments  of principal,  on the
mortgage  loans in the  trust.  In  addition,  holders  receive a portion of the
interest on the loans in the trust equal to the  pass-through  interest  rate on
the remaining  principal balance.  These securities are typically sold for a par
purchase  price,  or a  slight  discount  to par -  with  par  representing  the
aggregate  principal  balance of the  mortgage  loans  backing the  asset-backed
securities.  For example, if a securitization  trust contains collateral of $100
million  of  mortgage  loans,  we  typically  receive  close to $100  million in
proceeds  from the sales of these  securities,  depending  upon the structure we
utilize for the securitization.

   We allocate our basis in the mortgage  loans and residual  interests  between
the portion of the mortgage loans sold through the pass-through certificates and
the portion  retained (the excess cashflow  certificates)  based on the relative
fair values of those  portions on the date of sale.  We may  recognize  gains or
losses  attributable  to the  changes  in  fair  value  of the  excess  cashflow
certificates,  which are recorded at estimated  fair value and  accounted

                                       48

for as "trading" securities.  Since this is not an active market for such excess
cashflow  certificates,  we  determine  the  estimated  fair value of the excess
cashflow certificates by discounting the future expected cash flows.

   We have found that,  at times,  we can  receive  better  economic  results by
selling  certain  mortgage loans on a whole loan,  non-recourse  basis,  without
retaining  servicing  rights,  generally  in private  transactions  to financial
institutions or consumer finance companies.  We recognize a gain or loss when we
sell  loans on a whole  loan  basis  equal to the  difference  between  the cash
proceeds  received for the loans and our investment in the loans,  including any
unamortized loan origination fees and costs.

(G) EXCESS CASHFLOW CERTIFICATES, NET
   The  excess  cashflow  certificates  represent  an  ownership  interest  in a
securitization  trust. The assets of each securitization trust consist primarily
of two groups of  mortgage  loans:  a group of fixed rate  mortgage  loans and a
group of  hybrid/adjustable  rate  mortgage  loans.  The mortgage  loans in each
mortgage  pool  underlying  each excess  cashflow  certificate  consist of fully
amortizing and balloon mortgage loans secured by first or second liens primarily
on one- to four-family  residential  real  properties  having  original terms to
stated maturity of not greater than 30 years.

   Excess cashflow certificates  represent a subordinate right to receive excess
cash flow, if any, generated by the related mortgage pool. A holder of an excess
cashflow  certificate has the right to receive the difference,  if any,  between
the interest payments due on the mortgage loans sold to the securitization trust
and the interest payments due, at the pass-through  rates, to the holders of the
pass-through  certificates of the same series, less contractual  servicing fees,
trustee  fees and any  insurer  premiums,  reimbursements  and  other  costs and
expenses of  administering  the  securitization  trust.  The holder of an excess
cashflow  certificate  will receive cash  payments only if there are any amounts
remaining following payment by the securitization  trust of all amounts owing on
all other securities issued by that  securitization  trust in the securitization
and the payment of expenses.

   The excess cash flow of a securitization trust in any month is applied:

     o   first,  to cover  any  losses  on the  mortgage  loans  in the  related
         mortgage pool;
     o   second,  to  reimburse  the insurer,  if any, of the related  series of
         pass-through  certificates  for amounts paid by or  otherwise  owing to
         that insurer;
     o   third,  to  build  or  maintain  the   overcollateralization  for  that
         securitization  trust at the  required  level by  being  applied  as an
         accelerated  payment of  principal  to the holders of the  pass-through
         certificates of the related series;
     o   fourth,  to reimburse  holders of the subordinated  certificates of the
         related series of pass-through certificates for unpaid interest and for
         any losses previously allocated to those certificates;
     o   fifth, to pay interest on the related  pass-through  certificates which
         was not paid because of the  imposition of a cap on their  pass-through
         rates-- these payments being called basis risk shortfall amounts; and
     o   sixth, to the related excess cashflow certificates.

   Typically,  the  excess  cashflow  certificates  begin to  receive  cash flow
approximately   eighteen  to  twenty-four  months  after  the  completion  of  a
securitization,  with the  specific  timing of the cash flows  depending  on the
structure  and  performance  of the  securitization.  Initially,  securitization
trusts utilize any available  excess 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 securitization trust's outstanding loans and
the amount of outstanding pass-through certificates.

    The fair  value of  excess  cashflow  certificates  is  determined  by using
certain  assumptions  regarding the underlying  mortgage loans.  These estimates
primarily include: future rate of prepayment,  credit losses, discount rate used
to calculate present value and the London Inter-Bank  Offered Rate (the "LIBOR")
forward  curve (using  current  LIBOR as the floor  rate).  The values of excess
cashflow  certificates  represent  the  future  expected  cash  flow  from  such
certificate  based upon  management's  best  estimate.  Management  monitors the
performance  of the loans  underlying  each  certificate  and any changes in the
estimates  and  assumptions  (and  consequent  changes  in value  of the  excess
cashflow  certificates)  is reflected in interest income in the quarter in which
any such change in  estimate  is made.  Although  management  believes  that the
assumptions it uses are reasonable, there can be no assurance as to the accuracy
of the assumptions or estimates.

                                       49

(H) FAIR VALUE OF FINANCIAL INSTRUMENTS
   Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosure About
Fair Value of Financial  Instruments," requires us 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  excess  cashflow  certificates  which are  reported  at fair  value,
substantially all our assets and liabilities deemed to be financial  instruments
are carried at cost, which approximates their fair value.

(I) CASH AND INTEREST-BEARING DEPOSITS
   The fair value of cash and cash  equivalents  approximates the carrying value
reported in our consolidated balance sheet. During 2000, a significant amount of
the cash and  interest-bearing  deposits  balance  represented the collection of
mortgage  payments by us as a servicer,  from mortgagors,  which were due to the
investors,  representing  primarily  securitization  trusts.  These funds,  when
collected  were placed in  segregated  bank  accounts as provided by the related
servicing agreement.

(J) EQUIPMENT, NET
   Equipment,   including  leasehold  improvements,  is  stated  at  cost,  less
accumulated depreciation and amortization. Depreciation of equipment is computed
using the straight-line 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.

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

(L) INCOME TAXES
   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.

(M) EARNINGS PER SHARE
   Basic  Earnings  Per Share  ("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.

(N) STOCK OPTION PLANS
   In accordance with SFAS No. 123,  "Accounting for Stock-Based  Compensation,"
we continue to apply the provisions of the Accounting  Principles  Board ("APB")
Opinion No. 25,  "Accounting  for Stock  Issued to  Employees,"  and provide pro
forma net income and pro forma earnings per share disclosures for employee stock
option grants as if the fair-value based method defined in SFAS No. 123 had been
applied.

(O) SEGMENT REPORTING
   We  operate  as one  reporting  segment,  as  such,  the  segment  disclosure
requirements, are not applicable to us.

(P) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
    In June 2000,  the  Financial  Accounting   Standards  Board  (FASB)  issued
Statement of Financial  Accounting  Standards  (SFAS) No. 138,  "Accounting  for
Certain Derivative  Instruments and Certain Hedging Activities - an amendment of
FASB Statement No. 133." This statement supersedes and amends certain paragraphs
of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
The effective date for SFAS No. 138 is for fiscal years beginning after June 15,
2000. SFAS Nos. 138 and 133 apply to quarterly and annual financial  statements.
There was no impact on our  financial  condition or results of  operations  upon
adoption of SFAS Nos. 138 and 133.

   In September  2000, the FASB issued SFAS No. 140,  "Accounting  for Transfers
and Servicing of Financial Assets and  Extinguishments of Liabilities." SFAS No.
140,  which  replaces SFAS No. 125,  "Accounting  for

                                       50

Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
provides  accounting  and  reporting  standards  for  securitizations  and other
transfers  of assets.  The Standard is based on the  application  of a financial
component approach that focuses on control,  and provides  consistent  standards
for  distinguishing  transfers of financial assets that are sales from transfers
that are secured  borrowings.  The Standard  requires  disclosure of information
about securitized  assets,  including  principal  outstanding of securitized and
other  managed  assets,  accounting  policies,  key  assumptions  related to the
determination of the fair value of retained interests,  delinquencies and credit
losses.  Certain provisions of this Statement,  including relevant  disclosures,
are  effective  for fiscal years ending after  December 15, 2000.  The remaining
provisions  were effective for transfer  transactions  occurring after March 31,
2001.  SFAS No. 140 does not require  restatement of prior  periods.  In July of
2001, FASB Technical  Bulletin No. 01-1,  "Effective Date for Certain  Financial
Institutions of Certain  Provisions of Statement 140 Related to the Isolation of
Transferred  Financial  Assets," was issued which delays the effective  date for
the isolation  standards and related guidance under SFAS No. 140 to transfers of
financial assets  occurring after December 31, 2001,  instead of March 31, 2001.
The  implementation of SFAS No. 140 provisions did not have a material impact on
our financial  condition or results of  operations.  The  implementation  of the
remaining provisions, subsequent to December 31, 2001, is not expected to have a
material impact on our financial condition or results of operations.

   In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible  Assets." SFAS No. 141 requires that the
purchase  method of accounting be used for all business  combinations  initiated
after June 30, 2001. SFAS No. 141 also specifies criteria that intangible assets
acquired in a purchase  method business  combination  must meet to be recognized
and  reported  apart from  goodwill.  SFAS No. 142  requires  that  goodwill and
intangible  assets with  indefinite  useful  lives no longer be  amortized,  but
instead  be tested for  impairment  at least  annually  in  accordance  with the
provision of SFAS No. 142.  SFAS No. 142 also requires  that  intangible  assets
with estimable useful lives be amortized over their respective  estimated useful
lives to their estimated residual values. The amortizing  intangible assets will
also be reviewed for impairment at least annually. SFAS No. 142 is applicable to
fiscal years  beginning after December 15, 2001 and is required to be applied at
the beginning of the entity's  fiscal year.  There was no material impact on our
financial  condition or results of  operations  upon adoption of SFAS No. 141 on
July 1, 2001. We believe that there will be no impact on our financial condition
or results of operations upon adoption of SFAS No. 142 on January 1, 2002.

   In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
of Disposal of Long-Lived Assets," which replaces SFAS No. 121,  "Accounting for
the  Impairment of Long-Lived  Assets and for  Long-Lived  Assets to be Disposed
Of." The  provisions  of SFAS No. 144 are  effective  for  financial  statements
issued for fiscal years beginning after December 15, 2001 and, generally, are to
be applied prospectively. We do not believe that there will be a material impact
on our financial  condition or results of  operations  upon adoption of SFAS No.
144.

(2)SUMMARY OF REGULATORY SETTLEMENTS

   In  September  1999,  we settled  allegations  by the New York State  Banking
Department  (the  "NYSBD")  and a lawsuit  by the New York  State  Office of the
Attorney  General (the "NYOAG")  alleging that we had violated various state and
federal  lending laws. The global  settlement was evidenced by (a) a Remediation
Agreement by and between Delta Funding and the NYSBD,  dated as of September 17,
1999 and (b) a  Stipulated  Order on Consent by and among Delta  Funding,  Delta
Financial  and  the  NYOAG,  dated  as of  September  17,  1999.  As part of the
Settlement,  we,  among other  things,  implemented  agreed upon  changes to our
lending practices; are providing reduced loan payments aggregating $7.25 million
to certain borrowers identified by the NYSBD; and have created a fund managed by
the  NYSBD and  financed  by the grant of  525,000  shares of Delta  Financial's
common  stock,  with an  agreed  upon  fixed  value of  $9.10  per  share  which
approximates the stock's book value at the time of the settlement.

   Each month,  on behalf of borrowers  designated by the NYSBD, we make subsidy
payments to the related  securitization  trusts. These subsidy payments fund the
differential  between the original loan payments and the reduced loan  payments.
As part of the second exchange offer we completed in August 2001 (see Note No. 3
"-Corporate Restructuring,  Debt Modification,  and Debt Restructuring"),  Delta
Funding Residual  Exchange Company,  LLC (the "LLC") (an unaffiliated  entity to
us) - a newly-formed  entity, the voting membership interests of which are owned
by the former holders of our Senior Secured Notes and senior notes due 2004 (the
"Notes")  who  tendered  their  Notes for such  membership  interests  and other
securities - is obligated to satisfy  these  payment  subsidies  out of

                                       51

the cash flows generated by the mortgage related securities  (primarily from the
excess cashflow  certificates)  it owns.  Management  believes the LLC will have
sufficient  cash  flows  from its assets to  satisfy  these  payment  subsidies.
However,  if the LLC's cash flows are  insufficient to pay this  obligation,  we
remain responsible to satisfy our obligations under the Remediation Agreement.

   The proceeds of the stock fund will be used to pay borrowers and to finance a
variety of consumer  educational and counseling  programs.  We do not manage the
fund created for this purpose. The number of shares of common stock deposited in
the fund does not adjust to account for  fluctuations in the market price of our
common  stock.  Changes  to the  market  price of these  shares of common  stock
deposited in the fund do not have any impact on our financial statements. We did
not make any additional  financial  commitments  between the settlement date and
March 2000.

   In March 2000, we finalized an agreement with the U.S. Department of Justice,
the  Federal  Trade   Commission   and  the  Department  of  Housing  and  Urban
Development, to complete the global settlement we had reached with the NYSBD and
NYOAG. The federal agreement mandates some additional compliance efforts for us,
but it does not require any additional financial commitment by us.

(3)CORPORATE RESTRUCTURING, DEBT MODIFICATION, AND DEBT RESTRUCTURING

   In 2000, we began a corporate  restructuring  - by reducing our workforce and
modifying  the terms of the  indenture  governing our senior notes due 2004 (the
"senior  notes")  - as part  of our  continuing  efforts  to  improve  operating
efficiencies  and to address our negative  cash flow from  operations.  Entering
2001,  management  still had several  concerns,  which we believed  needed to be
addressed for us to remain a viable company. Our principal concerns were:

     o   the cash drain created by our ongoing monthly delinquency and servicing
         advance requirements as servicer (known as "securitization advances");
     o   the high cost of servicing a seasoned  loan  portfolio,  including  the
         capital charges associated with making securitization advances;
     o   our ability to make timely  interest  payments on our senior  notes and
         senior secured notes due 2004 (the "senior secured notes"); and
     o   our  ability  to  effectuate  a  successful  business  model  given the
         overhang of corporate ratings of "Caa2" by Moody's and "CC" by Fitch.

Therefore in the first  quarter of 2001,  we embarked upon a business plan aimed
at alleviating some of these concerns and issues.

   CORPORATE RESTRUCTURING

   In  January  2001,  we  entered  into  an  agreement  with  Ocwen   Financial
Corporation ("Ocwen") to transfer our servicing portfolio to Ocwen. In May 2001,
we physically  transferred our entire servicing portfolio to Ocwen, and laid-off
the majority of our servicing  staff - a total of 128  employees.  We recorded a
$0.5 million pre-tax charge relating to this restructuring  which is included in
the line item call "restructuring and other special charges" in our consolidated
statements of operations.  This charge relates to employee severance  associated
with closing our servicing operations. We no longer service loans nor do we have
a servicing operation.

   The following  table sets forth the  components of our accrual  restructuring
charges:
<TABLE>
<S>                                         <C>                   <C>         <C>                    <C>
                                       ACCRUAL BALANCE AT        ACCRUAL       EXPENSE         ACCRUAL BALANCE AT
(DOLLARS IN THOUSANDS)                  DECEMBER 31, 2000       INCREASE      RECOGNIZED       DECEMBER 31, 2001
----------------------------------------------------------------------------------------------------------------------
Write down of lease obligations              $1,163                --            (581)                582

Employment termination payments                180                 473           (653)                 --
----------------------------------------------------------------------------------------------------------------------
Total Accrual Restructuring Charges          $1,343                473         (1,234)                582
----------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       52

   The unpaid accrued restructuring charge was initially recorded under the exit
plan.  No charges  under  this exit plan are  associated  with or  benefit  from
activities that will be continued at the commitment date.

   DEBT MODIFICATION AND DEBT RESTRUCTURING

   In  August  2000,  we  announced  an  agreement  to  modify  the terms of the
indenture governing our senior notes (the "Debt Modification"). With the consent
of the holders of greater than fifty percent of our senior notes,  we modified a
negative  pledge  covenant in the senior notes  indenture,  which had previously
prevented us from selling or otherwise  obtaining  financing by using our excess
cashflow   certificates  as  collateral.   In   consideration   for  the  senior
noteholders'  consent,  we agreed,  in an exchange  offer (the  "First  Exchange
Offer"),  to offer then current  holders the  opportunity to exchange their then
existing  senior  notes for (a) new senior  secured  notes due 2004 (the "senior
secured  notes")  and (b)  ten-year  warrants to buy  approximately  1.6 million
shares of common stock, at an initial exercise price of $9.10 per share, subject
to upward or downward  adjustment in certain  circumstances.  The senior secured
notes have the same coupon,  face amount and  maturity  date as the senior notes
and, up until the Second Debt Restructuring (see below) were secured by at least
$165 million of the our excess cashflow  certificates.  The First Exchange Offer
was  consummated in December 2000, with holders of greater than $148 million (of
$150 million) of senior notes tendering in the exchange.

   In February  2001,  we entered  into a letter of intent  with the  beneficial
holders of over fifty percent of our senior  secured notes to  restructure,  and
ultimately   extinguish,   the   senior   secured   notes  (the   "Second   Debt
Restructuring").  In  March  2001,  we  obtained  the  formal  consent  of these
beneficial  holders of the senior  secured notes through a Consent  Solicitation
that modified certain provisions of the senior secured notes indenture to, among
other things,  allow for the release of two excess  cashflow  certificates  then
securing  the senior  secured  notes.  We were  first  able to finance  and then
ultimately sell the excess cashflow certificates underlying five securitizations
(including two excess  cashflow  certificates  that were released as part of the
Second Debt  Restructuring)  for a $15 million  cash  purchase  price to provide
working capital.

   In  consideration  for their  consent,  we agreed to offer the holders of the
senior  secured notes (and the senior  notes,  collectively,  the  "notes"),  an
opportunity  to exchange their notes for new  securities  described  immediately
below (the "Second Exchange  Offer").  The Second Exchange Offer was consummated
on August 29, 2001,  pursuant to which holders of  approximately  $138.1 million
(of $148.2  million) in principal  amount of our senior  secured  notes and $1.1
million (of $1.8  million) in principal  amount of our senior  notes,  exchanged
their notes for commensurate interests in:

     o   voting membership  interests in Delta Funding Residual Exchange Company
         LLC (the "LLC"), a newly-formed limited liability company (unaffiliated
         with  us),  to  which  we  transferred  all  of  the   mortgage-related
         securities  previously  securing the senior  secured  notes  (primarily
         comprised of excess cashflow certificates);

     o   shares of common stock of a newly-formed  management  corporation  that
         will manage the LLC's assets; and

     o   shares of our newly-issued Series A preferred stock having an aggregate
         preference amount of $13.9 million.

   The LLC is  controlled  by the former  noteholders  that now hold  membership
interest  in the LLC.  As part of the  transaction,  we  obtained  a  non-voting
membership interest in the LLC, which entitles us to receive 15% of the net cash
flows  from  the LLC  for  the  first  three  years  (through  June  2004)  and,
thereafter,  10% of the net cash flows from the LLC. The net cash flows from the
LLC are equal to the total cash flows  generated  by the assets  held by the LLC
for a particular  period,  less (a) all expenses of the LLC, (b) certain related
income tax payments,  and (c) the NYSBD  subsidy  payments.  We began  receiving
distributions  from the LLC in the first  quarter of 2002 from a fourth  quarter
2001 distribution.

   As part of the Second Exchange Offer, all tendering  noteholders waived their
right to receive  any future  interest  coupon  payments on the  tendered  notes
beginning with the August 2001 interest coupon payment.  With the closing of the
Second  Exchange  Offer,  we paid the August 2001 interest coupon payment on the
approximately  $10.8 million of notes that did not tender in the Second Exchange
Offer.  By  extinguishing  substantially  all of our long-

                                       53

term debt, the rating agencies that  previously  rated us and our long-term debt
have withdrawn their corporate ratings.

(4)LOANS HELD FOR SALE, NET

   Our inventory  consists of first and second  mortgages,  which had a weighted
average  interest rate of 10.11% at December 31, 2001. These mortgages are being
held, at the lower of cost or estimated fair value, for future sale.  Certain of
these  mortgages  are  pledged  as  collateral  for a portion  of the  warehouse
financing and other borrowings.

   Included in loans held for sale are  deferred  origination  fees and purchase
premiums in the amount of $0.8 million and $1.4 million at December 31, 2001 and
2000,  respectively,  and a valuation allowance of approximately $0.7 million at
December 31, 2001 and $34,000 as of December 31, 2000.  Mortgages are payable in
monthly  installments of principal and interest and have terms varying from five
to thirty years.

(5)ACCOUNTS RECEIVABLE

   Accounts receivable as of December 31, consist of the following:
<TABLE>
<S>                                    <C>                <C>

(DOLLARS IN THOUSANDS)                     2001             2000
-------------------------------------------------------------------
Securitization servicing advances       $    --            12,518
Prepaid insurance premiums                2,227             2,047
Current tax assets                           --               572
Other                                       427             5,365
-------------------------------------------------------------------
Total accounts receivable               $ 2,654            20,502
-------------------------------------------------------------------
</TABLE>

   Funds due to us for accounts  receivable  are tracked  through  various asset
accounts.  These  accounts  are  reconciled  monthly,  at which  time we perform
research and  resolution on the  receivables.  All aged items are identified and
reported to  management  and  management  decides  whether to write-off any aged
items. We evaluate accounts  receivable items on an individual basis and an item
is not written off until all options for payment have been exhausted.

   Activity  in  Accounts  Receivable  for the years  ended  December  31, is as
follows (dollars in thousands):
<TABLE>
<S>                   <C>                     <C>                  <C>          <C>           <C>

                      Securitization     Prepaid Insurance     Current Tax
2001                Servicing Advances       Premiums              Asset           Other         Total
--------------------------------------------------------------------------------------------------------
Beginning balance      $   12,518              2,047                 572           5,365         20,502
Additions                  69,613                180                  --          45,664        115,457
Payments                  (81,967)                --                (572)        (49,505)      (132,044)
Write offs                   (164)                --                  --          (1,097)        (1,261)
---------------------------------------------------------------------------------------------------------
Ending balance         $       --              2,227                  --             427          2,654
---------------------------------------------------------------------------------------------------------

                      Securitization     Prepaid Insurance     Current Tax
2001                Servicing Advances       Premiums              Asset           Other         Total
---------------------------------------------------------------------------------------------------------
Beginning balance      $   24,727              1,868                 846           3,486         30,927
Additions                  45,621                179                  --          59,645        105,445
Payments                  (57,200)                --                (274)        (57,537)      (115,011)
Write offs                   (630)                --                  --            (229)          (859)
---------------------------------------------------------------------------------------------------------
Ending balance         $   12,518              2,047                 572           5,365         20,502
---------------------------------------------------------------------------------------------------------
</TABLE>

(6) CAPITALIZED MORTGAGE SERVICING RIGHTS

   Prior to 2001, we  recognized  rights to service  mortgage  loans as separate
assets. Subsequent to 2001, we do not recognize rights to service mortgage loans
because we sell our servicing  rights in connection with our whole loan sales or
securitizations.  The total  cost of  mortgage  loans  sold or  securitized  was
allocated  between the loans and the  servicing  rights  based upon the relative
fair values of each. Purchased Mortgage Servicing Rights ("MSRs") were

                                       54

initially  recorded at cost. All MSRs were subsequently  carried at the lower of
the initial  carrying  value,  adjusted  for  amortization  and  deferred  hedge
gains/losses,  or fair value.  Fair values were estimated based on market prices
for  similar  MSRs and on the  discounted  anticipated  future  net  cash  flows
considering market loan prepayment predictions,  interest rates, servicing costs
and  other  economic  factors.   For  purposes  of  impairment   evaluation  and
measurement, we stratified MSRs based on predominant risk characteristics of the
underlying loans,  including loan type,  amortization type (fixed or adjustable)
and note rate. To the extent that the carrying value of MSRs exceeded fair value
by individual  stratum, a valuation reserve was established,  which was adjusted
in the future as the value of MSRs increased or decreased.  The cost of MSRs was
amortized in  proportion  to, and over the period of,  estimated  net  servicing
income.

   We  recognized  a $38.2  million  write-down,  which  represented  the entire
carrying  value of our MSR at December 31, 2000.  In December  2000,  we entered
into discussions with three third-party  sub-prime  servicers to either purchase
or  sub-service  our entire $3.31 billion  servicing  portfolio.  Based upon the
seasoning  of our loan  portfolio,  the high costs  associated  with monthly and
servicing  advances  necessary to maintain a seasoned  loan  portfolio,  and the
nominal amount of ancillary service fee income, the three bids for the portfolio
all  approximated  par,  meaning  that none of the  bidders  believed a purchase
premium  was  justified.  Following  three  consecutive  quarters of selling our
mortgage  servicing  rights on newly issued  securitizations  (beginning  in the
second  quarter of 2000) for a cash premium,  we were left with a more seasoned,
and  therefore  more costly,  servicing  portfolio  requiring  significant  cash
outlays for monthly delinquency and servicing advances, which adversely impacted
the overall value of the remaining loan  portfolio.  Therefore,  management felt
this  write-down was necessary to reflect the current market price we would have
received at December 31, 2000 for our servicing  portfolio.  Prior to soliciting
bids in December  2000,  management  believed that the carrying value of our MSR
was validated as the cash purchase price  (premium) we received from selling the
servicing rights associated with our  securitizations in June 2000 and September
2000 exceeded the carrying value of the MSR stated as a percentage of our entire
loan servicing portfolio. However, these specific pools were less seasoned, with
lower amounts of monthly and servicing advance obligations, and generated higher
ancillary service fee income.

   The activity related to the our capitalized mortgage servicing rights for the
years ended December 31, is as follows:
<TABLE>
<S>                                      <C>           <C>           <C>

(DOLLARS IN THOUSANDS)                      2001         2000         1999
--------------------------------------------------------------------------------
Balance, beginning of year                $  --         45,927        33,490
Additions                                    --         11,611        20,542
Amortization and FV adjustments              --         (8,916)       (8,105)
Sales                                        --        (10,385)           --
Write-down                                   --        (38,237)           --
--------------------------------------------------------------------------------
Balance, end of year                      $  --             --        45,927
--------------------------------------------------------------------------------
</TABLE>

(7) EXCESS CASHFLOW CERTIFICATES, NET

   We  classify   excess  cashflow   certificates   that  we  receive  upon  the
securitization of a pool of loans as "trading securities".  The amount initially
allocated to the excess cashflow  certificates  at the date of a  securitization
reflects  their  fair  value.  The  amount  recorded  for  the  excess  cashflow
certificates   is  reduced  for   distributions   which  we  receive   from  the
securitization  trusts as holder of these excess  cashflow  certificates  and is
adjusted for subsequent  changes in fair value of excess  cashflow  certificates
held by us.

    At the time each securitization transaction closes, we determine the present
value of the related excess cashflow certificates using certain assumptions made
by us regarding the underlying  mortgage loans. The excess cashflow  certificate
is then recorded at an estimated fair value. Our estimates primarily include the
following:

     o   future rate of prepayment of the mortgage loans;

     o   credit losses on the mortgage loans;

     o   a discount rate used to calculate present value; and

     o   the LIBOR forward curve (using current LIBOR as the floor rate).

                                       55

   The value of each excess  cashflow  certificate  represents  the cash flow we
expect to  receive  in the  future  from such  certificate  based  upon our best
estimate.  We  monitor  the  performance  of the loans  underlying  each  excess
cashflow  certificate,  and any changes in our estimates (and consequent changes
in value of the excess  cashflow  certificates)  is  reflected  in the line item
called "interest  income" in the quarter in which we make any such change in our
estimate. Although we believe that the assumptions we use are reasonable,  there
can be no assurance as to the accuracy of the assumptions or estimates.

   In determining the fair value of each of the excess cashflow certificates, we
make the following underlying assumptions:

(A)  PREPAYMENTS.  We  base  our  prepayment r ate  assumptions upon our ongoing
     analysis of the  performance of mortgage  pools we previously  securitized,
     and the  performance  of similar  pools of mortgage  loans  securitized  by
     others in the industry.  We apply different prepayment speed assumptions to
     different loan product types because it has been our  experience  that that
     different  loan  product  types  exhibit  different   prepayment  patterns.
     Generally,  our loans can be  grouped  into two loan  products - fixed rate
     loans and  adjustable  rate  loans.  With fixed rate loans,  an  underlying
     borrower's interest rate remains fixed throughout the life of the loan. Our
     adjustable  rate loans are really a "hybrid"  between fixed and  adjustable
     rate loans,  in that the rate  generally  remains  fixed for  typically the
     first three years of the loan, and then adjusts  typically every six months
     thereafter.  Within each product type, other factors can affect  prepayment
     rate assumptions. Some of these factors, for instance, include:

     o   whether or not a loan contains a prepayment  penalty - an amount that a
         borrower must pay to a lender if the borrower prepays the loan within a
         certain time after the loan was originated. Loans containing prepayment
         penalty  typically  do not prepay as quickly  as those  without  such a
         penalty;

     o   as is customary with adjustable rate mortgage loans,  the  introductory
         interest rate charged to the borrower is  artificially  lower,  between
         one and two  full  percentage  points,  than the  rate  for  which  the
         borrower would have otherwise qualified. Generally, once the adjustable
         rate  mortgage  begins  adjusting  on the first  adjustment  date,  the
         interest  rate  payable  on  that  loan  increases,   at  times  fairly
         substantially.  This interest rate increase can be exacerbated if there
         is an  absolute  increase  in  interest  rates.  As a  result  of these
         increases  and the  potential  for future  increases,  adjustable  rate
         mortgage loans typically are more susceptible to early prepayments.

         There  are  several  reasons   why a  loan  will  prepay  prior  to its
         maturity, including (but not limited to):

         o a decrease in interest rates;

         o improvement in the borrower's  credit profile,  which may allow them
           to qualify for a lower interest rate loan;

         o competition  in the  mortgage  market,  which  may  result in lower
           interest rates being offered;

         o the borrower's sale of his or her home; and

         o a default by the borrower, resulting in foreclosure by the lender.

     It is unusual  for a borrower  to prepay a mortgage  loan  during the first
     few months because:

         o it typically  takes at least several  months after the mortgage loans
           are originated for any of the above events to occur;

         o there are costs involved with refinancing a loan; and

         o the borrower does not want to incur prepayment penalties.

      Thereafter,  we have found that the rate at which loans prepay will slowly
      increase  and  stabilize,   then  decrease  and   eventually   level  off.
      Historically,  we used a "ramp"  prepayment  curve,  in which we projected
      that a loan would  initially  begin  prepaying at a certain rate, and that
      rate would incrementally increase (or "ramp up") over its first 12 months,
      and level off  thereafter.  Commencing  in 1998, we began using a "vector"
      curve,  which  is  similar  to a "ramp  curve"  in that  prepayment  rates
      incrementally  increase over a longer  period of time and then  stabilize.
      However,  as  opposed  to  a  ramp  curve  (which  remains  constant

                                       56

      once  prepayments  stabilize), we  believe  that a  vector  curve  is more
      representative of  projected  future  loan  prepayment  experience,  as it
      thereafter decreases and then eventually levels off.

      The  following  table shows our most  recently  changes to our  prepayment
      assumptions  - in the third  quarter  of 2001 and,  prior to that,  in the
      third quarter 2000:

      LOAN TYPE        AT SEPTEMBER 30, 2001       AT  SEPTEMBER 30, 2000
      --------------------------------------------------------------------------
      Fixed Rate:
        At Month                 4.00%                     4.00%
        Peak Speed              30.00%                    23.00%
      Adjustable Rate:
        At Month                 4.00%                     4.00%
        Peak Speed              75.00%                    50.00%

(B)   DEFAULT RATE. A default reserve for both fixed- and adjustable-rate  loans
      sold  to the  securitization  trusts  of  5.00%  of the  amount  initially
      securitized at December 31, 2001 compared to 3.50% at December 31, 2000.

      Our loan loss assumption reflects our belief that:

      o  prepayment  speeds  generally  will be slower in the future than in the
         past;

      o  the rise in home values  will be flat or slightly  moderate as compared
         to the past few years; and

      o  borrowers will therefore be less able to refinance  their  mortgages to
         avoid  default which may have an adverse  effect on the  non-performing
         loans in the  securitizations  trusts  underlying  our excess  cashflow
         certificates.

(C)   DISCOUNT  RATE. We use a discount rate that we believe  reflects the risks
      associated  with our excess  cashflow  certificates.  While quoted  market
      prices on comparable  excess cashflow  certificates are not available,  we
      have performed  comparisons of our valuation  assumptions  and performance
      experience to our competitors' in the  non-conforming  mortgage  industry.
      Our discount rate takes into account the asset quality and the performance
      of our  securitized  mortgage  loans  compared to that of the industry and
      other  characteristics  of our  securitized  loans.  We quantify the risks
      associated  with our excess  cashflow  certificates by comparing the asset
      quality and  payment and loss  performance  experience  of the  underlying
      securitized mortgage pools to comparable industry performance.  We believe
      that the  practice  of many  companies  in the  non-conventional  mortgage
      industry  has  been  to add a  spread  for  risk  to the  all-in  cost  of
      securitizations  to determine their discount rate. From these comparisons,
      we have identified a spread that we add to the all-in cost of our mortgage
      loan securitization  trusts' investor  certificates.  The discount rate we
      use to  determine  the present  value of cash flows from  excess  cashflow
      certificates reflects increased uncertainty surrounding current and future
      market conditions,  including without limitation,  uncertainty  concerning
      inflation, recession, home prices, interest rates and equity markets.

      We utilized a discount rate of 15% at December 31, 2001 compared to 13% at
      December 31, 2000 on "senior" excess cashflow  certificates  (i.e.,  those
      excess  cashflow  certificates  that were not  subject  to a Net  Interest
      Margin, or "NIM," Transaction).  Prior to the quarter ending September 30,
      2001,  some of our  excess  cashflow  certificates  were  subject to a NIM
      transaction,  for which we applied an 18%  discount  rate.  As part of the
      Second Exchange Offer, all of the excess cashflow  certificates subject to
      the NIM transaction  were transferred to the LLC. As such, at December 31,
      2001, we retain only "senior" excess cashflow certificates.

      In the third  quarter of 2000,  we had increased the discount rate we used
      on those excess cashflow  certificates  included in the NIM transaction to
      18% (from 12%) and  recorded an $8.8  million  valuation  adjustment.  The
      adjustment  reflected a reduction  in the  present  value of those  excess
      cashflow   certificates  sold  in  connection  with  our  NIM  transaction
      completed in the fourth quarter of 2000. We increased the discount rate on
      these excess cashflow  certificates  during the period that the senior NIM
      securities remain outstanding,  to account for the potentially higher risk
      associated  with the  residual  cash flows  expected to be received by the
      holder  of  the  certificated   interest  in  the  NIM  trust,   which  is
      subordinated   to  the  multiple   senior   securities  sold  in  the  NIM
      transaction.

                                       57

      In the fourth  quarter of 2000, we had increased the discount rate we used
      in  determining   the  present  value  of  our  "senior"  excess  cashflow
      certificates  to 13% from  12%,  and  recorded  a $7.1  million  valuation
      adjustment.  The adjustment reflected an increase in volatility concerning
      the other underlying  assumptions used in estimating  expected future cash
      flows due to greater  uncertainty  surrounding  current and future  market
      conditions,  including  without  limitation,  inflation,  recession,  home
      prices, interest rates and equity markets.

   At September 30, 2001,  we recorded a charge to interest  income to reflect a
fair value  adjustment to our remaining  excess cashflow  certificates  totaling
$19.7  million.  Our change in  assumptions  at September  30,  2001,  primarily
reflect recent  unforeseen  market events  relating to the terrorist  attacks on
September 11, 2001,  that further  accelerated an economic  downturn in the U.S.
economy,  and which we  believe  may have a  significant  adverse  impact on the
economy for the foreseeable future.

   Our current  prepayment rate and default rate assumptions  primarily  reflect
our current and future expectation for:

     o   a continuing relatively low interest rate environment based upon, among
         other  things,  the  Eurodollars  future curve.  At June 30, 2001,  the
         Eurodollar  futures  market,  an  indicator of future  interest  rates,
         projected  that 1-month  LIBOR and 6-month  LIBOR rates at December 31,
         2001 would be 4.13% and 4.41%,  respectively.  However,  as a result of
         the unexpected  events of September 11, 2001,  actual 1-month LIBOR and
         6-month LIBOR for December 31, 2001 were  significantly  lower at 1.87%
         and 1.98%, respectively;

     o   a  potential  for an adverse  economic  environment.  According  to the
         Mortgage Bankers Association,  the percentage of U.S. homeowners behind
         on their  mortgages  in the third  quarter of 2001 rose to the  highest
         levels since the last recession in the early 1990s,  citing a shrinking
         economy and higher  unemployment as among the causes. In addition,  the
         National  Bureau  of  Economic  research,  the  unofficial  arbiter  of
         expansions and contractions, reported in November 2001, its belief that
         the United States economy had officially  entered into a recession back
         in March 2001.  Lastly, we revised our discount rate to reflect current
         market  conditions  and the rate of return  management  believes  to be
         appropriate given the significant uncertainty regarding future economic
         events,  thus increasing the inherent risk and volatility of our excess
         cashflow certificates.

   For 2000, we recorded a non-cash  increase of $9.6 million to interest income
for a fair value  adjustment  to our excess  cashflow  certificates,  due to the
decrease in one-month  LIBOR.  Some of the our excess cashflow  certificates are
backed by floating rate securities,  which are susceptible to interest rate risk
(positive or negative) associated with a movement in short-term interest rates.

   In  1999,  we  recorded  a $6.3  million  reduction  to our  excess  cashflow
certificates  to reflect  changes to our  prepayment  rate and loan loss reserve
assumptions.

   The activity related to our excess cashflow  certificates for the years ended
December 31, is as follows:
<TABLE>
<S>                                      <C>              <C>          <C>

(DOLLARS IN THOUSANDS)                          2001         2000          1999
--------------------------------------------------------------------------------
Balance, beginning of year               $    216,907      224,659      203,803
Additions                                      11,081       32,716       48,356
Sales                                         (40,402)          --           --
Second Exchange Offer                        (153,090)          --           --
Cash remittances, accretion of
   discount and FV adjustments, net           (17,731)     (40,468)     (27,500)
--------------------------------------------------------------------------------
Balance, end of year                     $     16,765      216,907      224,659
--------------------------------------------------------------------------------
</TABLE>
                                       58

   At December 31, 2001,  key economic  assumptions  and the  sensitivity of the
current  estimated fair value of retained  interests caused by immediate 10% and
20% adverse changes in those assumptions are as follows:

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

                                      Fair value of excess       Impact to
(Dollars in thousands)               cashflow certificates       earnings
-------------------------------------------------------------------------------

Fair value as of 12/31/01:                    $ 16,765

10% increase in prepayment speed                13,838             $2,927
20% increase in prepayment speed                11,293              5,472

10% increase in credit losses                   13,547              3,218
20% increase in credit losses                   10,476              6,289

10% increase in discount rates                  15,860                905
20% increase in discount rates                  15,048              1,717
</TABLE>

   These  sensitivities  are  hypothetical  and are presented  for  illustrative
purposes  only.  Changes in  carrying  amount  based on a change in  assumptions
generally  cannot be  extrapolated  because  the  relationship  of the change in
assumption  to the change in carrying  amount may not be linear.  The changes in
assumptions  presented in the above table were calculated  without  changing any
other assumption; in reality, changes in one assumption may result in changes in
another, which may magnify or counteract the sensitivities. For example, changes
in market  interest rates may  simultaneously  impact  repayment  speed,  credit
losses and the discount rate.

(8) HEDGING TRANSACTIONS

   We adopted SFAS No. 133,  "Accounting for Derivative  Instruments and Hedging
Activities,"  as of January 1, 2001.  The Standard  requires that all derivative
instruments  be  recorded  in the  balance  sheet at fair  value.  However,  the
accounting  for changes in fair value of the  derivative  instrument  depends on
whether  the  derivative  instrument  qualifies  as a hedge.  If the  derivative
instrument  does not qualify as a hedge,  changes in fair value are  reported in
earnings when they occur. If the derivative instrument qualifies as a hedge, the
accounting treatment varies based on the type of risk being hedged. There was no
impact on our financial  condition or results of operations upon the adoption of
SFAS No. 133, as amended.

   We originate mortgage loans and then sell them through a combination of whole
loan sales and  securitizations.  Between the time we originate the mortgage and
sell it in the  secondary  market,  we may  hedge  the risk of  fluctuations  in
interest  rates.  Our risk begins  subsequent to originating  mortgage loans and
prior to selling or  securitizing  such mortgage  loans.  Since we have a closed
(and funded) a mortgage loan at a specified  interest rate with an expected gain
at the time of sale, our exposure is to a higher  interest rate  environment due
to market conditions.  A higher interest rate market implies that we will have a
higher cost of funds,  which  decreases the net spread we would earn between the
mortgage  interest  rate on each  mortgage  loan  less the cost of  funds.  As a
result, we may experience a lower gain on sale.

   The cost of funds is generally composed of two components,  the interest rate
swap with a similar  duration  and average  life and the swaps  spread or profit
margin required by the investors.  We had previously used a "Treasury Rate Lock"
and 15-year Fannie Mae mortgage securities ("FNMA Securities") to hedge our cost
of funds  exposure.  However  recently,  the  securitizations  are priced to the
investor using the interest rate swaps curve. As such, our cost of funds is more
closely tied to interest  rate swaps and we will likely use interest  rate swaps
to hedge our mortgage loans in inventory pending  securitization  pricing. While
none of the above are  perfect  hedges,  we  believe  interest  rate  swaps will
demonstrate the highest  correlation to our cost of funds on a go-forward basis.
We determine the nature and quantity of hedging  transactions based upon various
factors including, without limitation, market conditions and the expected volume
of mortgage  originations.  We will enter into these hedging  strategies through
one  of  our  warehouse  lenders  and/or  one of  the  investment  bankers  that
underwrite our securitizations. These strategies are designated as hedges on our
financial statements and are closed out when we sell the associated loans.

                                       59

   If the value of the hedges  decrease,  offsetting an increase in the value of
the loans,  upon settlement with our hedge  counterparty,  we will pay the hedge
loss in cash and then  realize  the  corresponding  increase in the value of the
loans as part of our net  gain on sale of  mortgage  loans  through  either  the
excess cashflow  certificates we retain from  securitization  or from whole loan
premiums. Conversely, if the value of the hedges increase, offsetting a decrease
in the value of the loans, upon settlement with our hedge counterparty,  we will
receive  the hedge gain in cash and realize  the  corresponding  decrease in the
value of the loans through a reduction in either the value of the  corresponding
excess cashflow certificates or whole loan premiums.

   We believe our hedging  strategy has largely been an effective tool to manage
our interest rate risk on loans prior to securitization,  by providing us with a
cash gain (or loss) to largely offset the reduced (increased) excess spread (and
resultant  lower (or  higher) net gain on sale from an  increase  (decrease)  in
interest  rates.  A hedge may not,  however,  perform  its  intended  purpose of
offsetting changes in net gain on sale.

   We make  decisions  concerning the nature of our hedging  transactions  based
upon various factors including,  without  limitation,  market conditions and the
expected  volume of  mortgage  originations.  We may enter  into  these  hedging
strategies  through one of our warehouse  lenders and/or an investment bank that
underwrites our  securitizations.  We will review  continually the frequency and
effectiveness  of our hedging strategy to mitigate risk pending a securitization
or loan sale.

   If a hedging  transaction  is deemed to be  appropriate,  and can be properly
documented  and  mathematically  shown  to meet  the  appropriate  effectiveness
criteria,  we will account for these  hedges as fair value hedges in  accordance
with SFAS No. 133, as amended.

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

   We did not have open hedge  positions as of December 31, 2001, 2000 and 1999.
We did not hedge during the year ended  December 31, 2001. We included a loss of
$2.1  million and a gain of $3.3  million on our hedges as part of gains on sale
of loans in 2000 and 1999, respectively.

(9) WAREHOUSE FINANCING AND OTHER BORROWINGS

   We have one warehouse  credit  facility in the amount of $200.0 million as of
December 31, 2001. This line is 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:
<TABLE>
<S>                         <C>           <C>                 <C>           <C>     <C>
(DOLLARS IN MILLIONS)
                             Facility                                 BALANCE               Expiration
Facility Description          Amount            Rate              2001       2000              Date
----------------------------------------------------------------------------------------------------------
Warehouse line of credit     $200.0         LIBOR + 1.125%      $ 80.9       74.9              April 2002
Term loan                       n/a             8.15%               --        0.3               June 2001
Capital leases                  n/a        6.63% - 10.25%          6.7       11.4    June 2002 - Nov 2004
Other Borrowings                n/a         7.00% - 8.00%          2.0        2.0                      --
----------------------------------------------------------------------------------------------------------
Balance at December 31,      $200.0                             $ 89.6       88.6
----------------------------------------------------------------------------------------------------------
</TABLE>

(10) SENIOR NOTES

   In August  2000,  we  announced  an agreement to modify our senior notes (the
"Debt  Modification").  With the  consent of the  holders of greater  than fifty
percent of our senior  notes,  we  modified a negative  pledge  covenant  in the
senior notes indenture,  which previously prevented us from selling or otherwise
obtaining financing by using our excess cashflow certificates as collateral.  In
consideration  for the senior  noteholders'  consent,  we agreed, in an exchange
offer  (the  "First  Exchange  Offer"),   to  offer  then  current  holders  the
opportunity  to exchange  their then  existing  senior  notes for (a) new senior
secured notes and (b) ten-year  warrants to buy approximately 1.6 million shares
of Common Stock,  at an initial  exercise  price of $9.10 per share,  subject to
upward or downward adjustment

                                       60

in certain  circumstances.  The senior secured notes have the same coupon,  face
amount and  maturity  date as the senior  notes  and,  up until the Second  Debt
Restructuring  (see below) were  secured by at least $165  million of our excess
cashflow  certificates.  The First  Exchange  Offer was  consummated in December
2000,  with  holders of greater  than $148  million (of $150  million) of senior
notes tendering in the exchange.

   In February  2001,  we entered  into a letter of intent  with the  beneficial
holders of over fifty percent of our senior  secured notes to  restructure,  and
ultimately   extinguish,   the   senior   secured   notes  (the   "Second   Debt
Restructuring").  In  March  2001,  we  obtained  the  formal  consent  of these
beneficial  holders of the senior  secured notes through a Consent  Solicitation
that modified certain provisions of the senior secured notes indenture to, among
other things,  allow for the release of two excess  cashflow  certificates  then
securing  the senior  secured  notes.  We were  first  able to finance  and then
ultimately sell the excess cashflow certificates underlying five securitizations
(including two excess  cashflow  certificates  that were released as part of the
Second Debt  Restructuring) for a $15 million cash purchase price to provide for
working capital.

   In  consideration  for their  consent,  we agreed to offer the holders of the
senior  secured notes (and the senior  notes,  collectively,  the  "Notes"),  an
opportunity to exchange their Notes for the new securities described immediately
below (the "Second Exchange  Offer").  The Second Exchange Offer was consummated
on August 29, 2001, pursuant to which holders of approximately $138.1 million in
principal  amount of our senior  secured  notes and $1.1  million  in  principal
amount of our senior notes, exchanged their notes for commensurate interest in:

     o   voting membership  interests in Delta Funding Residual Exchange Company
         LLC, a newly-formed  limited liability company  (unaffiliated with us),
         to  which  we  transferred  all  of  the  mortgage-related   securities
         previously  securing the senior secured notes  (primarily  comprised of
         excess cashflow certificates);

     o   shares of common stock of a newly-formed  management  corporation  that
         will manage the LLC's assets; and

     o   shares  of  our  newly-issued   preferred  stock  having  an  aggregate
         preference amount of $13.9 million.

   All of the voting  interests in the LLC are held by the former holders of our
senior and senior  secured  notes.  As part of the  transaction,  we  obtained a
non-voting  membership  interest in the LLC, which entitles us to receive 15% of
the net cash flows from the LLC for the first  three years  (through  June 2004)
and, thereafter, 10% of the net cash flows from the LLC. The net cash flows from
the LLC are equal to the total cash flows  generated  by the assets  held by the
LLC for a  particular  period,  less (a) all  expenses  of the LLC,  (b) certain
related  income  tax  payments,  and (c) the NYSBD  subsidy  payments.  We began
receiving  distributions from the LLC in the first quarter of 2002 from a fourth
quarter 2001 distribution.  By extinguishing  substantially all of our long-term
debt, the rating agencies that  previously  rated us and our long-term debt have
withdrawn their corporate ratings.

    As part of the Second Exchange Offer, all tendering Noteholders waived their
right to receive  any future  interest  coupon  payments on the  tendered  Notes
beginning with the August 2001 interest coupon payment.  With the closing of the
Second  Exchange  Offer,  we paid the August 2001 interest coupon payment on the
approximately  $10.8 million of Notes that did not tender in the Second Exchange
Offer.  By  extinguishing  substantially  all of our long-term  debt, the rating
agencies that  previously  rated us and our long-term debt have withdrawn  their
corporate ratings.

   The  senior  notes  bear  interest  at a rate  of  9.5%  per  annum,  payable
semi-annually  (February  1st and August  1st) and a maturity  date of August 1,
2004 when all  outstanding  principal is due. The  outstanding  balance  totaled
$10.8 million as of December 31, 2001.  The  outstanding  balance as of December
31, 2000, prior to the restructuring, totaled $149.6 million, net of unamortized
bond discount.

   Costs incurred with the issuance of the original notes, in the amount of $4.8
million,  have been  deferred and were being  amortized  over a seven-year  term
using a method that  approximates  level-yield.  During 2001,  we completed  our
Second  Exchange Offer and the  unamortized  issuance cost related to the Senior
Note was written  off. We  amortized  approximately  $0.4  million and wrote off
approximately $2.5 million.  The unamortized debt issuance cost was $2.9 million
at December 31, 2000.

                                       61

(11) BANK PAYABLE

   In order to maximize  our cash  management  practices,  we have  instituted a
procedure  whereby checks written  against our operating  account are covered as
they are presented to the bank for payment,  either by drawing down our lines of
credit or from subsequent  deposits of operating  cash. Bank payable  represents
the checks outstanding at December 31, 2001 and 2000, to be paid in this manner.

(12) INVESTOR PAYABLE

   Investor  payable  represents  the  collection of mortgage  payments by us as
servicer,  from  mortgagors,  which  are  due  to  the  investors,  representing
primarily  securitization  trusts.  These funds,  when collected,  are placed in
segregated bank accounts as provided by the related servicing agreements and are
reflected  on our  balance  sheet as a  component  of cash and  interest-bearing
deposits.  Investor  payable  decreased  to $0 at December  31, 2001  because we
transferred  our servicing  portfolio to Ocwen in May 2001,  and with it all the
monies that were held in the various servicing accounts we previously maintained
as servicer.

(13) EMPLOYEE BENEFIT PLANS

   We have an employee profit sharing plan covering all eligible  employees,  as
defined,  with at least 30 months of  service.  Effective  January 1, 1997,  the
employee profit sharing plan was merged with our 401(k) Retirement Savings Plan.

   We sponsor a 401(k) Retirement Savings Plan.  Substantially all our employees
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. We elected to make discretionary  contributions to the Plan of
$0.5  million,   $0.7  million  and  $0.8  million  for  2001,  2000  and  1999,
respectively.

(14) COMMITMENTS AND CONTINGENCIES

   We have  repurchase  agreements  with certain of the  institutions  that have
purchased  mortgages.   Currently,  some  of  the  agreements  provide  for  the
repurchase by us of any of the mortgage  loans that go to  foreclosure  sale. At
the foreclosure  sale, we will repurchase the mortgage,  if necessary,  and make
the  institution  whole.  The  dollar  amount  of  loans,  which  were sold with
recourse,  is $3.5 million at December 31, 2001 and $6.2 million at December 31,
2000.

   Included in accounts  receivable is an allowance for recourse  losses of $1.4
million  at  December   31,  2001  and  $1.5   million  at  December  31,  2000,
respectively. We recognized, as a charge to operations, a provision for recourse
losses of approximately  $311,000,  $11,600 and $70,000 for the years 2001, 2000
and 1999, respectively.  Additions to the allowance for loan losses are provided
by  charges  to income  based  upon  various  factors,  which,  in  management's
judgment,  deserve current  recognition in estimating  probable losses. The loss
factors are determined by management based upon an evaluation of historical loss
experience,   delinquency  trends,  loan  volume  and  the  impact  of  economic
conditions in our market area.

   Our rental expense,  net of sublease income, for the years ended December 31,
2001,  2000 and 1999  amounted to $5.0  million,  $7.0 million and $6.4 million,
respectively.

   Minimum future rentals under  non-cancelable  operating leases as of December
31, 2001 are as follows:
<TABLE>
<S>              <C>
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------
   Year             Amount
--------------------------------------------------------------------------------
   2002           $  3,882
   2003              2,945
   2004              2,579
   2005              2,274
   2006              2,318
   Thereafter        2,868
--------------------------------------------------------------------------------
   Total          $ 16,866
--------------------------------------------------------------------------------
</TABLE>

                                       62

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

(15) STOCK OPTION PLAN

   In October 1996,  the Board of Directors  ratified the 1996 Stock Option Plan
(the "1996 Plan") and authorized  the reserve of 2,200,000  shares of authorized
but unissued  common stock for issuance  pursuant to the 1996 Plan. In May 2001,
the Board of  Directors  ratified  the 2001 Stock  Option Plan (the "2001 Plan,"
collectively  with the 1996 Plan,  the  "Plans") and  authorized  the reserve of
1,500,000  shares of authorized but unissued common stock for issuance  pursuant
to the 2001 Plan.  Substantially all of the options issued vest over a five-year
period at 20% per year and expire seven years from the grant date.

   The following table  summarizes  certain  information  regarding the Plans at
December 31:
<TABLE>
<S>                           <C>             <C>        <C>             <C>         <C>           <C>

                                      2001                        2000                       1999
-------------------------------------------------------------------------------------------------------------------
                               Number       Wtd-Avg         Number      Wtd-Avg        Number      Wtd-Avg
                               of           Exercise        of          Exercise       of          Exercise
                               Shares       Price           Shares      Price          Shares      Price
-------------------------------------------------------------------------------------------------------------------
Balance, beginning of year       990,700       $12.38     1,146,050       $12.44        795,060     $16.96
Options granted                1,658,300         0.50        20,000         2.00        495,350       5.84
Options canceled                 469,500         8.16       175,350        11.57        144,360      14.70
-------------------------------------------------------------------------------------------------------------------
Balance at end of year         2,179,500       $ 4.25       990,700       $12.38      1,146,050     $12.44
-------------------------------------------------------------------------------------------------------------------
Options exercisable              515,650       $13.97       513,120       $15.07        359,200     $16.79
-------------------------------------------------------------------------------------------------------------------
</TABLE>

   We apply APB Opinion No. 25, and related  Interpretations  in accounting  for
the Plans. 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, 2001,
2000 and 1999.

   Had  compensation  cost for the Plans been determined based on the fair value
at the grant dates for awards under the Plans consistent with the method of SFAS
No. 123, our net income (loss) would have been $(101.0) million, $(49.4) million
and $4.5  million for 2001,  2000 and 1999,  respectively.  Earnings  (loss) per
share-basic for 2001, 2000 and 1999 would have been $(6.35),  $(3.10) and $0.29,
respectively.

   The weighted-average fair value of options granted during 2001, 2000 and 1999
was  $1.21,  $0.34  and  $3.86,  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 2001, 2000 and 1999 grants:

                                  2001       2000        1999
--------------------------------------------------------------------------------
Dividend yield                       0%        0%          0%
Expected volatility                164%      145%         78%
Risk-free interest rate           4.22%     6.14%       4.54%
Expected life                   5 years   5 years     5 years


                                       63

 (16) INCOME TAXES
<TABLE>
<S>         <C>                  <C>              <C>           <C>
(DOLLARS IN THOUSANDS)                 2001          2000         1999
------------------------------------------------------------------------
Current:     Federal              $   1,847        2,203         9,777
             State & Local            1,029          600         1,713
------------------------------------------------------------------------
Total current income taxes        $   2,876        2,803        11,490
------------------------------------------------------------------------

Deferred:    Federal              $ (31,053)     (19,860)       (7,172)
             State & Local           (7,393)      (4,448)       (1,265)
     Valuation allowance             38,446        8,297           --
------------------------------------------------------------------------
Total deferred income taxes              --      (16,011)       (8,437)
------------------------------------------------------------------------
Total tax provision (benefit)     $   2,876      (13,208)        3,053
------------------------------------------------------------------------
</TABLE>

   Significant  components  (temporary  differences and carryforwards) that give
rise to our net  deferred  tax asset as of  December  31,  2001 and 2000 were as
follows:

<TABLE>
<S>                                                              <C>              <C>
                                                                      2001          2000
DEFERRED TAX ASSETS:
-------------------------------------------------------------------------------------------
Book/tax difference in excess cashflow
       certificates, net carrying amount                          $   6,721            --
Loss reserves                                                         2,887         5,306
Book over tax depreciation                                              159            --
Federal and State net operating loss carryforwards                   42,894        25,318
-------------------------------------------------------------------------------------------
Gross deferred tax assets                                         $  52,661        30,624
Less: Valuation Allowance                                            46,743         8,297
-------------------------------------------------------------------------------------------
Deferred tax assets net of valuation allowance                    $   5,918        22,327
-------------------------------------------------------------------------------------------

DEFERRED TAX LIABILITIES:
-------------------------------------------------------------------------------------------
Book/tax difference in excess cashflow certificates, net
     carrying amount                                              $      --        14,123
Tax over book depreciation                                               --         2,055
Capitalized origination fees and related cost                           318           549
-------------------------------------------------------------------------------------------
Gross deferred tax liabilities                                    $     318        16,727
-------------------------------------------------------------------------------------------

Net deferred tax assets                                           $   5,600         5,600
-------------------------------------------------------------------------------------------
</TABLE>

   We are  required  to  recognize  all or a portion of our gross  deferred  tax
assets if we believe  that it is 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 will be realized. Management believes that,
based on the available evidence, it is more likely than not that we will realize
the benefit from our gross deferred tax assets, net of the valuation allowance.

      A  valuation  allowance  was  established  in 2000 and  increased  in 2001
because we believe  that we will have  insufficient  earnings  in the  immediate
future to ensure realization of our entire gross deferred tax assets.

     As of December 31, 2001, Federal and State net operating loss carryforwards
("NOLs")  totaled  $107.2  million,  with $1.1 million  expiring in 2018,  $21.1
million  expiring in 2019,  $12.4  million  expiring in 2020,  and $72.6 million
expiring in 2021.

                                       64

   A reconciliation of the statutory income tax rate to the effective income tax
rate,  as applied to income (loss) for the years ended  December 31, 2001,  2000
and 1999 is as follows:

<TABLE>
<S>                                                        <C>         <C>          <C>
                                                            2001        2000        1999
-------------------------------------------------------------------------------------------
Tax at statutory rate                                        35.0%       35.0%       35.0%
State & local taxes, net of Federal benefit                   4.3         4.0         1.1
Change in valuation allowance for deferred tax assets       (39.7)      (13.2)         --
Non-deductible expenses and other                            (2.6)       (4.7)        3.4
-------------------------------------------------------------------------------------------
Total tax rate                                              (3.0)%       21.1%       39.5%
-------------------------------------------------------------------------------------------
</TABLE>

(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:
<TABLE>
<S>                                        <C>            <C>          <C>

(DOLLARS IN THOUSANDS, EXCEPT EPS DATA)         2001         2000        1999
--------------------------------------------------------------------------------
Income before extraordinary item            $(80,535)      (49,417)      4,676
Extraordinary item, net of tax               (19,255)           --       --
--------------------------------------------------------------------------------
Net  income (loss)                          $(99,790)      (49,417)      4,676
--------------------------------------------------------------------------------

Weighted-average shares - basic               15,884        15,884      15,511
Incremental shares-options                        --            --           1
--------------------------------------------------------------------------------
Weighted-average shares - diluted             15,884        15,884      15,512
--------------------------------------------------------------------------------

Basic and diluted earnings per share:
Income before extraordinary item            $  (5.07)        (3.11)       0.30
Extraordinary item, net of tax                 (1.21)           --         --
--------------------------------------------------------------------------------
Net  income (loss)                          $  (6.28)        (3.11)       0.30
--------------------------------------------------------------------------------
</TABLE>

   For  2001  and  2000  Stock  Options  of  approximately  23,000  and  37,000,
respectively,  are excluded  from the  calculation  of diluted EPS because their
effect is antidiluted in periods where losses are reported.

(18) QUARTERLY FINANCIAL DATA (UNAUDITED)

   The following  table is a summary of financial  data by quarter for the years
ended December 31, 2001 and 2000:

For the quarters ended
<TABLE>
<S>                                             <C>           <C>           <C>          <C>

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)   March 31,      June 30,     Sept. 30,      Dec. 31,
------------------------------------------------------------------------------------------------------------
2001
  Revenues (a)(c)                                $(3,037)       25,065       (10,364)      21,261
  Expenses (a)(b)(c)                              30,243        41,500        21,430       17,411
  Extraordinary item, net of taxes                     --           --       (19,255)          --
  Net income (loss) (a)(b)(c)                    (33,752)      (16,528)      (52,910)       3,400
 Earnings (loss) per common share-
     basic and diluted (a)(b)(c)                   (2.12)        (1.04)        (3.33)        0.21

2000
  Revenues (d)((e)                               $35,945        28,944        27,625       26,457
  Expenses (d)(e)                                 32,820        34,977        43,010       70,789
  Net income (loss) (d)(e)                         1,826        (3,527)      (11,206)     (36,510)
  Earnings (loss) per common share-
     basic and diluted (d)(e)                       0.11         (0.22)        (0.71)       (2.30)

</TABLE>
                                       65

----------------------------------------
(a)The quarter ended March 31, 2001 includes:  (1) a $25.4 million write-down of
   excess cashflow certificates relating to a sale agreement entered into by us,
   (2) a $0.8 million charge related to disposition of branches,  and (3) a $0.5
   million related to restructuring charges.
(b)The quarter ended June 30, 2001 includes  non-recurring  charges  principally
   incurred in  connection  with the  recognition  of cost  attributable  to the
   disposition  and transfer of our  servicing  platform of $10.7  million and a
   change in accounting  estimate regarding the life expectancy of our equipment
   of $3.6 million. In addition,  we recorded a $1.5 million charge related to a
   fair value adjustment to a pool of non-performing loans.
(c)The quarter  ended  September  30, 2001  includes a charge of $19.7  million,
   which  represents a fair value  adjustment to our remaining  excess  cashflow
   certificates.  We changed the valuation  assumptions  we use to estimate fair
   value.  The quarter  also  includes a  non-recurring  charge of $1.4  million
   relating to professional fees incurred in connection with the Second Exchange
   Offer.
(d)The quarter ended  September 30, 2000  includes  $16.4 million  non-recurring
   items,   in  connection   with  our  corporate   restructuring   and  a  debt
   modification, NIM transaction and sale of a domain name.
(e)The quarter ended December 31, 2000 includes  $45.7 million of  non-recurring
   items,  in connection  with our  write-down of MSRs, NIM  transaction  costs,
   write-down of goodwill and other servicing related receivables.

ITEM 9.  CHANGES IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON   ACCOUNTING  AND
FINANCIAL DISCLOSURE.

      None.


                                    PART III

ITEMS 10-13

   The  Registrant  incorporates  by reference  herein  information in its proxy
statement that 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.
<TABLE>
<S> <C>                                                                                   <C>
  (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........................................................  43
     Consolidated Balance Sheets--December 31, 2001 and 2000.............................  44
     Consolidated Statements of Operations--Years ended December 31, 2001, 2000 and 1999.  45
     Consolidated Statement of Changes in Stockholders' Equity--Years ended
         December 31, 2001, 2000 and 1999................................................  46
     Consolidated Statements of Cash Flows--Years ended December 31, 2001, 2000 and
         1999............................................................................  47
     Notes to Consolidated Financial Statements..........................................  48
</TABLE>

  (A)(3) EXHIBITS:
<TABLE>
<S>    <C>  <C>    <C>


 EXH.
  NO.   FILED       DESCRIPTION
 ---    ----        ----------
  3.1   (a)  --     Certificate of Incorporation of Delta Financial Corporation
  3.2   (e)  --     Second Amended Bylaws of Delta Financial Corporation
  3.3   (m)  --     Certificate of Designations, Voting Powers, Preferences and Rights of Series A Preferred Stock of Delta
                    Financial Corporation
  4.1   (b)  --     Indenture dated July 23, 1997, between Delta Financial Corporation, its subsidiary guarantors and The Bank of
                    New York, as Trustee
  4.2   (g)  --     First  Supplemental  Indenture  dated  August  1, 2000,   between   Delta   Financial   Corporation,   its
                    subsidiary  guarantors  and  The  Bank of New  York,  as Trustee
  4.3   (k)  --     Second  Supplemental  Indenture dated October 16, 2000,   between   Delta   Financial   Corporation,   its
                    subsidiary  guarantors  and  The  Bank of New  York,  as Trustee
  4.4   (k)  --     Third Supplemental Indenture dated November 20, 2000 between Delta Financial Corporation, its subsidiary
                    guarantors and The Bank of New York, as Trustee
</TABLE>

                                       66
<TABLE>
<S>    <C>  <C>    <C>
  4.5   (k)  --     Fourth Supplemental Indenture dated December 21, 2000 between Delta Financial Corporation, its subsidiary
                    guarantors and The Bank of New York, as Trustee
  4.6   (h)  --     Indenture, dated December 21, 2000, relating to the 9 1/2% Senior Secured Notes due 2004 by and between Delta
                    Financial Corporation, its subsidiary guarantors and U.S. Bank Trust National Association, as Trustee.
  4.7   (k)  --     First Supplemental Indenture dated January 11, 2001, between Delta Financial Corporation, its subsidiary
                    guarantors and U.S. Bank Trust National Association, as Trustee
  4.8   (k)  --     Second Supplemental Indenture dated February 12, 2001, between Delta Financial Corporation, its subsidiary
                    guarantors and U.S. Bank Trust National Association, as Trustee
  4.9   (i)  --     Letter of Intent and Term Sheet, by and among the Delta  Financial   Corporation  and  certain  beneficial
                    holders  of  the  Senior  Secured  Notes,  dated  as  of February 23, 2001.
  4.10  (j)  --     Third Supplemental Indenture dated March 16, 2001, between Delta Financial Corporation, its subsidiary
                    guarantors and U.S. Bank Trust National Association, as Trustee
  4.11  (l)  --     Fourth Supplemental Indenture dated July 31, 2001, between Delta Financial Corporation, its subsidiary
                    guarantors and U.S. Bank Trust National Association, as Trustee
  4.12  (m)  --     Fifth Supplemental Indenture dated August 27, 2001, between Delta Financial Corporation, its subsidiary
                    guarantors and U.S. Bank Trust National Association, as Trustee
  10.2  (m)  --     Employment  Agreement dated February 27, 2002 between the Registrant and Hugh Miller
  10.3  (f)  --     Employment Agreement dated July 9, 1999 between the Registrant  and  Christopher  Donnelly
  10.4  (m)  --     Employment  Agreement  dated September 24, 2001 between the  Registrant  and Randall F. Michaels
  10.5  (m)  --     Employment Agreement dated February 27, 2002 between the Registrant and Richard Blass
  10.7  (a)  --     Lease Agreement between Delta Funding Corporation and the Tilles Investment Company, and the Second, Third
                    and Fourth Amendments to Lease Agreement
  10.8  (c)  --     Fifth, Sixth and Seventh Amendments to Lease Agreement between Delta Funding Corporation and the Tilles
                    Investment Company
  10.9  (d)  --     Eighth  Amendment  to  Lease  Agreement  between  Delta  Funding Corporation  and the Tilles  Investment Company
  10.10 (m)  --     Ninth Amendment to Lease  Agreement  between Delta Funding  Corporation  and the Tilles  Investment
                    Company
  10.11 (a)  --     1996 Stock Option Plan of Delta Financial Corporation
  10.12 (m)  --     2001 Stock Option Plan of Delta Financial Corporation
  21.1  (m)  --     Subsidiaries of Registrant
</TABLE>

---------------
(a)Incorporated by reference from our  Registration  Statement  on Form S-1 (No.
   333-11289), filed with the Commission on October 9, 1996.
(b)Incorporated by reference from our Current Report on Form 8-K(No. 001-12109),
   filed with the Commission on July 30, 1997.
(c)Incorporated  by reference  from our Annual  Report on Form 10-K for the year
   ended  December 31, 1997 (File No.  1-12109),  filed with the  Commission  on
   March 31, 1998.
(d)Incorporated  by  reference  from our  Quarterly  Report on Form 10-Q for the
   quarter ended March 31, 1998 (File No. 1-12109), filed with the Commission on
   May 12, 1998.
(e)Incorporated  by reference  from our Annual  Report on Form 10-K for the year
   ended  December 31, 1998 (File No.  1-12109),  filed with the  Commission  on
   March 31, 1999.
(f)Incorporated  by reference  from our Annual  Report on Form 10-K for the year
   ended  December 31, 1999 (File No.  1-12109),  filed with the  Commission  on
   March 31, 2000.
(g)Incorporated  by  reference  from our Current  Report  on Form  8-K (File No.
   1-12109),  filed  with the  Commission  on August 4, 2000.
(h)Incorporated  by  reference  from our Current  Report  on  Form 8-K (File No.
   1-12109), filed with the  Commission  on January 10, 2001.
(i)Incorporated  by  reference  from  our Current  Report on Form  8-K (File No.
   1-12109),  filed with the  Commission on March 2, 2001.
(j)Incorporated  by   reference  from  our Current  Report on Form 8-K (File No.
   1-12109),  filed with the Commission on March 22, 2001.
(k)Incorporated  by reference  from our Annual  Report on Form 10-K for the year
   ended  December 31, 2000 (File No.  1-12109),  filed with the  Commission  on
   April 2, 2001.
(l)Incorporated  by  reference  from our Current  Report on  Form 8-K  (File No.
   1-12109),  filed with the Commission on August 3, 2001.
(m)Filed herewith

   (B) REPORTS ON FORM 8-K.

       None.

                                       67
<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 25, 2002      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.
<TABLE>
<S>                                <C>                                                 <C>
SIGNATURE                               CAPACITY IN WHICH SIGNED                              DATE
--------------------------------     -------------------------------------------------- ----------------



/S/ SIDNEY A. MILLER                Chairman of the Board of Directors                  March 25, 2002
--------------------------------
Sidney A. Miller


/S/ HUGH MILLER                     Chief Executive Officer, President and Director     March 25, 2002
-------------------------------     (Principal Executive Officer)
Hugh Miller


/S/ RICHARD BLASS                   Executive Vice President, Chief Financial Officer   March 25, 2002
-------------------------------     and Director (Principal Financial Officer)
Richard Blass


/S/ MARTIN D. PAYSON                Director                                            March 25, 2002
-------------------------------
Martin D. Payson


/S/ ARNOLD B. POLLARD               Director                                            March 25, 2002
-------------------------------
Arnold B. Pollard


/S/ MARGARET WILLIAMS               Director                                            March 25, 2002
--------------------------------
Margaret Williams

</TABLE>

                                       68