<PAGE>


      AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 6, 1997
                                                     REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                            ------------------------

                                    FORM S-1
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933

                            ------------------------

                          DELTA FINANCIAL CORPORATION
                    AND THE GUARANTORS LISTED ON SCHEDULE A
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                                       <C>                                       <C>
             SEE SCHEDULE A                                 6162                                 SEE SCHEDULE A
    (STATE OR OTHER JURISDICTION OF             (PRIMARY STANDARD INDUSTRIAL                    (I.R.S. EMPLOYER
     INCORPORATION OR ORGANIZATION)             CLASSIFICATION CODE NUMBER)                  IDENTIFICATION NUMBER)
</TABLE>
 
                            ------------------------
 
                         1000 WOODBURY ROAD, SUITE 200
                         WOODBURY, NEW YORK 11797-9003
                                  516-364-8500
              (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
       INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

                            ------------------------
 
                      HUGH MILLER, CHIEF EXECUTIVE OFFICER
                          DELTA FINANCIAL CORPORATION
                         1000 WOODBURY ROAD, SUITE 200
                         WOODBURY, NEW YORK 11797-9003
                                  516-364-8500
           (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
                   INCLUDING AREA CODE, OF AGENT FOR SERVICE)

                            ------------------------
 
                                   Copies to:
 
<TABLE>

<S>                                                             <C>
                      JAMES R. TANENBAUM                                             MARK A. STEGEMOELLER
                STROOCK & STROOCK & LAVAN LLP                                          LATHAM & WATKINS
                       180 MAIDEN LANE                                             SEARS TOWER, SUITE 5800
                NEW YORK, NEW YORK 10038-4982                                       233 SOUTH WACKER DRIVE
                                                                                 CHICAGO, ILLINOIS 60606-6401
</TABLE>
 
                            ------------------------
 
    APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
 
    If the only securities being registered on this form offered pursuant to
dividend or interest reinvestment plans, please check the following box: / /
 
    If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, other than securities offered only in connection with dividend
or interest reinvestment plans, please check the following box: / /
 
    If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: / /
 
    If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
 
    If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /

                            ------------------------
 
                        CALCULATION OF REGISTRATION FEE
 
<TABLE>
<CAPTION>
                                                                    PROPOSED
                                                                MAXIMUM OFFERING         PROPOSED
             TITLE OF SECURITIES                AMOUNT TO BE    PRICE PER UNIT(1)   MAXIMUM AGGREGATE         AMOUNT OF
              BEING REGISTERED                   REGISTERED            (2)          OFFERING PRICE(1)      REGISTRATION FEE
<S>                                             <C>             <C>                 <C>                  <C>
  % Senior Notes due 2004....................   $150,000,000          100%             $150,000,000           $45,454.55
Subsidiary Guarantees ('Guarantees')(3)......        n/a               n/a                 n/a                   n/a
</TABLE>
 
(1) Estimated solely for the purpose of calculating the registration fee in
    accordance with Rule 457 under the Securities Act of 1933.
(2) Exclusive of accrued interest, if any.
(3) No separate consideration will be received for any Guarantees. The
    Guarantees include the rights of Holders of the Notes (as defined) under the

    Guarantees.

                            ------------------------
 
    THIS REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<PAGE>

                                   SCHEDULE A
 
<TABLE>
<CAPTION>
 STATE OR OTHER JURISDICTION
             OF                                                              I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION                                             IDENTIFICATION NUMBER
-----------------------------                                          ----------------------------
<S>                                <C>                                 <C>
       Delaware                    Delta Financial Corporation                  11-3336165
       New York                    Delta Funding Corporation                    11-2609517
       Delaware                    Fidelity Mortgage, Inc.                      11-3360263
                                   Fidelity Mortgage (Florida),
       Delaware                    Inc.                                         11-3360266
       Delaware                    DF Special Holdings Corporation              11-3374284
</TABLE>

<PAGE>

                          DELTA FINANCIAL CORPORATION

                             CROSS REFERENCE SHEET
                            PURSUANT TO ITEM 501(B)
 
<TABLE>
<CAPTION>
                        ITEMS AND CAPTIONS                                     CAPTION OR LOCATION
                           IN FORM S-1                                            IN PROSPECTUS
      ------------------------------------------------------  ------------------------------------------------------
 <S>  <C>                                                     <C>
 1.   Forepart of Registration Statement and Outside Front
        Cover Page of Prospectus............................  Outside Front Cover Page
 
 2.   Inside Front and Outside Back Cover Pages of
        Prospectus..........................................  Inside Front and Outside Back Cover Page
 
 3.   Summary Information, Risk Factors and Ratio of
        Earnings to Fixed Charges...........................  Prospectus Summary; Summary Consolidated Financial
                                                                Data; Risk Factors; Selected Consolidated
                                                                Financial Data; Management's Discussion and Analysis
                                                                of Financial Condition and Results of Operations
 
 4.   Use of Proceeds.......................................  Prospectus Summary; Use of Proceeds
 
 5.   Determination of Offering Price.......................  Outside Front Cover Page; Underwriting
 
 6.   Dilution..............................................  Dilution
 
 7.   Selling Security Holders..............................  Not Applicable
 
 8.   Plan of Distribution..................................  Outside Front Cover Page; Description of the Notes;
                                                                Underwriting
 
 9.   Description of Securities to be Registered............  Prospectus Summary; Capitalization; Description of the
                                                                Notes
 
10.   Interests of Named Experts and Counsel................  Not Applicable
 
11.   Information with Respect to Registrant................  Outside Front Cover Page; Prospectus Summary; Risk
                                                                Factors; Capitalization; Selected Consolidated
                                                                Financial Data; Management's Discussion and Analysis
                                                                of Financial Condition and Results of Operations;
                                                                Business; Management; Principal Stockholders;
                                                                Description of the Notes; Legal Matters; Experts;
                                                                Additional Information
 
12.   Disclosure of Commission Position on Indemnification
        for Securities Act Liabilities......................  Not Applicable
</TABLE>

<PAGE>

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION.  THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE.  THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.


                  SUBJECT TO COMPLETION,                , 1997

PROSPECTUS
                                  $150,000,000
 
                          DELTA FINANCIAL CORPORATION
                            % SENIOR NOTES DUE 2004
 
                            ------------------------
 
    The   % Senior Notes due 2004 (the 'Notes') are being offered (the
'Offering') by Delta Financial Corporation ('Delta' or the 'Company') and will
mature on             , 2004. The Notes will bear interest at a rate of     %
per annum, payable semi-annually on             and             , commencing on
            , 1997. On or after             , 2001, the Notes are redeemable at
the option of the Company, in whole or in part, at the redemption price set
forth herein plus accrued and unpaid interest to the date of redemption. Upon a
Change of Control (as defined), each holder of the Notes (a 'Holder') may
require the Company to repurchase the Notes held by such Holder at 101% of the
principal amount thereof plus accrued and unpaid interest to the date of
repurchase.
 
    The Notes will be general unsecured obligations of the Company and will rank
pari passu in right of payment with all existing and future unsecured
unsubordinated Indebtedness (as defined) of the Company and senior in right of
payment to all existing and future subordinated Indebtedness of the Company. In
addition, the obligations of the Company under the Notes will be fully and
unconditionally guaranteed on a joint and several basis (each, a 'Guarantee') by
each of the Company's existing and future Subsidiaries (as defined), other than
Subsidiaries designated as 'Unrestricted Subsidiaries' in accordance with the
Indenture (collectively, the 'Subsidiary Guarantors'). The Guarantees will rank
pari passu in right of payment with all existing and future unsubordinated
Indebtedness of the Subsidiary Guarantors and senior in right of payment to all
existing and future subordinated Indebtedness of the Subsidiary Guarantors. See
'Description of the Notes.' The Notes and the Guarantees will be effectively
subordinated to all existing and future secured Indebtedness of the Company and
the Subsidiary Guarantors (to the extent of the assets securing such
Indebtedness). As of March 31, 1997, after giving pro forma effect to the
Offering, the Company and the Subsidiary Guarantors had approximately $3.3
million of secured Indebtedness outstanding. See 'Description of the Notes.'
 
    There is no existing market for the Notes and the Company does not intend to

list the Notes on any national securities exchange. See 'Risk Factors--Absence
of Public Market for the Notes.'
 
                            ------------------------
 
    SEE 'RISK FACTORS' BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES OFFERED
HEREBY.
 
                            ------------------------
 
 THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
     EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
          SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
           COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
                    PROSPECTUS. ANY REPRESENTATION TO THE
                       CONTRARY IS A CRIMINAL OFFENSE.
 
<TABLE>
<CAPTION>
                                                   PRICE              UNDERWRITING            PROCEEDS
                                                   TO THE            DISCOUNTS AND             TO THE
                                                 PUBLIC(1)           COMMISSIONS(2)        COMPANY(1)(3)
<S>                                         <C>                   <C>                   <C>
Per Note.................                               %                     %                     %
Total....................                       $                     $                     $
</TABLE>
 
(1) Plus accrued interest, if any, from the date of issuance.
(2) See 'Underwriting' for indemnification arrangements with the Underwriters.
(3) Before deducting expenses payable by the Company estimated to be $         .
 
                            ------------------------
 
    The Notes are offered by the Underwriters, subject to prior sale, when, as
and if delivered to and accepted by the Underwriters and subject to certain
prior conditions, including the right of the Underwriters to reject any order in
whole or in part. It is expected that delivery of the Notes will be made in New
York, New York, on or about             , 1997.
 
                            ------------------------
 
DONALDSON, LUFKIN & JENRETTE
      SECURITIES CORPORATION
 
                                LEHMAN BROTHERS
 
                                                               SMITH BARNEY INC.

              THE DATE OF THIS PROSPECTUS IS                , 1997

<PAGE>




[GRAPHIC DESCRIPTION: A MAP OF THE EASTERN HALF OF THE UNITED STATES SHOWING THE
STATES IN WHICH THE COMPANY ORIGINATED OR PURCHASED AT LEAST $3 MILLION OF LOANS
IN THE LAST TWELVE MONTHS AND THE SITES OF THE COMPANY'S OFFICES AND ITS
HEADQUARTERS.]
 
                            ------------------------
 
          CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES
OFFERED HEREBY, INCLUDING PURCHASES OF THE NOTES TO STABILIZE THEIR MARKET
PRICE, PURCHASES OF THE NOTES TO COVER SOME OR ALL OF A SHORT POSITION IN THE
NOTES MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE 'UNDERWRITING.'

                            ------------------------
 
          CERTAIN INFORMATION CONTAINED IN THIS PROSPECTUS CONSTITUTES
'FORWARD-LOOKING STATEMENTS' WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED (THE 'SECURITIES ACT'), AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE 'EXCHANGE ACT'), WHICH CAN BE
IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS 'MAY,' 'WILL,'
'EXPECT,' 'ANTICIPATE,' 'ESTIMATE' OR 'CONTINUE' OR THE NEGATIVES THEREOF OR
OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. THE STATEMENTS IN 'RISK
FACTORS' ON PAGES 11 TO 20 OF THIS PROSPECTUS CONSTITUTE CAUTIONARY STATEMENTS
IDENTIFYING IMPORTANT FACTORS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES, WITH
RESPECT TO SUCH STATEMENTS THAT COULD CAUSE THE ACTUAL RESULTS, PERFORMANCE OR
ACHIEVEMENTS OF THE COMPANY TO DIFFER MATERIALLY FROM THOSE REFLECTED IN SUCH
FORWARD-LOOKING STATEMENTS.
 
                                       2

<PAGE>

                               PROSPECTUS SUMMARY
 
     The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. Unless the context
indicates otherwise, all references herein to the 'Company' or 'Delta' refer to
Delta Financial Corporation and its wholly-owned subsidiaries. All financial
information gives pro forma effect to the termination of the S corporation
status of Delta Funding Corporation, a wholly-owned subsidiary, and the
transactions described in the 'Selected Consolidated Financial Data' and the
related notes thereto and in 'Management's Discussion and Analysis of Financial
Condition and Results of Operations--Termination of S Corporation Status and
Income Taxes.'
 
                                  THE COMPANY
 
     Delta is a specialty consumer finance company that has engaged in
originating, acquiring, selling and servicing home equity loans since 1982.
Throughout its 15 years of operating history, Delta has focused on lending to
individuals who generally have impaired or limited credit profiles or higher
debt to income ratios and typically have substantial equity in their homes.
Management believes that these borrowers have been largely unsatisfied by the
more traditional sources of mortgage credit which underwrite loans to
conventional guidelines established by the Federal National Mortgage Association
('FNMA') and the Federal Home Loan Mortgage Corporation ('FHLMC'). The Company
makes loans to these borrowers for such purposes as debt consolidation, home
improvement, mortgage refinancing or education, and these loans are primarily
secured by first mortgages on one- to four-family residential properties.
 
     Through its wholly-owned subsidiary, Delta Funding Corporation, the Company
originates home equity loans indirectly through licensed brokers and other real
estate professionals who submit loan applications on behalf of the borrower
('Brokered Loans') and also purchases loans from mortgage bankers and smaller
financial institutions that satisfy Delta's underwriting guidelines
('Correspondent Loans'). Delta Funding Corporation currently originates and
purchases the majority of its loans in 21 states, through its network of
approximately 1,000 brokers and correspondents. The Company believes that it has
a competitive advantage in serving brokers and correspondents in the
nonconforming home equity market that stems from its substantial experience in
this sector and its emphasis on providing quality service that is prompt,
responsive and consistent. The 19 members of Delta Funding Corporation's senior
management have an average of over 13 years of nonconforming mortgage loan
experience. Management believes this industry-specific experience, coupled with
the systems and programs it has developed over the past 15 years, enable the
Company to provide quality services that include preliminary approval of most
Brokered Loans and certain Correspondent Loans within one day, consistent
application of its underwriting guidelines and funding or purchasing of loans
within 14 to 21 days of preliminary approval. In addition, the Company seeks to
establish and maintain productive relationships with its network of brokers and
correspondents by servicing each one with a business development representative,
a team of experienced underwriters and, in the case of Brokered Loans, a team of
loan officers and processors assigned to specific brokers to process all

applications submitted by such brokers.
 
     The Company currently originates and purchases the majority of its loans
through the Company's main office in Woodbury, New York, its full service office
in Atlanta, Georgia, its full processing offices in St. Louis, Missouri,
Chicago, Illinois and Warwick, Rhode Island and from seven business development
offices located in Michigan (2), New Jersey, Ohio (2), Pennsylvania and
Virginia. The Company historically made loans primarily in New York, New Jersey
and Pennsylvania. Commencing in 1995, the Company implemented a program to
expand its geographic presence into the New England, Mid-Atlantic, Midwest and
Southeast regions. As a consequence of its expansion into new markets, as well
as its further penetration of existing markets, the Company increased its loan
production substantially in 1995 and 1996. Total loan originations and purchases
increased $168.1 million, or 140%, from $119.7 million in 1994 to $287.8 million
in 1995, and increased $371.0 million, or 129%, in 1996 to $658.8 million.
 
     In February 1997, in an effort to broaden its origination sources and to
expand its geographic presence in the Company's new markets, the Company
acquired two related retail originators of home equity loans, Fidelity Mortgage,
Inc., based in Cincinnati, Ohio, and Fidelity Mortgage (Florida), Inc., based in
West Palm Beach, Florida (together, 'Fidelity Mortgage'). The Company acquired
Fidelity Mortgage with the expectation that the
 
                                       3

<PAGE>

acquisition would result in beneficial synergies, with Fidelity Mortgage
providing a dedicated source of mortgage loans for Delta Funding Corporation's
securitization pools and for its servicing arm, and Delta Financial Corporation
providing capital to Fidelity Mortgage for the expansion of its retail network.
Fidelity Mortgage develops retail loan leads primarily through its telemarketing
system and its network of seven retail offices located in Florida (2), Georgia,
Indiana and Ohio (3). Two of these offices were opened in the second quarter of
1997, and the Company intends to expand the Fidelity Mortgage network further,
with three new branch offices scheduled to open by the end of the second
quarter.
 
     The Company has been profitable in each of its 15 years of operation. The
Company's results of operations have improved significantly in recent periods as
a result of increased loan production and improved operating efficiencies. Total
revenues increased $37.4 million, or 103%, to $73.5 million in 1996 from $36.1
million in 1995, and pro forma income before extraordinary item increased 630%
to $19.1 million in 1996 from $2.6 million in 1995. During 1995 compared to
1994, the Company's total revenues increased 66% from $21.8 million to $36.1
million and pro forma income increased 128% from $1.1 million to $2.6 million.
See 'Management's Discussion and Analysis of Financial Condition and Results of
Operations.'
 
     The Company generates earnings and cash flow primarily through the
origination, purchase, securitization and servicing of home equity loans. In a
securitization, the Company sells the loans that it originates or purchases to a
trust for cash and records certain assets and income based upon (a) the
difference between all principal and interest received from the mortgage loans

sold and (i) all principal and interest required to be passed through to the
asset-backed bond investors, (ii) all contractual servicing fees, (iii) other
recurring fees and (iv) an estimate of losses on the loans (the 'Excess
Servicing') and (b) the difference between the contractual and estimated
ancillary servicing revenue with respect to the loans and the estimated cost to
service them ('Mortgage Servicing Rights'). At the time of the securitization,
the Company estimates these amounts based upon a declining principal balance of
the underlying loans, adjusted by an estimated prepayment rate, and capitalizes
these amounts using a discount rate that market participants would use for
similar financial instruments. These capitalized assets are recorded on the
Company's balance sheet as interest-only and residual certificates and
capitalized Mortgage Servicing Rights, respectively, and are aggregated and
reported on the income statement as net gain on sale of mortgage loans, after
being reduced (increased) by (i) loan acquisition premiums paid to
correspondents and brokers, (ii) costs of securitization and (iii) any hedge
losses (gains).
 
     The Company typically begins to receive Excess Servicing cash flow eight to
twelve months from the date of securitization, although this time period may be
shorter or longer depending upon the structure and performance of the
securitization. Prior to such time, the monoline insurer requires a reserve
provision to be created within the securitization trust which uses Excess
Servicing cash flows to retire the securitization bond debt until the spread
between the outstanding principal balance of the mortgage loans in the
securitization trust and the securitization bond debt equals 2 to 3% of the
initial securitization principal balance (hereinafter, the
'overcollateralization limit'). Once this overcollateralization limit is met,
excess cash flows are distributed to Delta. The Company begins to receive
contractual mortgage servicing cash flows in the month following the
securitization.
 
     Since 1991, Delta has sold approximately $1.5 billion of its mortgage loans
through 14 real estate mortgage investment conduit ('REMIC') securitizations.
Each of these securitizations has been credit-enhanced by an insurance policy
provided through a monoline insurance company to receive ratings of 'Aaa' from
Moody's Investors Service, Inc. ('Moody's') and 'AAA' from Standard & Poor's
Ratings Group, a division of The McGraw-Hill Companies, Inc. ('Standard &
Poor's'). The Company sells loans through securitizations and, from time to
time, on a whole loan basis, to enhance its operating leverage and liquidity, to
minimize financing costs and to reduce its exposure to fluctuations in interest
rates.
 
     In addition to the excess cash flow from securitizations and proceeds from
whole loan sales, the Company earns the net interest spread on loans held for
sale, origination fees on its Brokered Loans and retail loans (which are
included in other income) and servicing fees of between 0.50% and 0.65% per
annum of the outstanding balance of the loans it services. Since its inception,
the Company has serviced substantially all of the loans it has originated and
purchased, including all of those that it has subsequently sold through
securitizations. Management believes that servicing this loan portfolio enhances
certain operating efficiencies and provides an
 
                                       4

<PAGE>


additional and profitable revenue stream that is less cyclical than the business
of originating and purchasing loans. As of March 31, 1997, Delta had a servicing
portfolio of $1.1 billion of loans. See 'Business--Loans.'
 
     The Company's business objective is to increase profitably the volume of
its loan originations and purchases and the size of its servicing portfolio by
implementing the following strategies:
 
     Continuing to Provide Quality Service.  The Company believes its commitment
to service provides it with a competitive advantage in establishing and
maintaining productive broker and correspondent relationships. The Company's
loan officers and underwriters endeavor to respond promptly and consistently on
every loan submission. In addition, through its business development
representatives, Delta regularly communicates with brokers and correspondents in
order to better understand and respond to their needs.
 
     Maintaining Underwriting Standards.  The Company believes the depth and
experience of its underwriting staff, coupled with consistent application of its
underwriting procedures and criteria, provide the infrastructure needed to
manage and sustain the Company's recent growth, while maintaining the quality of
loans originated or purchased. The depth and experience in the Company's
underwriting department provide two significant competitive advantages. First,
it ensures that the Company's underwriting standards and subjective judgments
required in the non-conforming market are consistently applied and enables the
Company to effectively implement a risk-based pricing strategy. Second, it
provides the opportunity to expand underwriting activities beyond the Company's
headquarters while maintaining consistent underwriting standards.
 
     Further Penetrating Existing and Recently Entered Markets and Expanding
into New Markets.  The Company intends to continue to increase the volume of its
loan originations and purchases through a three-pronged strategy that includes
greater originations and purchases from its existing brokers and correspondents,
establishment of new broker and correspondent relationships in both existing and
recently-entered markets and expansion into new markets.
 
     Expanding its Retail Origination Capabilities.  The Company intends to
devote management and capital resources to expanding its retail network in order
to continue to broaden its origination capabilities and strengthen its
geographic presence. Since the acquisition of Fidelity Mortgage and its five
retail offices, the Company has opened additional Fidelity Mortgage branch
offices in Atlanta, Georgia and Fort Lauderdale, Florida and intends to open
three more branch offices of Fidelity Mortgage by the end of the second quarter
in Illinois, North Carolina and Ohio.
 
     Expanding Through Acquisitions.  Management believes acquisitions can be a
means of cost effectively increasing or diversifying the Company's loan
production capabilities. The Company continually considers acquisition
candidates which operate in geographic or product areas that complement the
Company's existing business.
 
     Leveraging its Information and Processing Technologies.  In recent years,
the Company has made significant capital investments to upgrade and expand its
information and processing technologies. These investments have included the

acquisition and implementation of a new servicing system and have enabled the
Company to achieve operational efficiencies and cost savings. The Company's
recent and anticipated geographic expansion and growth in originations and
servicing portfolio were considered when these systems were designed, and
management believes its strategic plans can be met by leveraging its existing
systems without substantial additional investment in the near future. See
'Business--Business Strategy.'
 
     All of the Company's operations are conducted through its wholly-owned
subsidiaries, Delta Funding Corporation, DF Special Holdings Corporation,
Fidelity Mortgage, Inc. and Fidelity Mortgage (Florida), Inc. In November 1996,
Delta completed the initial public offering of its common stock which trades on
the New York Stock Exchange under the symbol 'DFC.'
 
     The principal executive offices of the Company are located at 1000 Woodbury
Road, Suite 200, Woodbury, New York 11797, and its telephone number is (516)
364-8500.
 
                                       5

<PAGE>

                              RECENT DEVELOPMENTS
 
     Delta Funding Corporation is currently negotiating with the First National
Bank of Chicago ('First Chicago') the terms of a $100 million syndicated credit
agreement (the 'Credit Agreement'). Delta Funding Corporation and First Chicago
expect to sign a definitive Credit Agreement prior to the Issue Date (as
defined). However, there can be no assurance that the Credit Agreement will be
entered into prior to the Issue Date or at all. The execution and delivery of
the Credit Agreement is not a condition to this Offering. See 'Risk Factors--
Dependence on Funding Sources.'
 
     The Credit Agreement will be used primarily to finance mortgage loans held
for sale and to fund servicer advances by Delta Funding Corporation. The Credit
Agreement will provide for a $100 million secured revolving credit facility with
various borrowing base sublimits, including, but not limited to, a $15 million
secured recoverable advance sublimit. Delta Funding Corporation's obligations
under the Credit Facility will be guaranteed by the Company. Advances under the
Credit Facility will be secured by a first priority lien on warehouse collateral
and receivables created from recoverable servicer advances.
 
     In connection with the Credit Agreement, Delta Funding Corporation will
agree to certain standard affirmative covenants, including corporate existence,
maintenance of its properties and insurance coverage, prompt payment of taxes
and other claims and maintenance of a standard accounting system. Delta Funding
Corporation will also be required to make certain negative covenants which,
among other things, will require it to (i) maintain a specified leverage ratio,
(ii) limit its ability to incur additional indebtedness, (iii) maintain a
minimum net worth, (iv) limit its ability to pledge, mortgage or encumber its
assets and (v) limit its ability to merge with another entity or dispose of more
than a specified percentage of its total assets.
 
                                       6

<PAGE>

                                  THE OFFERING
 
<TABLE>
<S>                                         <C>
Securities Offered........................  $150,000,000 aggregate principal amount of        % Senior Notes due
                                            2004.
 
Maturity Date.............................              , 2004.
 
Interest Payment Dates....................  Each              , and              , commencing              ,
                                            1997.
 
Guarantees................................  The obligations of the Company under the Notes will be fully and
                                            unconditionally guaranteed on a joint and several basis by each of
                                            the existing and future Subsidiaries of the Company, other than
                                            Subsidiaries designated as 'Unrestricted Subsidiaries' in accordance
                                            with the Indenture. See 'Description of the Notes-- Guarantees.'
 
Optional Redemption.......................  On or after              , 2001, the Notes will be redeemable at the
                                            option of the Company, in whole or in part, at the redemption prices
                                            set forth herein, plus accrued and unpaid interest to the date of
                                            redemption. See 'Description of the Notes--Optional Redemption.'
 
Change of Control.........................  Upon a Change of Control (as defined), each Holder of the Notes may
                                            require the Company to repurchase the Notes held by such Holder at
                                            101% of the principal amount thereof plus accrued and unpaid interest
                                            to the date of repurchase. See 'Description of the Notes--Repurchase
                                            at the Option of Holders--Change of Control.'
 
Asset Sales...............................  The Indenture relating to the Notes (the 'Indenture') requires that
                                            the proceeds of certain Asset Sales (as defined) be applied as
                                            specified in the Indenture or be used to repurchase the Notes, at
                                            the option of the Holder thereof, at 100% of the principal amount thereof
                                            plus accrued and unpaid interest thereon to the date of purchase.
 
Ranking...................................  The Notes will be general unsecured obligations of the Company and
                                            will rank pari passu in right of payment with all existing and future
                                            unsecured unsubordinated Indebtedness of the Company and senior in
                                            right of payment to all existing and future subordinated Indebtedness
                                            of the Company. The Guarantee of each of the Subsidiary Guarantors
                                            will rank pari passu in right of payment with all existing and future
                                            unsubordinated Indebtedness of such Subsidiary Guarantor and senior
                                            in right of payment to all existing and future subordinated
                                            Indebtedness of the Subsidiary Guarantors. However, the Notes and
                                            Guarantees will be effectively subordinated to all existing and
                                            future secured Indebtedness of the Company and the Subsidiary
                                            Guarantors (to the extent of the value of the collateral securing
                                            such indebtedness). As of March 31, 1997, after giving pro forma
                                            effect to the Offering, the Company and the Subsidiary Guarantors had
                                            approximately $3.3 million of secured Indebtedness outstanding.
</TABLE>
 

                                       7

<PAGE>

 
<TABLE>
<S>                                         <C>
Certain Covenants.........................  The Indenture will contain certain covenants, including, but not
                                            limited to, covenants with limitations on the following matters: (i)
                                            restricted payments; (ii) incurrence of additional indebtedness;
                                            (iii) issuance of preferred stock; (iv) incurrence of additional
                                            liens; (v) dividends and other payment restrictions affecting
                                            subsidiaries; (vi) restrictions on distributions from subsidiaries;
                                            (vii) merger, consolidation or sale of assets; (viii) transactions
                                            with affiliates; and (ix) lines of business. However, all these
                                            limitations are subject to a number of important exceptions and
                                            qualifications. See 'Description of the Notes--Certain Covenants.'
 
Use of Proceeds...........................  The net proceeds will be used (i) to pay off all residual financing
                                            agreements (approximately $57.5 million at March 31, 1997), (ii) to
                                            repay amounts outstanding under certain of the Company's warehouse
                                            lines of credit (lines of credit used to finance, and secured by, a
                                            portion of the Company's inventory of mortgage loans) (approximately
                                            $51.8 million as of March 31, 1997), (iii) to fund future loan 
                                            originations and purchases, (iv) to support securitization transactions,
                                            (v) to fund expansion of Fidelity Mortgage's retail network and (vi) for 
                                            general corporate purposes, including to fund acquisitions. See 'Use of 
                                            Proceeds' and 'Underwriting.'
</TABLE>
 
                                       8

<PAGE>

                     SUMMARY CONSOLIDATED FINANCIAL DATA
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
                                                                       YEAR ENDED DECEMBER 31,
                                             ---------------------------------------------------------------------------
                                                1992            1993            1994            1995            1996
                                             -----------     -----------     -----------     -----------     -----------
<S>                                          <C>             <C>             <C>             <C>             <C>
INCOME STATEMENT DATA:
Revenues:
 Net gain on sale of mortgage loans......    $     4,757     $     7,639     $     6,661     $    15,383     $    46,525
 Interest................................         13,402           9,156           9,839          13,588          16,372
 Servicing fees..........................          1,892           2,101           2,183           2,855           5,368
 Other...................................          5,413           3,617           3,114           4,309           5,266
                                             -----------     -----------     -----------     -----------     -----------
   Total revenues........................    $    25,464     $    22,513     $    21,797     $    36,135     $    73,531
                                             -----------     -----------     -----------     -----------     -----------
   Total expenses........................    $    22,154     $    18,853     $    19,788     $    31,549     $    40,043
                                             -----------     -----------     -----------     -----------     -----------
Income (loss) before income taxes and
 extraordinary item......................    $     3,310     $     3,660     $     2,009     $     4,586     $    33,488
Provision for income taxes(1)............             --              --              --              --           9,466
Extraordinary item:
 Gain on extinguishment of debt..........             --              --              --              --           3,168
                                             -----------     -----------     -----------     -----------     -----------
Net income (loss)........................    $     3,310     $     3,660     $     2,009     $     4,586     $    27,190
                                             -----------     -----------     -----------     -----------     -----------
                                             -----------     -----------     -----------     -----------     -----------
UNAUDITED PRO FORMA INFORMATION:
Provision for pro forma income taxes
 before extraordinary item(1)(2).........    $     1,423     $     1,574     $       864     $     1,972     $    14,400
                                             -----------     -----------     -----------     -----------     -----------
Pro forma income (loss) before
 extraordinary item(1)(2)................    $     1,887     $     2,086     $     1,145     $     2,614     $    19,088
                                             -----------     -----------     -----------     -----------     -----------
                                             -----------     -----------     -----------     -----------     -----------
PER SHARE DATA:
Pro forma earnings (loss) per share of
 common stock(1)(2)(3)(4)................    $      0.15     $      0.17     $      0.09     $      0.21     $      1.46
                                             -----------     -----------     -----------     -----------     -----------
                                             -----------     -----------     -----------     -----------     -----------
Pro forma weighted average number of
 shares outstanding(3)(4)................     12,629,182      12,629,182      12,629,182      12,629,182      13,083,327
                                             -----------     -----------     -----------     -----------     -----------
                                             -----------     -----------     -----------     -----------     -----------
CASH FLOW DATA:
(Used in) provided by operating
 activities..............................    $    (5,057)    $     8,780     $   (10,160)    $   (23,903)    $   (42,025)
(Used in) provided by investing
 activities..............................            (44)            (64)           (917)         (1,207)         (2,283)
Provided by (used in) financing

 activities..............................          2,893          (7,139)         13,460          32,388          46,414
Net increase (decrease) in cash and cash
 equivalents.............................         (2,208)          1,577           2,383           7,278           2,106
 
OPERATING DATA:
Loans originated or purchased:
 Brokered Loans(5).......................    $    66,553     $    76,220     $    81,407     $   175,738     $   321,733
 Correspondent Loans.....................         10,080          26,844          38,341         112,065         337,033
                                             -----------     -----------     -----------     -----------     -----------
   Total.................................    $    76,633     $   103,064     $   119,748     $   287,803     $   658,766
                                             -----------     -----------     -----------     -----------     -----------
                                             -----------     -----------     -----------     -----------     -----------
Average principal balance per loan.......             51              60              67              74              78
Weighted average interest rate...........           13.5%           12.9%           12.1%           11.8%           11.4%
Combined weighted average initial
 loan-to-value ratio.....................           47.8            51.7            55.2            63.2            68.8
Percent of loans secured by first
 mortgages...............................           71.5            81.1            88.0            89.6            93.8
Loan Sales:
 Loans sold through securitizations......    $    64,102     $    88,943     $    90,000     $   229,998     $   615,000
 Whole loan sales........................          1,031           8,708          11,950          17,615          15,273
                                             -----------     -----------     -----------     -----------     -----------
   Total.................................    $    65,133     $    97,651     $   101,950     $   247,613     $   630,273
                                             -----------     -----------     -----------     -----------     -----------
 Total loans serviced....................    $   273,788     $   292,700     $   310,229     $   468,846     $   932,958
                                             -----------     -----------     -----------     -----------     -----------
                                             -----------     -----------     -----------     -----------     -----------

<CAPTION>
                                                  THREE MONTHS
                                                      ENDED
                                                    MARCH 31,
                                           ---------------------------
                                              1996            1997
                                           -----------     -----------
<S>                                          <C>           <C>
INCOME STATEMENT DATA:
Revenues:
 Net gain on sale of mortgage loans......  $       103     $    17,314
 Interest................................        3,967           5,559
 Servicing fees..........................        1,015           1,392
 Other...................................          219           3,040
                                           -----------     -----------
   Total revenues........................  $     5,304     $    27,305
                                           -----------     -----------
   Total expenses........................  $     5,616     $    15,065
                                           -----------     -----------
Income (loss) before income taxes and
 extraordinary item......................  $      (312)    $    12,240
Provision for income taxes(1)............           44           5,250
Extraordinary item:
 Gain on extinguishment of debt..........           --              --
                                           -----------     -----------
Net income (loss)........................  $      (356)    $     6,990
                                           -----------     -----------
                                           -----------     -----------
UNAUDITED PRO FORMA INFORMATION:
Provision for pro forma income taxes
 before extraordinary item(1)(2).........  $      (134)            n/a
                                           -----------
Pro forma income (loss) before
 extraordinary item(1)(2)................  $      (178)            n/a
                                           -----------
                                           -----------
PER SHARE DATA:
Pro forma earnings (loss) per share of
 common stock(1)(2)(3)(4)................  $     (0.01)    $      0.45
                                           -----------     -----------
                                           -----------     -----------
Pro forma weighted average number of
 shares outstanding(3)(4)................   12,629,182      15,420,883
                                           -----------     -----------
                                           -----------     -----------
CASH FLOW DATA:
(Used in) provided by operating
 activities..............................  $  (108,880)    $   (11,437)
(Used in) provided by investing
 activities..............................         (228)         (4,335)
Provided by (used in) financing
 activities..............................      101,863          16,142
Net increase (decrease) in cash and cash
 equivalents.............................       (7,245)            370

OPERATING DATA:
Loans originated or purchased:
 Brokered Loans(5).......................  $    66,389     $   114,063
 Correspondent Loans.....................       49,373         122,679
                                           -----------     -----------
   Total.................................  $   115,762     $   236,742
                                           -----------     -----------
                                           -----------     -----------
Average principal balance per loan.......           78              81
Weighted average interest rate...........         11.0%           11.3%
Combined weighted average initial
 loan-to-value ratio.....................         67.4            71.0
Percent of loans secured by first
 mortgages...............................         94.1            93.6
Loan Sales:
 Loans sold through securitizations......  $        --     $   235,000
 Whole loan sales........................        6,899              --
                                           -----------     -----------
   Total.................................  $     6,899     $   235,000
                                           -----------     -----------
 Total loans serviced....................  $   536,864     $ 1,110,999
                                           -----------     -----------
                                           -----------     -----------
</TABLE>
 
                                       9

<PAGE>

 <TABLE>
<CAPTION>
                                                                                                   THREE MONTHS
                                                                                                       ENDED
                                                       YEAR ENDED DECEMBER 31,                       MARCH 31,
                                          --------------------------------------------------     -----------------
                                           1992       1993       1994       1995       1996       1996       1997
                                          ------     ------     ------     ------     ------     ------     ------
<S>                                       <C>        <C>        <C>        <C>        <C>        <C>        <C>
DELINQUENCY DATA:
Total delinquencies as a percentage of
 loans serviced (period end)(6).......     19.96%     13.49%     11.44%     10.64%      8.37%      7.50%      7.98%
Defaults as a percentage of loans
 serviced (period end)(7).............      3.76%      5.35%      7.32%      5.87%      4.33%      5.91%      4.35%
Net losses as a percentage of average
 loans serviced.......................      0.02%      0.03%      0.24%      0.66%      0.43%      0.15%      0.09%
 
FINANCIAL RATIOS:
 Ratio of earnings to fixed
   charges(8).........................      1.73       2.26       1.54       1.58       3.96       0.87       4.86
 Ratio of indebtedness to total
   capitalization(9)..................      0.58       0.56       0.60       0.64       0.35       0.64       0.37
 Pre-tax interest coverage
   ratio(10)..........................      1.73       2.26       1.54       1.58       3.96       0.87       4.86
</TABLE>

<TABLE>
<CAPTION>
                                                                                                AT MARCH 31, 1997
                                                                                              ---------------------
                                                                                                          PRO FORMA
                                                                                               ACTUAL    AS ADJUSTED
                                                                                              --------    ---------
<S>                                                                                           <C>         <C>         
BALANCE SHEET DATA:                                                                    
Loans held for sale.......................................................................    $ 77,769     $ 77,769   
Interest-only and residual certificates...................................................     101,858      101,858   
Capitalized mortgage servicing rights.....................................................      13,448       13,448   
Total assets..............................................................................     257,356      298,139   
Warehouse financing and other borrowings(11)..............................................     112,507        3,290   
  % Senior Notes due 2004.................................................................          --      150,000   
Investor payables.........................................................................      20,770       20,770   
Total liabilities.........................................................................     154,332      195,115   
Stockholders' equity......................................................................     103,024      103,024   
 </TABLE>
 
------------------
 (1) Prior to October 31, 1996, Delta Funding Corporation was treated as an S
     corporation for federal and state income tax purposes. As a result, the
     Company's historical earnings prior to such date had been taxed directly to
     the former shareholders of Delta Funding Corporation (the 'Former
     Shareholders') and not to the Company. See 'Management's Discussion and

     Analysis of Financial Condition and Results of Operations--Termination of S
     Corporation Status and Income Taxes.'
 
 (2) Pro forma presentation reflects a provision for income taxes, as if the
     Company had been a C corporation since inception, at an assumed tax rate of
     43%.
 
 (3) Figures for the three months ended March 31, 1997 are actual.
 
 (4) Reflects the effect of 10,653,000 shares of common stock issued to the
     Former Shareholders and the effect of the issuance of 4,600,000 shares of
     common stock issued in the Company's initial public offering, 1,976,182 of
     which are treated as if they had always been outstanding to give effect to
     certain distributions paid to the Former Shareholders in connection with
     termination of S corporation status.
 
 (5) Includes $8.1 million of retail loans originated by Fidelity Mortgage
     during the three months ended March 31, 1997.
 
 (6) Represents the percentages of account balances contractually past due 30
     days or more, exclusive of loans in foreclosure and real estate owned
     ('REO').
 
 (7) Represents the percentages of account balances on loans in foreclosure and
     REO.
 
 (8) For the purpose of determining the ratio of earnings to fixed charges,
     earnings consist of income before income taxes and fixed charges; fixed
     charges consist of interest expense.
 
 (9) Represents the ratio of (i) total debt, exclusive of warehouse financing,
     to (ii) the sum of total stockholders' equity and total debt, exclusive of
     warehouse financing.
 
(10) Amounts represent the ratio of (i) the sum of income before income taxes
     plus interest expense to (ii) interest expense.
 
(11) Includes $57.5 million in residual financing.
 
     THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN 'RISK
FACTORS' AND IN 'MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--LIQUIDITY AND CAPITAL RESOURCES.'
 
                                       10

<PAGE>

                                  RISK FACTORS
 
     An investment in the Notes involves certain risks. Prospective investors
should carefully consider the following risk factors, which constitute all the

material risk factors, in addition to the other information contained in this
Prospectus, in evaluating an investment in the Notes offered hereby.
 
LEVERAGE; ASSET ENCUMBRANCE
 
     The Company currently has substantial outstanding indebtedness, and,
subsequent to the Offering, the Company will be significantly leveraged.
Although the covenants under the Indenture will restrict the incurrence of
Indebtedness by the Company and its Restricted Subsidiaries, the Indenture does
not limit the amount of Indebtedness under the Company's warehouse facilities
that qualifies as Permitted Warehouse Debt (as defined). With respect to the
Company's existing warehouse facilities, Permitted Warehouse Debt generally
means indebtedness used exclusively to finance or refinance the origination or
purchase of mortgage loans by the Company or a Subsidiary, up to the lesser
of (i) the amount advanced by the warehouse lender or (ii) 100% of the principal
amount of such loans. See 'Description of the Notes--Certain Definitions.' All
Permitted Warehouse Debt is secured by the mortgage loans financed thereby.
Although lenders under Permitted Warehouse Debt in a default or bankruptcy
situation can be expected to seek payment first out of the collateral securing
such Indebtedness, such existing Indebtedness is recourse to the Subsidiaries
incurring such Indebtedness and certain of such Indebtedness is unconditionally
guaranteed by the Company. Similarly, although the Company intends to use a
portion of the proceeds from this Offering to pay off all its residual
facilities, the Indenture will limit but not prohibit the Company's incurrence
of Indebtedness secured by interest-only and residual certificates, and such
Indebtedness would also be recourse to the Subsidiaries incurring such
Indebtedness. Thus, if the value of the collateral securing any such
Indebtedness was to be insufficient to repay such Indebtedness in full, the
lenders could be entitled to seek payment of the shortfall, if any, from the
Subsidiary incurring such Indebtedness, and in some cases, from the Company. See
'--Dependence on Funding Sources--Dependence on Warehouse and Other Financing
Sources.' The Indenture also will permit the Company and its Restricted
Subsidiaries to incur substantial amounts of additional secured Indebtedness. At
March 31, 1997 on an 'as adjusted basis' to give effect to the Offering and the
application of the net proceeds therefrom, aggregate outstanding consolidated
Indebtedness (including the current maturities thereof) of the Company would
have been approximately $153.7 million, of which $3.3 million would have been
secured Indebtedness to which the Notes and the Guarantees are effectively
subordinated, and the Company would have been able to incur (based upon
available collateral) an additional $76.6 million of Indebtedness (all of which
is secured) under its existing credit facilities and warehouse facilities. In
addition, assuming additional financing was available to the Company, it could
have incurred an additional $51.1 million of Indebtedness (excluding Permitted
Warehouse Debt) and complied with the covenants of the Indenture that will
restrict incurrence of Indebtedness. See 'Capitalization.'
 
     The degree to which the Company is leveraged could have important
consequences to the Holders of the Notes, including: (i) the Company may be more
vulnerable to adverse general economic and industry conditions; (ii) the Company
may find it more difficult to obtain additional financing for future working
capital, capital expenditures, acquisitions, general corporate purposes or other
purposes; and (iii) the Company will have to dedicate a substantial portion of
the Company's cash flow from operations to the payment of principal and interest
on Indebtedness (a substantial portion of which may become due prior to the

maturity of the Notes), thereby reducing the funds available for operations and
future business opportunities.
 
     The Company's ability to sustain its growth and make payments of principal
or interest on, or to refinance, its Indebtedness (including the Notes) will
depend on its future operating performance, and its ability to effect additional
securitizations and debt and/or equity financing, which to a certain extent is
subject to economic, financial, competitive and other factors beyond its
control. If the Company is unable to generate sufficient cash flow in the future
to service its debt, it may be required to refinance all or a portion of its
existing debt, including the Notes, or to obtain additional financing. There can
be no assurance that any such refinancing would be available or that any
additional financing could be obtained on terms reasonably satisfactory to the
Company. The inability to obtain additional financing could have a material
adverse effect on the Company and on its ability to service debt, including the
Notes. See '--Ability to Service Debt; Negative Cash Flows; Access to Capital
Markets' and '--Dependence on Funding Sources--Dependence on Warehouse and Other
Financing Sources.'
 
                                       11

<PAGE>

ABILITY TO SERVICE DEBT; NEGATIVE CASH FLOWS; ACCESS TO CAPITAL MARKETS
 
     There can be no assurance that the cash available from operations and
financing activities will be sufficient to enable the Company to make required
interest payments on the Notes and its other debt obligations and required
payments. The Company may encounter liquidity problems which could affect its
ability to meet such obligations while attempting to withstand competitive
pressures or adverse economic conditions. In such circumstances, the value of
the Notes could be materially adversely affected.
 
     The Company requires substantial amounts of cash to fund its loan
origination, loan purchase and securitization activities. The Company has
operated, and expects to continue to operate, on a negative cash flow basis due
to increases in the volume of loan originations and purchases and due to the
growth of its securitization program. In a securitization, the Company
recognizes a gain on sale for the loans securitized upon the closing of the
securitization and incurs significant associated taxes (both current and
deferred) and expenses but does not receive the cash representing such gain
until it receives the cash flows from the interest-only and residual
certificates and from servicing of the loans, which are payable over the actual
life of the loans securitized. For the three months ended March 31, 1997 and the
year ended December 31, 1996, the Company operated on this negative cash flow
basis using $11.4 million and $42.0 million, respectively, in operating
activities; this negative cash flow is expected to increase for the foreseeable
future as the Company continues to grow.
 
     Currently, the Company's primary cash requirements include the funding of
(i) loan originations and purchases pending their pooling and sale, (ii) the
points and expenses paid in connection with the acquisition of Brokered and
Correspondent Loans, (iii) interest expense on warehouse, residual and other
financing, (iv) fees, expenses and tax payments incurred in connection with its

securitization program and (v) ongoing administrative and other operating
expenses. The Company funds these cash requirements primarily through warehouse
and other financing facilities, securitizations and whole loan sales, interest,
servicing and other cash income and, subject to market conditions, debt and
equity financings. The Company believes that the sources of liquidity, including
the funds raised in this Offering, available to it should be sufficient to fund
the Company's liquidity requirements for the next 12 months if the Company's
future operations are consistent with management's current growth expectations.
However, because the Company expects to continue to require substantial amounts
of cash for the foreseeable future, it anticipates that it will need to effect
debt or equity financings regularly, in addition to quarterly securitizations.
The type, timing and terms of financing selected by the Company will be
dependent upon the Company's cash needs, the availability of other financing
sources and the prevailing conditions in the financial markets. There can be no
assurance that any such sources will be available to the Company at any given
time or as to the favorableness of the terms on which such sources may be
available. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources.'
 
DEPENDENCE ON FUNDING SOURCES
 
     Dependence on Warehouse and Other Financing Sources.  The Company funds
substantially all of the loans which it originates and purchases through
borrowings under warehouse financing facilities and through repurchase
agreements. The Company's borrowings are in turn repaid with the proceeds
received by the Company from selling such loans through securitizations or whole
loan sales. The Company's ability to implement its business strategy will
require increased financing. Historically, the Company has relied upon a few
lenders to provide the primary credit facilities for its loan originations and
purchases. There can be no assurance that such financings will be available on
terms reasonably satisfactory to the Company or at all. Any failure to renew or
obtain adequate funding under these warehouse financing facilities or other
financing arrangements, or any substantial reduction in the size of or increase
in the cost of such facilities, could have a material adverse effect on the
Company's financial condition and results of operations. Furthermore, the
Indenture will impose certain restrictions on the Company's ability to incur
additional warehouse financing and will require the Company to achieve, and
thereafter maintain, a specified amount of unencumbered interest-only and
residual certificates, thereby precluding the Company's ability to access
residual financing for a specified period and limiting its access to such
financing until the Company reaches predetermined levels in accordance with the
Indenture. Historically, the Company has relied upon residual financing
agreements (credit facilities secured by interest-only and residual
certificates) to fund the tax consequences of the recognition of the gains on
sale when a securitization occurs and other working capital needs prior to
receipt of any cash flow from the interest-only and
 
                                       12

<PAGE>

residual certificates retained by the Company in its securitizations. To the
extent that the Company is not successful in maintaining or replacing adequate
financing, it would not be able to hold a large volume of loans pending

securitization and therefore would have to curtail its loan production
activities or sell loans either through whole loan sales or in smaller
securitizations, thereby having a material adverse effect on the Company's
financial condition and results of operations. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources.'
 
     Delta Funding Corporation is currently negotiating the terms of the Credit
Agreement with First Chicago. The Credit Agreement will be used primarily to
finance mortgage loans held for sale and to fund servicer advances by Delta
Funding Corporation, subject to specified sublimits to be set forth therein.
Delta Funding Corporation expects to enter into the definitive Credit Agreement
prior to the Issue Date. However, there can be no assurance that the Credit
Agreement will be entered into prior to the Issue Date or at all. The execution
and delivery of the Credit Agreement is not a condition to this Offering. See
'Prospectus Summary--Recent Developments.'
 
     Dependence on Securitizations.  The Company relies significantly upon
securitizations to generate cash proceeds for repayment of its warehouse
facilities and to create availability to originate and purchase additional
loans. Further, gains on sale of loans generated by the Company's
securitizations represent a significant portion of the Company's revenues. The
Company anticipates effecting loan securitizations on at least a quarterly
basis. Several factors affect the Company's ability to complete securitizations,
including conditions in the securities markets generally, conditions in the
asset-backed securities market specifically, the credit quality of the Company's
portfolio of loans and the Company's ability to obtain credit enhancement.
Accordingly, if the Company were unable to securitize profitably a sufficient
number of loans in a particular financial reporting period, then the Company's
revenue, representing gain on sale, for such period would decline and could
result in lower income or a loss for such period. In addition, unanticipated
delays in closing the securitizations could increase the Company's costs
associated with carrying its loans during the warehousing period, including
hedging costs. Any impairment of, or delay in, the Company's ability to complete
securitizations could result in a material adverse effect on the Company's
financial condition and results of operations.
 
     The Company has relied on credit enhancements provided by monoline
insurance carriers to guarantee outstanding investor certificates in the related
trusts to enable it to obtain an AAA/Aaa rating for such investor certificates.
The Company has not attempted to structure a mortgage loan pool for sale through
a securitization based solely on the internal credit enhancements of the pool or
the Company's credit. Any substantial reductions in the size or availability of
such insurance policies, or increases in the price charged by, or required level
of protection to be provided to, the insurance companies issuing such policies,
could have a material adverse effect on the Company's financial condition and
results of operations. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources' and
'Business--Loans-- Loan Sales.'
 
POTENTIAL CHANGE IN VALUATION OF INTEREST-ONLY AND RESIDUAL CERTIFICATES AND
MORTGAGE SERVICING RIGHTS
 
     The Company sells substantially all of the loans that it originates or

purchases through securitizations. The Company derives a substantial portion of
its income by recording a gain on sale when loans are sold in such a manner. In
a securitization, the Company receives as an investment the interest-only and
residual certificates created as a result of such securitization. In addition,
under Statement of Financial Accounting Standards ('SFAS') No. 125, 'Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities' ('SFAS No. 125'), the Company also recognizes as an asset the
capitalized value of Mortgage Servicing Rights (including normal servicing and
other ancillary fees). The Company calculates the value of its interest-only and
residual certificates and Mortgage Servicing Rights based upon their fair
values. The fair value of these assets is determined based on various economic
factors, including loan types, balances, interest rates, dates of origination,
terms and geographic locations. The Company also uses other available
information applicable to the types of loans the Company originates and
purchases, such as reports on prepayment rates, interest rates, collateral
value, economic forecasts and historical default and prepayment rates of the
portfolio under review. The Company estimates the expected cash flows that it
will receive over the life of a portfolio of loans. These expected cash flows
constitute the excess of the interest rate payable by the obligors of loans over
 
                                       13

<PAGE>

the interest rate passed through to the purchasers of the related securities,
less applicable recurring fees and credit losses. The Company discounts the
expected cash flows using an interest rate that market participants would use
for similar financial instruments. As of March 31, 1997, the Company's balance
sheet reflected the fair value of interest-only and residual certificates of
$101.9 million and Mortgage Servicing Rights of $13.4 million.
 
     Realization of the value of these interest-only and residual certificates
and Mortgage Servicing Rights in cash is subject to the prepayment and loss
characteristics of the underlying loans and to the timing and ultimate
realization of the stream of cash flows associated with such loans. Significant
prepayment or loss experience would impair the future cash flows of the
interest-only and residual certificates and Mortgage Servicing Rights. If actual
experience differs from the assumptions used in determination of the asset
value, future cash flows and earnings could be negatively impacted and the
Company could be required to write down the value of its interest-only and
residual certificates and Mortgage Servicing Rights. No assurance can be given
that the Company's receivables will not experience significant prepayments or
losses or as to whether, and in what amounts, the Company in the future may have
to write down the value of the interest-only and residual certificates or
Mortgage Servicing Rights from its securitization transactions. In addition, if
the prevailing interest rate rose, the required discount rate might also rise,
resulting in impairment of the value of the interest-only and residual
certificates and Mortgage Servicing Rights. The Company believes that there is
no active market for the sale of its interest-only and residual certificates or
its Mortgage Servicing Rights. No assurance can be given that these assets could
be sold at their stated value on the balance sheet, if at all. See 'Management's
Discussion and Analysis of Financial Condition and Results of Operations.'
 
DELINQUENCIES; RIGHT TO TERMINATE SERVICING RIGHTS

 
     The forms of pooling and servicing agreements entered into in connection
with the Company's securitizations set forth certain conditions under which the
insurer or the trustee of a particular securitization can terminate the
Company's right to act as servicer. If, at any measuring date, the loss and
delinquency performance of the mortgage loans in the securitization exceeds
certain levels, the monoline insurance company may terminate the Company's
servicing rights. Although the insurer has the right to terminate servicing with
respect to three of the Company's securitizations (including one in which the
Company sold all of the residual interests), to date, no servicing rights have
been terminated. There can be no assurance that the Company's servicing rights
with respect to the mortgage loans in such securitizations, or any other
securitization which exceeds the specified limits in future periods, will not be
terminated in the future. The monoline insurer has other rights to terminate
servicing if the Company were to breach its obligations under the pooling and
servicing agreements, losses on foreclosure were to exceed specified limits, the
insurance company was required to make payments under its policy or the Company
failed to meet certain financial tests, including a minimum net worth test.
Under some of the Company's servicing agreements, a failure by the Miller family
to continue to own, directly or indirectly, a majority of the Company's
outstanding voting stock, may result in a termination event. None of these
events has occurred with respect to any of the Company's securitizations. Any
termination of the Company's right to act as servicer under a securitization
would materially and adversely affect its ability to engage in future
securitizations which would have a material adverse effect on the Company's
financial condition and results of operations.
 
     In addition, high delinquency rates have a negative impact on cash flows.
Provisions in the pooling and servicing agreements have the effect of requiring
the overcollateralization account, which is primarily funded by Excess Servicing
from the loans held in the trust, to be increased to certain specified levels
when delinquency rates exceed predetermined limits. As of March 31, 1997, the
Company was required to maintain an additional $1.8 million in
overcollateralization accounts as a result of delinquency rates in loans sold in
two securitizations being higher than the predetermined limits set in the
pooling and servicing agreements.
 
CONTINGENT RISKS
 
     Although the Company sells substantially all of the loans that it
originates and purchases on a nonrecourse basis, the Company retains some degree
of credit risk on all loans originated or purchased. During the period of time
that loans are held pending sale, the Company is subject to the various business
risks associated with lending, including the risk of borrower default, the risk
of foreclosure and the risk that an increase in interest rates would result in a
decline in the value of loans to potential purchasers. The Company's
securitizations generally
 
                                       14

<PAGE>

require the use of the excess cash flow distributions related to the residual
certificates to accelerate the amortization of certificate holders' principal

balances relative to the amortization of the mortgage loans held by the trust up
to certain pre-set levels. The resulting overcollateralization amounts serve as
credit enhancement for the related trust and therefore are available to absorb
losses realized on loans held by such trust. Generally, the form of credit
enhancement agreement entered into in connection with securitization
transactions contains specified limits on the delinquency, default and loss
rates on the receivables included in each trust. If, at any measuring date, the
delinquency, default or loss rate with respect to any trust were to exceed the
specified delinquency, default and loss rates, excess cash flow from the trust,
if any, would be used to fund the increased overcollateralization limit instead
of being distributed to the Company, which would have an adverse effect on the
Company's cash flow. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations.' In addition, when borrowers are delinquent
in making monthly payments on loans included in a securitization, the Company is
required to advance interest payments with respect to such delinquent loans to
the extent that the Company deems such advances ultimately recoverable. These
advances require funding from the Company's capital resources but have priority
of repayment from the succeeding month's collections. Lastly, agreements
governing securitizations, including the Company's securitizations, require the
seller to commit to repurchase or replace loans that do not conform to the
representations and warranties made by the seller at the time of sale. To date,
the Company has not been required to repurchase or replace a loan due to a
violation of a representation or warranty; however, there can be no assurance
that in future the Company will not be required to repurchase or replace a loan.
 
     Prior to 1991, the Company combined mortgage loans into pools and sold
these pools as well as individual mortgage loans directly to a network of
commercial banks, savings and loans, insurance companies, pension funds and
accredited investors. The Company generally sold these pools or individual loans
with recourse whereby the Company is obligated to repurchase any loan if it
defaults and the related mortgaged property becomes a REO property. This
obligation is subject to various terms and conditions, including, in some
instances, a time limit. At March 31, 1997, $18.0 million, or 1.6%, of the
Company's $1.1 billion servicing portfolio was subject to be repurchased in the
future should such loans become REO properties.
 
     In the ordinary course of its business, the Company is subject to claims
made against it by borrowers and private investors arising from, among other
things, losses that are claimed to have been incurred as a result of alleged
breaches of fiduciary obligations, misrepresentations, errors and omissions of
employees, officers and agents of the Company (including its appraisers),
incomplete documentation and failures by the Company to comply with various laws
and regulations applicable to its business. The Company believes that the
liability with respect to any currently asserted claims or legal actions is not
likely to be material to the Company's financial condition or results of
operations; however, any claims asserted in the future may result in legal
expenses or liabilities which could have a material adverse effect on the
Company's financial condition and results of operations.
 
RESTRICTIVE COVENANTS
 
     The instruments governing the Indebtedness of the Company, including the
Indenture, impose significant operating and financial restrictions on the
Company. Such restrictions will affect, and in many respects significantly limit

or prohibit, among other things, the ability of the Company to incur additional
Indebtedness, pay dividends, repay Indebtedness prior to its stated maturity,
sell assets or engage in mergers or acquisitions. See 'Description of the
Notes--Certain Covenants.' These restrictions could also limit the ability to
the Company to effect future financings, make needed capital expenditures,
withstand a future downturn in the business or the economy, or otherwise conduct
necessary corporate activities.
 
FRAUDULENT CONVEYANCES CONSIDERATIONS
 
     Under applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent conveyance law, if, among other things, the
Company or any of the Subsidiary Guarantors, at the time it incurred the
indebtedness evidenced by the Notes or its Guarantee, as the case may be, (i)
(a) was or is insolvent or rendered insolvent by reason of such occurrence or
(b) was or is engaged in a business or transaction for which the assets
remaining with the Company or such debts as they mature, and (ii) the Company or
such Subsidiary Guarantor received or receives less than the reasonably
equivalent value of fair consideration for the incurrence
 
                                       15

<PAGE>

of such indebtedness, the Notes and the Guarantees could be voided, or claims in
respect of the Notes or such Guarantees could be subordinated to all other debts
of the Company or such Subsidiary Guarantors, as they case may be. In addition,
the payment of interest and principal by the Company pursuant to the Notes or
the payment of amounts by a Subsidiary Guarantor pursuant to a Guarantee could
be voided and required to be returned to the person making such payment, or to
fund for the benefit of the creditors of the Company or such Subsidiary
Guarantor, as the case may be.
 
     The measures of insolvency for purposes of the foregoing considerations
will vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, the Company or a Subsidiary Guarantor would be
considered insolvent if (i) the sum of its debts, including contingent
liabilities, were greater than the saleable value of all of its assets at a fair
valuation or if the present saleable value of its assets were less than the
amount of its probable liability on its existing debts, including contingent
liabilities, as they become absolute and mature or (ii) it could not pay its
debts as they become due.
 
     To the extent any Guarantees were voided as a fraudulent conveyance or held
unenforceable for an other reason, Holders of the Notes would cease to have any
claim in respect of such Subsidiary Guarantor and would be creditors solely of
the Company and any Subsidiary Guarantor whose Guarantee was not avoided or held
unenforceable. In such event, the claims of the Holders of the Notes against the
issuer of an invalid Guarantee would be subject to the prior payment of all
liabilities and preferred stock claims of such Subsidiary Guarantor. There can
be no assurance that, after providing for all prior claims and preferred stock
interests, if any, there would be sufficient assets to satisfy the claims of the
Holders of the Notes relating to any voided portions of any Guarantees. The
Company is a holding company whose material assets consist primarily of the

capital stock of the Subsidiary Guarantors. Consequently the Company is
dependent upon dividends paid by the Subsidiary Guarantors to pay its operating
expenses, service its debt obligations, including the Notes, and satisfy any
mandatory repurchase obligations relating to the Notes, as a result of a Change
of Control or sale or other disposition of certain assets. See 'Description of
the Notes' and 'Management's Discussion and Analysis of Financial Condition and
Results of Operations.'
 
     On the basis of historical financial information, recent operating history
as discussed in 'Management's Discussion and Analysis of Financial Condition and
Results of Operations' and other factors, the Company and each Subsidiary
Guarantor believes that, after giving effect to the indebtedness incurred in
connection with the Offering, it (i) will not be insolvent, will not have
unreasonably small capital for the businesses in which it is engaged and will
not incur debts beyond its ability to pay such debts as they mature and (ii)
will have sufficient assets to satisfy any probable money judgment against it in
any pending action. There can be no assurance, however, as to what standard a
court would apply in making such determination.
 
ECONOMIC CONDITIONS
 
     General.  The Company's business may be adversely affected by periods of
economic slowdown or recession which may be accompanied by decreased demand for
consumer credit and declining real estate values. In the mortgage business, any
material decline in real estate values reduces the ability of borrowers to use
the equity in their homes to support borrowings and increases the loan-to-value
ratios of loans previously made by the Company, thereby weakening collateral
coverage and increasing the possibility of a loss in the event of default.
Delinquencies, foreclosures and losses generally increase during economic
slowdowns or recessions.
 
     Because of the Company's focus on credit-impaired borrowers in the home
equity loan market, the actual rates of delinquencies, foreclosures and losses
on such loans could be higher under adverse economic conditions than
delinquencies, foreclosures and losses currently experienced in the mortgage
lending industry in general. In addition, in an economic slowdown or recession,
the Company's actual costs of servicing the loans may increase without an
increase in the servicing fee paid to the Company under its securitizations. Any
sustained period of increased delinquencies, foreclosures, losses or increased
costs could adversely affect the Company's ability to sell, and could increase
the cost of selling, loans through securitization or on a whole loan basis,
which could adversely affect the Company's financial condition and results of
operations.
 
     Interest Rates.  The Company's profitability may be directly affected by
the levels of and fluctuations in interest rates, which affect the Company's
ability to earn a spread between interest received on its loans and the costs of
borrowing. The profitability of the Company is likely to be adversely affected
during any period of
 
                                       16

<PAGE>


unexpected or rapid changes in interest rates. For example, a substantial or
sustained increase in interest rates could adversely affect the ability of the
Company to originate and purchase loans and would reduce the value of loans that
were originated prior to such increase. A significant decline in interest rates
could decrease the size of the Company's loan servicing portfolio by increasing
the level of loan prepayments. Higher than anticipated rates of loan prepayments
or losses could require the Company to write down the value of such Excess
Servicing, adversely impacting earnings and the Company's financial condition
and results of operations.
 
     Fluctuating interest rates also may affect the net interest income earned
by the Company, resulting from the difference between the yield to the Company
on fixed rate loans held pending sale and the interest paid by the Company for
funds borrowed at variable rates under the Company's warehouse financing
facilities. While the Company monitors the interest rate environment and
currently employs a hedging strategy designed to mitigate the impact of changes
in interest rates, there can be no assurance that the profitability of the
Company would not be adversely affected during any period of changes in interest
rates. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources--Hedging' and
'--Inflation and Interest Rates.'
 
MANAGEMENT OF RAPID GROWTH
 
     Since January 1, 1995, the Company has expanded into new geographic regions
and products and substantially increased its volume of loans originated and
purchased. The Company recently completed its initial public offering and the
Fidelity Mortgage acquisition. In light of such growth, the historical financial
performance of the Company may be of limited relevance in predicting future
performance. Any credit or other problems associated with the large number of
loans originated and purchased in the recent past would not become apparent
until sometime in the future. The Company's continued growth and expansion will
place additional pressures on the Company's personnel and systems. Any future
growth may be limited by, among other things, the Company's need for continued
funding sources, access to capital markets, ability to retain and attract
qualified personnel, sensitivity to economic slowdowns, fluctuations in interest
rates and competition from other consumer finance companies and from new market
entrants. There can be no assurance that the Company will successfully obtain or
apply the human, operational and financial resources needed to manage a
developing and expanding business. Failure by the Company to manage its growth
effectively, or to sustain its historical levels of performance in credit
analysis and transaction structuring with respect to the increased loan
origination and purchase volume, could have a material adverse effect on the
Company's financial condition and results of operations. See 'Management's
Discussion and Analysis of Financial Condition and Results of Operations' and
'Business--Business Strategy.'
 
     With its acquisition of Fidelity Mortgage during the first quarter of 1997,
the Company expanded its origination network to include the retail solicitation
of home equity loans. The Company acquired Fidelity Mortgage with the
expectation that the acquisition would result in beneficial synergies, with
Fidelity Mortgage providing a dedicated source of mortgage loans for Delta
Funding Corporation's securitization pools and for its servicing arm, and Delta
Financial Corporation providing capital to Fidelity Mortgage for the expansion

of its retail network. There is no assurance that the integration of these
operations will be accomplished smoothly or successfully. Although all the key
senior managers of Fidelity Mortgage have remained with Fidelity Mortgage and
entered into employment contracts, the integration of the operations of Fidelity
Mortgage will require the dedication of certain management resources of Delta.
The inability to integrate successfully the Fidelity Mortgage business in a
timely manner could adversely affect the Company's financial condition and
results of operations.
 
COMPETITION
 
     As an originator and purchaser of mortgage loans, the Company faces intense
competition, primarily from mortgage banking companies, commercial banks, credit
unions, savings and loans, credit card issuers and finance companies. Many of
these competitors in the financial services business are substantially larger
and have more capital and other resources than the Company. Competition can take
many forms, including convenience in obtaining a loan, service, marketing and
distribution channels and interest rates. 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,
 
                                       17

<PAGE>

competitors may solicit the Company's borrowers to refinance their loans. During
economic slowdowns or recessions, the Company's borrowers may have new financial
difficulties and may be receptive to offers by the Company's competitors.
Furthermore, the current level of gains realized by the Company and its
competitors on the sale of the type of loans originated and purchased is
attracting additional competitors into this market with the effect of lowering
the gains that may be realized by the Company on future loan sales. In addition,
greater investor acceptance of securities backed by loans comparable to the
Company's mortgage loans and greater availability of information regarding the
prepayment and default experience of such loans creates greater efficiencies in
the market for such securities. Such efficiencies may create a desire for even
larger transactions giving companies with greater volumes of originations a
competitive advantage. In addition, a more efficient market for such securities
may lead certain investors to purchase securities backed by other types of
assets where potential returns may be greater.
 
     Furthermore, certain large national finance companies, with greater
capitalization and financial resources, and conforming mortgage originators have
announced their intention to adapt their conforming origination programs and
allocate resources to the origination of non-conforming loans. In addition,
certain of these larger mortgage companies, commercial banks and savings and
loans have begun to offer products similar to those offered by the Company,
targeting customers similar to those of the Company. The entrance of these
competitors into the Company's market could have a material adverse effect on
the Company's financial condition and results of operations. See
'Business--Competition.'
 
DEPENDENCE ON BROKERS AND CORRESPONDENTS

 
     The Company depends primarily on brokers and correspondents for its
originations and purchases of new loans. None of these brokers or correspondents
is contractually obligated to do business with the Company. Further, the
Company's competitors also have relationships with the Company's brokers and
correspondents and actively compete with the Company in its efforts to expand
its broker and correspondent networks. Accordingly, there can be no assurance
that the Company will be successful in maintaining its existing relationships or
expanding its broker and correspondent networks.
 
     The Company currently originates and purchases loans from a network of
approximately 1,000 brokers and correspondents. However, the top 20 brokers and
correspondents and the top broker accounted for approximately 48.2% and 11.4%,
respectively, and 48.2% and 8.9%, respectively, of the total volume of loans
originated and purchased for the year ended December 31, 1996 and for the three
months ended March 31, 1997. Accordingly, the loss of a significant number of
any of these brokers or correspondents could have a material adverse impact on
the volume of loan originations and purchases and a resulting material adverse
effect on the Company's financial condition and results of operations. See
'Business--Loans.'
 
CONCENTRATION OF OPERATIONS
 
     For the three months ended March 31, 1997 and the year ended December 31,
1996, 85.7% and 87.6%, respectively, of the aggregate principal balance of the
mortgage loans originated or purchased by the Company were secured by properties
located in 10 states, with New York and New Jersey together accounting for 56.1%
and 62.0%, respectively, of total originations and purchases. Although the
Company continues to expand its mortgage origination network in other regions of
the country, the Company's origination business is likely to remain concentrated
in the Northeast for the foreseeable future. Consequently, the Company's
financial condition and results of operations are dependent upon general trends
in the economy and the residential real estate market in the Northeast. See
'Business--Loans.'
 
CREDIT-IMPAIRED BORROWERS
 
     The Company targets credit-impaired borrowers. Loans made to such borrowers
generally entail a higher risk of delinquency and possibly higher losses than
loans made to more creditworthy borrowers. No assurance can be given that the
Company's underwriting policies and collection procedures will alleviate such
risks. In the event that pools of loans warehoused, sold and serviced by the
Company experience higher delinquencies, foreclosures or losses than
anticipated, the Company's financial condition and results of operations would
be adversely affected. See 'Business--Loans.'
 
                                       18

<PAGE>

LEGISLATIVE AND REGULATORY RISK; LEGAL PROCEEDINGS
 
     Members of Congress and government officials from time to time have
suggested the elimination of the mortgage interest deduction for federal income

tax purposes, either entirely or in part, based on borrower income, type of loan
or principal amount. Because many of the Company's loans are made to borrowers
for the purpose of consolidating consumer debt or financing other consumer
needs, the competitive advantages of tax deductible interest, when compared with
alternative sources of financing, could be eliminated or seriously impaired by
such government action. Accordingly, the reduction or elimination of these tax
benefits could have a material adverse effect on the demand for loans of the
kind offered by the Company.
 
     The Company's business is subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and is subject to
various laws and judicial and administrative decisions imposing requirements and
restrictions on part or all of its operations. The Company's consumer lending
activities are subject to the Federal Truth-in-Lending Act and Regulation Z
(including the Home Ownership and Equity Protection Act of 1994), the Federal
Equal Credit Opportunity Act and Regulation B, as amended ('ECOA'), the Fair
Credit Reporting Act of 1994, as amended, the Federal Real Estate Settlement
Procedures Act ('RESPA') and Regulation X, the Home Mortgage Disclosure Act and
the Federal Debt Collection Practices Act, as well as other federal and state
statutes and regulations affecting the Company's activities. The Company is also
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, underwriting, selling and servicing loans.
These rules and regulations, among other things, impose licensing obligations on
the Company, establish eligibility criteria for mortgage loans, prohibit
discrimination, provide for inspections and appraisals of properties, require
credit reports on loan applicants, regulate assessment, collection, foreclosure
and claims handling, investment and interest payments on escrow balances and
payment features, mandate certain disclosures and notices to borrowers and, in
some cases, fix maximum interest rates, fees and mortgage loan amounts. Failure
to comply with these requirements can lead to loss of approved status,
termination or suspension of servicing contracts without compensation to the
servicer, demands for indemnifications or mortgage loan repurchases, certain
rights of rescission for mortgage loans, class action lawsuits and
administrative enforcement actions. There can be no assurance that the Company
will maintain compliance with these requirements in the future without
additional expenses, or that more restrictive local, state or federal laws,
rules and regulations will not be adopted that would make compliance more
difficult for the Company. See 'Business--Regulation.'
 
     Several class-action lawsuits have been filed recently against a number of
consumer finance companies, including one against the Company, alleging that the
compensation of mortgage brokers through the payment of yield spread premiums
violates various federal and state consumer protection laws. Although management
believes the Company has meritorious defenses and intends to defend this suit,
the Company cannot estimate with any certainty its ultimate legal or financial
liability, if any, with respect to the alleged claims. No assurance can be given
that a negative outcome in this suit will not have a material adverse effect on
the Company's financial condition and results of operations. See
'Business--Legal Proceedings.'
 
DEPENDENCE ON KEY PERSONNEL
 
     The Company's growth and development to date has been largely dependent

upon the services of Sidney A. Miller, Hugh Miller and other key members of
management. The Company has employment agreements with both persons, as well as
with certain other members of senior management. Although the Company has been
able to hire and retain other qualified and experienced management personnel,
the loss for any reason of the services of one or more key members of management
could have a material adverse effect on the Company's financial condition and
results of operations. See 'Management--Employment Agreements; Key-Man Life
Insurance.'
 
CONTROL BY PRINCIPAL STOCKHOLDERS
 
     The Company's principal stockholders, members of the Miller family,
beneficially own an aggregate of 68.8% of the outstanding shares of the
Company's common stock. Accordingly, such persons, if they were to act in
concert, would have majority control of the Company with the ability to approve
certain fundamental corporate transactions (including mergers, consolidations
and asset sales), to elect all members of the Board of Directors
 
                                       19

<PAGE>

and to appoint new management. As long as the Millers are the controlling
stockholders of the Company, third parties will not be able to gain control of
the Company through purchases of common stock not beneficially owned or
otherwise controlled by the Millers. The directors elected by the Millers will
have the authority to effect decisions affecting the capital structure of the
Company, including the issuance of additional capital stock, the implementation
of stock repurchase programs and the declaration of dividends. See 'Description
of the Notes--Repurchase at the Option of Holders--Change of Control' and
'Principal Stockholders.'
 
POSSIBLE ENVIRONMENTAL LIABILITIES
 
     In the ordinary course of its business, the Company from time to time
forecloses on properties securing loans. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real estate may be required to investigate and clean up hazardous or
toxic substances or chemical releases at such property 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. Such laws typically impose cleanup responsibility. Liability
under such laws has been interpreted to be joint and several unless the harm is
divisible, and there is a reasonable basis for allocation of responsibility. The
costs of investigation, remediation or removal of such substances may be
substantial, and the presence of such substances, or the failure to properly
remediate such property, may adversely affect the owner's ability to sell or
rent such property or to borrow using such property as collateral. Persons who
arrange for the disposal or treatment of hazardous or toxic substances also may
be liable for the costs of removal or remediation of such substances at a
disposal or treatment facility, whether or not the facility is owned or operated
by such person. 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. See

'Business--Environmental Matters.'
 
ABSENCE OF PUBLIC MARKET FOR THE NOTES
 
     There is no public market for the Notes, and the Company does not intend to
list the Notes on any national securities exchange. The Company has been advised
by the Underwriters that, following completion of the Offering, they intend to
make a market in the Notes; however, they are under no obligation to do so and
market-making activities with respect to the Notes may be discontinued at any
time without notice. There can be no assurance as to the liquidity of the
trading market for the Notes or that an active public market for the Notes will
develop. If such a market were to develop, the Notes could trade at prices that
may be higher or lower than the initial offering price thereof depending on a
number of factors, including prevailing interest rates, the Company's operating
results and markets for similar securities. If an active public market for the
Notes does not develop, the market price and liquidity of the Notes may be
adversely affected. See 'Underwriting.'
 
                                       20

<PAGE>

                                USE OF PROCEEDS
 
     The net proceeds to the Company from the sale of the Notes offered hereby
are estimated to be $            , after deducting the underwriting discounts
and commissions and estimated offering expenses.
 
     The net proceeds will be used (i) to pay off all residual financing
agreements (approximately $57.5 million as of March 31, 1997), (ii) to repay
amounts outstanding under certain of Company's warehouse lines of credit 
(approximately $51.8 million as of March 31, 1997), (iii) to fund future loan
originations and purchases, (iv) to support securitization transactions, (v) to
fund expansion of Fidelity Mortgage's retail network and (vi) for general
corporate purposes, including to fund acquisitions. Currently, the Company has
no agreement or understanding with respect to any acquisition. See
'Underwriting.'
 
     Pending their ultimate application, net proceeds will be invested in
short-term, investment grade, interest-bearing securities and deposit accounts.
 
                                       21

<PAGE>

                                 CAPITALIZATION
 
     The following table shows the capitalization of the Company at March 31,
1997 and as adjusted, to give pro forma effect to the Offering and the
anticipated application of the net proceeds therefrom. See 'Use of Proceeds.'
This table should be read in conjunction with the Company's consolidated
financial statements and the notes thereto included elsewhere herein.
 
<TABLE>

<CAPTION>
                                                                 MARCH 31, 1997
                                                          ---------------------------
                                                        ACTUAL            PRO FORMA AS ADJUSTED
                                                ----------------------    ----------------------
                                                             (DOLLARS IN THOUSANDS)
<S>                                             <C>                       <C>
DEBT:
Warehouse financing and other
  borrowings(1)..............................          $112,507                  $  3,290
Bank payable.................................             1,696                     1,696
      % Senior Notes due 2004................                --                   150,000
                                                    -----------               -----------
  Total debt.................................          $114,203                  $154,986
                                                    -----------               -----------
                                                    -----------               -----------
 
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value; 49,000,000
  shares authorized; 15,372,288 shares
  outstanding, actual and pro forma..........               154                       154
Preferred Stock, $.01 par value; 1,000,000
  shares authorized; no shares outstanding...                --                        --
Additional paid-in capital...................            93,468                    93,468
Retained earnings............................             9,402                     9,402
                                                    -----------               -----------
  Total stockholders' equity.................           103,024                   103,024
                                                    -----------               -----------
     Total capitalization....................          $217,227                  $258,010
                                                    -----------               -----------
                                                    -----------               -----------
</TABLE>
 
------------------
(1) Includes aggregate residual financing of $57,454 and $0 outstanding under
    working capital lines of credit.
 
                                       22

<PAGE>

                      SELECTED CONSOLIDATED FINANCIAL DATA
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
     The following table sets forth historical selected consolidated financial
and operating data of the Company as of December 31, 1992, 1993, 1994, 1995 and
1996 and for each of the years in the five year period ended December 31, 1996
and as of March 31, 1996 and 1997 and for each of the three month periods then
ended.
 
     The following selected consolidated income statement data for the years
ended December 31, 1994, 1995 and 1996 and the consolidated balance sheet data
as of December 31, 1995 and 1996 are derived from the Company's audited
consolidated financial statements and notes thereto included elsewhere herein

audited by KPMG Peat Marwick LLP, independent public accountants, as set forth
in their report also included elsewhere herein. The selected consolidated income
statement data for the year ended December 31, 1992 and 1993 and the selected
consolidated balance sheet data as of December 31, 1992, 1993 and 1994 are
derived from the Company's audited consolidated financial statements not
included herein.
 
     The financial data for the Company as of and for the three months ended
March 31, 1996 and 1997 have been derived from unaudited consolidated financial
statements of the Company. The consolidated unaudited financial statements have
been prepared on the same basis as the audited consolidated financial statements
and include all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation of the financial information for the interim periods.
Results of operations for the three months ended March 31, 1997 are not
necessarily indicative of the results to be expected for 1997.
 
     The information set forth below should be read in conjunction with
'Management's Discussion and Analysis of Financial Condition and Results of
Operations' and all of the consolidated financial statements, notes thereto and
other financial information included elsewhere in this Prospectus.
 
<TABLE>
<CAPTION>
                                                                                              THREE MONTHS
                                                                                                 ENDED
                                                      YEAR ENDED DECEMBER 31,                  MARCH 31,
                                          -----------------------------------------------   ----------------
                                           1992      1993      1994      1995      1996      1996     1997
                                          -------   -------   -------   -------   -------   ------   -------
                                                    (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                       <C>       <C>       <C>       <C>       <C>       <C>      <C>
INCOME STATEMENT DATA:
Revenues:
  Net gain on sale of mortgage loans....  $ 4,757   $ 7,639   $ 6,661   $15,383   $46,525   $  103   $17,314
  Interest..............................   13,402     9,156     9,839    13,588    16,372    3,967     5,559
  Servicing fees........................    1,892     2,101     2,183     2,855     5,368    1,015     1,392
  Other.................................    5,413     3,617     3,114     4,309     5,266      219     3,040
                                          -------   -------   -------   -------   -------   ------   -------
    Total revenues......................  $25,464   $22,513   $21,797   $36,135   $73,531   $5,304   $27,305
                                          -------   -------   -------   -------   -------   ------   -------
Expenses:
  Payroll and related costs.............  $10,713   $ 9,268   $ 8,815   $12,876   $16,509   $1,373   $ 7,496
  Interest..............................    4,536     2,915     3,735     7,964    11,298    2,401     3,170
  General and administrative............    6,905     6,670     7,238    10,709    12,236    1,842     4,399
                                          -------   -------   -------   -------   -------   ------   -------
    Total expenses......................  $22,154   $18,853   $19,788   $31,549   $40,043   $5,616   $15,065
                                          -------   -------   -------   -------   -------   ------   -------
  Income (loss) before income taxes and
    extraordinary item..................  $ 3,310   $ 3,660   $ 2,009   $ 4,586   $33,488   $ (312)  $12,240
  Provision for income taxes(1).........       --        --        --        --     9,466       44     5,250
                                          -------   -------   -------   -------   -------   ------   -------
  Income (loss) before extraordinary
    item................................  $ 3,310   $ 3,660   $ 2,009   $ 4,586   $24,022   $ (356)  $ 6,990
  Extraordinary item:

    Gain on extinguishment of debt......       --        --        --        --     3,168       --        --
                                          -------   -------   -------   -------   -------   ------   -------
  Net income (loss).....................  $ 3,310   $ 3,660   $ 2,009   $ 4,586   $27,190   $ (356)  $ 6,990
                                          -------   -------   -------   -------   -------   ------   -------
                                          -------   -------   -------   -------   -------   ------   -------
 
UNAUDITED PRO FORMA INFORMATION:
Provision for pro forma income taxes
  before extraordinary item(1)(2).......  $ 1,423   $ 1,574   $   864   $ 1,972   $14,400   $ (134)      n/a
                                          -------   -------   -------   -------   -------   ------
Pro forma income (loss) before
  extraordinary item(1)(2)..............  $ 1,887   $ 2,086   $ 1,145   $ 2,614   $19,088   $ (178)      n/a
                                          -------   -------   -------   -------   -------   ------
                                          -------   -------   -------   -------   -------   ------
</TABLE>
 
                                       23


<PAGE>

 
<TABLE>
<CAPTION>
                                                                                                            THREE MONTHS ENDED
                                                     YEAR ENDED DECEMBER 31,                                    MARCH 31,
                             -----------------------------------------------------------------------    --------------------------
                                1992           1993           1994           1995           1996           1996           1997
                             -----------    -----------    -----------    -----------    -----------    -----------    -----------
                                                         (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                          <C>            <C>            <C>            <C>            <C>            <C>            <C>
PER SHARE DATA:
Pro forma earnings (loss)
  per share of common
  stock(1)(2)(3)(4).......   $      0.15    $      0.17    $      0.09    $      0.21    $      1.46    $     (0.01)   $      0.45
                             -----------    -----------    -----------    -----------    -----------    -----------    -----------
                             -----------    -----------    -----------    -----------    -----------    -----------    -----------
Pro forma weighted average
  number of shares
  outstanding(4)..........    12,629,182     12,629,182     12,629,182     12,629,182     13,083,327     12,629,182     15,420,883
                             -----------    -----------    -----------    -----------    -----------    -----------    -----------
                             -----------    -----------    -----------    -----------    -----------    -----------    -----------
CASH FLOW DATA:
(Used in) provided by
  operating activities....   $    (5,057)   $     8,780    $   (10,160)   $   (23,903)   $   (42,025)   $  (108,880)   $   (11,437)
(Used in) investing
  activities..............           (44)           (64)          (917)        (1,207)        (2,283)          (228)        (4,335)
Provided by (used in)
  financing activities....         2,893         (7,139)        13,460         32,388         46,414        101,863         16,142
Net increase (decrease) in
  cash and cash
  equivalents.............        (2,208)         1,577          2,383          7,278          2,106         (7,245)           370
 
OPERATING DATA:

Loans originated or
  purchased:
  Brokered Loans(5).......   $    66,553    $    76,220    $    81,407    $   175,738    $   321,733    $    66,389    $   114,063
  Correspondent Loans.....        10,080         26,844         38,341        112,065        337,033         49,373        122,679
                             -----------    -----------    -----------    -----------    -----------    -----------    -----------
    Total.................   $    76,633    $   103,064    $   119,748    $   287,803    $   658,766    $   115,762    $   236,742
                             -----------    -----------    -----------    -----------    -----------    -----------    -----------
                             -----------    -----------    -----------    -----------    -----------    -----------    -----------
Average principal balance
  per loan................            51             60             67             74             78             78             81
Weighted average interest
  rate....................         13.5%          12.9%          12.1%          11.8%          11.4%          11.0%          11.3%
Combined weighted average
  initial loan-to-value
  ratio...................         47.8%          51.7%          55.2%          63.2%          68.8%          67.4%          71.0%
Percent of loans secured
  by first mortgages......         71.5%          81.1%          88.0%          89.6%          93.8%          94.1%          93.6%
Loan sales:
  Loans sold through
    securitizations.......   $    64,102    $    88,943    $    90,000    $   229,998    $   615,000    $        --    $   235,000
  Whole loan sales........         1,031          8,708         11,950         17,615         15,273          6,899             --
                             -----------    -----------    -----------    -----------    -----------    -----------    -----------
    Total.................   $    65,133    $    97,651    $   101,950    $   247,613    $   630,273    $     6,899    $   235,000
                             -----------    -----------    -----------    -----------    -----------    -----------    -----------
Total loans serviced......   $   273,788    $   292,700    $   310,229    $   468,846    $   932,958    $   536,864    $ 1,110,999
                             -----------    -----------    -----------    -----------    -----------    -----------    -----------
                             -----------    -----------    -----------    -----------    -----------    -----------    -----------
 
DELINQUENCY DATA:
Total delinquencies as a
  percentage of loans
  serviced (period
  end)(6).................        19.96%         13.49%         11.44%         10.64%          8.37%          7.50%          7.98%
Defaults as a percentage
  of loans serviced
  (period end)(7).........         3.76%          5.35%          7.32%          5.87%          4.33%          5.91%          4.35%
Net losses as a percentage
  of average loans
  serviced................         0.02%          0.03%          0.23%          0.57%          0.43%          0.15%          0.09%
 
FINANCIAL RATIOS:
Ratio of earnings to fixed
  charges(8)..............          1.73           2.26           1.54           1.58           3.96           0.87           4.86
Ratio of indebtedness to
  total
  capitalization(9).......          0.58           0.56           0.60           0.64           0.35           0.64           0.37
Pre-tax interest coverage
  ratio(10)...............          1.73           2.26           1.54           1.58           3.96           0.87           4.86
</TABLE>
 
<TABLE>
<CAPTION>
                                                          DECEMBER 31,                                          MARCH 31,
                             -----------------------------------------------------------------------    --------------------------

                                1992           1993           1994           1995           1996           1996           1997
                             -----------    -----------    -----------    -----------    -----------    -----------    -----------
                                                         (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                          <C>            <C>            <C>            <C>            <C>            <C>            <C>
BALANCE SHEET DATA:
Loans held for sale.......     $47,079        $41,703        $48,833       $  63,816      $  83,677      $ 171,999      $  77,769
Interest-only and residual
  certificates............          --          2,204          7,514          25,310         83,073         25,317        101,858
Capitalized mortgage
  servicing rights........       5,705          3,491          2,421           3,831         11,412          3,534         13,448
Total assets..............      80,775         81,143         98,589         139,612        232,736        240,719        257,356
Warehouse financing and
  other
  borrowings..............      42,659         36,780         52,491          82,756         95,482        184,964        112,507
Investor payables.........       4,959          8,687         11,091          14,272         22,569         13,638         20,770
Total liabilities.........      54,891         52,793         70,425         109,779        139,218        211,422        154,332
Stockholders' equity......      25,884         28,350         28,164          29,833         93,518         29,297        103,024
</TABLE>
 
------------------
 (1) Prior to October 31, 1996, Delta Funding Corporation was treated as an S
     corporation for federal and state income tax purposes. As a result, the
     Company's historical earnings prior to such date had been taxed directly to
     the Former Shareholders and not to the Company. See
 
                                              (Footnotes continued on next page)
 
                                       24

<PAGE>

(Footnotes continued from previous page)

     'Management's Discussion and Analysis of Financial Condition and Results of
     Operations--Termination of S Corporation Status and Income Taxes.'
 
 (2) Pro forma presentation reflects a provision for income taxes, as if the
     Company had been a C corporation since inception, at an assumed tax rate of
     43%.
 
 (3) Figures for the three months ended March 31, 1997 are actual.
 
 (4) Reflects the effect of 10,653,000 shares of common stock issued to the
     Former Shareholders and the effect of the issuance of 4,600,000 shares of
     common stock issued in the Company's initial public offering; 1,976,182 of
     which are treated as if they had always been outstanding to give effect to
     certain distributions paid to the Former Shareholders in connection with
     termination of S corporation status.
 
 (5) Includes $8.1 million of retail loans originated by Fidelity Mortgage
     during the three months ended March 31, 1997.
 
 (6) Represents the percentages of account balances contractually past due 30
     days or more, exclusive of loans in foreclosure and REO.

 
 (7) Represents the percentages of account balances on loans in foreclosure and
     REO.
 
 (8) For the purpose of determining the ratio of earnings to fixed charges,
     earnings consist of income before income taxes and fixed charges; fixed
     charges consist of interest expense.
 
 (9) Represents the ratio of (i) total debt, exclusive of warehouse financing,
     to (ii) the sum of total stockholders' equity and total debt, exclusive of
     warehouse financing.
 
(10) Amounts represent the ratio of (i) the sum of income before income taxes
     plus interest expense to (ii) interest expense.
 
                                       25

<PAGE>

               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS
 
     The following discussion should be read in conjunction with the
consolidated financial statements of the Company and the notes thereto.
 
GENERAL
 
  Overview
 
     The Company is a specialty consumer finance company engaged in the business
of originating, acquiring, selling and servicing mortgage loans secured
primarily by one- to four-family residences. Delta has focused on lending to
individuals who generally have impaired or limited credit profiles or higher
debt to income ratios and typically have substantial equity in their homes. The
Company primarily generates revenue from gain on sale of loans sold through
securitizations, gains recognized from premiums on loans sold through whole loan
sales, interest earned on loans held for sale, origination fees received as part
of the loan application process and fees earned from servicing loans.
 
  Recent Growth
 
     The Company has experienced significant growth in the last few years,
particularly since January 1, 1995. Management believes that this growth is
primarily attributable to (i) the Company's geographic expansion of its
operations, (ii) the Company's further penetration into its established markets
and (iii) the Company's increased access to additional funding sources through
larger warehouse agreements which enabled the Company to accumulate larger pools
of loans for sales through securitizations.
 
     In connection with its geographic expansion, the Company has continued to
focus on developing loan production from brokers and correspondents. The Company
has followed a two-pronged approach to increase the volume of loan originations
from these sources. The Company employs business development representatives to
initiate and expand relationships with brokers and correspondents. In addition,

the Company uses its loan officers and correspondent underwriters to maintain
and strengthen existing relationships. The Company is also committed to
developing and growing the Fidelity Mortgage retail origination network. There
can be no assurance that the Company will continue to grow significantly in the
future. Any future growth will be limited by, among other things, the Company's
need for continued funding sources, access to capital markets, sensitivity to
economic slowdowns, ability to attract and retain qualified personnel,
fluctuations in interest rates and competition from other consumer finance
companies and from new market entrants. To date, the Company has not experienced
any significant seasonal variations in loan originations and purchases.
 
     The Company's recent and rapid growth may have a somewhat distortive impact
on certain of the Company's ratios and financial statistics and may make
period-to-period comparisons difficult. In light of the Company's growth,
historical performance of the Company's earnings may be of limited relevance in
predicting future performance. Furthermore, the Company's financial statistics
may not be indicative of the Company's results in future periods. Any credit or
other problems associated with the large number of loans originated and
purchased in the recent past may not become apparent until sometime in the
future.
 
  Operating Cash Flow
 
     The Company has operated and expects to continue to operate, on a negative
cash flow basis due to increases in the volume of loans purchased and originated
and due to the growth of its securitization program. Currently, the Company's
primary operating cash uses include the funding of (i) mortgage originations and
purchases pending their pooling and sale, (ii) the points and expenses paid in
connection with the acquisition of Correspondent Loans, (iii) interest expense
on warehouse, residual and other financing, (iv) fees, expenses and tax payments
incurred in connection with the securitization program and (v) ongoing
administrative and other operating expenses. The Company's primary operating
sources of cash are (i) Excess Servicing received in each period, (ii) cash
payments of contractual and ancillary servicing revenues received by the Company
in its capacity as servicer for securitized loans, (iii) interest income on
loans held for sale and certain cash balances and (iv) income received in
connection with its broker and retail originations.
 
                                       26

<PAGE>

     The table below summarizes cash flows generated by and used in operating
activities:
 
<TABLE>
<CAPTION>
                                                                                                  THREE MONTHS ENDED
                                                                 YEAR ENDED DECEMBER 31,               MARCH 31,
                                                             --------------------------------    ---------------------
                                                               1994        1995        1996        1996         1997
                                                             --------    --------    --------    ---------    --------
                                                                              (DOLLARS IN THOUSANDS)
<S>                                                          <C>         <C>         <C>         <C>          <C>

OPERATING CASH INCOME:
  Excess cash flow from securitization trusts.............   $    912    $  1,612    $  3,238    $     888    $  3,676
  Servicing fees received.................................      2,267       2,539       5,012          956       1,568
  Interest received.......................................      6,742       9,969      14,791        3,046       4,945
  Securitization premium (discount) and hedge gain
    (loss)................................................      2,711       1,199        (600)          --         907
  Other cash income.......................................      3,004       5,112       6,138        1,537       2,759
                                                             --------    --------    --------    ---------    --------
    Total operating cash income...........................   $ 15,636    $ 20,431    $ 28,579    $   6,427    $ 13,855
                                                             --------    --------    --------    ---------    --------
OPERATING CASH EXPENSES:
  Securitization and loan acquisition costs...............       (655)     (5,169)    (20,712)      (2,860)     (8,029)
  Cash operating expenses.................................    (14,918)    (22,563)    (27,559)      (6,292)    (10,451)
  Interest on warehouse financing.........................     (3,045)     (6,581)     (7,945)      (1,375)     (3,055)
  Interest on non-warehouse financing.....................       (537)     (1,423)     (2,508)        (480)       (847)
  Taxes paid..............................................       (138)         (2)       (250)          --      (4,464)
                                                             --------    --------    --------    ---------    --------
    Total operating cash expenses.........................    (19,293)    (35,738)    (58,974)     (11,007)    (26,846)
                                                             --------    --------    --------    ---------    --------
  Cash flow due to operating cash income and expenses.....     (3,657)    (15,307)    (30,395)      (4,580)    (12,991)
  Cash (used in) provided by other payables and
    receivables...........................................        945       6,426       5,933         (514)     (4,304)
  Cash provided by (used in) loans held for sale..........     (7,448)    (15,022)    (17,563)    (103,786)      5,858
                                                             --------    --------    --------    ---------    --------
  Net cash used in operating activities...................   $(10,160)   $(23,903)   $(42,025)   $(108,880)   $(11,437)
                                                             --------    --------    --------    ---------    --------
                                                             --------    --------    --------    ---------    --------
</TABLE>
 
TERMINATION OF S CORPORATION STATUS AND INCOME TAXES
 
     On October 31, 1996, in contemplation of the Company's initial public
offering, Delta Funding Corporation, one of the Subsidiaries, terminated its S
corporation status. The Former Shareholders, pursuant to the terms of a
contribution agreement, contributed their shares of capital stock of Delta
Funding Corporation to the Company, thereby becoming a wholly-owned subsidiary
of the Company, in exchange for 10,653,000 shares of common stock, which
constituted all of the then outstanding shares of common stock of the Company
(the 'Exchange'). Simultaneous with the Exchange, Delta Funding Corporation
ceased to be treated as an S corporation.
 
     In connection with termination of its S corporation status, Delta Funding
Corporation made final S corporation distributions to the Former Shareholders
and the Company used $32.6 million of its net proceeds of its initial public
offering to pay such distributions.
 
     As an S corporation, the Company's income, whether or not distributed, was
taxed at the shareholder level for federal and state tax purposes. The pro forma
provision for income taxes in the Company's statements of income shows results
as if the Company had always been fully subject to federal and state taxes at an
assumed tax rate of 43%. The Company incurred a $3.9 million deferred tax
liability as a result of its conversion from an S corporation to a C corporation
on October 31, 1996.
 

RESULTS OF OPERATIONS
 
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1996
 
  Revenues
 
     Total revenues increased $22.0 million, or 415% to $27.3 million for the
three months ended March 31, 1997, from $5.3 million for the three months ended
March 31, 1996. The increase in revenues was primarily due to the fact that the
Company completed a securitization during the three months ended March 31, 1997
but did
 
                                       27

<PAGE>

not complete a securitization during the corresponding period of the prior year.
To a lesser extent, the increase was due to the increase in total loan
originations and purchases and a corresponding increase in the Company's
servicing portfolio. As a result, the Company generated an increased amount of
origination fees, servicing fees and interest income on loans held for sale.
 
     Net Gain on Sale of Mortgage Loans.  Net gain on sale of mortgage loans
represents the sum of (i) the present value of Excess Servicing of loans
securitized in each period, (ii) the present value of Mortgage Servicing Rights
associated with loans securitized in each period and (iii) premiums earned on
whole loan sales less the (a) premiums paid to originate or acquire mortgage
loans, (b) cost associated with securitizations and (c) any hedge loss (gain).
Net gain on sale of mortgage loans increased $17.2 million to $17.3 million in
three months ended March 31, 1997, from $0.1 million in the corresponding period
of the prior year. The Company completed a $235.0 million securitization, with a
weighted average net gain on sale of 7.4%, during the three months ended March
31, 1997 but did not complete a securitization during the corresponding period
of the prior year.
 
     Interest Income.  Interest income primarily represents the sum of (i)
interest earned on loans held for sale, (ii) interest earned on cash collection
balances and (iii) Excess Servicing received in each period less the accumulated
discount on previously recorded interest-only and residual certificates.
Interest income increased $1.6 million, or 40%, to $5.6 million in the three
months ended March 31, 1997, from $4.0 million in the corresponding period of
the prior year. The increase in interest income was primarily due to higher
interest rates on mortgage loans and to a higher average balance of mortgage
loans held for sale during the three months ended March 31, 1997 resulting from
the increase in loan originations and purchases. The weighted average interest
rate on loans held for sale was 11.3% and 11.0% for the quarters ended March 31,
1997 and 1996, respectively.
 
     Servicing Income.  Servicing income represents all contractual and
ancillary servicing revenue earned by the Company less (a) the amortization of
capitalized Mortgage Servicing Rights and (b) prepaid interest shortfalls.
Servicing income increased $0.4 million, or 40%, to $1.4 million in the three
months ended March 31, 1997, from $1.0 million in the corresponding period of

the prior year. This increase was primarily due to higher average loan servicing
volume, which resulted in the increased contractual and ancillary service fees.
During the three months ended March 31, 1997, the average balance of mortgage
loans serviced by the Company increased 103% to $1,048.6 million from $517.2
million during the corresponding period of the prior year. Servicing fees
increased at a slower rate than average mortgage loans serviced primarily
because the Company lowered its contractual servicing fee rate to conform with
industry standards, and due to amortization of the capitalized servicing asset
in accordance with SFAS No. 125.
 
     Other Income.  Other income primarily represents origination fees earned on
brokered and retail loans and ancillary revenue associated with loan production.
Other income increased $2.8 million to $3.0 million in the three months ended
March 31, 1997 from $0.2 million in the corresponding period of the prior year.
This increase was primarily due to an increase in loan origination fees, which
is the primary component of other income. The Company generates loan origination
fees on loans originated through its broker network and from its Fidelity
Mortgage's retail operations. During the three months ended March 31, 1997,
Brokered Loan originations (excluding Fidelity Mortgage) increased by $39.6
million, or 60%, to $106.0 million from $66.4 million in the corresponding
period of the prior year. Fidelity Mortgage's originations were $8.1 million for
the period from February 11, 1997 through March 31, 1997. The Company did not
originate any retail loans during the corresponding period of the prior year.
 
  Expenses
 
     Total expenses increased $9.5 million, or 170%, to $15.1 million for the
three months ended March 31, 1997, from $5.6 million in the corresponding period
of the prior year. The increase in expenses was primarily the result of higher
operating expenses associated with the additional personnel required to process
a greater number of loan originations and purchases, the acquisition of Fidelity
Mortgage and increased interest expense on loans held for sale, as well as the
deferral of direct origination costs to a greater extent in the three months
ended March 31, 1996 in accordance with SFAS No. 91 (as defined). See '--Certain
Accounting Considerations-- SFAS No. 91.'
 
     Payroll Expense.  Payroll expense increased $6.1 million to $7.5 million
for the three months ended March 31, 1997, from $1.4 million for the
corresponding period of the prior year. The increase was primarily due
 
                                       28

<PAGE>

to (a) increased staffing in the Company's originations area associated with
increases in loan originations and purchases and the acquisition of Fidelity
Mortgage, and (b) the deferral of payroll related direct origination costs to a
greater extent in the three months ended March 31, 1996 in accordance with SFAS
No. 91. At March 31, 1997, the Company employed 530 full-and part-time persons,
including 383 employees of Delta Funding Corporation and 147 employees of
Fidelity Mortgage, compared to of 268 full- and part-time persons as of March
31, 1996.
 
     Interest Expense.  Interest expense increased $0.8 million, or 33%, to $3.2

million in the three months ended March 31, 1997, from $2.4 million in the
corresponding period of the prior year. The increase in interest expense was
attributable to the interest costs associated with both a higher balance of
loans pending sale during the three months ended March 31, 1997, resulting from
increases in loan originations and purchases during the period, and an increase
in interest-only and residual financings during the three months ended March 31,
1997. The Company had interest-only and residual certificate financings of $57.5
million as of March 31, 1997, compared to $15.7 million as of March 31, 1996.
 
     General and Administrative Expenses.  General and administrative expenses,
which consist primarily of office and administrative, rent, and health care and
insurance expenses increased $2.6 million, or 144%, to $4.4 million in the three
months ended March 31, 1997 from $1.8 million in the corresponding period of the
prior year. The increase in general and administrative expenses was primarily
due to (a) expenses incurred in connection with increases in loan originations
and purchases, increased employee benefit expenses and the Company's acquisition
of Fidelity Mortgage, and (b) the deferral of general and administrative related
direct origination costs to a greater extent in the three months ended March 31,
1996 in accordance with SFAS No. 91.
 
     Income Taxes.  Prior to October 31, 1996, Delta Funding Corporation was
treated as an S corporation for federal and state income tax purposes. As a
result, the Company's historical earnings prior to such date had been taxed
directly to the Former Shareholders and not the Company. For the three months
ended March 31, 1997, the Company recorded a tax provision of $5.3 million
compared to $0.04 million the corresponding period of the prior year.
 
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
 
  Revenues
 
     Total revenues increased $37.4 million, or 103%, to $73.5 million in 1996
from $36.1 million in 1995. The increase in revenues was primarily due to the
increase in loan originations and purchases and corresponding increase in the
amount of loans sold through securitizations.
 
     Net Gain on Sale of Mortgage Loans.  Net gain on sale of mortgage loans
increased $31.1 million, or 202%, to $46.5 million in 1996 from $15.4 million in
1995. This increase was the result of higher loan originations and purchases,
resulting in an increased amount of loans sold through securitizations. Total
loan originations and purchases increased $371.0 million, or 129%, to $658.8
million in 1996 from $287.8 million in 1995. The Company sold or securitized
$630.4 million of loans in 1996 compared to $247.6 million in 1995, with a
weighted average net gain on sale of 7.4% and 6.2%, respectively.
 
     Interest Income.  Interest income increased $2.8 million, or 20%, to $16.4
million in 1996 from $13.6 million in 1995. The increase in interest income was
primarily due to a higher average balance of loans held for sale during 1996
resulting from the increases in loan originations and purchases, but was
partially offset due to the shorter holding period during which the mortgage
loans remained in inventory during 1996. The Company completed three
securitizations during 1996 compared to two securitizations in 1995. The
weighted average interest rate on loans held for sale was 11.40% for both 1996
and 1995.

 
     Servicing Income.  Servicing income increased $2.5 million, or 88%, to $5.4
million in 1996 from $2.9 million in 1995. This increase was primarily due to
higher loan servicing volume, which resulted in increased contractual and
ancillary service fees. During 1996, the average balance of mortgage loans
serviced by the Company increased 79% to $667.4 million from $373.4 million
during 1995.
 
     Other Income.  Other income increased $1.0 million, or 22%, to $5.3 million
in 1996 from $4.3 million in 1995. This increase was primarily due to an
increase in loan origination fees, which is the primary component of
 
                                       29

<PAGE>

other income. The Company generates loan origination fees on loans originated
through its broker network. During 1996, Brokered Loan originations increased by
$146.0 million, or 83%, to $321.7 million from $175.7 million in 1995. Loan
origination fees increased at a slower rate than Brokered Loan originations
primarily because the Company earned lower average origination fees per loan.
 
  Expenses
 
     Total expenses increased $8.5 million, or 27%, to $40.0 million for 1996
from $31.5 million in 1995. The increase in expenses was primarily the result of
increased interest expense on loans held for sale and higher operating expenses
associated with the additional personnel required to process the greater number
of loan originations and purchases. Total expenses increased at a much slower
rate than total revenues, primarily due to efficiencies realized from the
Company's investment in technology, experienced staff and economies of scale.
 
     Payroll Expense.  Payroll expense increased $3.6 million, or 28%, to $16.5
million for 1996, from $12.9 million for 1995. The increase was primarily due to
increased staffing in the Company's originations area associated with the
increase in loan originations and purchases, as well as the Company's expansion
into new and existing markets. As of December 31, 1996, the Company employed 346
full- and part-time persons compared to 255 full- and part-time persons as of
December 31, 1995.
 
     Interest Expense.  Interest expense increased $3.3 million, or 42%, to
$11.3 million in 1996 from $8.0 million in 1995. The increase in interest
expense was attributable to the interest costs associated with both a higher
balance of loans pending sale during 1996, resulting from increases in loan
originations and purchases during the period, and an increase in the Excess
Servicing receivable financing during 1996. The Company had financings against
its Excess Servicing receivables (interest-only and residual certificates) of
$47.0 million as of December 31, 1996 compared to $16.2 million as of December
31, 1995. Interest expense was partially offset by lower cost of funds on the
Company's floating rate borrowings which are based on one-month London Interbank
Offered Rate ('LIBOR'). The average one-month LIBOR was on average 0.52% lower
during 1996 than during 1995.
 
     General and Administrative Expenses.  General and administrative expenses,

which consist primarily of office and administrative, rent, and health care and
insurance expenses, increased $1.5 million, or 14%, to $12.2 million in 1996
from $10.7 million in 1995. The increase in general and administrative expenses
was primarily due to expenses incurred in connection with the increases in loan
originations and purchases and increased employee benefit expenses.
 
  Extraordinary Gain
 
     In May 1996, the Company closed out its long-term $31.7 million warehouse
facility with a European financial institution at a 10% discount. As a result,
the Company realized an extraordinary gain of $3.17 million for the year ended
December 31, 1996.
 
  Income Taxes
 
     On October 31, 1996, in conjunction with the Exchange, Delta Funding
Corporation's status as an S corporation was terminated and the Company became a
C corporation for federal and state income tax purposes and as such was subject
to federal and state income tax on its taxable income for the months of November
and December 1996. During 1996, the Company recorded a tax provision of $9.5
million. This includes a $4.2 million provision for November and December
earnings at the statutory rate of 42% and a deferred tax expense of $3.9 million
in connection with the change in tax status from an S corporation to a C
corporation.
 
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
 
  Revenues
 
     Total revenues increased $14.3 million, or 66%, to $36.1 million in 1995
from $21.8 million in 1994. The increase in revenues was primarily due to the
combined effect of increases in loan originations and purchases, the effects of
certain accounting changes and higher gains realized on the sale of loans
through securitizations.
 
                                       30

<PAGE>

     Net Gain on Sale of Loans.  Net gain on sale of mortgage loans increased
$8.7 million, or 131%, to $15.4 million in 1995 from $6.7 million in 1994. This
increase was primarily due to the combined effect of increased loan originations
and purchases and subsequent sales of loans through securitizations and the
effects of certain accounting changes. Total loan originations and purchases
increased $168.1 million, or 140%, to $287.8 million in 1995 from $119.7 million
in 1994. The Company sold or securitized $247.6 million of loans in 1995
compared to $102.0 million in 1994, with a weighted average net gain on sale of
6.2% and 6.5%, respectively. Included in the gain on sale of loans in 1995 was
$2.1 million which represents the present value of Mortgage Servicing Rights
that the Company receives over time, as it sells loans through securitizations
on a servicing-retained basis.
 
     Interest Income.  Interest income increased $3.8 million, or 38%, to $13.6
million in 1995 from $9.8 million in 1994. The increase in interest income was

primarily due to a higher average balance of loans held for sale during 1995
resulting from the increases in loan originations and purchases and, to a lesser
extent, to unrealized gains on interest-only and residual certificates held in
the amount of $1.0 million.
 
     Servicing Income.  Servicing income increased $0.7 million, or 31%, to $2.9
million in 1995 from $2.2 million in 1994. This increase was primarily the
result of higher loan servicing volume which resulted in larger contractual and
ancillary service fees. During 1995, the average balance of mortgage loans
serviced by the Company increased 24% to $373.4 million, compared to $300.7
million in 1994. During 1995, the Company also increased its ancillary servicing
income by charging prepayment penalties in states where such charges are
allowed.
 
     Other Income.  Other income increased $1.2 million, or 38%, to $4.3 million
in 1995 from $3.1 million in 1994. This increase was primarily due to the
increase in loan origination fees, which is the largest component of other
income. During 1995, Brokered Loan originations increased by $94.3 million, or
116%, to $175.7 million from $81.4 million in 1994.
 
  Expenses
 
     Total expenses increased $11.7 million, or 59%, to $31.5 million for 1995
from $19.8 million in 1994. The increase in expenses was primarily the result of
increased interest expense on loans held for sale, the increased expense
associated with additional personnel required to process the greater number of
loan originations and purchases and higher operating expenses related to
increased loan volume during 1995 compared to 1994.
 
     Payroll Expense.  Payroll expense increased $4.1 million, or 46%, to $12.9
million for 1995, from $8.8 million for 1994. The increase was due primarily to
bonus increases granted to certain members of senior management and, to a lesser
extent, due to increased staffing in the Company's originations area. As of
December 31, 1995, the Company employed 255 persons as compared to 197 persons
as of December 31, 1994.
 
     Interest Expense.  Interest expense increased $4.3 million, or 113%, to
$8.0 million in 1995 from $3.7 million in 1994. The increase in interest expense
was attributable to the interest costs associated with a higher balance of loans
pending sale during 1995, resulting from increases in loan originations and
purchases during the period, and a higher balance of loans held for sale at the
beginning of the period ($48.8 million compared to $41.7 million for 1995 and
1994, respectively). The Company's cost of funds on its floating rate warehouse
facilities where it holds mortgage loans until the time of sale, was, on
average, 1.51% higher in 1995 compared to 1994.
 
     General and Administrative Expenses.  General and administrative expenses
increased $3.5 million, or 48%, to $10.7 million in 1995 from $7.2 million in
1994. The increase in general and administrative expenses was primarily due to
expenses incurred in connection with the increases in loan originations and
purchases and associated increases in personnel expenses and the direct costs
relating to the transfer of the Company's prior servicing system to its current
servicing system.
 

                                       31

<PAGE>

FINANCIAL CONDITION
 
MARCH 31, 1997 COMPARED TO DECEMBER 31, 1996
 
     Cash and interest-bearing deposits increased $0.4 million, or 2%, to $19.1
million at March 31, 1997 from $18.7 million at December 31, 1996. The increase
was primarily due to additional moneys held in securitization trust accounts
related to the Company's ongoing securitization program.
 
     Accounts receivable increased $0.7 million, or 8%, to $9.4 million at March
31, 1997 from $8.7 million at December 31, 1996. This increase was primarily due
to higher average loan servicing volume, which resulted in increased
reimbursable servicing advances made by the Company, acting as servicer on its
securitization.
 
     Loans held for sale decreased $5.9 million, or 7%, to $77.8 million at
March 31, 1997 from $83.7 million at December 31, 1996. This decrease was
primarily the result of the Company securitizing a larger percentage of the
loans it originated and purchased during the three months ended March 31, 1997
as compared to the three months ended December 31, 1996.
 
     Accrued interest and late charges receivable increased $1.8 million, or 9%,
to $22.0 million at March 31, 1997 from $20.2 million at December 31, 1996. This
increase was primarily due to a higher average loan servicing portfolio during
the first quarter of 1997. The Company's average servicing portfolio increased
22% to $1.05 billion during the first quarter of 1997 from $859.6 million during
the fourth quarter of 1996.
 
     Capitalized Mortgage Servicing Rights increased $2.0 million, or 18%, to
$13.4 million at March 31, 1997 from $11.4 million at December 31, 1996. This
increase was primarily attributable to the Company's 1997-1 securitization.
 
     Interest-only and residual certificates increased $18.8 million, or 23%, to
$101.9 million at March 31, 1997 from $83.1 million at December 31, 1996,
primarily due to interest-only and residual certificates acquired in connection
with the Company's 1997-1 securitization and recorded at fair value in
accordance with SFAS No. 125. See '--Certain Accounting Considerations.'
 
     Warehouse financing and other borrowings increased $17.0 million, or 18%,
to $112.5 million at March 31, 1997 from $95.5 million at December 31, 1996,
primarily due to additional borrowings to finance loans held for sale and
additional financing secured by interest-only and residual certificates. During
the fourth quarter of 1996, the Company used $38.0 million in net proceeds from
its initial public offering to pay down amounts outstanding on a warehouse
facility.
 
     Investor payable decreased $1.8 million, or 8%, to $20.8 million at March
31, 1997 from $22.6 million at December 31, 1996. The decrease was primarily due
to a decline in the amount of principal collected by the Company acting as
servicer, which must be remitted to the various trusts for the following

distribution period. Investor payable is comprised of all principal collected on
mortgage loans, either due to principal amortization or principal repayment, and
accrued certificate interest. Variability in this account is primarily due to
the principal prepayments collected within a given collection period.
 
     Stockholders' equity increased $9.5 million, or 10%, to $103.0 million at
March 31, 1997 from $93.5 million at December 31, 1996. This increase is
primarily due to net income for the quarter of $7.0 million, as well as the
issuance of 119,288 additional shares of common stock valued at $2.5 million in
connection with the Company's acquisition of Fidelity Mortgage.
 
DECEMBER 31, 1996 COMPARED TO DECEMBER 31, 1995
 
     Cash and interest-bearing deposits increased $2.1 million, or 13%, to $18.7
million at December 31, 1996 from $16.6 million at December 13, 1995. The
increase was primarily due to additional moneys held in securitization trust
accounts related to the Company's ongoing securitization program.
 
     Accounts receivable increased $1.8 million, or 26%, to $8.6 million at
December 31, 1996 from $6.8 million at December 31, 1995. This increase was
primarily due to higher average loan servicing volume, which resulted in
increased reimbursable servicing advances made by the Company, acting as
servicer on its securitizations.
 
                                       32

<PAGE>

     Loans held for sale increased $19.9 million, or 31%, to $83.7 million at
December 31, 1996 from $63.8 million at December 31, 1995. This increase was a
result of increases in loan originations and purchases in the fourth quarter of
1996 versus the fourth quarter of 1995, and a corresponding increase in the
amount of loans remaining in inventory subsequent to the Company's 1996-3
securitization. Loan originations and purchases increased $142.6 million, or
141%, to $243.7 million in the fourth quarter of 1996 from $101.1 million in the
fourth quarter of 1995.
 
     Accrued interest and late charges receivable increased $4.3 million, or
26%, to $20.2 million at December 31, 1996 from $15.9 million at December 31,
1995. This increase was primarily due to higher loan servicing volume during
1996. The Company's average servicing portfolio increased 79% to $667.4 million
in 1996 from $373.4 million in 1995.
 
     Capitalized Mortgage Servicing Rights increased $7.6 million, or 198%, to
$11.4 million at December 31, 1996 from $3.8 million at December 31, 1995. This
increase was directly attributable to certain accounting changes, which allows
the Company to capitalize the fair market value of the servicing retained asset
after its completes a securitization. The Company's securitization issuance
amount increased 167% to $615 million from $230 million in 1995. In 1996, the
Company began to capitalize ancillary servicing fee income which was not
previously recognized in prior periods.
 
     Interest-only and residual certificates increased $57.8 million, or 228%,
to $83.1 million at December 31, 1996 from $25.3 million at December 31, 1995,

primarily due to interest-only and residual certificates acquired in connection
with securitizations during the year. The Company securitized $615 million in
1996 compared to $230 million in 1995.
 
     Warehouse financing and other borrowings increased $12.7 million, or 15%,
to $95.5 million at December 31, 1996 from $82.8 million at December 31, 1995,
primarily due to additional loans held for sale and additional financing secured
by interest-only and residual certificates. The Company initially used $38.0
million of net proceeds from its initial public offering to pay down amounts
outstanding on a warehouse facility.
 
     Investor payable increased $8.3 million, or 58%, to $22.6 million at
December 31, 1996 from $14.3 million at December 31, 1995. The increase was
primarily due to the higher loan servicing volume which resulted in an increase
in the amount of principal collected by the Company acting as servicer, which
must be remitted to the various trusts for the following distribution period.
Investor payable is comprised of all principal collected on mortgage loans,
either due to principal amortization or principal repayment, and accrued
certificate interest. Variability in this account is primarily due to the
principal prepayments collected within a given collection period.
 
     Stockholders' equity increased $63.7 million, or 213%, to $93.5 million at
December 31, 1996 from $29.8 million at December 31, 1995. This increase is
primarily due to the net proceeds of $69.7 million received in connection with
the Company's initial public offering at November 1, 1996, as well as net income
for the year of $27.2 million, offset by distributions of $33.2 million made to
the Former Shareholders in connection with the initial public offering.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     The Company has operated, and expects to continue to operate, on a negative
cash flow basis due to increases in the volume of loan originations and
purchases and due to the growth of its securitization program. During 1994,
1995, 1996 and the three months ended March 31, 1997, the Company used cash in
operations of approximately $10.2 million, $23.9 million, $42.0 million and
$11.4 million, respectively.
 
     Historically, the Company has utilized various financing facilities and an
equity financing to offset negative operating cash flows and support the
continued growth in loan volumes, securitizations and general operating
expenses. The Company's primary sources of liquidity are its warehouse and other
financing facilities, securitizations and whole loan sales and, subject to
market conditions, sales of additional debt and equity securities.
 
     The Company securitized and sold in the secondary market $90.0 million,
$230.0 million, $615.0 million and $235.0 million of loans in 1994, 1995, 1996
and the three months ended March 31, 1997, respectively. In
 
                                       33

<PAGE>

connection with each securitization transaction completed during these periods,
the Company has or is utilizing Excess Servicing cash flow from such

securitization to prepay an overcollateralization limit and generally did or
does not receive any such Excess Servicing cash flow from the securitization
until such level was or is prepaid.
 
     In addition, the increasing use of securitization transactions as a funding
source by the Company has resulted in a significant increase in the amount of
gain on sale recognized by the Company. During 1994, 1995, 1996 and the three
months ended March 31, 1997, the Company recognized net gain on sale of mortgage
loans in the amounts of $6.7 million, $15.4 million, $46.5 million and $17.3
million, respectively. The recognition of this gain has a negative impact on the
cash flow of the Company since the Company is required to pay federal and state
taxes on a portion of the gain in the period recognized although it does not
receive the cash representing the gain until later periods. The Company also
incurs certain expenses in connection with securitizations, including
underwriting fees, rating agency fees, legal fees, accounting fees, shelf
registration fees, credit enhancement fees, trustee fees, hedging and other
costs.
 
     To accumulate loans for securitization, the Company borrows money on a
short-term basis through warehouse lines of credit. To date, substantially all
of the loans which the Company has purchased and originated have been funded
through borrowing under those warehouse lines. The Company has two warehouse
lines of credit for this purpose. One warehouse facility is a committed
revolving line for $250 million with a variable rate of interest and a maturity
date of February 1998. The Company's second warehouse facility is a $200 million
committed revolving line with a variable rate of interest and a maturity date of
February 1998. This facility was obtained subsequent to December 31, 1996 and
replaced a $100 million uncommitted credit facility previously maintained by the
Company with the warehouse lender. The outstanding balance on the $250 million
facility and $200 million facility as of March 31, 1997 was $51.8 million and
$0, respectively.
 
     The Company has obtained financing facilities for interest-only and
residual certificates acquired as part of its securitizations. As of March 31,
1997, the outstanding balance on these facilities was $57.5 million. These
facilities have variable interest rates and mature between October 1997 and
December 1999.
 
     In addition, the Company has lines of credit with two financial
institutions to support its daily operating requirements. One is a one-year
renewable credit line in the amount of $1.0 million with a variable interest
rate, renewable in September 1997. The Company's second line of credit is in the
amount of $7.5 million with a variable interest rate, which was obtained
subsequent to March 31, 1997. The outstanding balance on the credit lines was $0
as of March 31, 1997.
 
     On October 31, 1996, the Company issued to the public 4,600,000 shares of
common stock and received net proceeds of approximately $69.7 million. $37.1
million of the net proceeds were used to repay amounts outstanding under the
Company's warehouse lines, and $32.6 million was used to pay S corporation
distributions to the Former Shareholders.
 
     Delta Funding Corporation is currently negotiating the terms of the Credit
Agreement with First Chicago. The Credit Agreement will be used primarily to

finance mortgage loans held for sale and to fund servicer advances by Delta
Funding Corporation, subject to specified sublimits to be set forth therein.
Delta Funding Corporation expects to enter into the definitive Credit Agreement
prior to the Issue Date. However, there can be no assurance the Credit Agreement
will be entered into prior to the Issue Date or at all. The execution and
delivery of the Credit Agreement is not a condition to this Offering. See
'Prospectus Summary--Recent Developments.'
 
     The Company is required to comply with various operating and financial
covenants as provided in the agreements described above which are customary for
agreements of their type. The Company does not believe that its existing
financial covenants will restrict its operations or growth. Continued
availability of funds under these agreements is subject to the Company's
compliance with such covenants. Management believes the Company is in compliance
with all such covenants under these agreements.
 
     The Company's ability to make payments of principal of or interest on, or
to refinance its Indebtedness (including the Notes) depends on its future
operating performance, and its ability to effect additional debt and/or equity
financings, which to a certain extent is subject to economic, financial,
competitive and other factors beyond its control. If the Company is unable to
generate sufficient cash flow in the future to service its debt, it may be
required to refinance all or a portion of its existing debt, including the
Notes, or to obtain additional
 
                                       34

<PAGE>

financing. There can be no assurance that any such refinancing would be possible
or that any additional financing could be obtained. The inability to obtain
additional financing could have a material adverse effect on the Company. See
'Risk Factors--Leverage; Asset Encumbrance,' '--Ability to Service Debt;
Negative Cash Flows; Access to Capital Markets' and '-- Dependence on Funding
Sources--Dependence on Warehouse and Other Financing Sources.' The Company
believes that the sources of liquidity, including the funds raised in this
Offering, available to it should be sufficient to fund the Company's liquidity
requirements for the next 12 months if the Company's future operations are
consistent with management's current growth expectations. However, because the
Company expects to continue to require substantial amounts of cash for the
foreseeable future, it anticipates that it will need to effect debt or equity
financings regularly, in addition to quarterly securitizations. The type, timing
and terms of financing selected by the Company will be dependent upon the
Company's cash needs, the availability of other financing sources and the
prevailing conditions in the financial markets. There can be no assurance that
any such sources will be available to the Company at any given time or as to the
favorableness of the terms on which such sources may be available.
 
  Hedging
 
     The Company originates and purchases mortgage loans and then sells them
primarily through securitization. At the time of securitization and delivery of
the loans, the Company recognizes gain on sale based on a number of factors
including the difference or 'spread' between the interest rate on the loans and

the interest rate on treasury securities with maturities corresponding to the
anticipated life of the loans. If interest rates rise between the time the
Company originates or purchases the loans and the time the loans are priced at
securitization, the Excess Spread narrows, resulting in a loss in value of the
loans. To protect against such losses, the Company currently hedges the value of
the loans through the use of treasury rate lock contracts which function similar
to the short sale of securities. Prior to hedging, the Company performs an
analysis of its loans taking into account such factors as interest rates,
maturities, durations, inventory of loans and amount of loans held for sale to
determine the proportion of contracts to sell so that the risk to the value of
the loans is most effectively hedged. The Company will enter into treasury lock
rate contracts through one of its warehouse lenders and/or one of the investment
bankers which underwrite the Company's securitizations. These contracts are
designated as hedges in the Company's records and are closed out when the loans
are sold through securitization.
 
     If the value of the hedges decrease, offsetting an increase in the value of
the loans, the Company, upon settlement with its counterparty, will pay the
hedge loss in cash and realize the corresponding increase in the value of the
loans as part of its interest-only and residual certificates. Conversely, if the
value of the hedges increase, offsetting a decrease in the value of the loans,
the Company, upon settlement with its counterparty, will receive the hedge gain
in cash and realize the corresponding decrease in the value of the loans through
a reduction in the value of the corresponding interest-only and residual
certificates.
 
     The Company believes that its current hedging strategy of using treasury
rate lock contracts is the most effective way to manage its interest rate risk
on loans prior to securitization.
 
INFLATION AND INTEREST RATES
 
     Inflation affects the Company most significantly in the area of loan
originations and can have a substantial effect on interest rates. Interest rates
normally increase during periods of high inflation and decrease during periods
of low inflation. Profitability may be directly affected by the level and
fluctuation in interest rates which affect the Company's ability to earn a
spread between interest received on its loans and the costs of its borrowings.
The profitability of the Company is likely to be adversely affected during any
period of unexpected or rapid changes in interest rates. A substantial and
sustained increase in interest rates could adversely affect the ability of the
Company to originate and purchase loans and affect the mix of first and second
mortgage loan products. Generally, first mortgage production increases relative
to second mortgage production in response to low interest rates and second
mortgage production increases relative to first mortgage production during
periods of high interest rates. A significant decline in interest rates could
decrease the size of the Company's loan servicing portfolio by increasing the
level of loan prepayments. Additionally, to the extent servicing rights,
interest-only and residual classes of certificates have been capitalized on the
books of the Company, higher than anticipated rates of loan prepayments or
losses could require the Company to write down the value of such servicing
rights, interest-only and residual certificates, adversely impacting earnings.
Fluctuating interest rates
 

                                       35

<PAGE>

also may affect the net interest income earned by the Company resulting from the
difference between the yield to the Company on loans held pending sales and the
interest paid by the Company for funds borrowed under the Company's warehouse
facilities.
 
CERTAIN ACCOUNTING CONSIDERATIONS
 
  Interest-Only and Residual Certificates
 
     The Company derives a substantial portion of its income by recognizing gain
on sale of loans sold through securitization, represented by the interest-only
and residual certificates that the Company retains. In securitizations, the
Company sells loans that it has originated or purchased to a trust for a cash
purchase price and the interest-only and residual certificates. The cash
purchase price is raised through an offering by the trust of pass-through
certificates representing regular interests in the trust. Following the
securitizations, the purchasers of the pass-through certificates receive the
principal collected and the investor pass-through interest rate on the principal
balance, while the Company receives the excess of the interest rate payable by
an obligor on a loan over the interest rate passed through to the purchasers of
the regular-interest certificates (with respect to the interest-only and
residual certificates), as well as the Company's normal servicing fee and other
recurring fees. The interest-only and residual certificates which are
capitalized on the Company's balance sheet are reduced as cash distributions are
received. The interest-only and residual certificates are accounted for as
trading securities in accordance with SFAS No. 115, 'Accounting for Certain
Investments in Debt and Equity Securities,' and as such they are recorded at
their fair value. Changes in fair value of the interest-only and residual
certificates are reflected in the statement of operations. Fair value of the
interest-only and residual certificates is determined based on various economic
factors, including considerations of loan type, size, date of origination,
interest rate, term, collateral value and geographic location. Higher than
anticipated rates of loan prepayments or losses would require the Company to
write down the fair value of the interest-only and residual certificates,
adversely impacting earnings. Similarly, if delinquencies, liquidations or
interest rates were greater than initially assumed by the Company, the fair
value of the interest-only and residual certificates would be negatively
impacted resulting in an adverse effect on interest income for the periods
during which such events occurred. The residual certificates held by the Company
are subject to losses on liquidated loans which flow through each securitization
trust. Since the calculation of the fair value of these certificates at the time
of securitization included certain assumptions concerning losses, any additional
losses from such assumptions will have an adverse effect on interest income.
 
  SFAS No. 91
 
     In December 1986, the Financial Accounting Standards Board ('FASB') issued
SFAS No. 91, 'Accounting for Non-Refundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases' ('SFAS No.
91'). SFAS No. 91 establishes the accounting for non-refundable fees and costs

associated with lending, committing to lend, or purchasing a loan or a group of
loans.
 
     Under SFAS No. 91, direct loan origination costs, net of loan origination
fees, are recognized as a reduction of the loan's yield over the earlier of the
life of the related loan or the sale of the loan. In effect, SFAS No. 91
requires that origination fees be offset by their related direct loan costs and
that net deferred fees be recognized over the earlier of the life of the loan or
the sale of the loan, whether the loan is sold through securitization or on a
whole loan basis.
 
     Prior to the second quarter of 1996, the Company generally sold loans
through securitization on a semiannual basis and, as such, carried a larger
inventory of loans on its books from quarter to quarter and from year to year,
which resulted in SFAS No. 91 adjustments being made during those periods. The
Company contemplates that in the future it will sell substantially all of its
loan originations and purchases on a quarterly basis primarily through
securitizations and, to a lesser extent, on a whole loan basis. This should
minimize the amount of loans being held in inventory and, therefore, minimize
the effects of SFAS No. 91 on the Company's financial statements.
 
                                       36

<PAGE>

  SFAS No. 125
 
     In June 1996, FASB issued SFAS No. 125 which provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a financial-
components approach that focuses on control. SFAS No. 125 distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. SFAS No. 125 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996, and
is to be applied prospectively. Effective January 1, 1997, the Company adopted
SFAS No. 125, which supersedes SFAS No. 122, 'Accounting for Mortgage Servicing
Rights.'
 
     Securitization of a financial asset, a portion of a financial asset, or a
pool of financial assets in which the transferor surrenders control over the
assets transferred, is accounted for as a sale. If the transfer does not qualify
as a sale, the transferred assets will remain on the balance sheet and the
proceeds raised will be accounted for as a secured borrowing with no gain or
loss recognition. Because Delta's transfers of loans made in connection with its
securitizations qualify as sales under this pronouncement, the required
accounting will be an allocation of basis approach.
 
     After the securitization of mortgage loans held for sale, the
mortgage-backed security (or any retained interests in REMIC securitizations of
loans held for sale, whether they are subordinate classes or interest-only or
residual certificates) shall be classified as a trading security and reported at
fair value under SFAS No. 115, 'Accounting for Certain Investments in Debt and
Equity Securities.'
 

     Servicing assets created in a securitization (contractually specified
servicing fees which are due the servicer in exchange for servicing those
assets) shall initially be measured at their allocated carrying amount, based
upon the relative fair value at the date of securitization. Servicing assets are
to be amortized in proportion to, and over the period of, estimated net
servicing income (the excess of servicing revenues over servicing costs).
 
     SFAS No. 125 requires mortgage banking entities that acquire or originate
loans and subsequently sell or securitize those loans and retain the Mortgage
Servicing Rights to allocate the total cost of the loans to the Mortgage
Servicing Rights and the mortgage loans without the Mortgage Servicing Rights.
The Company determines fair value based upon the present value of estimated net
future servicing revenues less the estimated cost that would fairly compensate a
substitute servicer to service the loans. The servicing asset is then recorded
on the balance sheet and accounted for under SFAS No. 125 using the allocation
of cost relative to fair value approach. The assumptions used to calculate fair
value are the same assumptions used to determine the fair value of the
interest-only strip. The cost allocated to the servicing rights is amortized in
proportion to and over the period of estimated net future cash flows related to
servicing income.
 
     SFAS No. 125 also requires impairment evaluations of all amounts
capitalized as servicing rights, including those purchased before the adoption
of SFAS No. 125, based upon the fair value of the underlying servicing rights.
The Company periodically performs these evaluations on a disagregated basis for
the predominant risk characteristics of the underlying loans which are loan
type, term, credit quality and interest rate. The continuing effects of SFAS No.
125 on the Company's financial position and results of operations will depend on
several factors, including, among other things, the amount of acquired or
originated loans sold or securitized, the type, term and credit quality of loans
and estimates of future prepayment rates.
 
  SFAS No. 123
 
     In October 1995, FASB issued SFAS No. 123, 'Accounting for Stock-Based
Compensation' ('SFAS No. 123'). SFAS No. 123 establishes financial accounting
and reporting standards for stock-based employee compensation plans. Those plans
include all arrangements by which employees receive shares of stock or other
equity instruments of the employer or the employer incurs liabilities to
employees in amounts based on the price of the employer's stock. Examples are
stock purchase plans, stock options, restricted stock awards, and stock
appreciation rights. This statement also applies to transactions in which an
entity issues its equity instruments to acquire goods or services from
non-employees. Those transactions must be accounted for, or at least disclosed
in the case of stock options, based on the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is more
reliably measurable. The accounting requirements of SFAS No. 123 are effective
for financial statements for fiscal years beginning after December 15, 1995, or
for an earlier fiscal year
 
                                       37

<PAGE>


for which SFAS No. 123 is initially adopted for recognizing compensation cost.
The statement permits a company to choose either a new fair value-based method
or the current APB Opinion No. 25 intrinsic value-based method of accounting for
its stock-based compensation arrangements. The Company applies APB Opinion No.
25 in accounting for its stock option plan. Further, the Company provides in a
footnote to its financial statements pro forma disclosures of net earnings and
earnings per share computed as if the fair value-based method had been applied
in accordance with SFAS No. 123.
 
  Earnings Per Share
 
     SFAS No. 128, 'Earnings per Share' ('SFAS No. 128') specifies the
computation, presentation and disclosure requirements for earnings per share.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997 and the pronouncement supersedes APB Opinion No. 15,
'Earnings per Share.' The objectives of SFAS No. 128 are to simplify the
computation of earnings per share and make financial statements more useful for
investors and creditors by increasing the international comparability of
accounting standards concurrent with improving the quality of accounting
standards. The Company has not completed its analysis of SFAS No. 128.
 
  Disclosure of Information about Capital Structure
 
     SFAS No. 129, 'Disclosure of Information about Capital Structure' ('SFAS
No. 129') was issued in February 1997 and is effective for financial statements
for periods ending after December 15, 1997. SFAS No. 129 requires disclosure of
pertinent rights and privileges of the various securities outstanding. The
statement also requires disclosure of the number of shares issued upon
conversion, exercise, or satisfaction of required conditions during at least the
most recent annual fiscal period and any subsequent interim period presented.
The Company has not completed its analysis of SFAS No. 129.
 
                                       38

<PAGE>

                                    BUSINESS
 
     Delta is a specialty consumer finance company that has engaged in
originating, acquiring, selling and servicing home equity loans since 1982.
Throughout its 15 years of operating history, Delta has focused on lending to
individuals who generally have impaired or limited credit profiles or higher
debt to income ratios and typically have substantial equity in their homes.
Management believes that these borrowers have been largely unsatisfied by the
more traditional sources of mortgage credit which underwrite loans to
conventional guidelines established by FNMA and FHLMC. The Company makes loans
to these borrowers for such purposes as debt consolidation, home improvement,
mortgage refinancing or education, and these loans are primarily secured by
first mortgages on one- to four-family residential properties.
 
     Through its wholly-owned subsidiary, Delta Funding Corporation, the Company
originates Brokered Loans and also purchases Correspondent Loans. Delta Funding
Corporation currently originates and purchases the majority of its loans in 21
states, through its network of approximately 1,000 brokers and correspondents.

The Company believes that it has a competitive advantage in serving brokers and
correspondents in the nonconforming home equity market that stems from its
substantial experience in this sector and its emphasis on providing quality
service that is prompt, responsive and consistent. The 19 members of Delta
Funding Corporation's senior management have an average of over 13 years of
nonconforming mortgage loan experience. Management believes this
industry-specific experience, coupled with the systems and programs it has
developed over the past 15 years, enable the Company to provide quality services
that include preliminary approval of most Brokered Loans and certain
Correspondent Loans within one day, consistent application of its underwriting
guidelines and funding or purchasing of loans within 14 to 21 days of
preliminary approval. In addition, the Company seeks to establish and maintain
productive relationships with its network of brokers and correspondents by
servicing each one with a business development representative, a team of
experienced underwriters and, in the case of Brokered Loans, a team of loan
officers and processors assigned to specific brokers to process all applications
submitted by such brokers.
 
     The Company currently originates and purchases the majority of its loans
through the Company's main office in Woodbury, New York, its full service office
in Atlanta, Georgia, its full processing offices in St. Louis, Missouri,
Chicago, Illinois and Warwick, Rhode Island and from seven business development
offices located in Michigan (2), New Jersey, Ohio (2), Pennsylvania, and
Virginia. The Company historically made loans primarily in New York, New Jersey
and Pennsylvania. Commencing in 1995, the Company implemented a program to
further expand its geographic presence into the New England, Mid-Atlantic,
Midwest and Southeast regions. As a consequence of its expansion into new
markets, as well as its further penetration of existing markets, the Company
increased its loan production substantially in 1995 and 1996. Total loan
originations and purchases increased $168.1 million, or 140%, from $119.7
million in 1994 to $287.8 million in 1995, and increased $371.0 million or 129%,
in 1996 to $658.8 million.
 
     In February 1997, in an effort to broaden its origination sources and to
expand its geographic presence in the Company's new markets, the Company
acquired Fidelity Mortgage. The Company acquired Fidelity Mortgage with the
expectation that the acquisition would result in beneficial synergies, with
Fidelity Mortgage providing a dedicated source of mortgage loans for Delta
Funding Corporation's securitization pools and for its servicing arm, and Delta
Financial Corporation providing capital to Fidelity Mortgage for the expansion
of its retail network. Fidelity Mortgage develops retail loan leads primarily
through its telemarketing system and its network of seven retail offices located
in Florida (2), Georgia, Indiana and Ohio (3). Two of these offices were opened
in the second quarter of 1997, and the Company intends to expand the Fidelity
Mortgage network further, with three new branch offices scheduled to open by the
end of the second quarter.
 
     The Company has been profitable in each of its 15 years of operation. The
Company's results of operations have improved significantly in recent periods as
a result of increased loan production and improved operating efficiencies. Total
revenues increased $37.4 million, or 103%, to $73.5 million in 1996 from $36.1
million in 1995, and pro forma income before extraordinary item increased 630%
to $19.1 million in 1996 from $2.6 million in 1995. During 1995 compared to
1994, the Company's total revenues increased 66% from $21.8 million to $36.1

million and pro forma income increased 128% from $1.1 million to $2.6 million.
See 'Management's Discussion and Analysis of Financial Condition and Results of
Operations.'
 
                                       39

<PAGE>

     The Company generates earnings and cash flow primarily through the
origination, purchase, securitization and servicing of home equity loans. In a
securitization, the Company sells the loans that it originates or purchases to a
trust for cash and records certain assets and income based upon the Excess
Servicing and the Mortgage Servicing Rights. At the time of the securitization,
the Company estimates these amounts based upon a declining principal balance of
the underlying loans, adjusted by an estimated prepayment rate, and capitalizes
these amounts using a discount rate that market participants would use for
similar financial instruments. These capitalized assets are recorded on the
Company's balance sheet as interest-only and residual certificates and
capitalized Mortgage Servicing Rights, respectively and are aggregated and
reported on the income statement as net gain on sale of mortgage loans, after
being reduced (increased) by (i) loan acquisition premiums paid to
correspondents and brokers, (ii) cost of securitization and (iii) any hedge
losses (gains).
 
     The Company typically begins to receive Excess Servicing cash flow eight to
twelve months from the date of securitization, although this time period may be
shorter or longer depending upon the structure and performance of the
securitization. Prior to such time, the monoline insurer requires a reserve
provision to be created within the securitization trust which uses Excess
Servicing cash flows to retire the securitization bond debt until the spread
between the outstanding principal balance of the mortgage loans in the
securitization trust and the securitization bond debt equals 2-3% of the initial
securitization principal balance. Once this overcollateralization limit is met,
excess cash flows are distributed to Delta. The Company begins to receive
contractual mortgage servicing cash flows in the month following the
securitization.
 
     Since 1991, Delta has sold approximately $1.5 billion of its mortgage loans
through 14 REMIC securitizations. Each of these securitizations has been
credit-enhanced by an insurance policy provided through a monoline insurance
company to receive ratings of 'Aaa' from Moody's and 'AAA' from Standard &
Poor's. The Company sells loans through securitizations and, from time to time,
on a whole loan basis, to enhance its operating leverage and liquidity, to
minimize financing costs and to reduce its exposure to fluctuations in interest
rates.
 
     In addition to the excess cash flow from securitizations and proceeds from
whole loan sales, the Company earns the net interest spread on loans held for
sale, origination fees on its Brokered Loans and retail loans (which are
included in other income) and servicing fees of between 0.50% and 0.65% per
annum of the outstanding balance of the loans it services. Since its inception,
the Company has serviced substantially all of the loans it has originated and
purchased, including all of those that it has subsequently sold through
securitizations. Management believes that servicing this loan portfolio enhances

certain operating efficiencies and provides an additional and profitable revenue
stream that is less cyclical than the business of originating and purchasing
loans. As of March 31, 1997, Delta had a servicing portfolio of $1.1 billion of
loans. See '--Loans.'
 
BUSINESS STRATEGY
 
     The Company's business objective is to increase profitably the volume of
its loan originations and purchases and the size of its servicing portfolio by
(i) continuing to provide top quality service to its network of brokers and
correspondents, (ii) maintaining its underwriting standards, (iii) further
penetrating its established markets and recently-entered markets and expanding
into new geographic markets, (iv) expanding its retail origination capabilities,
(v) expanding through acquisitions and (vi) leveraging its information and
processing technologies.
 
  Continuing to Provide Quality Service
 
     The Company provides a high level of service to its network of brokers and
correspondents that includes preliminary approval of most Brokered Loans and
certain Correspondent Loans within one day, consistent application of its
underwriting guidelines and funding or purchase of loans generally within 14 to
21 days of preliminary approval. In addition, the Company services each broker
and correspondent with a team of professionals that includes a business
development representative, a team of experienced underwriters and, in the case
of Brokered Loans, a team of loan officers working on a primarily commission
basis with processors assisting them to handle applications submitted by each
broker. The Company's loan officers and underwriters respond promptly and
consistently on every loan submission. In addition, through its business
development representatives, Delta regularly communicates with brokers and
correspondents in order to better understand and
 
                                       40

<PAGE>

respond to their needs. The Company believes that this commitment to service
provides it with a competitive advantage in establishing and maintaining
productive broker and correspondent relationships.
 
  Maintaining Underwriting Standards
 
     Over its 15 years in existence, the Company has developed an underwriting
process designed to thoroughly, but efficiently, review and underwrite each
prospective loan. The Company underwrites loans on a highly centralized basis
from its Woodbury, New York headquarters, as well as from its newly opened
underwriting office in Atlanta, Georgia and its Fidelity Mortgage Cincinnati,
Ohio headquarters. Based on its belief that an experienced staff provides a more
effective means of assessing credit risk, the Company employs 51 underwriters,
with an average of seven and one-half years of nonconforming mortgage loan
experience, to ensure that all originated or purchased loans satisfy the
Company's underwriting criteria. The Company's experienced personnel use
underwriting standards developed by the Company in accordance with its
risk-based approach to structuring loans. Each loan must be approved by at least

two underwriters, undergo a full appraisal review and is subject to pre- and
post-funding reviews to confirm compliance with the underwriting procedures and
guidelines. The Company believes that the depth and experience of its
underwriting staff, coupled with consistent application of its underwriting
procedures and criteria provide the infrastructure needed to manage and sustain
the Company's recent growth, while maintaining the quality of loans originated
or purchased. The depth and experience in the Company's underwriting department
has provided two significant competitive advantages. First, it has ensured that
the Company's underwriting standard and subjective judgments sometimes required
in the non-conforming market are consistently applied, enabling the Company to
implement a risk-based pricing strategy. Second, the Company's extensive
training produces experienced underwriters, some of whom are relocated to the
Company's new offices to ensure the same consistency in recently-entered
markets.
 
  Further Penetrating Existing and Recently Entered Markets and Expanding into
  New Markets
 
     The Company intends to continue to increase the volume of its Brokered and
Correspondent Loan originations and purchases through a three-pronged strategy
that includes greater originations and purchases from its existing brokers and
correspondents, establishment of new broker and correspondent relationships in
both existing and recently-entered markets and expansion into new markets.
 
     The Company currently originates and purchases loans through its network of
approximately 1,000 brokers and correspondents. Of these, the top 20 brokers and
correspondents and the top broker accounted for 48.2% and 8.9%, respectively, of
the total loans originated and purchased for the three months ended March 31,
1997. Accordingly, the Company believes that there is an opportunity to increase
loan volume from its existing brokers and correspondents.
 
     Prior to 1995, the Company concentrated its efforts on serving brokers and
correspondents in New York, New Jersey and Pennsylvania. Commencing in 1995, the
Company began to implement a program to expand its geographic focus into the New
England, Mid-Atlantic (outside of the tri-state area), Midwest and Southeast
regions. To increase its network of brokers and correspondents in these new
markets, the Company opened four new regional branch offices--including a full
service office in Atlanta, Georgia staffed by two members of Delta's senior
management, three full processing offices in St. Louis, Missouri, Warwick, Rhode
Island and Chicago, Illinois and five business development offices in Ohio (2),
Michigan (2) and Virginia. Although these steps enabled the Company to increase
production in the Midwest, New England, Mid-Atlantic and Southeast regions from
$6.6 million in 1994 to $221.9 million in 1996, production in such regions for
1996 represented only 33.7% of total production, and the Company believes that
it can continue to increase loan volume from brokers and correspondents in these
markets.
 
     The Company will continue to consider expansion into new markets. Potential
new markets include those with demographic statistics and regulatory
requirements comparable to or more favorable than those in the Company's
established markets and markets in which the Company is able to hire a business
development representative with substantial contacts with the local brokers and
correspondents.
 

                                       41

<PAGE>

  Expanding its Retail Origination Capabilities
 
     The Company intends to continue to increase the volume of its retail loan
originations by expanding its Fidelity Mortgage operations through new branch
openings in new geographic markets and by further penetrating its existing and
newly entered markets. Since the acquisition of Fidelity Mortgage and its five
retail offices, the Company has opened two additional Fidelity Mortgage offices
in Atlanta, Georgia and Fort Lauderdale, Florida and expects to open three new
offices by the end of the second quarter in Illinois, North Carolina and Ohio.
 
  Expanding Through Acquisitions
 
     Management believes acquisitions can be a means of cost effectively
increasing or diversifying the Company's loan production capabilities. Given the
highly competitive and fragmented nature of the non-conforming mortgage finance
industry, acquisitions present an attractive opportunity for growth. During the
first quarter of 1997, the Company completed its acquisition of Fidelity
Mortgage, which represents Delta's entrance into the retail mortgage origination
market. The Company continually considers acquisition candidates which operate
in geographic or product areas that complement the Company's existing business.
 
  Leveraging its Information and Processing Technologies
 
     In its continued effort to increase efficiency, the Company has added a new
servicing system, purchased a secondary marketing system and a new general
ledger system and upgraded all of its computer hardware within the last year.
The Company's recent and anticipated geographic expansion and growth in
originations and servicing portfolio were considered when these systems were
designed, and management believes its strategic plans can be met without
substantial additional investment in informational systems in the near future.
Management also believes that as the Company further develops the capabilities
of these new systems, further cost savings will be realized.
 
LOANS
 
  Overview
 
     Delta's consumer finance activities consist of originating, acquiring,
selling and servicing non-conforming mortgage loans. These loans are primarily
secured by first mortgages on one- to four-family residences. Once loan
applications have been received, the underwriting process completed and the
loans funded or purchased, Delta typically packages the loans in a portfolio and
sells the portfolio through a securitization. Delta retains the right to service
the loans that it securitizes. To a lesser extent, the Company sells loans on a
whole loan basis with servicing released.
 
     The Company focuses on providing its customers with an array of loan
products designed to meet customer needs. The Company implements a risk-based
pricing strategy and, as such, has developed products for the various risk
categories. Historically, the Company offered fixed rate loan products. As the

Company has expanded geographically, it has expanded its product offerings to
include adjustable rate mortgage and fixed/adjustable mortgages.
 
     Historically, the Company conducted substantially all of its broker and
correspondent lending operations out of its Woodbury, New York headquarters.
Recently, the Company has begun opening regional branch offices, which include
loan processing, underwriting and business development functions, to bring it in
closer contact with brokers and correspondents and enhance customer service
while underscoring Delta's long-term commitment in newer regions. Typically,
these offices are staffed with a combination of experienced Delta personnel who
oversee implementation of Delta's operating methods and local employees with
established relationships in, and specific knowledge of, the local market.
Currently, the Company's Southeast regional office (Atlanta, Georgia), which
is staffed by two members of Delta's senior management including a Vice
President of Underwriting, is the only 'full service' regional branch, i.e., it
has full underwriting authority. Delta's Midwest (St. Louis, Missouri and
Chicago, Illinois) and New England (Warwick, Rhode Island) regional offices are
'full processing' regional branches, i.e., final underwriting approval is
required from the Woodbury, New York headquarters for all mortgage loans. As
these branches mature and demonstrate their ability to meet operating standards,
Delta intends to further strengthen their operations by delegating full
underwriting authority,
 
                                       42

<PAGE>

thereby increasing the Company's long-term growth potential. The Fidelity
Mortgage offices have full underwriting authority.
 
     The following chart illustrates the Company's principal consumer finance
activities:
 
                                    [CHART]

                                   BORROWER
                             Applies for loan from
                                       |
               ________________________|________________________
               |                       |                       |
               |                       |                       |
         CORRESPONDENT               BROKER            FIDELITY MORTGAGE
      Closes loan in own         Refers loan to    Retail loan organization
    name and sells loan to             |                       |
               |                       |                       |
               |                       |                       |
              D E L T A    F U N D I N G    C O R P O R A T I O N
                                       |
                                       |
                          DELTA'S LOAN HELD FOR SALE
                                 |           |
 Sells loan through securitiza-  |           | Sells loan on whole loan basis,
tion and recognizes gain on sale |           | without recourse, to institu-
represented by interest-only and |           | tional purchasers for a cash
           residual certificates |           | gain on sale
                                 |           |
                       SECURITIZATION     WHOLE LOAN SALE
                             |          SERVICING RELEASED
     Services all loans sold |
     through securitization, |
  earning a fixed, recurring |
 servicing fee and ancillary |
              service income |
                             |
                       LOAN SERVICING
                         PORTFOLIO

 
  Loan Originations and Purchases
 
     The Company has increased its loan originations and purchases by 129% to
$658.8 million in 1996 from $287.8 million in 1995, which was an increase of
140% over 1994 production of $119.7 million.
 
                                       43

<PAGE>

     As Delta has expanded into new markets, Correspondent Loans as a percentage

of all originations and purchases has increased because the average
correspondent generates significantly more production than the average broker.
Delta initially establishes itself in these new markets primarily through
purchases of loans, after which it focuses on broker development which often
leads to establishing a physical presence in the market. Due to Delta's growth
and the repositioning of its portfolio of loans, in recent years the weighted
average loan-to-value ratios have increased while weighted average interest
rates have decreased. The Company believes that a decreased interest rate
environment, coupled with increased lending to 'A' and 'B' borrowers relative to
'C' and 'D' borrowers, has resulted in higher loan-to-value ratios and lower
interest rates. Also, since the late 1980's and early 1990's, home equity
lenders in general have become more comfortable with the stability of home
values.
 
     Delta currently originates and acquires the majority of its loans in 21
states and the District of Columbia through its network of approximately 1,000
brokers and correspondents.
 
     The following table shows certain information regarding the Company's loan
originations and purchases by source for the periods shown:
 
<TABLE>
<CAPTION>
                                                                                             THREE MONTHS ENDED
                                                            YEAR ENDED DECEMBER 31,              MARCH 31,
                                                        --------------------------------    --------------------
                                                          1994        1995        1996        1996        1997
                                                        --------    --------    --------    --------    --------
                                                                         (DOLLARS IN THOUSANDS)
<S>                                                     <C>         <C>         <C>         <C>         <C>
BROKER:
  Principal balance..................................   $ 81,407    $175,738    $321,733    $ 66,389    $114,063
  Average principal balance per loan.................         66          76          85          85          87
  Combined weighted average initial loan-to-value
     ratio(1)........................................       54.8%       62.3%       67.7%       66.8%       70.1%
  Weighted average interest rate.....................       11.7%       11.4%       11.1%       10.4%       11.0%
CORRESPONDENT:
  Principal balance..................................   $ 38,341    $112,065    $337,033    $ 49,373    $122,679
  Average principal balance per loan.................         68          70          73          70          76
  Combined weighted average initial loan-to-value
     ratio(1)........................................       56.2%       64.5%       69.8%       68.1%       71.9%
  Weighted average interest rate.....................       13.0%       12.4%       11.7%       11.8%       11.6%
TOTAL LOAN ORIGINATIONS AND PURCHASES:
  Principal balance..................................   $119,748    $287,803    $658,766    $115,762    $236,742
  Average principal balance per loan.................         67          74          78          78          81
  Combined weighted average initial loan-to-value
     ratio(1)........................................       55.2%       63.2%       68.8%       67.4%       71.0%
  Weighted average interest rate.....................       12.1%       11.8%       11.4%       11.0%       11.3%
PERCENTAGE OF LOANS SECURED BY:
  First mortgage.....................................       88.0%       89.6%       93.8%       94.1%       93.6%
  Second mortgage....................................       12.0%       10.4%        6.2%        5.9%        6.4%
</TABLE>
 
------------------

(1) The weighted average initial loan-to-value ratio of a loan secured by a
    first mortgage is determined by dividing the amount of the loan by the
    lesser of the purchase price or the appraised value of the mortgage property
    at origination. The weighted average initial loan-to-value ratio of loan
    secured by a second mortgage is determined by taking the sum of the loan
    secured by the first and second mortgages and dividing by the lesser of the
    purchase price or the appraised value of the mortgage property at
    origination.
 
     The following table shows the geographic distribution of loan originations
and purchases for the periods indicated:

<TABLE>
<CAPTION>
                                                                                                              
                                  YEAR ENDED                  YEAR ENDED                  YEAR ENDED          
                               DECEMBER 31, 1994           DECEMBER 31, 1995           DECEMBER 31, 1996      
                           -------------------------   -------------------------   -------------------------  
REGION                     PERCENTAGE   DOLLAR VALUE   PERCENTAGE   DOLLAR VALUE   PERCENTAGE   DOLLAR VALUE   
-------------------------  ----------   ------------   ----------   ------------   ----------   ------------   
<S>                        <C>          <C>            <C>          <C>            <C>          <C>            
NY, NJ and PA............     94.5%        $113.2         86.2%        $248.0         66.3%        $436.9      
Midwest..................      2.4            2.9          5.4           15.7         17.0          112.0      
Southeast................      0.3            0.3          0.8            2.2          4.2           27.6      
New England..............      1.7            2.1          2.2            6.2          5.9           38.6      
Mid-Atlantic*............      1.0            1.2          5.4           15.7          6.6           43.7      
 
<CAPTION>

                             THREE MONTHS ENDED
                               MARCH 31, 1997
                           ------------------------
REGION                     PERCENTAGE  DOLLAR VALUE
-------------------------  ----------  ------------
<S>                        <C>         <C>
NY, NJ and PA............     60.6%       $143.5
Midwest..................     18.2          43.1
Southeast................      9.4          22.2
New England..............      6.4          15.2
Mid-Atlantic*............      5.4          12.7
</TABLE>
 
------------------
* Excluding New York (NY), New Jersey (NJ) and Pennsylvania (PA).
 
                                       44

<PAGE>

     Broker and Correspondent Marketing. Throughout its history Delta has been
successful in establishing and maintaining relationships with brokers and
correspondents interested in offering non-conforming mortgage products to their
clientele, and management believes that this success is primarily attributable
to the quality of service the Company provides to its network of brokers and

correspondents.
 
     Delta typically initiates contact with a broker or correspondent through
Delta's Business Development Department, comprised of 20 business development
representatives supervised by a senior officer with over ten years of sales and
marketing experience in the industry. The Company usually hires business
development representatives who have contacts with brokers and correspondents
that originate nonconforming mortgage loans within their geographic territory.
The business development representatives are responsible for developing and
maintaining the Company's broker and correspondent networks within their
geographic territory by frequent visits to the broker or correspondent,
communicating the Company's underwriting guidelines, disseminating new product
information and pricing changes, and by a continuing commitment to understanding
the needs of the customer. The business development representatives attend
industry trade shows and are a source of information to Delta concerning
products and pricing offered by competitors and new market entrants, all of
which assists Delta in refining its programs and product offerings in order to
offer competitive service. Business development representatives are compensated
with a base salary and commissions based on the volume of loans originated or
purchased as a result of their efforts.
 
     Approval Process. Before a broker or correspondent becomes part of Delta's
network, it must go through an approval process. Once approved, brokers and
correspondents may immediately begin submitting applications and/or loans to
Delta.
 
     To be approved, a broker must demonstrate that it is properly licensed and
registered in the state in which it seeks to transact business, submit to a
credit check, and sign a standard broker agreement with Delta. A correspondent
is eligible to submit loans to Delta for purchase only after an extensive
investigation of the prospective correspondent's lending operations including an
on-site visit, a review of the correspondent's financial statements for the
prior two years, a credit report on the correspondent, a review of sample loan
documentation and business references provided by the correspondent. Once
approved, Delta requires that each correspondent sign an Agreement of Purchase
and Sale in which the correspondent makes representations and warranties
governing both the mechanics of doing business with Delta and the quality of the
loan submissions themselves. Delta also performs an annual review of each
approved correspondent in order to ensure continued compliance with legal
requirements and that lending operations and financial information continue to
meet Delta's standards. In addition, Delta regularly reviews the performance of
loans originated or purchased through its brokers or correspondents.
 
     Brokers. For the three months ended March 31, 1997, the Company's broker
network accounted for $114.1 million, or 48.2%, of Delta's loan originations and
purchases compared to $66.4 million, or 57.3% of Delta's loan originations and
purchases for the three months ended March 31, 1996, compared to $27.8 million
or 65.8% of Delta's loan originations and purchases for the three months ended
March 31, 1995. No single broker contributed more than 8.9%, 13.5% or 7.4% of
Delta's total originations and purchases for the three months ended March 31,
1997, 1996 or 1995, respectively.
 
     Once approved, a broker may submit loan applications for prospective
borrowers to Delta. To process broker submissions, Delta's broker originations

area is organized into teams, consisting of loan officers and processors, which
are generally assigned to specific brokers. Because Delta operates in a highly
competitive environment where brokers may submit the same loan application to
several prospective lenders simultaneously, Delta strives to provide brokers
with a rapid and informed response. Loan officers analyze the application and
provide the broker with a preliminary approval, subject to final underwriting
approval, or a denial, typically within one business day. If the application is
approved by the Company's underwriters, a 'conditional approval' will be issued
to the broker with a list of specific conditions to be met and additional
documents to be supplied prior to funding the loan. The loan officer and
processor team will then work directly with the submitting broker to collect the
requested information and meet all underwriting conditions. In most cases, the
Company funds loans within 14 to 21 days after preliminary approval of the loan
application. In the case of a denial, Delta will make all reasonable attempts to
ensure that there is no missing information concerning the borrower or the
application that might change the decision on the loan.
 
     The Company compensates its loan officers, who on a loan-by-loan basis are
the primary relationship contacts with the brokers, predominantly on a
commission basis. The Company believes its primarily commission based
 
                                       45

<PAGE>

compensation for loan officers gives it a competitive advantage over its
competitors, who, the Company believes, typically assign non- or
lower-commissioned processors to handle this function. Furthermore, all of the
Company's loan officers must complete an extensive 9 to 12 month training
program to attain the level of knowledge and experience integral to the
Company's commitment to providing the highest quality service for brokers.
Management believes that by maintaining an efficient, trained and experienced
staff, it has addressed three central factors which determine where a broker
sends its business: (i) the speed with which a lender closes loans and (ii) the
lender's knowledge concerning the broker and his business and (iii) the support
a lender provides.
 
     Correspondents. For the three months ended March 31, 1997, respectively,
Delta's correspondent network accounted for $122.7 million or 51.8% of Delta's
loan originations and purchases compared to $49.4 million or 42.7% of Delta's
loan originations and purchases for the three months ended March 31, 1996 and
$14.5 million or 34.2% of Delta's loan originations and purchases for the three
months ended March 31, 1995. No single correspondent contributed more than 6.2%,
4.4% or 13.3% of Delta's total loan originations and purchases for the three
months ended March 31, 1997, 1996 or 1995, respectively.
 
     An approved correspondent is a licensed mortgage banker or savings and loan
who sells loans to Delta which the correspondent has originated, processed,
closed and funded in its own name in conformity with Delta's underwriting
standards. The loans are sold to Delta either on an individual flow basis or in
block sales. When selling on a flow basis, a correspondent will typically seek a
preapproval from Delta prior to closing the loan, and Delta will approve the
loan based on a partial or full credit package, stipulating for any items needed
to complete the package in adherence to Delta's underwriting guidelines. On a

block sale, a correspondent will offer a group of loans to Delta for sale (not
necessarily loans that have been preapproved), and Delta will underwrite and
purchase those loans in the block that meet Delta's underwriting criteria. As
with the broker network, Delta's Correspondent Division has a commitment to
quick and knowledgeable service, and is staffed by some of the most capable
mortgage professionals within the Company.
 
     Retail Loans. Fidelity Mortgage is able, through its marketing efforts, to
identify, locate and focus on individuals who, based on its historic customer
profiles, are likely customers for the Company's products. Fidelity Mortgage's
telemarketing representatives identify interested customers and refer these to
loan officers at the retail branch offices who, then, proceed to determine the
applicant's qualifications for the Company's loan products, negotiate loan terms
with the borrower and process the loan through completion.
 
  Loan Underwriting
 
     All of Delta's brokers, correspondents and retail offices are provided with
the Company's underwriting guidelines. Loan applications received from brokers
and correspondents or retail customers are classified according to certain
characteristics, including but not limited to: condition and location of the
collateral, credit history of the applicant, ability to pay, loan-to-value ratio
and general stability of the applicant in terms of employment history and time
in residence. Delta has established classifications with respect to the credit
profile of the applicant, and each loan is placed into one of four letter
ratings 'A' through 'D', with subratings within those categories. Terms of loans
made by Delta, as well as maximum loan-to-value ratios and debt-to-income
ratios, vary depending on the applicant's classification. Loan applicants with
less favorable credit ratings are generally offered loans with higher interest
rates and lower loan-to-value ratios than applicants with more favorable credit
ratings. The general criteria used by Delta's underwriting staff in classifying
loan applicants are set forth below.
 
                                       46

<PAGE>

                         DELTA'S UNDERWRITING CRITERIA
 
<TABLE>
<CAPTION>
                             'A' RISK
                         EXCELLENT CREDIT           'B' RISK               'C' RISK               'D' RISK
                              HISTORY          GOOD OVERALL CREDIT    GOOD TO FAIR CREDIT    FAIR TO POOR CREDIT
                       ---------------------  ---------------------  ---------------------  ---------------------
<S>                    <C>                    <C>                    <C>                    <C>
Existing mortgage
  history............  Current at             Current at             Up to 30 days          Mortgage rating not a
                       application time and   application time and   delinquent at          factor
                       a maximum of two       a maximum of four      application time and
                       30-day late payments   30-day late payments   a maximum of four
                       in the last 12 months  in the last 12 months  30-day late payments,
                                                                     two 60-day late
                                                                     payments and one
                                                                     90-day late payment
                                                                     in the last 12 months
 
Other credit.........  Minor 30-day late      Some slow pays         Slow pays, some open   Not a factor.
                       items allowed with a   allowed but majority   delinquencies          Derogatory credit
                       letter of              of credit and          allowed. Isolated      must be paid with
                       explanation; no open   installment debt paid  charge-offs,           proceeds. Must
                       collection accounts,   as agreed. Small       collection accounts    demonstrate ability
                       charge-offs,           isolated charge-offs,  or judgments case-     to pay
                       judgments              collections, or        by-case
                                              judgments allowed
                                              case-by-case

Bankruptcy
  filings............  Discharged more than   Discharged more than   Discharged more than   May be open at
                       four years prior to    three years prior to   one year prior to      closing, but must be
                       closing and excellent  closing and excellent  closing and good       paid off with
                       reestablished credit   reestablished credit   reestablished credit   proceeds

Debt service to
  income ratio.......  Generally 45% or less  Generally 50% or less  Generally 50% or less  Generally 50% or less

Maximum loan-to-value
  ratio:
Owner-occupied.......  Generally 80% (up to   Generally 80% (up to   Generally 75% (up to   Generally 65% (up to
                       90%*) for a one- to    85%*) for a one- to    80%*) for a one- to    70%*) for a one- to
                       four-family residence  four-family residence  four-family residence  four-family residence

Non-owner occupied...  Generally 70% (up to   Generally 70% (up to   Generally 65% (up to   Generally 55% (up to
                       80%*) for a one- to    80%*) for a one- to    75%*) for a one- to    60%*) for a one- to
                       four-family residence  four-family residence  four-family residence  four-family residence
 
Employment...........  Minimum 2 years        Minimum 2 years        No minimum required    No minimum required
                       employment in the      employment in the
                       same field             same field

</TABLE>
 
------------------
 
* On an exception basis.
 
                                       47

<PAGE>

     Delta uses the foregoing categories and characteristics as guidelines only.
On a case-by-case basis, the Company may determine that the prospective borrower
warrants an exception, if sufficient compensating factors exist. Examples of
such compensating factors are: low loan-to-value ratio, low debt ratio,
long-term stability of employment and/or residence, excellent payment history on
past mortgages, or a significant reduction in monthly housing expenses.
 
     The following table sets forth certain information with respect to Delta's
originations and purchases of first and second mortgage loans by borrower
classification, along with weighted average coupons, for the periods shown.
 
<TABLE>
<CAPTION>
             YEAR                 CREDIT      TOTAL       PERCENT OF TOTAL     WAC(1)     WLTV(2)
------------------------------    -------    --------     ----------------     ------     -------
<S>                               <C>        <C>          <C>                  <C>        <C>
             1994                    A       $ 35,121            29.4%          10.8%       58.9%
                                     B         38,575            32.2%          11.7%       56.4%
                                     C         25,562            21.3%          12.8%       52.9%
                                     D         20,490            17.1%          14.3%       49.3%
                                             --------          ------          ------     -------
            Totals                           $119,748           100.0%          12.1%       55.2%
                                             --------          ------          ------     -------
                                             --------          ------          ------     -------
 
             1995                    A       $ 89,830            31.3%          10.7%       66.8%
                                     B        124,954            43.4%          11.6%       64.5%
                                     C         37,190            12.9%          12.8%       59.6%
                                     D         35,831            12.4%          14.5%       53.2%
                                             --------          ------          ------     -------
            Totals                           $287,805           100.0%          11.8%       63.2%
                                             --------          ------          ------     -------
                                             --------          ------          ------     -------
 
             1996                    A       $219,550            33.4%          10.6%       72.1%
                                     B        234,589            35.6%          11.2%       70.2%
                                     C        156,296            23.7%          12.2%       65.7%
                                     D         48,331             7.3%          13.8%       56.9%
                                             --------          ------          ------     -------
            Totals                           $658,766           100.0%          11.4%       68.8%
                                             --------          ------          ------     -------
                                             --------          ------          ------     -------
 
Three Months

ended March 31, 1997                 A       $109,829            46.4%          10.8%       74.2%
                                     B         65,786            27.8%          11.2%       71.2%
                                     C         46,192            19.5%          12.1%       67.8%
                                     D         14,944             6.3%          13.5%       56.9%
                                             --------          ------          ------     -------
            Totals                           $236,751           100.0%          11.3%       71.0%
                                             --------          ------          ------     -------
                                             --------          ------          ------     -------
</TABLE>
 
------------------
(1) Weighted Average Coupon ('WAC').
 
(2) Weighted Average Initial Loan-to-Value Ratio ('WLTV').
 
     Delta employs experienced nonconforming mortgage loan credit underwriters
to scrutinize the applicant's credit profile and to evaluate whether an impaired
credit history is a result of adverse circumstances or a continuing inability or
unwillingness to meet credit obligations in a timely manner. Personal
circumstances including divorce, family illnesses or deaths and temporary job
loss due to layoffs and corporate downsizing will often impair an applicant's
credit record. Assessment of an applicant's ability and willingness to pay is
one of the principal elements that distinguishes Delta's lending practices from
methods employed by traditional lenders, such as savings and loans and
commercial banks. All lenders utilize debt ratios and loan-to-value ratios in
the approval process. In contrast, many lenders simply use software packages to
score an applicant for loan approval and fund the loan after auditing the data
provided by the borrower.
 
     Delta has a staff of 51 underwriters, with an average of more than seven
and one-half years of non-conforming underwriting experience. Delta does not
delegate underwriting authority to any broker or correspondent. Delta's
Underwriting Department functions independently of its Business Development and
Mortgage Origination Departments and does not report to any individual directly
involved in the origination process. No underwriter at Delta is compensated on
an incentive or commission basis.
 
                                       48

<PAGE>

     Delta has instituted underwriting checks and balances that are designed to
ensure that every loan is reviewed and approved by a minimum of two
underwriters, with certain higher loan amounts requiring a third approval.
Management believes that by requiring each file be seen by a minimum of two
underwriters, a high degree of accuracy and quality control is ensured
throughout the underwriting process.
 
     Delta's underwriting of every loan submitted consists not only of a
thorough credit review, but also (i) a separate appraisal review conducted by
Delta's Appraisal Review Department and (ii) a full compliance review to ensure
that all documents have been properly prepared, all applicable disclosures have
been given in a timely fashion, proper compliance with all federal and state
regulations, the existence of title insurance insuring Delta's interest as

mortgagee and evidence of adequate homeowner's insurance naming Delta as an
additional insured party. Appraisals are performed by third party, fee-based
appraisers or by the Company's staff appraisers and generally conform to current
FNMA/FHLMC secondary market requirements for residential property appraisals.
Each such appraisal includes, among other things, an inspection of the exterior
of the subject property and, where available, data from sales within the
preceding 12 months of similar properties within the same general location as
the subject property.
 
     Delta performs a thorough appraisal review on each loan prior to closing or
prior to purchasing. While Delta recognizes that the general practice by
conventional mortgage lenders is to perform only drive-by appraisals after
closings, management believes this practice does not provide sufficient
protection. In addition to reviewing each appraisal for accuracy, the Company
accesses other sources to validate sales used in the appraisal to determine
market value. These sources include: interfacing with Multiple Listing Services,
Comps, Inc. and other similar databases to access current sales and listing
information and other sources for verification, including broker price opinions
and market analyses by local real estate agents.
 
     Post closing, in addition to its normal due diligence, the Company selects
one out of every ten appraisals and performs its own drive-by appraisal. This
additional step helps to give the Company an added degree of comfort with
respect to appraisers with which the Company has had limited experience. Delta
actively tracks all appraisers from which it accepts appraisals for quality
control purposes and does not accept work from appraisers who have not conformed
to its review standards.
 
     The Company performs a post-funding quality control review to monitor and
evaluate the Company's loan origination policies and procedures. At least 10% of
all loan originations and purchases are subjected to a full quality control
re-underwriting and review, the results of which are reported to senior
management. Discrepancies noted by this review are analyzed and corrective
actions are instituted. However, to date, this important quality control process
has not revealed material deficiencies in the Company's loan underwriting
procedures. A typical quality control review currently includes: (a) obtaining a
new drive-by appraisal for each property; (b) running a new credit report from a
different credit report agency; (c) reviewing loan applications for
completeness, signatures, and for consistency with other processing documents;
(d) obtaining new written verification of income and employment; (e) obtaining
new written verification of mortgage to re-verify any outstanding mortgages; and
(f) analyzing the underwriting and program selection decisions. The quality
control process is updated from time to time as the Company's policies and
procedures change.
 
  Loan Sales
 
     Delta sells substantially all the loans it originates or purchases through
one of two methods: (i) securitizations, which involve the private placement or
public offering of pass-through mortgage-backed securities, and (ii) whole loan
sales, which include the sale of blocks of individual loans to institutional or
individual investors. Since 1991, the Company has sold $1.5 billion of the loans
it originated or purchased through securitizations and $54.6 million of loans
through whole loan sales.

 
                                       49

<PAGE>

     Securitizations.  The following table sets forth certain information with
respect to Delta's securitizations (all of which have been insured by monoline
insurance companies and have been rated AAA/Aaa by Standard & Poor's and
Moody's, respectively) by offering size, which includes prefunded amounts,
weighted average pass-through rate and credit rating of securities sold.
 
<TABLE>
<CAPTION>
                                                                  REMAINING
                                          OFFERING SIZE       PRINCIPAL BALANCE        WEIGHTED AVERAGE
         SECURITIZATION     COMPLETED      (MILLIONS)         AT MARCH 31, 1997        PASS-THROUGH RATE
         --------------     ---------     -------------     ----------------------     -----------------
         <S>                <C>           <C>               <C>                        <C>
             1991-1         02/22/91         $  92.4                $ 15.5                   9.000%
             1991-2         12/12/91         $  50.6                $  9.1                   7.850%
             1992-1         11/25/92         $  64.1                $ 14.7                   7.875%
             1993-1         03/31/93         $  27.4                $  6.9                   6.850%
             1993-3         08/31/93         $  31.6                $  8.6                   6.180%
             1993-4         12/15/93         $  30.0                $  8.8                   6.380%
             1994-1         03/30/94         $  30.0                $ 12.1                   6.950%
             1994-2         10/26/94         $  60.0                $ 21.3                   8.310%
             1995-1         05/10/95         $  80.0                $ 45.8                   7.527%
             1995-2         11/30/95         $ 150.0                $109.1                   6.791%
             1996-1         06/12/96         $ 225.0                $193.5                   6.598%
             1996-2         09/26/96         $ 180.0                $167.0                   6.658%
             1996-3         12/27/96         $ 210.0                $203.9                   6.299%
             1997-1         03/21/97         $ 235.0                $235.0                   6.724%
</TABLE>
 
     When Delta securitizes loans, it sells a portfolio of loans to a trust (the
'Home Equity Loan Trust') and issues classes of certificates representing an
undivided ownership interest in the Home Equity Loan Trust. In its capacity as
servicer for each securitization, the Company collects and remits principal and
interest payments to the appropriate Home Equity Loan Trust which in turn passes
through payments to certificate holders. In the 1995-2, 1996-1, 1996-2, 1996-3
and 1997-1 transactions, Delta retained 100% of the interests in the
interest-only and residual classes of certificates. The Company will continue to
retain the interest-only and residual certificates as long as, in management's
opinion, this practice maximizes earnings and is consistent with the Company's
liquidity requirements.
 
     Each Home Equity Loan Trust has the benefit of a financial guaranty
insurance policy from a monoline insurance company, which insures the timely
payment of interest and the ultimate payment of principal of the investor
certificate. In addition to such insurance policies, the Excess Servicing is
applied as an additional payment of principal of the investor certificates,
thereby accelerating the amortization of the investor certificates relative to
the amortization of the loans. This use of the Excess Servicing creates
overcollateralization. Once the overcollateralization limit is reached, the use

of Excess Servicing to create overcollateralization stops unless it subsequently
becomes necessary to again obtain or maintain the required overcollateralization
limit. Overcollateralization is intended to create a source of cash (the
payments on the 'extra' loans) to absorb losses prior to making a claim on the
financial guaranty insurance policy. To date, no claims have been made on the
financial guarantee insurance policies for any of the Company's securitizations.
 
     Delta may be required either to repurchase or to replace loans which do not
conform to the representations and warranties made by Delta in the pooling and
servicing agreement entered into when the portfolio of loans are sold through a
securitization. To date, Delta has not had to make any such repurchases or
replacements. Delta intends to continue to conduct loans sales through
securitization, either in private placements or in public offerings, when market
conditions are attractive for such loan sales.
 
     Whole Loan Sales Without Recourse.  The Company has determined from time to
time that some of its 'A' loans and higher loan-to-value ratio loans receive
better execution by being sold on a whole loan, servicing released, non-recourse
basis to third party institutions. The Company does not incur any future loss on
loans sold through this method. The Company intends to continue this practice as
long as it is deemed to be more profitable for the Company. For the three months
ended March 31, 1997, and the years ended 1996 and 1995, Delta sold $0 million,
$15.3 million and $17.6 million, respectively, which represents 0%, 6.1% and
9.9%, respectively, of its originations and purchases.
 
                                       50

<PAGE>

     Whole Loan Sales With Recourse.  Prior to 1991, Delta combined mortgage
loans into pools and sold those pools as well as individual mortgage loans
directly to a network of commercial banks, savings and loans, insurance
companies, pension funds and accredited investors. Delta generally sold these
pools or individual loans for 100% of the principal balance and negotiated the
pass-through rate of interest to be paid to the investor with the excess
interest retained by Delta. Delta sold loans to investors with recourse whereby
Delta would repurchase any loan which became REO property. This obligation is
subject to various terms and conditions, including, in some instances, a time
limit. At March 31, 1997, there were approximately $18.0 million of loans which
Delta could be required to repurchase in the future should such loans become REO
property.
 
  Loan Servicing and Collections
 
     Delta has been servicing loans since its inception in 1982, and Delta has
serviced or is servicing substantially all of the loans that it has originated
or purchased. Servicing involves, among other things, collecting payments when
due, remitting payments of principal and interest and furnishing reports to the
current owners of the loans and enforcing such owner's rights with respect to
the loans, including, recovering delinquent payments, instituting foreclosure
and liquidating the underlying collateral. The Company receives a servicing fee
for servicing residential mortgage loans of 0.50% per annum (0.65% per annum on
all securitizations completed before and including the 1996-1 securitization) on
the declining principal balance of all loans sold through securitization and on

the declining principal balance of the loans sold to investors on a recourse
basis, which servicing fees are collected out of the monthly mortgage payments.
Management believes that servicing the Company's own portfolio enhances certain
operating efficiencies and provides an additional and profitable revenue stream
that is less cyclical than the business of originating and purchasing loans. As
of March 31, 1997, Delta had a servicing portfolio of $1.1 billion of loans.
 
     Delta services all loans out of its headquarters in Woodbury, New York,
utilizing a leading in-house loan servicing system ('LSAMS') which it
implemented in 1995. LSAMS replaced Delta's former 'service bureau' loan
servicing system, and has provided Delta with considerably more flexibility to
adapt the system to Delta's specific needs as a nonconforming home equity
lender. As such, Delta has achieved significant cost efficiencies by automating
a substantial number of previously manual servicing procedures and functions
since its conversion to LSAMS on July 1, 1995. Management believes that even
greater cost efficiencies can be realized through further automation provided by
LSAMS.
 
     At the same time that it upgraded its primary servicing system, Delta
purchased a default management sub-servicing system ('TPLS') with separate
'modules' for foreclosure, bankruptcy and REO to provide it with the ability to
more efficiently monitor and service loans in default. These sub-servicing
modules provide detailed tracking of all key events in foreclosure and
bankruptcy on a loan-by-loan and portfolio-wide basis; the ability to track and
account for all pre- and post-petition payments received in bankruptcy from the
borrower and/or trustee; and the ability to monitor, market and account for all
aspects necessary to liquidate a REO property after foreclosure. These features
have led to cost savings through greater automation and system upgrades and have
helped mitigate loan losses as the Servicing Department has been able to
identify problem loans earlier, thus allowing for earlier corrective action.
Additionally, Delta's Management Information Systems Department has created a
market value analysis program to run with LSAMS, which provides Delta with the
ability to monitor its equity position on a loan-by-loan and/or portfolio-wide
basis.
 
     Delta's collections policy is designed to identify payment problems
sufficiently early to permit Delta to quickly address delinquency problems and,
when necessary, to act to preserve equity in a pre-foreclosure property. Delta
believes that these policies, combined with the experience level of independent
appraisers engaged by Delta, help to reduce the incidence of charge-offs of a
first or second mortgage loan.
 
     Centralized controls and standards have been established by Delta for the
servicing and collection of mortgage loans in its portfolio. Delta revises such
policies and procedures from time to time in connection with changing economic
and market conditions and changing legal and regulatory requirements.
 
     Borrowers are billed on a monthly basis in advance of the due date.
Collection procedures commence upon identification of a past due account by
Delta's automated servicing system. If timely payment is not received, LSAMS
automatically places the loan in the assigned collector's 'auto queue' and
collection procedures are generally initiated on the day immediately following
the payment due date for chronic late payers, or the day
 

                                       51

<PAGE>

immediately following the end of the grace period for those borrowers who
usually pay within the grace period or shortly thereafter. LSAMS automatically
queues up each loan in the assigned collector's 'auto queue' at one of these two
dates based upon a particular borrower's payment history over the prior 12
months. The account remains in the queue unless and until a payment is received,
at which point LSAMS automatically removes the loan from that collector's auto
queue until the next month's payment is due and/or becomes delinquent.
 
     When a loan appears in a collector's auto queue, a collector will telephone
to remind the borrower that a payment is due. Follow-up telephone contacts are
attempted until the account is current or other payment arrangements have been
made. Standard form letters are utilized when attempts to reach the borrower by
telephone fail and/or, in some circumstances, to supplement the phone contacts.
During the delinquency period, the collector will continue to contact the
borrower. Company collectors have computer access to telephone numbers, payment
histories, loan information and all past collection notes. All collection
activity, including the date collection letters were sent and detailed notes on
the substance of each collection telephone call, is entered into a permanent
collection history for each account on LSAMS. Additional guidance with the
collection process is derived through frequent communication with Delta's senior
management.
 
     For those loans in which collection efforts have been exhausted without
success, the Pre-foreclosure Manager recommends the loans be sent to foreclosure
at one of two Foreclosure Committee Meetings held each month. At each such
committee meeting, the Pre-foreclosure Manager meets with the Foreclosure
Manager and a member of the Executive Department, to determine whether
foreclosure proceedings are appropriate based upon their analysis of all
relevant factors, including a market value analysis, reason for default and
efforts by the borrower to cure the default.
 
     Regulations and practices regarding the liquidation of properties (e.g.,
foreclosure) and the rights of a borrower in default vary greatly from state to
state. As such, all foreclosures are assigned to outside counsel, located in the
same state as the secured property. Bankruptcies filed by borrowers are
similarly assigned to appropriate local counsel. All aspects of foreclosures and
bankruptcies are closely monitored by Delta through its TPLS sub-servicing loan
system described above and through monthly status reports from attorneys.
 
     Prior to foreclosure sale, Delta performs an in-depth market value analysis
on all defaulted loans. This analysis includes: (i) a current valuation of the
property obtained through a drive-by appraisal or broker's price opinion
conducted by an independent appraiser and/or a broker from Delta's network of
real estate brokers, complete with a description of the condition of the
property, recent price lists of comparable properties, recent closed
comparables, estimated marketing time and required or suggested repairs and an
estimate of the sales price; (ii) an evaluation of the amount owed, if any, for
real estate taxes; (iii) an evaluation of the amount owed, if any, to a senior
mortgagee and (iv) estimated carrying costs, broker's fee, repair costs and
other related costs associated with REO properties. Delta bases the amount it

will bid at foreclosure sales on this analysis.
 
     If Delta acquires title to a property at a foreclosure sale or otherwise,
the REO Department immediately begins working the file by obtaining an estimate
of the sale price of the property by sending at least two local real estate
brokers to inspect the premises, and then hiring one to begin marketing the
property. If the property is not vacant when acquired, local eviction attorneys
are hired to commence eviction proceedings and/or negotiations are held with
occupants in an attempt to get them to vacate without incurring the additional
time and cost of eviction. Repairs are performed if it is determined that they
will increase the net liquidation proceeds, taking into consideration the cost
of repairs, the carrying costs during the repair period and the marketability of
the property both before and after the repairs.
 
     Delta's loan servicing software also tracks and maintains homeowners'
insurance information and tax and insurance escrow information. Expiration
reports are generated bi-weekly listing all policies scheduled to expire within
the next 15 days. When policies lapse, a letter is issued advising the borrower
of such lapse and notifying the borrower that Delta will obtain force-placed
insurance at the borrower's expense. Delta also has an insurance policy in place
that provides coverage automatically for Delta in the event that Delta fails to
obtain force-placed insurance.
 
                                       52

<PAGE>

     The following table sets forth information relating to the delinquency and
loss experience of Delta for its servicing portfolio of mortgage loans for the
periods indicated.
 
<TABLE>
<CAPTION>
                                             YEAR ENDED DECEMBER 31,                THREE MONTHS ENDED MARCH 31,
                                   --------------------------------------------    ------------------------------
                                       1994            1995            1996            1996             1997
                                   ------------    ------------    ------------    ------------    --------------
<S>                                <C>             <C>             <C>             <C>             <C>
Total Outstanding Principal
  Balance (at period end).......   $310,228,743    $468,846,079    $932,958,188    $536,863,662    $1,110,998,901
Average Outstanding (1).........   $300,678,046    $373,384,417    $667,368,565    $517,153,985    $1,048,629,760
DELINQUENCY (at period end)
30-59 Days:
  Principal Balance.............   $ 22,569,938    $ 35,052,951    $ 54,582,550    $ 27,846,676    $   60,469,078
  Percent(2)....................           7.28%           7.48%           5.85%           5.19%             5.44%
60-89 Days:
  Principal Balance.............   $  6,398,055    $  8,086,230    $ 14,272,587    $  7,543,965    $   15,092,040
  Percent.......................           2.06%           1.72%           1.53%           1.41%             1.36%
90 Days or More:
  Principal Balance.............   $  6,517,506    $  6,748,061    $  9,224,525    $  4,860,781    $   13,131,534
  Percent.......................           2.10%           1.44%           0.99%           0.91%             1.18%
Total Delinquencies:
  Principal Balance.............   $ 35,485,499    $ 49,887,242    $ 78,079,663    $ 40,251,422    $   88,692,651
  Percent.......................          11.44%          10.64%           8.37%           7.50%             7.98%

FORECLOSURES
  Principal Balance.............   $ 20,768,336    $ 23,506,751    $ 34,765,638    $ 27,722,786    $   41,892,909
  Percent of Foreclosures by
    Dollar......................           6.69%           5.01%           3.73%           5.16%             3.77%
REO (at period end).............   $  1,926,922    $  4,020,295    $  5,672,811    $  4,019,817    $    6,426,415
Net losses on liquidated loans..   $   (687,090)   $ (2,142,099)   $ (2,866,204)   $   (799,130)   $     (993,559)
Percentage of net losses on
  liquidated loans (based on
  Average Outstanding Principal
  Balance)......................          (0.23)%         (0.57)%         (0.43)%         (0.15)%           (0.09)%
</TABLE>
 
------------------
(1) Calculated by summing the actual outstanding principal balances at the end
    of each month and dividing the total by the number of months in the
    applicable period.
 
(2) Percentages are expressed based upon the total outstanding principal balance
    at the end of the indicated period.
 
                                       53

<PAGE>

COMPETITION
 
     As an originator and purchaser of mortgage loans, the Company faces intense
competition, primarily from mortgage banking companies, commercial banks, credit
unions, savings and loans, credit card issuers and finance companies. Many of
these competitors in the financial services business are substantially larger
and have more capital and other resources than the Company. Competition can take
many forms, including convenience in obtaining a loan, service, marketing and
distribution channels and interest rates. Furthermore, the current level of
gains realized by the Company and its competitors on the sale of the type of
loans originated and purchased is attracting additional competitors into this
market with the effect of lowering the gains that may be realized by the Company
on future loan sales. In addition, greater investor acceptance of securities
backed by loans comparable to the Company's mortgage loans and greater
availability of information regarding the prepayment and default experience of
such loans creates greater efficiencies in the market for such securities. Such
efficiencies may create a desire for even larger transactions giving companies
with greater volumes of originations a competitive advantage. In addition, a
more efficient market for such securities may lead certain investors to purchase
securities backed by other types of assets where potential returns may be
greater. Competition may be affected by fluctuations in interest rates and
general economic conditions. During periods of rising rates, competitors which
have 'locked in' low borrowing costs may have a competitive advantage. During
periods of declining rates, competitors may solicit the Company's borrowers to
refinance their loans. During economic slowdowns or recessions, the Company's
borrowers may have new financial difficulties and may be receptive to offers by
the Company's competitors.
 
     Furthermore, certain large national finance companies and conforming
mortgage originators have announced their intention to adapt their conforming

origination programs and allocate resources to the origination of nonconforming
loans. In addition, certain of these larger mortgage companies and commercial
banks have begun to offer products similar to those offered by the Company,
targeting customers similar to those of the Company. The entrance of these
competitors into the Company's market could have a material adverse effect on
the Company's financial condition and results of operations.
 
REGULATION
 
     Delta's business is subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and is subject to
various laws and judicial and administrative decisions imposing requirements and
restrictions on part or all of its operations. Delta's consumer lending
activities are subject to the Federal Truth-in-Lending Act and Regulation Z
(including the Home Ownership and Equity Protection Act of 1994), ECDA, the Fair
Credit Reporting Act of 1970, as amended, RESPA, and Regulation X, the Home
Mortgage Disclosure Act and the Federal Debt Collection Practices Act, as well
as other federal and state statutes and regulations affecting Delta's
activities. Delta is also subject to the rules and regulations of, and
examinations by HUD and state regulatory authorities with respect to
originating, processing, underwriting and servicing loans. These rules and
regulations, among other things, impose licensing obligations on Delta,
establish eligibility criteria for mortgage loans, prohibit discrimination,
provide for inspections and appraisals of properties, require credit reports on
loan applicants, regulate assessment, collection, foreclosure and claims
handling, investment and interest payments on escrow balances and payment
features, mandate certain disclosures and notices to borrowers and, in some
cases, fix maximum interest rates, fees and mortgage loan amounts. Failure to
comply with these requirements can lead to loss of approved status, termination
or suspension of servicing contracts without compensation to the servicer,
demands for indemnifications or mortgage loans repurchases, certain rights of
rescission for mortgage loan repurchases, certain rights of rescission for
mortgage loans, class action lawsuits and administrative enforcement actions.
Delta believes it is in compliance in all material respects with applicable
federal and state laws and regulations.
 
ENVIRONMENTAL MATTERS
 
     To date, Delta has not been required to perform any investigation or
cleanup activities, nor has it been subject to any environmental claims. There
can be no assurance, however, that this will remain the case in the future. In
the ordinary course of its business, Delta from time to time forecloses on
properties securing loans. Although Delta primarily lends to owners of
residential properties, there is a risk that Delta could be required to
investigate and clean-up hazardous or toxic substances or chemical releases at
such properties after acquisition by
 
                                       54

<PAGE>

Delta, and may be held liable to a governmental entity or to third parties for
property damage, personal injury and investigation and clean-up 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 March 31, 1997, Delta had a total of 530 employees (full and
part-time). None of Delta's employees is covered by a collective bargaining
agreement. Delta considers its relations with its employees to be good.
 
PROPERTIES
 
     Delta's executive and administrative offices are located at 1000 Woodbury
Road, Suite 200, Woodbury, New York 11797, where Delta leases approximately
63,600 square feet of office space at an aggregate annual rent of approximately
$1.2 million. The lease provides for certain scheduled rent increases and
expires in 2004.
 
     Delta Funding Corporation maintains a full service office in Atlanta,
Georgia, full processing offices in St. Louis, Missouri, Chicago, Illinois and
Warwick, Rhode Island, and business development offices in Michigan (2), New
Jersey, Ohio (2), Pennsylvania and Virginia. Fidelity Mortgage maintains seven
retail mortgage origination offices in Florida (2), Georgia, Indiana and Ohio
(3). The terms of the leases vary as to duration and escalation provisions, with
the latest expiring in 2001.
 
LEGAL PROCEEDINGS
 
     Because the nature of the Company's business involves the collection of
numerous accounts, the validity of liens and compliance with state and federal
lending laws, the Company is subject to numerous claims and legal actions in the
ordinary course of its business. While it is impossible to estimate with
certainty the ultimate legal and financial liability with respect to such claims
and actions, the Company believes that the aggregate amount of such liabilities
will not result in monetary damages which in the aggregate would have a material
adverse effect on the financial condition or results of the Company.
 
     Several class-action lawsuits have been filed recently against a number of
consumer finance companies alleging that the compensation of mortgage brokers
through the payment of yield spread premiums violates various federal and state
consumer protection laws. On March 18, 1997, the Company received notice that it
had been named in a lawsuit filed in Federal District Court, E.D.N.Y., alleging
that the Company's compensation of mortgage brokers by means of yield spread
premiums violates, among other things, RESPA. The complaint seeks (i)
certification of a class of plaintiffs, (ii) an injunction against payment of
yield spread premiums by the Company and (iii) unspecified compensatory and
punitive damages (including attorney's fees). Management believes the Company
has meritorious defenses and intends to defend this suit, but the Company has
not yet answered the complaint and cannot estimate with any certainty its
ultimate legal or financial liability, if any, with respect to the alleged
claims. On May 2, 1997, the Company filed a motion to dismiss for failure to
join a necessary party.
 
                                       55


<PAGE>

                                   MANAGEMENT
 
DIRECTORS AND EXECUTIVE OFFICERS
 
     The following table sets forth certain information regarding the current
directors and executive officers of the Company.
 
<TABLE>
<CAPTION>
NAME                                               AGE   POSITION WITH THE COMPANY
------------------------------------------------   ---   ------------------------------------------------
<S>                                                <C>   <C>
Sidney A. Miller................................   62    Chairman of the Board of Directors
Hugh Miller.....................................   33    Chief Executive Officer, President and Director
Richard Blass...................................   33    Senior Vice President, Chief Financial Officer,
                                                           Treasurer and Director
Martin D. Payson................................   61    Director
Arnold B. Pollard...............................   54    Director
Christopher Donnelly............................   36    Senior Vice President
Teresa E. Ginter................................   58    Senior Vice President and Secretary
Randall F. Michaels.............................   37    Senior Vice President
Franklin E. Pellegrin, Jr.......................   46    Senior Vice President
</TABLE>
 
     References to positions held by persons named below covering periods before
the Company's incorporation in 1996 are references to positions held by such
persons at Delta Funding Corporation.
 
     SIDNEY A. MILLER founded the Company and has been Chairman of the Board of
Directors of the Company since its inception. He was President and Chief
Executive Officer from 1982 to 1991 and has been involved in the mortgage
banking industry since 1974. He is also a chartered life insurance underwriter.
Mr. Miller is a director of the Home Equity Lenders Leadership Organization and
the National Home Equity Mortgage Association, as well as an Associate Trustee
of North Shore University Hospital.
 
     HUGH MILLER has been the President and Chief Executive Officer of the
Company since 1991. He has been associated with the Company in various
capacities since 1985 and has been primarily responsible for the day-to-day
operations of the Company since 1985.
 
     RICHARD BLASS is a Senior Vice President and Treasurer of the Company and,
in March 1997, became the Chief Financial Officer. He has served in various
capacities since joining the Company in 1992. Prior thereto, Mr. Blass was a
money market and derivatives trader at Citicorp Securities Markets Inc.
 
     MARTIN D. PAYSON became a Director of the Company in 1996. Mr. Payson
formerly served as Vice Chairman of Time Warner, Inc. from 1990 to 1992, and
prior to the merger of Time Inc. and Warner Communications, Inc., Mr. Payson
held the position of Office of the President and General Counsel of Warner
Communications, Inc., of which he also was a Director for 14 years. Mr. Payson

also serves on the Board of Directors of Renaissance Communications, Corp., a
communications company, Meridian Sports Incorporated, a boating and sports
equipment company, Unapix Entertainment Inc., a media/communications company,
all publicly held companies, and these privately held companies: Latin
Communications Group Inc., Ithaca Holdings Inc., and SCUUL Ltd.
 
     ARNOLD B. POLLARD, PH.D. became a Director of the Company in 1996. Dr.
Pollard has been the President and Chief Executive Officer of Chief Executive
Group, which publishes Chief Executive magazine, since 1993 and, for nearly 20
years, Dr. Pollard has been President of Decision Associates. Dr. Pollard was
also a founding member of the Strategic Decision Analysis Group of SRI and
previously served as Chairman and Chief Executive Officer of Biopool
International. Dr. Pollard also serves on the Board of Directors of GKN
Securities, Inc., a brokerage firm, a public company, and The Landry Service
Co., Inc. and is on the advisory board of Simply Interactive, Inc.
 
                                       56

<PAGE>

     CHRISTOPHER DONNELLY has been a Senior Vice President of the Company since
1995 and was a Vice President of the Company from 1992 to 1995. Mr. Donnelly
joined the Company in 1987 and since 1991, has been primarily responsible for
supervising all aspects of credit and underwriting, including the Broker and
Correspondent Divisions and Appraisal Review. Since joining the Company in 1987,
Mr. Donnelly has served in a variety of positions, including Assistant Manager
of Originations.
 
     TERESA E. GINTER has been a Senior Vice President of the Company since 1992
and was a Vice President of the Company from 1986 to 1992. Ms. Ginter's primary
responsibilities include supervising the internal operations of the Broker
Division. Ms. Ginter has been with the Company since its inception and has
served in a variety of positions.
 
     RANDALL F. MICHAELS has been a Senior Vice President of the Company since
1996 and has been the National Sales Manager since he joined the Company in 1995
as a Vice President. Mr. Michaels is primarily responsible for supervising all
aspects of sales and marketing for the Company. Mr. Michaels has over 14 years
experience in the non-conforming mortgage loan markets. Prior to joining Delta,
Mr. Michaels was Regional Sales Manager of Quality Mortgage/Express Funding
Inc., a mortgage finance company, for two years and, before that, Regional Sales
Manager of American Funding Group, a mortgage finance company, for six years.
 
     FRANKLIN E. PELLEGRIN, JR. has been a Senior Vice President of the Company
since 1996 and has been the Servicing Manager since he joined the Company in
1996 as a Vice President. Mr. Pellegrin has been involved in the mortgage
banking industry for 24 years. From 1979 to 1995, Mr. Pellegrin served as Senior
Vice President in charge of servicing and data processing of Mid-Coast Mortgage
Company, a mortgage finance company.
 
     The directors are divided into three classes, denominated Class I, Class II
and Class III, with the terms of office of each class expiring at the 1997, 1998
and 1999 annual meeting of stockholders, respectively. At each annual meeting
following such initial classification and election, directors elected to succeed

those directors whose terms expire will be elected for a term to expire at the
third succeeding annual meeting of stockholders after their election. The
directors in each class are as follows: Class I--Arnold B. Pollard and Richard
Blass, Class II--Martin D. Payson and Sidney A. Miller, and Class III--Hugh
Miller. All officers are appointed by and serve, subject to the terms of their
employment agreements, if any, at the discretion of the Board of Directors.
 
FAMILY RELATIONSHIPS
 
     Hugh Miller is Sidney A. Miller's son. No other family relationship exists
among any of the Directors or executive officers of the Company. No arrangement
or understanding exists between any Director or executive officer or any other
person pursuant to which any Director or executive officer was selected as a
Director or executive officer of the Company. Subject to rights under applicable
employment agreements, each executive officer serves at the pleasure of the
Board of Directors.
 
COMMITTEES OF THE BOARD OF DIRECTORS
 
     The Board of Directors has three standing committees: the Executive
Committee, the Compensation Committee and the Audit Committee. Sidney A. Miller
and Hugh Miller serve on the Executive Committee which is authorized to exercise
the powers of the Board of Directors between meetings. However, the Executive
Committee may not (i) amend the Certificate of Incorporation or the By-laws of
the Company, (ii) adopt an agreement of merger or consolidation, (iii) recommend
to the stockholders the sale, lease, or exchange of all or substantially all of
the Company's property and assets, (iv) recommend to the stockholders a
dissolution of the Company or revoke a dissolution, (v) elect a director or
(vi) declare a dividend or authorize the issuance of stock. Messrs. Payson and
Pollard serve on the Compensation Committee and the Audit Committee. The
Compensation Committee is responsible for recommending to the Board of Directors
the Company's executive compensation policies for senior officers and
administering the 1996 Employee Stock Option Plan (the 'Stock Option Plan'). See
'--Stock Option Plan.' The Audit Committee is responsible for recommending
independent auditors, reviewing the audit plan, the adequacy of internal
controls, the audit report and the management letter and performing such other
duties as the Board of Directors may from time to time prescribe.
 
                                       57

<PAGE>

EMPLOYMENT AGREEMENTS; KEY-MAN LIFE INSURANCE
 
  Employment Agreements
 
     Effective October 1, 1996, the Company entered into employment agreements
with Sidney A. Miller, Hugh Miller, Christopher Donnelly and Randall F.
Michaels, and on March 4, 1997, the Company entered into an employment agreement
with Richard Blass. Sidney A. Miller's and Hugh Miller's employment agreements
are for terms of five years, and Richard Blass', Christopher Donnelly's and
Randall F. Michaels' employment agreements are for terms of three years.
 
     Under the terms of the respective employment agreements, the Company pays

Sidney A. Miller a minimum base salary of $350,000 per year, Hugh Miller a
minimum base salary of $350,000 per year, Richard Blass a minimum base salary of
$160,000 per year, Christopher Donnelly a minimum base salary of $150,000 per
year and Randall F. Michaels a minimum base salary of $125,000 per year. Each of
these officers is entitled to participate generally in the Company's employee
benefit plans, including the Stock Option Plan, and is eligible for an incentive
bonus from the Company's executive bonus pool. The cash bonuses available to
Christopher Donnelly and Randall F. Michaels are made at the discretion of the
Board of Directors and are based on subjective performance criteria. Under the
terms of their employment agreements, Sidney A. Miller, Hugh Miller and Richard
Blass are eligible for cash bonuses in any one fiscal year of up to 400% of
their annual salary for Messrs. Miller and Miller and up to 50% of his annual
salary for Richard Blass, payable on a quarterly basis 60 days after the
relevant quarter. The amount of such quarterly cash bonus is calculated under
the agreements as follows: for each 1% increase in net earnings per share for
the relevant fiscal quarter greater than 10% as measured against the
corresponding quarter in the prior fiscal year, each of Sidney A. Miller and
Hugh Miller will receive a quarterly cash bonus of 15% of his respective current
annual salary and Richard Blass will receive a quarterly cash bonus of 1.875% of
his current annual salary.
 
     Under the terms of their respective employment agreements, Sidney A. Miller
and Hugh Miller also are granted benefits covering life insurance (Sidney A.
Miller receives coverage up to $25,000,000, and Hugh Miller receives coverage of
up to $1,000,000), medical expenses not covered by insurance (up to $100,000 per
year) and allowances for business related travel and entertainment (up to
$25,000 per year).
 
     If any of these five executive officers is terminated 'for cause,' which
definition generally includes termination by the Company due to the executive's
willful failure to perform his duties under the employment agreement, the
executive's personal dishonesty, or the executive's breach of his fiduciary
duties or the employment agreement to which he is a party, then the Company is
obligated to pay the executive so terminated only his base salary up to the date
of his termination 'for cause.' However, if either Richard Blass, Christopher
Donnelly or Randall F. Michaels is terminated without cause, the Company is
obligated to pay such executive officer certain amounts set forth in the
agreement which would be paid to Mr. Blass, Mr. Donnelly or Mr. Michaels in
equal installments over the six months following any such termination without
cause. If either Sidney A. Miller or Hugh Miller is terminated without cause,
the Company is obligated to pay such executive officer his base salary, bonus
and benefits for the remaining term of his employment agreement. If either
Sidney A. Miller or Hugh Miller resigns for 'good reason,' which generally
includes the executive officer's resignation due to a breach by the Company of
his employment agreement or a change of control in the ownership of the Company,
the Company must pay such executive officer his salary, bonus and benefits for
the remaining term of the employment agreement.
 
  Key-Man Life Insurance
 
     The Company maintains a key-man life insurance policy in the amount of
approximately $1,000,000 on Hugh Miller, on which the Company is named as
beneficiary. The Company does not maintain key-man life insurance policies on
any of its other executive officers, however, the Company would be reimbursed

from Sidney A. Miller's split-dollar life insurance policy for the lesser of the
cash value or all premiums paid during the term of the policy. See 'Certain
Relationships and Related Party Transactions.'
 
                                       58

<PAGE>

COMPENSATION OF DIRECTORS
 
     The Company pays each nonemployee director compensation of $20,000 per
annum and a fee of $1,000 for each meeting of the Board of Directors that he
attends. The Company initially granted 10,000 options to each nonemployee
director, one-quarter of which will vest immediately, with an additional
one-quarter vesting each year thereafter. The Company reimburses each director
for ordinary and necessary travel expenses related to such director's attendance
at Board of Directors and committee meetings.
 
EXECUTIVE COMPENSATION
 
     The Summary Compensation Table below provides certain summary information
concerning compensation paid or accrued during the years ended December 31,
1996, 1995 and 1994 by the Company to or on behalf of the Chief Executive
Officer and the four other highest paid executive officers of the Company.
 
                           SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                                                      LONG-TERM
                                                                                     COMPENSATION
                                                                                        AWARDS
                                                ANNUAL COMPENSATION                  ------------
                                   ----------------------------------------------     SECURITIES
                                                                     OTHER ANNUAL     UNDERLYING        ALL OTHER
NAME AND PRINCIPAL POSITION        YEAR     SALARY       BONUS       COMPENSATION      OPTIONS       COMPENSATION(1)
--------------------------------   ----    --------    ----------    ------------    ------------    ---------------
<S>                                <C>     <C>         <C>           <C>             <C>             <C>
Sidney A. Miller................   1996    $ 53,846    $  350,000           --           25,000          $ 5,218
  Chairman of the Board            1995          --     3,000,000           --               --            4,672
                                   1994     624,000       150,000           --               --            2,669
 
Hugh Miller.....................   1996     408,554       350,000           --          100,000            5,218
  Chief Executive Officer          1995     419,200       275,000           --               --            4,675
                                   1994     520,000        50,000           --               --            2,752
 
Richard Blass...................   1996     108,173        50,000       $2,038           25,000            5,218
  Chief Financial Officer          1995      68,062         6,000           --               --            2,308
                                   1994      61,308         2,000        1,112               --            1,182
 
Christopher Donnelly............   1996     138,462        16,000        5,288           25,000            5,218
  Senior Vice President            1995      91,019         9,500          488               --            3,148
                                   1994      68,851         4,950          747               --            1,368
 

Randall F. Michaels.............   1996     120,739       143,054           --           25,000               --
  Senior Vice President            1995      32,298         7,155           --               --               --
                                   1994          --            --           --               --               --
</TABLE>
 
------------------
(1) Consists of contributions by the Company to the executive officers'
    respective accounts pursuant to the Delta Funding Corporation Profit-Sharing
    Plan.
 
STOCK OPTION PLAN
 
     The Company adopted the Stock Option Plan in October 1996. The Stock Option
Plan is administered by the Compensation Committee. All employees and directors
of, and consultants to, the Company as may be determined from time to time by
the Compensation Committee are eligible to receive options under the Stock
Option Plan.
 
     A total of 2,200,000 shares of common stock were authorized for issuance
under the Stock Option Plan. Not more than 1,000,000 shares of common stock may
be the subject of options granted to any individual during the duration of the
Stock Option Plan. As of March 31, 1997, the Company granted options to purchase
an aggregate of 631,850 shares of its common stock to certain eligible
participants under the Stock Option Plan.
 
     The exercise price of an incentive stock option and a non-qualified stock
option is fixed by the Compensation Committee at the date of grant; however, the
exercise price under an incentive stock option must
 
                                       59

<PAGE>

be at least equal to the fair market value of the common stock at the date of
grant, and 110% of the fair market value of the common stock at the date of
grant for any incentive stock option granted to a member of the Miller family.
 
     Stock options are exercisable for a duration determined by the Compensation
Committee, but in no event more than ten years after the date of grant. Options
shall be exercisable at such rate and times as may be fixed by the Compensation
Committee on the date of grant. The aggregate fair market value (determined at
the time the option is granted) of the common stock with respect to which
incentive stock options are exercisable for the first time by a participant
during any calendar year (under all stock option plans of the Company) shall not
exceed $100,000; to the extent this limitation is exceeded, such excess options
shall be treated as non-qualified stock options for purposes of the Stock Option
Plan and the Code (as defined).
 
     At the time a stock option is granted, the Compensation Committee may, in
its sole discretion, designate whether the stock option is to be considered an
incentive stock option or non-qualified stock option. Stock options with no such
designation shall be deemed non-qualified stock options.
 
     Payment of the purchase price for shares acquired upon the exercise of

options may be made by any one or more of the following methods: in cash, by
check, by delivery to the Company of shares of common stock already owned by the
option holder, or by such other method as the Compensation Committee may permit
from time to time. However, a holder may not use previously owned shares of
common stock to pay the purchase price under an option, unless the holder has
beneficially owned such shares for at least six months.
 
     Stock options become immediately vested and exercisable in full upon the
occurrence of such special circumstances as in the opinion of the Board of
Directors merit special consideration.
 
     Stock options terminate at the end of the 30th business day following the
holder's termination of employment or service. This period is extended to one
year in the case of the disability or death of the holder and, in the case of
death, the stock option is exercisable by the holder's estate. The
post-termination exercise period for any individual may be extended by the Board
of Directors, but not beyond the expiration of the original term of the option.
 
     The options granted under the Stock Option Plan contain anti-dilution
provisions which will automatically adjust the number of shares subject to the
option in the event of a stock dividend, split-up, conversion, exchange,
reclassification or substitution. In the event of any other change in the
corporate structure or outstanding shares of common stock, the Compensation
Committee may make such equitable adjustments to the number of shares and the
class of shares available under the Stock Option Plan or to any outstanding
option as it shall deem appropriate to prevent dilution or enlargement of
rights.
 
     The Company shall obtain such consideration for granting options under the
Stock Option Plan as the Compensation Committee in its discretion may request.
 
     Each option may be subject to provisions to assure that any exercise or
disposition of common stock will not violate federal and state securities laws.
 
     No option may be granted under the Stock Option Plan after the day
preceding the tenth anniversary of the adoption of the Stock Option Plan.
 
     The Board of Directors or the Compensation Committee may at any time
withdraw or amend the Stock Option Plan and may, with the consent of the
affected holder of an outstanding option at any time withdraw or amend the terms
and conditions of outstanding options. Any amendment which would increase the
number of shares issuable pursuant to the Stock Option Plan or to any individual
thereunder or change the class of individuals to whom options may be granted
shall be subject to the approval of the stockholders of the Company.
 
401(K) SAVINGS PLAN
 
     In 1994, Delta Funding Corporation established a 401(k) Profit-Sharing Plan
(the 'Plan'), which is intended to comply with Sections 401(a) and 401(k) of the
Code, and the applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended. Amounts contributed to the Plan are held under a trust
intended to be exempt from income tax pursuant to Section 501(a) of the Code.
All employees of Delta Funding
 

                                       60

<PAGE>

Corporation that have completed at least one year of service and who are at
least 21 years old are eligible to participate in the Plan. Participating
employees are entitled to make pre-tax contributions to their accounts, subject
to certain maximum annual limits imposed by law, in 1996), and certain other
limitations. Delta Funding Corporation may elect to make a discretionary
contribution to the Plan each year. Employees are always fully vested in their
own contributions, Delta Funding Corporation's contributions vest in
participating employees over a six-year period. Distributions generally are
payable in a lump-sum after retirement, disability or death and, in certain
circumstances, upon termination of employment with Delta Funding Corporation for
other reasons.
 
OPTION GRANTS
 
     The following table shows all grants of options in 1996 to the executive
officers of the Company named in the Summary Compensation Table. The options
were granted under the Stock Option Plan. Pursuant to the rules of the
Securities and Exchange Commission (the 'Commission'), the table also shows the
value of the options granted at the end of the option terms (seven years) if the
stock price were to appreciate annually by 5% and 10%, respectively. There is no
assurance that the stock price will appreciate at the rates shown in the table.
The table also indicates that if the stock price does not appreciate, there will
be no increase in the potential realizable value of the options granted.
 
<TABLE>
<CAPTION>
                                               INDIVIDUAL GRANTS(1)
                             --------------------------------------------------------    POTENTIAL REALIZABLE VALUE AT
                               NO. OF      PERCENT OF                                       ASSUMED ANNUAL RATES OF
                             SECURITIES   TOTAL OPTIONS                                     STOCK PRICE APPRECIATION
                             UNDERLYING    GRANTED TO                                           FOR OPTION TERM
                              OPTIONS     EMPLOYEES IN    EXERCISE PRICE   EXPIRATION   --------------------------------
NAME                          GRANTED         1996            ($/SH)          DATE         0%         5%         10%
---------------------------  ----------   -------------   --------------   ----------   --------   --------   ----------
<S>                          <C>          <C>             <C>              <C>          <C>        <C>        <C>
Sidney A. Miller...........     25,000         5.36%          $16.50        11-01-03       --      $167,929   $  391,346
Hugh Miller................    100,000        21.42            16.50        11-01-03       --       671,716    1,565,383
Richard Blass..............     25,000         5.36            16.50        11-01-03       --       167,929      391,346
Christopher Donnelly.......     25,000         5.36            16.50        11-01-03       --       167,929      391,346
Randall F. Michaels .......     25,000         5.36            16.50        11-01-03       --       167,929      391,346
</TABLE>
 
------------------
(1) No stock appreciation rights were granted to executive officers in 1996.
 
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
 
     There were no options exercised by any of the executive officers of the
Company named in the Summary Compensation Table during 1996. No stock

appreciation rights ('SARs') have ever been granted to executive officers.
 
<TABLE>
<CAPTION>
                                                                    NUMBER OF SECURITIES               VALUE OF UNEXERCISED
                                                                   UNDERLYING UNEXERCISED            IN-THE-MONEY OPTIONS AT
                                     SHARES                     OPTIONS AT DECEMBER 31, 1996            DECEMBER 31, 1996
                                   ACQUIRED ON     VALUE      --------------------------------   --------------------------------
NAME                               EXERCISE(#)  REALIZED($)   EXERCISABLE(#)  UNEXERCISABLE(#)   EXERCISABLE($)  UNEXERCISABLE($)
---------------------------------- -----------  -----------   --------------  ----------------   --------------  ----------------
<S>                                <C>          <C>           <C>             <C>                <C>             <C>
Sidney A. Miller..................      0           $ 0              0              25,000             $0           $   37,500
Hugh Miller.......................      0             0              0             100,000              0              150,000
Richard Blass.....................      0             0              0              25,000              0               37,500
Christopher Donnelly..............      0             0              0              25,000              0               37,500
Randall F. Michaels...............      0             0              0              25,000              0               37,500
</TABLE>
 
                                       61

<PAGE>

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
     Prior to the Company's initial public offering, the Company had not had a
compensation committee or any other committee of the Board of Directors
performing similar functions. Prior to the Company's initial public offering,
decisions concerning executive compensation were made by the Board of Directors,
including Sidney A. Miller and Hugh Miller, who were and continue to be
executive officers of the Company and participated in deliberations of the Board
of Directors regarding executive officer compensation. The Board of Directors of
the Company established a Compensation Committee on November 1, 1996. See
'--Committees of the Board of Directors.'
 
     None of the executive officers of the Company currently serves on the
compensation committee of another entity or any other committee of the board of
directors of another entity performing similar functions. For other related
party transactions, see 'Certain Relationships and Related Party Transactions.'
 
              CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
 
     In October 1996, the Company's subsidiary, Delta Funding Corporation,
issued certain S corporation distribution notes in the amount of $23,400,000 to
the Former Shareholders. Said notes were repaid in November 1996.
 
     A note due from Hugh Miller in the amount of $990,000 which had an interest
rate of 7.5% per annum and a maturity date in 2001 was repaid in full in June
1996.
 
     A note due from Sidney A. Miller in the amount of $2,000,000 which had an
interest rate of 7.8% per annum was repaid in full when it matured in December
1995.
 
     The Company previously sub-leased its Woodbury, New York office space from

Commercial Capital Corp. of New York ('Commercial Capital'), a corporation which
is wholly-owned by Rona V. Miller (Sidney A. Miller's wife). This lease was
assigned to the Company on August 2, 1996. Prior to this assignment, the Company
always paid rent to Commercial Capital in an amount equal to that which
Commercial Capital paid the landlord.
 
     Long Island Closing Corporation, a company wholly-owned by Rona V. Miller,
is hired by title abstract companies as closing agent to clear titles on
substantially all of the Company's Brokered Loan closings held at the Company's
headquarters. All fees for these services are paid by the borrowers, which
amounted to $96,213 for 1995, $126,672 for 1996 and $29,660 for the three months
ended March 31, 1997.
 
     Miller Planning Corporation, a company which is wholly-owned by Sidney A.
Miller, acts as the Company's agent in procuring the Company's group health,
disability and life insurance policies from independent insurance carriers and
receives commissions from the insurance companies on the same; which, in 1995,
totaled $29,240 and in 1996, totaled $25,455. This same affiliate previously
offered life and disability credit insurance to the Company's borrowers for
which this affiliate received commissions.
 
     The Company pays the annual premium on a $25,000,000 split-dollar life
insurance policy for Sidney A. Miller. The beneficiaries on the policy are
certain members of the Miller family; however, in the event of Sidney A.
Miller's demise, the Company is first reimbursed out of the proceeds of the
policy for the lesser of the cash value or all premiums it has paid during the
term of the policy.
 
     Certain members of the Miller family guaranteed two of the Company's lines
of credit with unaffiliated financial institutions in 1996. A $1,000,000 line
was personally guaranteed by Sidney A. Miller and a $2,500,000 line was
personally guaranteed, jointly and severally, by Sidney A. Miller and Hugh
Miller. Currently, none of the Company's credit facilities are personally
guaranteed. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources.'
 
TRANSACTIONS IN CONNECTION WITH TERMINATION OF S CORPORATION STATUS
 
     On October 31, 1996, the Company acquired all of the outstanding stock of
Delta Funding Corporation in exchange for 10,653,000 shares of common stock of
the Company. Prior to the Exchange, Delta Funding Corporation was treated for
federal income tax purposes as an S corporation under Subchapter S of the Code,
and
 
                                       62

<PAGE>

as such, the historical earnings of Delta Funding Corporation through October
31, 1996 were taxed directly to the shareholders of Delta Funding Corporation.
As a result of the Exchange, the Company and Delta Funding Corporation, which
became a wholly-owned subsidiary of the Company, became subject to federal and
state income taxes and the Company recorded a deferred tax liability on its
balance sheet relating to the tax effect of temporary differences between book

and tax accounting, principally relating to recognition of gain on sales of
mortgage loans.
 
     On November 1, 1996, the Company completed its initial public offering of
4,600,000 shares of common stock at an offering price of $16.50 per share. The
net proceeds of the offering to the Company, exclusive of underwriting discounts
and commissions and other expenses, were $69,701,435. In November 1996,
$32,607,000 of the proceeds raised in the offering was distributed to the Former
Shareholders to make distributions of S corporation earnings. Remaining
undistributed S corporation earnings of $18,071,687 were reclassified as
additional paid-in capital.
 
     On October 31, 1996, the Company became a C corporation for federal and
state income tax purposes and as such was subject to federal and state income
tax on its taxable income for the months of November and December 1996. In
connection with the change in tax status from an S corporation to a C
corporation, the Company incurred a deferred income tax expense of $3,900,496 as
of October 31, 1996. The liability for income taxes at December 31, 1996
reflected on the consolidated balance sheet includes a deferred tax liability of
$5,010,676. This represents the tax effect of differences between the tax basis
and financial statement carrying amounts of assets and liabilities.
 
     Prior to the Exchange, Delta Funding Corporation and the Former
Shareholders entered into a tax agreement relating to their respective income
tax liabilities. Because the Company became fully subject to corporate income
taxation after the termination of the Company's S corporation status, the
reallocation of income and deduction between the period during which the Company
was treated as an S corporation and the period after which the Company became
subject to corporate income taxation may increase the taxable income of one
party while decreasing that of another party. Accordingly, the tax agreement is
intended to assure that taxes are borne by the Company on the one hand and the
Former Shareholders on the other, only to the extent that such parties received
the related income. The tax agreement generally provides that, if an adjustment
is made to the taxable income of the Company for a year in which it was treated
as an S corporation, the Company will indemnify the Former Shareholders and the
Former Shareholders will indemnify the Company against any increase in the
indemnified party's income tax liability (including interest and penalties and
related costs and expenses), with respect to any tax year to the extent such
increase results in a related decrease in the income tax liability of the
indemnifying party for that year. However, the tax agreement specifically
provides that the Former Shareholders will not be responsible for any portion of
any deferred tax liability recorded on the balance sheet of Delta Funding
Corporation upon termination of the S corporation status. The Company will also
indemnify the Former Shareholders for all taxes imposed upon them as the result
of their receipt of an indemnification payment under the tax agreement. Any
payment made by the Company to the Former Shareholders pursuant to the tax
agreement may be considered by the Internal Revenue Service or state taxing
authorities to be non-deductible by the Company for income tax purposes. Neither
parties' obligations under the tax agreement are secured, and, as such, there
can be no assurance that the Former Shareholders or the Company will have funds
available to make any payments which may become due under the tax agreement. To
date, no payments have been made under the tax agreement.
 
                                       63


<PAGE>

                             PRINCIPAL STOCKHOLDERS
 
     The following table provides information at May 31, 1997, with respect to
(i) any person known to the Company to be the beneficial owner of five percent
or more of the common stock, (ii) all Directors (both continuing and nominees)
of the Company, (iii) each of the five most highly compensated executive
officers of the Company, and (iv) all directors and executive officers as a
group. Unless otherwise indicated, the beneficial ownership disclosed consists
of sole voting and investment power.
 
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER(1)                                            NUMBER OF SHARES    PERCENT OF CLASS
--------------------------------------------------------------------   ----------------    ----------------
<S>                                                                    <C>                 <C>
Hugh Miller(2)......................................................       5,618,319             36.6%
Sidney A. Miller....................................................       4,957,027             32.2%
Marc E. Miller(3)...................................................       4,120,645             26.8%
Lee Miller(4).......................................................       4,120,645             26.8%
Richard Blass.......................................................           1,517                *
Martin D. Payson....................................................          12,500(5)             *
Arnold B. Pollard...................................................           2,500(6)             *
Randall F. Michaels.................................................           2,064                *
Christopher Donnelly................................................             508                *
All Directors and executive officers as a group.....................      10,597,010             68.9%
</TABLE>
 
------------------
 * Less than one percent
 
(1) Unless otherwise indicated, the address of each beneficial owner is c/o
    Delta Financial Corporation, 1000 Woodbury Road, Woodbury, New York 11797.
 
(2) Includes (i) 4,119,451 shares of common stock owned by two grantor retained
    annuity trusts, of which Mr. Hugh Miller is a trustee and has shared voting
    and investment power (Mr. Hugh Miller disclaims beneficial ownership of
    these shares of common stock); and (ii) 2,388 shares of common stock of
    which he has sole voting and investment power for the benefit of two family
    members under the Uniform Gifts for Minor's Act (Mr. Hugh Miller disclaims
    beneficial ownership of these shares of common stock).
 
(3) Includes 4,119,451 shares of common stock owned by two grantor retained
    annuity trusts, of which Mr. Marc Miller is a trustee and has shared voting
    and investment power (Mr. Marc Miller disclaims beneficial ownership of
    these shares of common stock).
 
(4) Includes 4,119,451 shares of common stock owned by two grantor retained
    annuity trusts, of which Mr. Lee Miller is a trustee and has shared voting
    and investment power (Mr. Lee Miller disclaims beneficial ownership of these
    shares of common stock).
 

(5) Includes 2,500 options held by Mr. Payson which are currently exercisable.
    Mr. Payson's address is 750 Lexington Avenue, New York, New York 10022.
 
(6) Includes 2,500 options held by Dr. Pollard which are currently exercisable.
    Dr. Pollard's address is c/o Chief Executive Group, 733 Third Avenue, New
    York, New York 10017.
 
                                       64

<PAGE>

                            DESCRIPTION OF THE NOTES
 
GENERAL
 
     The Notes will be issued pursuant to an Indenture dated as of the Issue
Date (the 'Indenture'), among the Company, the Subsidiary Guarantors and
              , as trustee (the 'Trustee'). The terms of the Notes include those
stated in the Indenture and those made part of the Indenture by reference to the
Trust Indenture Act of 1939, as amended (the 'Trust Indenture Act'). The Notes
are subject to all such terms, and Holders of the Notes are referred to the
Indenture and the Trust Indenture Act for a statement thereof. The following
summary of certain provisions of the Indenture does not purport to be complete
and is qualified in its entirety by reference to the Indenture, including the
definitions therein of certain terms used below. A copy of the form of Indenture
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The definitions of certain terms used in the following
summary are set forth below under 'Certain Definitions.' For purposes of this
summary, the term 'Company' refers only to Delta Financial Corporation and not
to any of its Subsidiaries.
 
     The Notes will be general unsecured obligations of the Company and will
rank pari passu in right of payment with all current and future unsecured
unsubordinated Indebtedness of the Company. However, the Notes will be
effectively subordinated to secured Indebtedness of the Company and the
Subsidiary Guarantors, and interests (including Indebtedness) of Securitization
Trusts which rank senior in right of payment to the Company's right to receive
excess cash flow of such trusts. The operations of the Company are conducted
through its Subsidiaries and, therefore, the Company is dependent upon the cash
flow of its Subsidiaries to meet its obligations, including its obligations
under the Notes. All of the Company's current and future Restricted Subsidiaries
will guarantee the Company's payment obligations under the Notes on a senior
unsecured basis. See 'Risk Factors--Fraudulent Conveyance Considerations.' As of
the Issue Date, all of the Subsidiaries will be Restricted Subsidiaries.
However, under certain circumstances, the Company will be able to designate
current or future Subsidiaries as Unrestricted Subsidiaries. Unrestricted
Subsidiaries will not be subject to many of the restrictive covenants set forth
in the Indenture.
 
     As of March 31, 1997, after giving effect to this Offering and the
application of the proceeds thereof, the Company and the Subsidiary Guarantors
had approximately $3.3 million of secured Indebtedness outstanding under credit
facilities and an additional $76.6 million was available for borrowing
thereunder. The Indenture will permit substantial additional borrowings by the

Company and the Subsidiary Guarantors under its credit facilities in the future,
subject to certain restrictions. See 'Risk Factors--Leverage; Asset
Encumbrances.'
 
PRINCIPAL, MATURITY AND INTEREST
 
     The Notes will be limited in aggregate principal amount to $150.0 million
and will mature on             , 2004. Interest on the Notes will accrue at the
rate of      % per annum and will be payable semi-annually in arrears on
            and             , commencing on             , 1997, to Holders of
record on the immediately preceding             and             . Interest on
the Notes will accrue from the most recent date to which interest has been paid
or, if no interest has been paid, from the date of original issuance. Interest
will be computed on the basis of a 360-day year comprised of twelve 30-day
months. Principal, premium, if any, and interest on the Notes will be payable at
the office or agency of the Company maintained for such purpose within the City
and State of New York or, at the option of the Company, payment of interest may
be made by check mailed to the Holders of the Notes at their respective
addresses set forth in the register of Holders of the Notes; provided that all
payments of principal, premium, if any, and interest with respect to the Notes
the Holders of which have given valid, timely and complete wire transfer
instructions to the Company and the Trustee will be required to be made by wire
transfer of immediately available funds to the accounts specified by the Holders
thereof in such instructions. Until otherwise designated by the Company, the
Company's office or agency in New York will be the office of the Trustee
maintained for such purpose. The Notes will be issued in denominations of $1,000
and integral multiples thereof.
 
                                       65

<PAGE>

GUARANTEES
 
     The Company's payment obligations under the Notes will be jointly and
severally guaranteed on a senior unsecured basis by the Subsidiary Guarantors.
The obligations of each Subsidiary Guarantor under its Guarantee will be limited
so as not to constitute a fraudulent conveyance under applicable law. See,
however, 'Risk Factors--Fraudulent Conveyance Considerations.' The Company is a
holding company and substantially all of its assets and liabilities are held,
and its operations are conducted, by such Restricted Subsidiaries. Consequently,
separate financial statements of the Subsidiary Guarantors are not presented
because management has determined that they would not be material to investors.
 
     The Indenture will provide that no Subsidiary Guarantor may consolidate
with or merge with or into (whether or not such Subsidiary Guarantor is the
surviving Person), another Person whether or not affiliated with such Subsidiary
Guarantor unless (i) subject to the provisions of the following paragraph, the
Person formed by or surviving any such consolidation or merger (if other than
such Subsidiary Guarantor) assumes all the obligations of such Subsidiary
Guarantor pursuant to a supplemental indenture in form and substance reasonably
satisfactory to the Trustee, under the Notes and the Indenture and (ii)
immediately after giving effect to such transaction, no Default or Event of
Default exists.

 
     The Indenture will provide that, subject to the covenant described below
under 'Certain Covenants-- Merger, Consolidation or Sale of Assets', in the
event of a sale or other disposition of all of the assets of any Subsidiary
Guarantor, by way of merger, consolidation or otherwise, or a sale or other
disposition of all of the capital stock of any Subsidiary Guarantor, then such
Subsidiary Guarantor (in the event of a sale or other disposition, by way of
such a merger, consolidation or otherwise, of all of the capital stock of such
Subsidiary Guarantor) or the Person acquiring the property (in the event of a
sale or other disposition of all of the assets of such Subsidiary Guarantor)
will be released and relieved of its obligations under its Guarantee; provided
that the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the Indenture. In addition, the
Indenture will provide that, in the event the Company designates a Restricted
Subsidiary to be an Unrestricted Subsidiary in accordance with the Indenture,
then such Restricted Subsidiary shall be released from its obligations under its
Guarantee. See 'Repurchase at the Option of Holders--Asset Sales.'
 
OPTIONAL REDEMPTION
 
     The Notes will not be redeemable at the option of the Company prior to
            , 2001. Thereafter, the Notes will be redeemable at the Company's
option, in whole or in part, at any time or from time to time, upon not less
than 30 nor more than 60 days' prior notice to each Holder, at the following
redemption prices (expressed in percentages of principal amount), plus accrued
and unpaid interest thereon to the applicable redemption date, if redeemed
during the twelve-month period commencing on             of the years set forth
below:
 
<TABLE>
<CAPTION>
YEAR                                                             PERCENTAGE
--------------------------------------------------------------   ----------
<S>                                                              <C>
2001..........................................................          %
2002..........................................................          %
2003 and thereafter...........................................          %
</TABLE>
 
MANDATORY REDEMPTION
 
     The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
 
REPURCHASE AT THE OPTION OF HOLDERS
 
  Change of Control
 
     The Indenture will provide that, upon the occurrence of a Change of
Control, each Holder of the Notes will have the right to require the Company to
repurchase all or any part (equal to $1,000 or an integral multiple thereof) of
such Holder's Notes pursuant to the offer described below (the 'Change of
Control Offer') at an offer price in cash equal to 101% of the aggregate
principal amount thereof plus accrued and unpaid interest

 
                                       66

<PAGE>

thereon, if any, to the date of purchase (the 'Change of Control Payment').
Within ten days following any Change of Control, the Company will mail a notice
to each Holder describing the transaction or transactions that constitute the
Change of Control and offering to repurchase the Notes on the date specified in
such notice, which date shall be no earlier than the earliest date permitted
under Rule 14e-1 under the Exchange Act ('Rule 14e-1') and no later than 60 days
from the date such notice is mailed (the 'Change of Control Payment Date'),
pursuant to the procedures required by the Indenture and described in such
notice. The Company will comply with the requirements of Rule 14e-1 and any
other securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Notes as a
result of a Change of Control. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of the covenant
described hereunder, the Company shall comply with the applicable securities
laws and regulations and shall not be deemed to have breached its obligations
under the covenant described hereunder by virtue thereof.
 
     Pursuant to the Indenture, on the Change of Control Payment Date, the
Company will, to the extent lawful, (1) accept for payment all the Notes or
portions thereof properly tendered pursuant to the Change of Control Offer, (2)
deposit with the Paying Agent an amount equal to the Change of Control Payment
in respect of all the Notes or portions thereof so tendered and (3) deliver or
cause to be delivered to the Trustee the Notes so accepted together with an
Officers' Certificate stating the aggregate principal amount of the Notes or
portions thereof being purchased by the Company. The Paying Agent is required to
promptly mail to each Holder of the Notes so tendered the Change of Control
Payment for such Notes, and the Trustee is required to promptly authenticate and
mail (or cause to be transferred by book entry) to each Holder a new Note equal
in principal amount to any unpurchased portion of the Notes surrendered, if any;
provided that each such new Note will be in a principal amount of $1,000 or an
integral multiple thereof. The Company will publicly announce the results of the
Change of Control Offer on or as soon as practicable after the Change of Control
Payment Date.
 
     The Change of Control provisions described above will be applicable whether
or not the covenant described below under '--Certain Covenants--Merger,
Consolidation or Sale of Assets' is applicable. Except as described above with
respect to a Change of Control, the Indenture does not contain provisions that
permit the Holders of the Notes to require that the Company repurchase or redeem
the Notes in the event of a takeover, recapitalization or similar transaction.
 
     The Company's Warehouse Facilities contain, and future Indebtedness of the
Company may contain, prohibitions of certain events that could constitute a
Change of Control. In addition, the financial effect on the Company of the
exercise by the Holders of the Notes of their right to require the Company to
repurchase the Notes could cause a default under outstanding Indebtedness, even
if the Change of Control itself does not. In addition, the Company's ability to
pay cash to the Holders of the Notes upon a repurchase may be limited by the
Company's then existing financial resources.

 
     The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer and purchases all the
Notes validly tendered and not withdrawn under such Change of Control Offer.
 
     The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of 'all or substantially all'
of the assets of the Company and its Restricted Subsidiaries taken as a whole.
Although there is a developing body of case law interpreting the phrase
'substantially all,' there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a Holder of the Notes to
require the Company to repurchase such Notes as a result of a sale, lease,
transfer, conveyance or other disposition of less than all of the assets of the
Company and its Restricted Subsidiaries, taken as a whole, to another Person or
group may be uncertain.
 
  Asset Sales
 
     The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by an Officers' Certificate delivered to the Trustee and, with
respect to any Asset Sale involving consideration in excess of $5.0 million, a
resolution of the Company's Board of Directors) of the assets or Equity
Interests issued or sold or
 
                                       67

<PAGE>

otherwise disposed of and (ii) at least 85% (or, in the case of the sale or
other disposition of any Residual Receivables (or interest therein), 50%) of the
consideration therefor received by the Company or such Restricted Subsidiary is
in the form of Cash Equivalents; provided that the amount of (x) any liabilities
(as shown on the Company's or such Restricted Subsidiary's most recent balance
sheet) of the Company or any Restricted Subsidiary (other than contingent
liabilities and liabilities that are by their terms subordinated to the Notes or
any Guarantee thereof) that are expressly assumed by the transferee of any such
assets pursuant to a customary novation agreement that releases the Company or
such Restricted Subsidiary from further liability and (y) any currencies,
securities, notes or other obligations received by the Company or any such
Restricted Subsidiary from such transferee that are converted by the Company or
such Restricted Subsidiary into Cash Equivalents within 30 days after receipt
(to the extent of the cash received), shall be deemed to be Cash Equivalents for
purposes of this provision.
 
     The Indenture will permit the Company or the Restricted Subsidiary, as the
case may be, within 180 days after the receipt of any Net Proceeds from an Asset
Sale subject to this covenant, to apply an amount equal to 100% of such Net
Proceeds to (i) an Investment (other than in Receivables that, at the time of
purchase, are not Eligible Receivables), or (ii) the purchase of Receivables

that are, at the time of purchase, Eligible Receivables, or (iii) the making of
any capital expenditure, or (iv) the acquisition of any other tangible assets,
in each case, in or with respect to a Permitted Business. Pending the final
application of any such Net Proceeds, the Company or such Restricted Subsidiary
may temporarily reduce outstanding Indebtedness or otherwise invest such Net
Proceeds in any manner not prohibited by the Indenture. Any Net Proceeds from
Asset Sales not applied or invested as provided in the preceding sentence of
this paragraph will be deemed to constitute 'Excess Proceeds.' When the
aggregate amount of Excess Proceeds exceeds $10.0 million, the Indenture will
require the Company to make an offer to all Holders of the Notes (an 'Asset Sale
Offer') to purchase the maximum principal amount of the Notes that may be
purchased out of the Excess Proceeds, at an offer price in cash in an amount
equal to 100% of the principal amount thereof plus accrued and unpaid interest
thereon to the date of purchase, in accordance with the procedures set forth in
the Indenture.
 
     Notwithstanding the foregoing, the Indenture will further provide that the
Company will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly sell or otherwise convey or dispose of any Residual
Receivables or interest therein for consideration of which less than 85% is in
the form of Cash Equivalents, unless: (i) from and after the Issue Date, upon
the creation of any Senior Residual Receivables by the Company or any Restricted
Subsidiary, the Company shall designate, by an Officers' Certificate delivered
to the Trustee, Senior Residual Receivables with an aggregate book value equal
to 25% of the book value of the Senior Residual Receivables so created as
Retained Residual Receivables ('Retained Residual Receivables') and no such
designation shall have been revoked except as provided below; (ii) none of the
Residual Receivables sold, conveyed or otherwise disposed of constitute Retained
Residual Receivables unless after giving effect to such sale, conveyance or
other disposition the aggregate amount of Senior Residual Receivables of the
Company and its Restricted Subsidiaries which are unencumbered by any Lien (of
which no more than 25% of the aggregate book value thereof shall constitute
Retained Residual Receivables) would be greater than or equal to 250% of all
Senior Indebtedness of the Company and its Restricted Subsidiaries; and (iii)
after giving effect to any such sale, conveyance or other disposition of
Residual Receivables the aggregate amount of Senior Residual Receivables of the
Company and its Restricted Subsidiaries which are unencumbered by any Lien (of
which not more than 25% of the aggregate book value thereof shall constitute
Retained Residual Receivables) would be greater than or equal to 150% of all
Senior Indebtedness of the Company and its Restricted Subsidiaries. The
Indenture will provide that from time to time the Company may revoke the
designation of any Senior Residual Receivable as a Retained Residual Receivable
if the Company simultaneously designates as Retained Residual Receivables (in
addition to any other such designation otherwise required by the Indenture)
Senior Residual Receivables (not subject to any Lien) with an aggregate book
value equal to or greater than that of the Senior Residual Receivables as to
which such designation has been revoked. Any determination of the amount of
Residual Receivables shall be based on the consolidated balance sheet of the
Company and its Restricted Subsidiaries for the most recently ended fiscal
quarter for which financial statements are available, after giving pro forma
effect to the Asset Sale for which such determination is being made and to any
other sale of or Lien on or reduction of Residual Receivables since the date of
such balance sheet.
 

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     To the extent that the aggregate amount of the Notes tendered pursuant to
an Asset Sale Offer is less than the Excess Proceeds, the Company or the
Restricted Subsidiary, as the case may be, may use any remaining Excess Proceeds
for general corporate purposes. If the aggregate principal amount of the Notes
surrendered by Holders thereof exceeds the amount of Excess Proceeds, the
Trustee is required to select the Notes to be purchased on a pro rata basis.
Upon completion of such Asset Sale Offer, the amount of Excess Proceeds shall be
reset at zero.
 
     Under the Indenture, the Asset Sale Offer is required to remain open for
the minimum period of time required by Rule 14e-1 and no longer (the 'Asset Sale
Offer Period'). Under the Indenture, no later than five Business Days after
termination of the Asset Sale Offer Period (the 'Asset Sale Purchase Date'), the
Company is required to purchase the principal amount of the Notes required to be
purchased pursuant to this covenant (the 'Asset Sale Offer Amount') or, if less
than the Asset Sale Offer Amount has been tendered, all the Notes tendered in
response to the Asset Sale Offer.
 
     If the Asset Sale Purchase Date is on or after an interest payment record
date and on or before the related interest payment date, any accrued and unpaid
interest will be paid to the Person in whose name a Note is registered at the
close of business on such record date, and no additional interest will be
payable to Holders who tender the Notes pursuant to the Asset Sale Offer.
 
     Under the Indenture, on or before the Asset Sale Purchase Date, the Company
is required, to the extent lawful, to accept for payment, on a pro rata basis,
to the extent necessary, the Asset Sale Offer Amount of the Notes or portions
thereof tendered pursuant to the Asset Sale Offer, or if less than the Asset
Sale Offer Amount has been tendered, all such Notes tendered, and to deliver to
the Trustee an Officers' Certificate stating that such Notes or portions thereof
were accepted for payment by the Company in accordance with the terms of this
covenant. The Company, the Depositary or the Paying Agent, as the case may be,
is required, not later than five days after the Asset Sale Purchase Date, to
mail or deliver to each tendering Holder an amount equal to the purchase price
of the Notes tendered by such Holder and accepted by the Company for purchase,
and the Company is required to issue a new Note, and the Trustee, upon delivery
of an Officers' Certificate from the Company, is required to authenticate and
mail or deliver such new Note to such Holder, in a principal amount equal to any
unpurchased portion of any Note surrendered. Any Note not so accepted is
required to be promptly mailed or delivered by the Company to the Holder
thereof. The Company will publicly announce the results of the Asset Sale Offer
on the Asset Sale Purchase Date.
 
     The Company will comply, to the extent applicable, with the requirements of
Rule 14e-1 and any other securities laws or regulations in connection with the
repurchase of any Notes pursuant to the covenant described hereunder. To the
extent that the provisions of any securities laws or regulations conflict with
the provisions of the covenant described hereunder, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under the covenant described hereunder by virtue

thereof.
 
CERTAIN COVENANTS
 
  Restricted Payments
 
     The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or
pay any dividend or make any other payment or distribution on account of the
Company's or any of its Restricted Subsidiaries' Equity Interests (including,
without limitation, any payment in connection with any merger or consolidation
involving the Company) other than dividends or other payments or distributions
payable in Equity Interests (other than Disqualified Stock) of the Company or
dividends or other payments or distributions payable to the Company or any
Wholly-Owned Restricted Subsidiary of the Company; (ii) purchase, redeem or
otherwise acquire or retire for value (including, without limitation, any
payment in connection with any merger or consolidation involving the Company)
any Equity Interests of the Company (other than any such Equity Interests owned
by any Wholly-Owned Restricted Subsidiary of the Company) or any direct or
indirect parent of the Company; (iii) make any principal payment on or with
respect to, purchase, redeem, defease or otherwise acquire or retire for value
any Indebtedness that is subordinated to the Notes or any Guarantee (other than
intercompany Indebtedness payable to the Company or a Restricted Subsidiary by
any
 
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Restricted Subsidiary), except at its stated maturity; or (iv) make any
Restricted Investment (all such payments and other actions set forth in clauses
(i) through (iv) above being collectively referred to as 'Restricted Payments'),
unless, at the time of and after giving effect to such Restricted Payment:
 
          (a)  no Default or Event of Default shall have occurred and be
     continuing or would occur as a consequence thereof; and
 
          (b)  the Company would, at the time of such Restricted Payment and
     after giving pro forma effect thereto, have been permitted to incur at
     least $1.00 of additional Indebtedness pursuant to the test set forth in
     the first paragraph of the covenant described below under '--Incurrence of
     Indebtedness and Issuance of Preferred Stock'; and
 
          (c)  such Restricted Payment, together with the aggregate amount of
     all other Restricted Payments made by the Company and its Restricted
     Subsidiaries after the Issue Date (excluding Restricted Payments permitted
     by clauses (ii) and (iii) of the next succeeding paragraph), is less than
     the sum of (i) 25% of the aggregate cumulative Consolidated Net Income of
     the Company for the period (taken as one accounting period) from and after
     the last day of the first fiscal quarter ending immediately following the
     Issue Date to the end of the Company's most recently ended fiscal quarter
     for which internal financial statements are available at the time of such
     Restricted Payment (or, if such Consolidated Net Income for such period is
     a deficit, less 100% of such deficit); plus (ii) 100% of the aggregate net

     cash proceeds received by the Company from the issue or sale since the
     Issue Date of Equity Interests of the Company (other than Disqualified
     Stock) or of Disqualified Stock or Indebtedness represented by securities
     of the Company that have been converted into such Equity Interests (other
     than Equity Interests (or Disqualified Stock or convertible debt
     securities) sold to a Subsidiary of the Company and other than Disqualified
     Stock or other Indebtedness represented by securities that have been
     converted into Disqualified Stock); plus (iii) to the extent that any
     Restricted Investment that was made after the Issue Date is sold for cash
     or otherwise liquidated or repaid for cash, the lesser of (A) the cash
     return of capital with respect to such Restricted Investment (less the cost
     of disposition, if any) and (B) the initial amount of such Restricted
     Investment.
 
     The foregoing provisions will not prohibit the following Restricted
Payments: (i) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would have
complied with the provisions of the Indenture; (ii) the purchase, redemption or
other acquisition or retirement for value of any Equity Interests of the Company
in exchange for, or out of the proceeds of, the substantially concurrent sale
(other than to a Subsidiary of the Company) of other Equity Interests of the
Company (other than any Disqualified Stock); provided, that the amount of any
such net cash proceeds that are utilized for such redemption, repurchase,
retirement or other acquisition shall be excluded from clause (c)(ii) of the
preceding paragraph; (iii) the payment of principal on, or purchase, redemption,
defeasance or other acquisition or retirement for value of Indebtedness with the
net cash proceeds from an incurrence of, Permitted Refinancing Indebtedness or
the substantially concurrent sale (other than to a Subsidiary of the Company) of
Equity Interests of the Company (other than Disqualified Stock); provided, that
the amount of any such net cash proceeds from any such sale of Equity Interests
that are utilized for such redemption, repurchase, retirement or other
acquisition shall be excluded from clause (c)(ii) of the preceding paragraph;
(iv) payments in an amount not to exceed $500,000 in the aggregate during any
fiscal year of the Company (plus any such amount not utilized in the preceding
fiscal year) in connection with the repurchase, redemption or other acquisition
or retirement for value of any Equity Interests of the Company held by an
employee or director of the Company or any of its Subsidiaries, related to
compensation or severance arrangements; (v) advances to a Securitization Trust
required to be made by the Company or any Restricted Subsidiary (in its capacity
or the holder of the residual interest in such trust) if such advances rank
senior in right of payment to all other interests in, and Indebtedness of, such
trust; and (vi) the making and consummation of any offer to repurchase any
Indebtedness upon the occurrence of a change of control under and as defined in
the documents governing such Indebtedness; provided, that in connection with
Indebtedness incurred after the Issue Date, the definition of 'change of
control' is the same in all material respects as the definition of 'Change of
Control' set forth in the Indenture and payments pursuant thereto are not
required to be made prior to the date on which the Change of Control Payment is
required to be made under the Indenture and, with respect to any Indebtedness
subordinated in right of payment to the Notes, no sooner than 30 days after the
date such Change of Control Offer is required to be made.
 
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     The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash) in
the Subsidiary so designated will be deemed to be Restricted Payments at the
time of such designation and will reduce the amount available for Restricted
Payments under the first paragraph of this covenant. All such outstanding
Investments will be deemed to constitute Investments in an amount equal to the
fair market value of such Investments at the time of such designation. Such
designation will only be permitted if such Restricted Payment would be permitted
at such time and if such Restricted Subsidiary otherwise meets the definition of
an Unrestricted Subsidiary.
 
     The amount of all Restricted Payments other than cash shall be the fair
market value (evidenced by an Officers' Certificate on the date of the
Restricted Payment) of the asset(s) or securities proposed to be transferred or
issued by the Company or such Restricted Subsidiary, as the case may be,
pursuant to the Restricted Payment. The fair market value of any non-cash
Restricted Payment in excess of $1.0 million shall be determined by the Board of
Directors whose resolution with respect thereto shall be delivered to the
Trustee, such determination to be based upon an opinion or appraisal issued by
an accounting, appraisal or investment banking firm of national standing if such
fair market value exceeds $10.0 million. Not later than the date of making any
Restricted Payment, the Company shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by the covenant 'Restricted
Payments' were computed.
 
  Incurrence of Indebtedness and Issuance of Preferred Stock
 
     The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guaranty or otherwise become directly or indirectly liable, contingently
or otherwise, with respect to (collectively, 'incur') any Indebtedness
(including Acquired Debt) or issue Disqualified Stock, and that the Company will
not permit any of its Restricted Subsidiaries to issue any shares of preferred
stock except for preferred stock issued to and held by the Company or any
Wholly-Owned Restricted Subsidiary of the Company, provided that any subsequent
issuance or transfer of Capital Stock that results in such Wholly-Owned
Restricted Subsidiary ceasing to be a Wholly-Owned Restricted Subsidiary of the
Company or any subsequent transfer of such preferred stock (other than to the
Company or any of its Wholly-Owned Restricted Subsidiaries) will be deemed, in
each case, to constitute the issuance of such preferred stock by the issuer
thereof; provided, however, that the Company or any Subsidiary Guarantor may
incur Indebtedness (including Acquired Debt) or issue Disqualified Stock and any
Subsidiary Guarantor may issue preferred stock if, on the date of such
incurrence or issuance and after giving effect thereto, the Consolidated
Leverage Ratio does not exceed 2.0 to 1.0.
 
     The foregoing provisions will not apply to:
 
          (1)  the incurrence by the Company or any Restricted Subsidiary of

     Indebtedness represented by Capital Lease Obligations, mortgage financings
     or purchase money obligations, in each case incurred for the purpose of
     financing all or any part of the purchase price or cost of construction or
     improvement of property used in the business of the Company or such
     Restricted Subsidiary, in an aggregate principal amount not to exceed $15.0
     million in the aggregate since the Issue Date;
 
          (2)  the existence of Warehouse Facilities, regardless of amount, and
     the incurrence of Permitted Warehouse Debt by the Company or any of its
     Restricted Subsidiaries; provided, however, that to the extent any such
     Indebtedness of the Company or a Restricted Subsidiary of the Company
     ceases to constitute Permitted Warehouse Debt, to such extent such
     Indebtedness shall be deemed to be incurred by the Company or such
     Restricted Subsidiary of the Company, as the case may be, at such time;
 
          (3)  the incurrence by the Company or any of its Restricted
     Subsidiaries of intercompany Indebtedness owing to the Company or any of
     its Restricted Subsidiaries; provided, however, that (i)(A) any subsequent
     issuance or transfer of any Capital Stock which results in any such
     Indebtedness being held by a Person other than a Restricted Subsidiary of
     the Company and (B) any sale or transfer of any such Indebtedness to a
     Person that is not either the Company or a Restricted Subsidiary of the
     Company, shall be deemed, in each case, to constitute the incurrence of
     such Indebtedness by the Company or such Restricted Subsidiary, as the
 
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     case may be, and (ii) any Indebtedness of the Company to any Restricted
     Subsidiary is permitted by the covenant described above under '--Restricted
     Payments;'
 
          (4) the incurrence by the Company of Indebtedness represented by the
     Notes and the incurrence by the Subsidiary Guarantors of Guarantees;
 
          (5) Indebtedness of the Company and its Restricted Subsidiaries
     outstanding on the Issue Date;
 
          (6) the incurrence by the Company or any of its Restricted
     Subsidiaries of Permitted Refinancing Indebtedness with respect to
     Indebtedness that was permitted by the Indenture to be incurred or that was
     outstanding at the Issue Date;
 
          (7) the incurrence by the Company or any of its Restricted
     Subsidiaries of Hedging Obligations directly related to (i) Indebtedness of
     the Company or a Restricted Subsidiary of the Company that was permitted by
     the Indenture to be incurred, (ii) Receivables held by the Company or a
     Restricted Subsidiary pending sale in a Securitization, (iii) Receivables
     of the Company or a Restricted Subsidiary that have been sold pursuant to a
     Warehouse Facility; or (iv) Receivables that the Company or a Restricted
     Subsidiary reasonably expects to purchase or commit to purchase, finance or
     accept as collateral; provided, however, that, in the case of each of the
     foregoing clauses (i) through (iv), such Hedging Obligations are eligible

     to receive hedge accounting treatment in accordance with GAAP as applied by
     the Company and its Restricted Subsidiaries on the Issue Date;
 
          (8) the incurrence of Acquired Debt by the Company or any Subsidiary
     Guarantor in a principal amount not to exceed $15.0 million in the
     aggregate since the Issue Date (reduced by the amount of Acquired Debt
     repaid with Net Proceeds of Asset Sales of the Restricted Subsidiary
     acquired subject to such Acquired Debt) that is without recourse to the
     Company or any of its Restricted Subsidiaries or any of their respective
     assets (other than the Subsidiary Guarantor acquired subject to such
     Acquired Debt), and is not guaranteed by any such Person;
 
          (9)  the Guarantee by the Company or any of the Subsidiary Guarantors
     of the Indebtedness of the Company or another Subsidiary Guarantor that was
     permitted to be incurred by another provision of this covenant;
 
          (10)  the incurrence by the Company and the Subsidiary Guarantors of
     Indebtedness in an aggregate principal amount at any time outstanding not
     to exceed $10.0 million; and
 
          (11)  (A) the incurrence by an Unrestricted Subsidiary of the Company
     of Non-Recourse Debt (including, without limitation, Non-Recourse Debt that
     would constitute Permitted Warehouse Debt if incurred by a Restricted
     Subsidiary of the Company); provided, however, that if any such
     Indebtedness ceases to be Non-Recourse Debt of the Unrestricted Subsidiary,
     such event shall be deemed to constitute an incurrence of Indebtedness by a
     Restricted Subsidiary and (B) the issuance by an Unrestricted Subsidiary of
     the Company of preferred stock.
 
     The Indenture will also provide that the Company will not, and will not
permit any Subsidiary Guarantor to, incur any Indebtedness that is contractually
subordinated to any Indebtedness of the Company or any such Subsidiary Guarantor
unless such Indebtedness is also contractually subordinated to the Notes, or the
Guarantee of such Subsidiary Guarantor (as applicable), on substantially
identical terms; provided, however, that no Indebtedness shall be deemed to be
contractually subordinated to any other Indebtedness solely by virtue of being
unsecured or of limited recourse.
 
     For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Indebtedness described in clauses (1) through (11) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Company shall, in its sole discretion, classify such item of Indebtedness in any
manner that complies with this covenant and such item of Indebtedness will be
treated as having been incurred pursuant to only one of such clauses or pursuant
to the first paragraph hereof.
 
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  Liens
 
     The Indenture will provide that the Company will not, and will not permit

any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or suffer to exist any Lien on any asset now owned or hereafter acquired,
or any income or profits therefrom or assign or convey any right to receive
income therefrom, except Permitted Liens.
 
  Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
 
     The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to (i)(A) pay dividends
or make any other distributions to the Company or any of its Restricted
Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest
or participation in, or measured by, its profits, or (B) pay any indebtedness
owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or
advances to the Company or any of its Restricted Subsidiaries or (iii) transfer
any of its properties or assets to the Company or any of its Restricted
Subsidiaries, except for such encumbrances or restrictions existing under or by
reason of (a) agreements relating to Indebtedness as in effect as of the Issue
Date, and any amendments, modifications, restatements, renewals, increases,
supplements, refundings, additions (including additional Warehouse Facilities),
replacements or refinancings thereof, provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
additions, replacements or refinancings are no more restrictive with respect to
such dividend and other payment restrictions than those contained in the
agreements relating to Indebtedness as in effect on the Issue Date, (b)
applicable law, (c) any instrument governing Acquired Debt or Capital Stock of a
Person acquired by the Company or any of its Restricted Subsidiaries as in
effect at the time of such acquisition (except to the extent such Acquired Debt
was incurred or such Capital Stock was issued or its terms amended in connection
with or in contemplation of such acquisition), which encumbrance or restriction
is not applicable to any Person, or the property or assets of any Person, other
than the Person or the property or assets of the Person, so acquired, provided
that such Person is not taken into account in determining on a pro forma basis
whether such acquisition subject to such Acquired Debt was permitted by the
terms of the Indenture, (d) customary non-assignment provisions in leases
entered into in the ordinary course of business and consistent with past
practices, (e) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature described in clause
(iii) above on the property so acquired, and (f) Permitted Refinancing
Indebtedness; provided that the restrictions contained in the agreements
governing such Permitted Refinancing Indebtedness are no more restrictive than
those contained in the agreements governing the Indebtedness being refinanced.
 
  Merger, Consolidation or Sale of Assets
 
     The Indenture will provide that the Company may not consolidate or merge
with or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions to, another
Person unless (i) the Company is the surviving corporation or the Person formed
by or surviving any such consolidation or merger (if other than the Company) or
to which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of

the United States, any state thereof or the District of Columbia; (ii) the
Person formed by or surviving any such consolidation or merger (if other than
the Company) or the Person to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made assumes all the obligations
of the Company under the Notes and the Indenture pursuant to a supplemental
indenture in a form reasonably satisfactory to the Trustee; (iii) immediately
after such transaction no Default or Event of Default exists; and (iv) the
Company or the Person formed by or surviving any such consolidation or merger
(if other than the Company), or to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made (A) will have Consolidated
Net Worth immediately after the transaction equal to or greater than the
Consolidated Net Worth of the Company immediately preceding the transaction and
(B) will, at the time of such transaction and after giving pro forma effect
thereto, be permitted to incur at least $1.00 of additional Indebtedness
pursuant to the first paragraph of the covenant described above under
'--Incurrence of Indebtedness and Issuance of Preferred Stock.'
 
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  Transactions with Affiliates
 
     The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into or make or amend any transaction, contract,
agreement, understanding, loan, advance or guarantee with, or for the benefit
of, any Affiliate (each of the foregoing actions, considered separately, an
'Affiliate Transaction'), unless (i) such Affiliate Transaction is on terms that
are no less favorable to the Company or the relevant Restricted Subsidiary than
those that would have been obtained in a comparable transaction by the Company
or such Restricted Subsidiary with an unrelated Person and (ii) the Company
delivers to the Trustee (a) with respect to any Affiliate Transaction or series
of related Affiliate Transactions involving aggregate consideration in excess of
$1.0 million, a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause (i)
above and that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $5.0 million, an opinion as to the fairness
to the Company or such Restricted Subsidiary of such Affiliate Transaction from
a financial point of view issued by an accounting, appraisal or investment
banking firm of national standing; provided that Affiliate Transactions shall
not include (A) any employment agreement, stock option, employee benefit,
indemnification, compensation (including the payment of reasonable fees to
Directors of the Company or its Restricted Subsidiaries who are not employees of
the Company or its Restricted Subsidiaries), business expense reimbursement or
other employment-related agreement, arrangement or plan entered into by the
Company or any of its Restricted Subsidiaries in the ordinary course of business
of the Company or such Restricted Subsidiary, (B) transactions between or among
the Company and/or its Restricted Subsidiaries not otherwise prohibited by the
Indenture, (C) loans or advances to employees in the ordinary course of business
of the Company or its Restricted Subsidiaries, but in any event not to exceed

$500,000 in aggregate principal amount outstanding at any one time, and (D)
Restricted Payments other than Restricted Investments that are permitted by the
provisions of the Indenture described above under the caption '--Restricted
Payments'.
 
  Business Activities
 
     The Company will not, and will not permit any Restricted Subsidiary to,
engage in any business other than Permitted Businesses.
 
  Payments for Consent
 
     The Indenture will provide that neither the Company nor any of its
Subsidiaries will, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder of
any of the Notes for or as an inducement to any consent, waiver or amendment of
any of the terms or provisions of the Indenture or the Notes unless such
consideration is offered to be paid or is paid to all Holders of Notes that
consent, waive or agree to amend in the time frame set forth in the solicitation
documents relating to such consent, waiver or agreement.
 
  Reports
 
     The Indenture will provide that, whether or not required by the rules and
regulations of the Commission, so long as any of the Notes are outstanding, the
Company will furnish to the Holders of the Notes (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including a 'Management's Discussion and Analysis of Financial Condition
and Results of Operations' that describes the financial condition and results of
operations of the Company and its consolidated Subsidiaries (showing in
reasonable detail, either on the face of the financial statements or in the
notes thereto and in Management's Discussion and Analysis of Financial Condition
and Results of Operations, the financial condition and results of operations of
the Company and its Restricted Subsidiaries separately from the financial
condition and results of operations of the Unrestricted Subsidiaries of the
Company) and, with respect to the annual information only, a report thereon by
the Company's certified independent accountants and (ii) all current reports
that would be required to be filed with the Commission on Form 8-K if the
Company were required to file such reports. In addition, whether or not
 
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required by the rules and regulations of the Commission, the Company will file a
copy of all such information and reports with the Commission for public
availability (unless the Commission will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request.
 
EVENTS OF DEFAULT AND REMEDIES
 
     The Indenture will provide that each of the following constitutes an Event

of Default: (i) default for 30 days in the payment when due of interest on the
Notes; (ii) default in payment when due of the principal of or premium, if any,
on the Notes; (iii) failure by the Company to comply with the provisions
described above under 'Change of Control,' 'Asset Sales,' 'Restricted Payments,'
'Incurrence of Indebtedness and Issuance of Preferred Stock,' 'Merger,
Consolidation or Sale of Assets' or 'Liens'; (iv) failure by the Company for 30
days after notice to comply with any of its other agreements in the Indenture or
the Notes; (v) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Subsidiaries (or
the payment of which is guaranteed by the Company or any of its Subsidiaries)
whether such Indebtedness or guarantee now exists, or is created after the date
of the Indenture, which default (a) is caused by a failure to pay principal of
or premium, if any, or interest on such Indebtedness prior to the expiration of
the grace period provided in such Indebtedness on the date of such default (a
'Payment Default') or (b) results in the acceleration of such Indebtedness prior
to its express maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such Indebtedness
under which there has been a Payment Default or the maturity of which has been
so accelerated, aggregates $5.0 million or more; (vi) failure by the Company or
any of its Subsidiaries to pay final judgments aggregating in excess of $5.0
million, which judgments are not paid, discharged or stayed for a period of 60
days; (vii) certain events of bankruptcy or insolvency with respect to the
Company or any of its Subsidiaries; and (viii) except as permitted by the
Indenture, any Guarantee shall be held in any judicial proceeding to be invalid
or unenforceable or shall cease for any reason to be in full force and effect or
any Subsidiary Guarantor or any Person acting on behalf of any Subsidiary
Guarantor shall deny or disaffirm its obligations under its Guarantee.
 
     If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company or any Subsidiary, all
outstanding Notes will become due and payable without further action or notice.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. Subject to certain limitations, Holders of a majority
in principal amount of the then outstanding Notes may direct the Trustee in its
exercise of any trust or power. The Trustee may withhold from Holders of the
Notes notice of any continuing Default or Event of Default (except a Default or
Event of Default relating to the payment of principal or interest) if it
determines that withholding notice is in their interest.
 
     In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to
            , 2001 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to             , 2001, then the
premium specified in the Indenture shall also become immediately due and payable

to the extent permitted by law upon the acceleration of the Notes.
 
     The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
premium, if any, or interest on, or the principal of, the Notes.
 
     The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required, upon
becoming aware of any Default or Event of Default, to deliver to
 
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the Trustee a statement specifying such Default or Event of Default. The 'Events
of Default and Remedies' provisions described above shall apply to the Notes in
lieu of those described in the accompanying Prospectus.
 
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
 
     No director, officer, employee, incorporator or stockholder of the Company
or a Subsidiary Guarantor, as such, shall have any liability for any obligations
of the Company or the Subsidiary Guarantors under the Notes, the Indenture, the
Guarantees or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder of the Notes by accepting a Note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
 
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
 
     The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ('Legal
Defeasance') except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
on such Notes when such payments are due from the trust referred to below, (ii)
the Company's obligations with respect to the Notes concerning issuing temporary
Notes, registration of the Notes, mutilated, destroyed, lost or stolen Notes and
the maintenance of an office or agency for payment and money for security
payments held in trust, (iii) the rights, powers, trusts, duties and immunities
of the Trustee, and the Company's obligations in connection therewith and (iv)
the Legal Defeasance provisions of the Indenture. In addition, the Company may,
at its option and at any time, elect to have the obligations of the Company
released with respect to certain covenants that are described in the Indenture
('Covenant Defeasance') and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under 'Events of Default' will no longer constitute an Event
of Default with respect to the Notes.
 

     In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest on the outstanding Notes
on the stated maturity or on the applicable redemption date, as the case may be,
and the Company must specify whether the Notes are being defeased to maturity or
to a particular redemption date; (ii) in the case of Legal Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and based
thereon such opinion of counsel shall confirm that, the Holders of the
outstanding Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance had not occurred; (iii) in the
case of the Covenant Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders of the outstanding Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit (other than a Default or
Event of Default resulting from the borrowing of funds to be applied to such
deposit) or insofar as Events of Default from bankruptcy or insolvency events
are concerned, at any time in the period ending on the 91st day after the date
of deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in
a breach or violation of, or constitute a default under any material agreement
or instrument (other than the Indenture) to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound; (vi) the Company must have delivered to the Trustee an opinion of counsel
to the effect that after the 91st day following the deposit, the trust funds
will not be subject to the effect of any applicable bankruptcy,
 
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insolvency, reorganization or similar laws affecting creditors' rights
generally; (vii) the Company must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the intent
of preferring the Holders of the Notes over the other creditors of the Company
or the Subsidiary Guarantors with the intent of defeating, hindering, delaying
or defrauding creditors of the Company, the Subsidiary Guarantors or others; and
(viii) the Company must deliver to the Trustee an Officers' Certificate and an
opinion of counsel, each stating that all conditions precedent provided for
relating to the Legal Defeasance or the Covenant Defeasance have been complied
with.
 
TRANSFER AND EXCHANGE

 
     A Holder may transfer or exchange the Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company is not required to transfer or exchange any Note selected for
redemption. Also, the Company is not required to transfer or exchange any Note
for a period of 15 days before a selection of the Notes to be redeemed.
 
     The registered Holder of a Note will be treated as the owner of it for all
purposes.
 
AMENDMENT, SUPPLEMENT AND WAIVER
 
     Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, the Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender offer
or exchange offer for the Notes).
 
     Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of the Notes whose Holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed maturity
of any Note or alter the provisions with respect to the redemption of the Notes
(other than provisions relating to the covenants described above under
'Repurchase at the Option of Holders'), (iii) reduce the rate of or change the
time for payment of interest on any Note, (iv) waive a Default or Event of
Default in the payment of principal of or premium, if any, or interest on the
Notes (except a rescission of acceleration of the Notes by the Holders of at
least a majority in aggregate principal amount of the Notes and a waiver of the
payment default that resulted from such acceleration), (v) make any Note payable
in money other than that stated in the Notes, (vi) make any change in the
provisions of the Indenture relating to waivers of past Defaults or the rights
of Holders of the Notes to receive payments of principal of or premium, if any,
or interest on the Notes, (vii) waive a redemption payment with respect to any
Note (other than a payment required by one of the covenants described above
under '--Repurchase at the Option of Holders'), (viii) make any change in the
foregoing amendment and waiver provisions or (ix) release any Subsidiary
Guarantor from its obligations under the Indenture or its Guarantee of the Notes
(other than in accordance with the Indenture).
 
     Notwithstanding the foregoing, without the consent of any Holder of the
Notes, the Company and the Trustee may amend or supplement the Indenture or the
Notes to cure any ambiguity, defect or inconsistency, to provide for
uncertificated Notes in addition to or in place of certificated Notes (provided
that the uncertificated Notes are issued in registered form for purposes of
Section 163(f) of the Code, or in a manner such that the uncertificated Notes
are described in Section 163(f)(2)(B) of the Code), to provide for the
assumption of the Company's obligations to Holders of the Notes in the case of a
merger or consolidation, to make any change that would provide any additional

rights or benefits to the Holders of the Notes or that does not adversely affect
the legal rights under the Indenture of any such Holder, or to comply with
requirements of the Commission in order to effect or maintain the qualification
of the Indenture under the Trust Indenture Act.
 
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CERTAIN DEFINITIONS
 
     Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
 
     'Acquired Debt' means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
 
     'Affiliate' of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, 'control'
(including, with correlative meanings, the terms 'controlling,' 'controlled by'
and 'under common control with'), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided, that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
 
     'Asset Sale' means (i) the sale, lease, conveyance or other disposition of
any assets (including, without limitation, by way of a sale and leaseback and
the sale or other disposition of any Residual Receivables) other than sales of
Receivables in connection with Securitizations or Warehouse Facilities and sales
of foreclosed assets, in each case in the ordinary course of business (provided
that the sale, lease, conveyance or other disposition of all or substantially
all of the assets of the Company and its Restricted Subsidiaries taken as a
whole will be governed by the provisions of the Indenture described above under
the caption 'Change of Control' and/or the provisions described above under
'Merger, Consolidation or Sale of Assets' and not by the provisions of the Asset
Sale covenant), and (ii) the issuance by the Company or any of its Restricted
Subsidiaries of Equity Interests, or the sale by the Company or any Restricted
Subsidiary of any Equity Interests, in each case, of their Subsidiaries (other
than directors qualifying shares), in the case of either clause (i) or (ii),
whether in a single transaction or a series of related transactions (a) that
have a fair market value in excess of $1.0 million or (b) for net proceeds in
excess of $1.0 million. Notwithstanding the foregoing, the following will not be
deemed to be Asset Sales: (i) an issuance of Equity Interests by a Wholly-Owned
Restricted Subsidiary to the Company or to another Wholly-Owned Restricted
Subsidiary; (ii) a Restricted Payment that is permitted by the covenant

described above under 'Restricted Payments'; and (iii) a disposition by a
Restricted Subsidiary to the Company or a Wholly-Owned Restricted Subsidiary or
by the Company to a Wholly-Owned Restricted Subsidiary of the Company.
 
     'Capital Lease Obligation' means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
 
     'Capital Stock' means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership (whether general or limited) or membership interests and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
 
     'Cash Equivalents' means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than one
year from the date of acquisition, (iii) certificates of deposit and Eurodollar
time deposits with maturities of one year or less from the date of acquisition,
bankers' acceptances with maturities not exceeding one year and overnight bank
deposits, in each case with any domestic commercial bank having capital and
surplus in excess of $500.0 million and a Keefe Bank Watch Rating of 'B' or
better, (iv) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (ii) and (iii) above
entered into with any financial institution meeting the qualifications specified
in clause (iii) above, (v) commercial paper having one of the two highest
ratings obtainable from Moody's or Standard & Poor's and
 
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in each case maturing within nine months after the date of acquisition, and (vi)
money market funds, the portfolios of which are limited to investments described
in clauses (i) through (v) above.
 
     'Change of Control' means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation and excluding sales, leases, transfers, conveyances or
other dispositions pursuant to Securitizations, Warehouse Facilities or Residual
Receivables financing arrangements otherwise permitted by the Indenture entered
into in the ordinary course of business), in one or a series of related
transactions, of all or substantially all of the assets of the Company and its
Restricted Subsidiaries taken as a whole to any 'person' (as such term is used
in Section 13(d)(3) of the Exchange Act) other than a Permitted Holder, (ii) the
adoption of a plan relating to the liquidation or dissolution of the Company,
(iii) the consummation of any transaction (including, without limitation, any
merger or consolidation) the result of which is that any 'person' (as defined
above) other than a Permitted Holder becomes the 'beneficial owner' (as such
term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly

or indirectly, of more than 50% of the Voting Stock of the Company (measured by
general voting power rather than number of shares), (iv) the first day on which
a majority of the members of the Board of Directors of the Company are not
Continuing Directors or (v) the Company consolidates with, or merges with or
into, any Person, or any Person consolidates with, or merges with or into, the
Company, in any such event pursuant to a transaction in which any of the
outstanding Voting Stock of the Company is converted into or exchanged for cash,
securities or other property, other than any such transaction where the Voting
Stock of the Company outstanding immediately prior to such transaction is
converted into or exchanged for Voting Stock (other than Disqualified Stock) of
the surviving or transferee Person constituting a majority of the outstanding
shares of such Voting Stock of such surviving or transferee Person (immediately
after giving effect to such issuance). For purposes of this definition, any
transfer of an equity interest of an entity that was formed for the purpose of
acquiring Voting Stock of the Company will be deemed to be a transfer of such
portion of such Voting Stock as corresponds to the portion of the equity of such
entity that has been so transferred.
 
     'Code' means the Internal Revenue Code of 1986, as amended.
 
     'Consolidated Leverage Ratio' as of any date of determination means the
ratio of (i) the aggregate amount of all consolidated Indebtedness of the
Company and its Restricted Subsidiaries excluding (A) Permitted Warehouse Debt,
and (B) Hedging Obligations permitted to be incurred pursuant to clause (7) of
the covenant described under '--Incurrence of Indebtedness and Issuance of
Preferred Stock' to (ii) the Consolidated Net Worth of the Company.
 
     'Consolidated Net Income' means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
(for such period, on a consolidated basis, determined in accordance with GAAP);
provided, that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly-Owned Restricted
Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (that
has not been obtained) or, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute, rule
or governmental regulation applicable to that Restricted Subsidiary or its
stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded, and (iv) the cumulative effect of a change in accounting principles
shall be excluded.
 
     'Consolidated Net Worth' means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Restricted Subsidiaries as of such date plus (ii) the
respective amounts reported on such Person's balance sheet as of such date with
respect to any series of preferred stock (other than Disqualified Stock) that by
its terms is not entitled to the payment of dividends unless such dividends may
be declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such

Person upon issuance of such preferred stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern made within 12 months after the acquisition of such
business) subsequent to the date of the Indenture in the book value of any asset
owned by such Person or a consolidated Restricted Subsidiary of
 
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such Person, (y) all Investments as of such date in unconsolidated Restricted
Subsidiaries and in Persons that are not Restricted Subsidiaries and (z) all
unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
 
     'Continuing Director' means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the Issue Date or (ii) was nominated for election or elected to
such Board of Directors with the approval of a majority of the Directors
constituting Continuing Directors who were members of such Board at the time of
such nomination or election.
 
     'Credit Enhancement Agreements' means, collectively, any documents,
instruments or agreements entered into by the Company or, any of its Restricted
Subsidiaries with any Person exclusively for the purpose of providing credit
support for asset-backed securities issued in connection with Securitizations.
 
     'Default' means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
 
     'Disqualified Stock' means any Capital Stock that either (A) by its terms
(or by the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, (i) matures or is mandatorily
redeemable, in whole or in part, pursuant to a sinking fund obligation or
otherwise or, (ii) is convertible into or exchangeable for Indebtedness or
Disqualified Stock, in whole or in part, or (iii) is redeemable, in whole or in
part, at the option of the Holder thereof at any time, in any such case, on or
prior to the date that is 91 days after the date on which the Notes mature, or
(B) is designated by the Company (in a resolution of the Board of Directors
delivered to the Trustee) as Disqualified Stock.
 
     'Eligible Receivables' means, at the time of determination, Receivables
meeting the sale or loan eligibility criteria set forth in one or more of the
Warehouse Facilities to which the Company or any of its Restricted Subsidiaries
is a party at such time and is eligible for sale in a Securitization.
 
     'Equity Interests' means Capital Stock and all warrants, options or other
rights to acquire such Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, such Capital Stock).
 
     'Excess Spread' means, over the life of a pool of Receivables that have
been sold by the Company or a Restricted Subsidiary in a Securitization, the
rights, other than servicing rights, retained by the Company or such Restricted
Subsidiary at or subsequent to the closing of such Securitization or sale with

respect to such pool, to receive cash flows attributable to such pool.
 
     'fair market value' means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between an informed and willing seller and an informed and willing and able
buyer, neither of whom is under undue pressure or compulsion to complete the
transaction.
 
     'GAAP' means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
 
     'Guarantee' means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness. Notwithstanding the foregoing, the term 'Guarantee' does not
include obligations pursuant to representations, warranties, covenants and
indemnities in connection with a Securitization or Warehouse Facility.
 
     'Hedging Obligations' means, with respect to any Person, the obligations of
such Person under (i) interest rate or currency swap agreements, cap agreements,
collar agreements and related agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in value of
assets owned, financed or sold, or of liabilities incurred or assumed, or of
pre-funding arrangements, in any case in the ordinary course of business of such
Person and not for speculative purposes.
 
     'Indebtedness' means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of (i) borrowed money or evidenced
by bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital
 
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Lease Obligations or the unpaid deferred balance of the purchase price of any
property or representing any Hedging Obligations, except any such balance that
constitutes an accrued expense or trade payable, if and to the extent any of the
foregoing indebtedness (other than letters of credit and Hedging Obligations)
would appear as a liability upon a balance sheet of such Person prepared in
accordance with GAAP, (ii) all indebtedness of others secured by a Lien on any
asset of such Person (whether or not such indebtedness is assumed by such
Person), (iii) without duplication, all Warehouse Debt, (iv) all obligations of
such Person with respect to the redemption, repayment or other repurchase of any
Disqualified Stock and, in the case of any Subsidiary Guarantor, preferred stock
(but excluding in each case any accrued dividends thereon), and (v) to the
extent not otherwise included, the Guarantee by such Person of any indebtedness
of any other Person to the extent of any Guarantee of such indebtedness provided

by such Person. Except in the case of Warehouse Debt (the amount of which shall
be determined in accordance with the definition thereof) and except in the case
of Hedging Obligations (the amount of which shall be determined on a net basis
after rights of set-off and related positions), the amount of Indebtedness of
any Person at any date shall be the outstanding balance at such date of all
unconditional obligations as described above and the maximum liability, upon the
occurrence of the contingency giving rise to the obligation, of any contingent
obligations at such date. Notwithstanding the foregoing, the term 'Indebtedness'
does not include obligations pursuant to representations, warranties, covenants
and indemnities in connection with a Securitization or Warehouse Facility.
 
     'Investments' means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including Guarantees of Indebtedness), advances or capital
contributions (excluding commission, travel and similar advances to officers and
employees made in the ordinary course of business), purchases or other
acquisitions for consideration of Indebtedness, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP; provided that
an acquisition of Equity Interests or other securities by the Company for
consideration consisting of common equity securities of the Company (other than
Disqualified Stock) shall not be deemed to be an Investment.
 
     'Issue Date' means             , 1997.
 
     'Lien' means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
 
     'Net Income' means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but
not loss), together with any related provision for taxes on such extraordinary
or nonrecurring gain (but not loss).
 
     'Net Proceeds' means the aggregate Cash Equivalent proceeds received by the
Company or any of its Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, any Cash Equivalent received upon the sale or
other disposition of any non-cash consideration received in any Asset Sale), net
of the direct costs relating to such Asset Sale (including, without limitation,
legal, accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied to

the repayment of Indebtedness secured by a Lien on the asset or assets that were
the subject of such Asset Sale and any reserve for adjustment in respect of the
sale price of such asset or assets established in accordance with GAAP.
 
     'Non-Recourse Debt' means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), or (b) is directly or indirectly liable (as a guarantor or
otherwise); and (ii) as to
 
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which the lenders have been notified in writing that they will not have any
recourse to the stock or assets of the Company or any of its Restricted
Subsidiaries.
 
     'Permitted Businesses' means any consumer or commercial finance business or
any financial service business.
 
     'Permitted Holder' means any of Messrs. Sidney A. Miller, Hugh Miller, Marc
Miller and Lee Miller, any spouse or lineal descendant thereof or any trust all
of the beneficiaries of which are any of the foregoing.
 
     'Permitted Investments' means (a) any Investment in the Company or in a
Restricted Subsidiary that is a Subsidiary Guarantor; (b) any Investment in Cash
Equivalents; (c) any Investment by the Company or any Restricted Subsidiary in a
Person if, as a result of such Investment, (i) such Person becomes a
Wholly-Owned Restricted Subsidiary and a Subsidiary Guarantor that is engaged in
a Permitted Business or (ii) such Person is merged, consolidated or amalgamated
with or into, or transfers or conveys substantially all of its assets to, or is
liquidated into, the Company or a Wholly-Owned Restricted Subsidiary that is a
Subsidiary Guarantor and that is engaged in a Permitted Business; (d) any
Restricted Investment made as a result of the receipt of non-cash consideration
from an Asset Sale that was made pursuant to and in compliance with the covenant
described above under 'Repurchase at the Option of Holders--Asset Sales;' (e)
any Investment in Receivables, Residual Receivables or Servicing Receivables
made in the ordinary course of business; and (f) other Investments in any Person
(other than an Affiliate of the Company that is not also a Subsidiary of the
Company) that do not exceed $10.0 million in the aggregate since the Issue Date.
 
     'Permitted Liens' means (i) Liens on Receivables or other assets (other
than Residual Receivables) securing Warehouse Debt or Hedging Obligations (or
Guarantees of Warehouse Debt or Hedging Obligations); (ii) Liens on Servicing
Receivables, Residual Receivables and on the Capital Stock of Restricted
Subsidiaries of the Company substantially all of the assets of which are
Residual Receivables; provided, however, that, (x) all Retained Residual
Receivables shall remain unencumbered by any Lien unless after giving effect to
such sale, conveyance or other disposition the aggregate amount of Senior
Residual Receivables of the Company and its Restricted Subsidiaries which are
unencumbered by any Lien (of which no more than 25% of the aggregate book value
thereof shall constitute Retained Residual Receivables) would be greater than or
equal to 250% of all Senior Indebtedness of the Company and its Restricted

Subsidiaries; and (y) after giving effect to the incurrence of such Lien the
aggregate amount of Senior Residual Receivables of the Company and its
Restricted Subsidiaries which are unencumbered by any Lien (of which not more
than 25% of the aggregate book value thereof shall constitute Retained Residual
Receivables) would be greater than or equal to 150% of all Senior Indebtedness
of the Company and its Restricted Subsidiaries; (iii) Liens in favor of the
Company or any Restricted Subsidiary; (iv) Liens on property of a Person
existing at the time such Person is merged into or consolidated with the Company
or any Restricted Subsidiary of the Company; provided that such Liens were in
existence prior to the contemplation of such merger or consolidation and do not
extend to any assets other than those of the Person merged into or consolidated
with the Company or such Restricted Subsidiary; (v) Liens on property existing
at the time of acquisition thereof by the Company or any Restricted Subsidiary
of the Company, provided that such Liens were in existence prior to the
contemplation of such acquisition; (vi) Liens to secure the performance of
statutory obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of business; (vii)
Liens to secure Indebtedness (including Capital Lease Obligations) permitted by
clause (1) of the second paragraph of the covenant entitled 'Incurrence of
Indebtedness and Issuance of Preferred Stock' covering only the assets acquired
with such Indebtedness; (viii) Liens existing on the Issue Date; (ix) Liens for
taxes, assessments or governmental charges or claims that are not yet delinquent
or that are being contested in good faith by appropriate proceedings, provided
that any reserve or other appropriate provision as shall be required in
conformity with GAAP shall have been made therefor; (x) Liens (including,
without limitation, Liens on Residual Receivables) in favor of a monoline
insurance company or other provider of credit enhancement pursuant to a Credit
Enhancement Agreement; (xi) Liens incurred in the ordinary course of business of
the Company or any Restricted Subsidiary of the Company with respect to
obligations that do not exceed $1.0 million at any one time outstanding and that
(a) are not incurred in connection with the borrowing of money or the obtaining
of advances or credit (other than trade credit in the ordinary course of
business) and (b) do not in the aggregate materially detract from the value of
the property or materially impair the use thereof in the operation of business
by the Company or such Restricted Subsidiary; (xii) Liens imposed by law,
including but not limited to carriers', warehousemen's and mechanics' Liens, in
each case for sums not yet due or being contested in good faith by appropriate
proceedings or, other
 
                                       82

<PAGE>

Liens arising out of judgments or awards against the Company or any of its
Restricted Subsidiaries with respect to which the Company or such Restricted
Subsidiary shall then be proceeding with an appeal or other proceedings for
review; (xiii) survey exceptions, easements and other restrictions on the use of
property; (xiv) Liens securing Indebtedness the proceeds of which were utilized
by the Company or a Restricted Subsidiary solely to fund any advances to
Securitization Trusts permitted by clause (v) of the second full paragraph under
the caption '--Certain Covenants--Restricted Payments,' provided that such Liens
encumber no assets other than the contractual right of the Company or such
Restricted Subsidiary, as the case may be, to be reimbursed in respect of any
advances funded by such Indebtedness; (xv) Liens on assets of Unrestricted

Subsidiaries of the Company that secure Non-Recourse Debt of Unrestricted
Subsidiaries of the Company; and (xvi) Liens to secure any Refinancing (or
successive Refinancings), in whole or in part, of any Indebtedness (or
commitment for Indebtedness) existing on the Issue Date; provided, however, that
(x) any such new Lien shall be a Lien on the same asset class or interest
securing the original Lien and (y) the Indebtedness secured by such Lien is not,
solely by virtue of the Refinancing (unless otherwise permitted by the
Indenture), increased to an amount greater than the greater of (A) the
outstanding principal amount of the Indebtedness existing on the Issue Date
secured by such Lien, or (B) if such Lien secures Indebtedness under a line of
credit, the commitment amount of such line of credit existing on the Issue Date.
Any determination of Senior Residual Receivable shall be based on the
consolidated balance sheet of the Company and its Restricted Subsidiaries for
the most recently ended fiscal quarter for which financial statements are
available, after giving pro forma effect to the Lien for which such
determination is being made and to any other sale of or Lien on or reduction of
Residual Receivable since the date of such balance sheet.
 
     'Permitted Refinancing Indebtedness' means any Indebtedness or Disqualified
Stock of the Company or any of its Restricted Subsidiaries issued in exchange
for, or the net proceeds of which are used to extend, refinance, renew, replace,
defease or refund other Indebtedness or Disqualified Stock of the Company or any
of its Restricted Subsidiaries (other than Indebtedness incurred pursuant to
dates (2), (3), (7), (9), (10) and (11) of the second paragraph of the covenant
described under 'Limitation on Incurrence of Indebtedness and Issuance of
Preferred Stock'; provided that: (i) the principal amount (or accreted value, if
applicable) or mandatory redemption amount of such Permitted Refinancing
Indebtedness does not exceed the principal amount of (or accreted value, if
applicable) or mandatory redemption amount, plus accrued interest or dividends
on, the Indebtedness or Disqualified Stock so extended, refinanced, renewed,
replaced, defeased or refunded (plus the amount of contractual prepayment
charges and reasonable expenses incurred in connection therewith); (ii) such
Permitted Refinancing Indebtedness has a final maturity or final redemption date
later than the final maturity or final redemption date of, and has a Weighted
Average Life to Maturity equal to or greater than the Weighted Average Life to
Maturity of, the Indebtedness or Disqualified Stock being extended, refinanced,
renewed, replaced, defeased or refunded; (iii) if the Indebtedness or
Disqualified Stock being extended, refinanced, renewed, replaced, defeased or
refunded is subordinated in right of payment to the Notes, such Permitted
Refinancing Indebtedness is subordinated in right of payment to, the Notes on
terms at least as favorable to the Holders of the Notes as those contained in
the documentation governing the Indebtedness or Disqualified Stock being
extended, refinanced, renewed, replaced, defeased or refunded; and (iv) such
Indebtedness is incurred or such Disqualified Stock is issued either by the
Company or by the Restricted Subsidiary who is the obligor on the Indebtedness
or Disqualified Stock being extended, refinanced, renewed, replaced, defeased or
refunded.
 
     'Permitted Warehouse Debt' means Warehouse Debt of the Company or a
Restricted Subsidiary outstanding under one or more Warehouse Facilities
(excluding any Guarantees issued by the Company or a Restricted Subsidiary in
connection therewith); provided, however, that (i) the assets purchased with
proceeds of such Warehouse Debt are or, prior to any funding under the Warehouse
Facility with respect to such assets, were eligible to be recorded as held for

sale on the consolidated balance sheet of the Company and its Restricted
Subsidiaries in accordance with GAAP, (ii) such Warehouse Debt will be deemed
Permitted Warehouse Debt (a) in the case of a Purchase Facility, only to the
extent the holder of such Warehouse Debt has no contractual recourse to the
Company or any of its Restricted Subsidiaries to satisfy claims in respect of
such Warehouse Debt in excess of the realizable value of the Eligible
Receivables financed thereby, and (b) in the case of any other Warehouse
Facility, at the time such Warehouse Debt is incurred, only to the extent of the
lesser of (A) the amount advanced by the lender with respect to the Eligible
Receivables financed under such Warehouse Facility, and (B) 100% of the
aggregate principal amount of such Eligible Receivables and (iii) any such
Indebtedness incurred under such Warehouse Facility has not been outstanding in
excess of 364 days.
 
                                       83

<PAGE>

     'Person' means any individual, corporation, partnership, joint venture,
association, joint stock company, limited liability company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
 
     'Purchase Facility' means any Warehouse Facility in the form of a purchase
and sale facility pursuant to which the Company or a Restricted Subsidiary sells
Receivables to a financial institution, commercial paper facility or conduit and
retains a right of first refusal or other repurchase arrangement upon the
subsequent resale of such Receivables by such financial institution, commercial
paper facility or conduit.
 
     'Receivables' means consumer and commercial loans, leases and receivables
purchased or originated by the Company or any Restricted Subsidiary; provided,
however, that for purposes of determining the amount of a Receivable at any
time, such amount shall be determined in accordance with GAAP, consistently
applied, as of the most recent practicable date.
 
     'Refinance' means, in respect of any Indebtedness, to extend, refinance,
renew, replace, defease, refund, repay, prepay, redeem, or retire, or to issue
other Indebtedness in exchange or replacement for, such Indebtedness.
'Refinanced' and 'Refinancing' shall have correlative meanings.
 
     'Residual Receivables' of the Company means at any time, the capitalized
asset value of Excess Spread of the Company and its Restricted Subsidiaries
(including, without limitation, subordinated, interest-only and residual
certificates of a Securitization Trust), with respect to any Receivable pool of
any Securitization Trust, calculated in accordance with GAAP.
 
     'Restricted Investment' means an Investment other than a Permitted
Investment.
 
     'Restricted Subsidiary' means any Subsidiary other than an Unrestricted
Subsidiary.
 
     'Retained Residual Receivables' has the meaning specified under

'--Repurchase at Option of Holders-Asset Sales.'
 
     'Securitization Trust' means any Person that is not a Restricted Subsidiary
established exclusively for the purpose of issuing securities in connection with
any Securitization, the obligations of which are without recourse to the Company
or any of its Subsidiaries (other than obligations constituting Indebtedness
incurred in accordance with the first paragraph of the covenant described under
'Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock').
 
     'Securitization' means a public or private transfer of Receivables in the
ordinary course of business and by which the Company or a Restricted Subsidiary
directly or indirectly securitizes a pool of specialized Receivables, including
any such transaction involving the sale of specialized Receivables to a
Securitization Trust.
 
     'Senior Indebtedness' means all Indebtedness of any Person that is not
subordinated in right of payment to any other Indebtedness or other obligations
of such Person, excluding Permitted Warehouse Debt and Hedging Obligations
permitted to be incurred under the Indenture and, in the case of Indebtedness
secured by Senior Residual Receivables, the lesser of (x) the amount of such
Indebtedness and (y) the amount of the Senior Residual Receivables securing such
Indebtedness.
 
     'Senior Residual Receivables' means Residual Receivables which have not
been created as the result of or in connection with the sale, securitization or
other disposition of other Residual Receivables.
 
     'Servicing Receivables' means the servicing rights or any interest therein
with respect to any Receivables.
 
     'Subsidiary' means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership or limited liability company (a) the sole
general partner or the managing general partner or managing member of which is
such Person or a Subsidiary of such Person or (b) the only general partners or
managing members of which are such Person or one or more Subsidiaries of such
Person (or any combination thereof).
 
     'Subsidiary Guarantor' means any Subsidiary of the Company that executes a
Guarantee in accordance with the provisions of the Indenture.
 
     'Unrestricted Subsidiary' means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution;
but only to the extent that such Subsidiary: (a) is not
 
                                       84

<PAGE>


party to any agreement, contract, arrangement or understanding with the Company
or any Restricted Subsidiary unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary that those that might be obtained at the time from Persons
who are not Affiliates of the Company; (b) is a Person with respect to which
neither the Company nor any of its Restricted Subsidiaries has any direct or
indirect obligation (other than obligations constituting Indebtedness incurred
in accordance with the first paragraph of the covenant described under 'Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock') (x) to
subscribe for additional Equity Interests or (y) to maintain or preserve such
Person's financial condition or to cause such Person to achieve any specified
levels of operating results; and (c) has not guaranteed or otherwise directly or
indirectly provided credit support for any Indebtedness of the Company or any of
its Restricted Subsidiaries. Any such designation by the Board of Directors
shall be evidenced to the Trustee by filing with the Trustee a certified copy of
the Board Resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
conditions and was permitted by the covenant described above under the caption
'Certain Covenants--Restricted Payments.' If, at any time, any Unrestricted
Subsidiary would fail to meet the foregoing requirements as an Unrestricted
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the Indenture and any Indebtedness of such Subsidiary shall be
deemed to be incurred by a Restricted Subsidiary of the Company as of such date
(and, if such Indebtedness is not permitted to be incurred as of such date under
the covenant described under the caption 'Incurrence of Indebtedness and
Issuance of Preferred Stock,' the Company shall be in default of such covenant).
The Board of Directors of the Company may at any time designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided that such designation shall
be deemed to be an incurrence of Indebtedness and issuance of preferred stock by
a Restricted Subsidiary of the Company of any outstanding Indebtedness of such
Unrestricted Subsidiary and such designation shall only be permitted if (i) such
Indebtedness and preferred stock is permitted under the covenant described under
the caption 'Certain Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock,' (ii) such Subsidiary becomes a Subsidiary Guarantor, and (iii)
no Default or Event of Default would exist following such designation.
 
     'Voting Stock' of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote generally in the election of the
Board of Directors of such Person.
 
     'Warehouse Debt' means Indebtedness of the Company or a Restricted
Subsidiary equal to the greater of (x) the consideration received by the Company
or its Restricted Subsidiaries under a Warehouse Facility and (y) in the case of
a Purchase Facility, the book value of the Eligible Receivables financed under
such Warehouse Facility, until such time as such Eligible Receivables are (i)
securitized, (ii) repurchased by the Company or its Restricted Subsidiaries or
(iii) sold by the counterparty under the Warehouse Facility to a Person who is
not an Affiliate of the Company, including any Guarantees issued by the Company
or a Restricted Subsidiary in connection therewith.
 
     'Warehouse Facility' means any funding arrangement, including Purchase
Facilities, with a financial institution or other lender or purchaser or any
conduit or special purpose vehicle used in connection with such funding
arrangement, to the extent (and only to the extent) that the Company or any of

its Restricted Subsidiaries incurs Warehouse Debt thereunder exclusively to
finance or refinance the purchase or origination of Receivables by the Company
or a Restricted Subsidiary prior to securitization.
 
     'Weighted Average Life to Maturity' means, when applied to any Indebtedness
or Disqualified Stock at any date, the number of years obtained by dividing (i)
the sum of the products obtained by multiplying (a) the amount of each then
remaining installment, sinking fund, serial maturity or other required payments
of principal, including payment at final maturity (or final redemption, in the
case of Disqualified Stock), in respect thereof, by (b) the number of years
(calculated to the nearest one-twelfth) that will elapse between such date and
the making of such payment, by (ii) the then outstanding principal amount of
such Indebtedness or mandatory redemption amount of Disqualified Stock.
 
     'Wholly-Owned Restricted Subsidiary' of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly-Owned Restricted
Subsidiaries of such Person.
 
                                       85

<PAGE>

                                  UNDERWRITING
 
     Subject to the terms and conditions of the Underwriting Agreement (the
'Underwriting Agreement'), each of the underwriters named below (the
'Underwriters') has agreed to purchase from the Company and the Company has
agreed to sell to the Underwriters, the aggregate principal amount of the Notes
set forth opposite its name below:
 
<TABLE>
<CAPTION>
                                                                                         PRINCIPAL AMOUNT
UNDERWRITER                                                                                OF THE NOTES
--------------------------------------------------------------------------------------   ----------------
<S>                                                                                      <C>
Donaldson, Lufkin & Jenrette Securities Corporation...................................     $
Lehman Brothers Inc...................................................................
Smith Barney Inc......................................................................
                                                                                         ----------------
 
     Total............................................................................     $150,000,000
                                                                                         ----------------
                                                                                         ----------------
</TABLE>
 
     The Underwriting Agreement provides that the obligations of the
Underwriters to purchase and accept delivery of the Notes offered hereby are
subject to certain conditions precedent. If any of the Notes are purchased by
the Underwriters pursuant to the Underwriting Agreement, all such Notes must be
purchased.
 

     The Underwriters propose initially to offer the Notes directly to the
public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not to exceed
      % of the principal amount of the Notes. The Underwriters may allow, and
such dealers may reallow, discounts not to exceed       % of the principal
amount of the Notes on sales to certain other dealers. After the initial public
offering of the Notes, the public offering price and concession and reallowance
and other selling terms may be changed by the Underwriters.
 
     The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments which the Underwriters may be required to make in respect thereof.
 
     The Notes are a new issue of securities with no existing market and the
Company does not intend to list the Notes on any national securities exchange.
The Underwriters have advised the Company that they currently intend to make a
market in the Notes, but are not obligated to do so and may discontinue any such
market making at any time without notice. Accordingly, no assurance can be given
as to the liquidity of the trading market for the Notes or that an active
trading market for the Notes will develop.
 
     In connection with the Offering, certain Underwriters and selling group
members (if any) and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the price of the Notes. Such
transactions may include stabilization transactions effected in accordance with
Rule 104 of Regulation M, pursuant to which such persons may bid for or purchase
the Notes for the purpose of stabilizing their market price. The Underwriters
also may create a short position for the account of the Underwriters by selling
more of the Notes in connection with this offering then they are committed to
purchase from the Company, and in such case may purchase Notes in the open
market following completion of the Offering to cover all or a portion of such
short position. In addition, Donaldson, Lufkin & Jenrette Securities
Corporation, Lehman Brothers Inc. or Smith Barney Inc., on behalf of the
Underwriters, may impose 'penalty bids' under contractual arrangements with the
Underwriters whereby it may reclaim from an Underwriter (or dealer participating
in the Offering) for the account of the other Underwriters, the selling
concession with respect to the Notes that is distributed in the Offering but
subsequently purchased for the account of the Underwriters in the open market.
Any of the transactions described in this paragraph may result in the
maintenance of the price of the Notes at a level above that which might
otherwise prevail in the open market. None of the transactions described in this
paragraph is required, and, if any is undertaken, it may be discontinued at any
time.
 
     Under the Rules of Fair Practice of the National Association of Securities
Dealers ('NASD'), if more than 10% of the net proceeds of a public offering of
debt securities, not including underwriting compensation, are intended to be
paid to members of the NASD or affiliated or associated persons that are
participating in the distribution of the offering, the yield at which the debt
securities are distributed to the public must be no lower than that recommended
by a 'qualified independent underwriter', as defined in Rule 2720 of the Conduct
Rules of the NASD. Donaldson, Lufkin & Jenrette Securities Corporation and
Lehman Brothers Inc. provide interest-
 

                                       86

<PAGE>

only and residual loans and warehouse lines of credit which are being repaid in
connection with the Offering. See 'Use of Proceeds.' As a result, Donaldson,
Lufkin & Jenrette Securities Corporation and Lehman Brothers Inc. are expected
to receive in the aggregate more than 10% of the net proceeds of the Offering.
Accordingly, Smith Barney Inc. has agreed to act as the qualified independent
underwriter in connection with this Offering. The yield on the Notes, when sold
to the public at the public offering price set forth on the cover of this
Prospectus, will be no lower than that recommended by Smith Barney Inc. In
exchange for its services for acting as a qualified independent underwriter,
Smith Barney Inc. will receive $5,000 from the Company.
 
     The Underwriters have informed the Company that they do not expect
discretionary sales by the Underwriters to exceed 5% of the principal amount of
the Notes being offered hereby.
 
     Donaldson, Lufkin & Jenrette Securities Corporation and Lehman Brothers
Inc. have provided, and expect in the future to provide, investment banking
and/or other advisory services to the Company and its subsidiaries.
 
                                 LEGAL MATTERS
 
     The validity of the issuance of the Notes and the Guarantees offered hereby
will be passed upon for the Company by Stroock & Stroock & Lavan LLP, New York,
New York. Certain legal matters in connection with the Offering will be passed
upon for the Underwriters by Latham & Watkins, Los Angeles, California.
 
                                    EXPERTS
 
     The consolidated financial statements of the Company as of December 31,
1995 and 1996 and for each of the years in the three-year period ended December
31, 1996 appearing in this Prospectus and Registration Statement, have been
audited by KPMG Peat Marwick LLP, independent auditors, as set forth in their
report thereon appearing elsewhere in this Prospectus and Registration Statement
and are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
 
                             ADDITIONAL INFORMATION
 
     The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act, of which this Prospectus forms a part, with
respect to the Notes offered hereby. This Prospectus omits certain information
contained in the Registration Statement, and reference is made to the
Registration Statement for further information with respect to the Company and
the Notes offered hereby. Statements contained herein concerning the provisions
of documents are necessarily summaries of such documents and when any such
document is an exhibit to the Registration Statement, each such statement is
qualified in its entirety by reference to the copy of such document filed with
the Commission. Copies of the Registration Statement may be acquired upon
payment of the prescribed fees or examined without charge at the public
reference facilities of the Commission at 450 Fifth Street, N.W., Washington,

D.C. 20549. In addition, the Registration Statement may be accessed
electronically at the Commission's site on the World Wide Web located at
http://www.sec.gov.
 
     The Indenture pursuant to which the Notes will be issued will require the
Company to file with the Commission and, if requested, to distribute to Holders
of the Notes annual reports containing audited financial statements of the
Company and a report thereon audited by independent certified public accountants
and quarterly reports containing unaudited summary financial information for
each of the first three quarters of each fiscal year.
 
                                       87

<PAGE>

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                                                              PAGE
                                                                                                              ----
<S>                                                                                                           <C>
Report of Independent Auditors..............................................................................  F-2
Consolidated Financial Statements of Delta Financial Corporation:
  Consolidated Balance Sheets as of December 31, 1995 and 1996 and March 31, 1997 (unaudited)...............  F-3
  Consolidated Statements of Income for the years ended December 31, 1994, 1995 and 1996 and the three
     months ended March 31, 1996 (unaudited) and 1997 (unaudited)...........................................  F-4
  Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1994, 1995 and
     1996 and the three months ended March 31, 1997 (unaudited).............................................  F-5
  Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and the three
     months ended March 31, 1996 (unaudited) and 1997 (unaudited)...........................................  F-6
Notes to Consolidated Financial Statements..................................................................  F-7
</TABLE>
 
                                      F-1

<PAGE>

                          INDEPENDENT AUDITORS' REPORT
 
The Board of Directors
Delta Financial Corporation:
 
We have audited the accompanying consolidated balance sheets of Delta Financial
Corporation and subsidiary as of December 31, 1995 and 1996, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
 
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Delta Financial
Corporation and subsidiary as of December 31, 1995 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
 
                                          KPMG PEAT MARWICK LLP
 
New York, New York
February 19, 1997
 
                                      F-2

<PAGE>

                   DELTA FINANCIAL CORPORATION AND SUBSIDIARY

                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                           DECEMBER 31,              MARCH 31,
                                                                   ----------------------------    ------------
                                                                       1995            1996            1997
                                                                   ------------    ------------    ------------ 
                                                                                                   (UNAUDITED)
<S>                                                                <C>             <C>             <C>
                             ASSETS
Cash and interest bearing deposits..............................   $ 16,635,135    $ 18,741,182    $ 19,111,677
Accounts receivable.............................................      6,845,947       8,654,885       9,362,420
Loans held for sale.............................................     63,816,298      83,677,017      77,768,963
Accrued interest and late charges receivable....................     15,946,847      20,158,812      21,999,632
Capitalized mortgage servicing rights...........................      3,830,996      11,411,634      13,447,924
Equipment, net..................................................      1,550,099       2,836,360       3,400,910
Cash held for advance payments..................................      3,119,558       2,488,218       2,585,208
Real estate owned...............................................        250,908         134,750         134,750
Interest-only and residual certificates.........................     25,309,548      83,072,777     101,858,297
Prepaid and other assets........................................      1,316,702       1,560,578       1,576,970
Goodwill........................................................             --              --       6,109,446
Due from stockholders...........................................        990,000              --              --
                                                                   ------------    ------------    ------------
                                                                   $139,612,038    $232,736,213    $257,356,197
                                                                   ------------    ------------    ------------
                                                                   ------------    ------------    ------------
 
              LIABILITIES AND STOCKHOLDERS' EQUITY
Bank payable....................................................   $  5,100,087    $  2,294,742    $  1,695,533
Warehouse financing and other borrowings........................     82,756,232      95,481,627     112,507,300
Accounts payable and accrued expenses...........................      4,843,719       7,201,674       6,849,065
Investor payable................................................     14,271,967      22,568,730      20,769,591
Advance payments by borrowers for taxes and insurance...........      2,806,818       2,255,045       2,351,000
Income taxes payable............................................             --       9,416,784      10,159,467
                                                                   ------------    ------------    ------------
                                                                    109,778,823     139,218,602     154,331,956
                                                                   ------------    ------------    ------------

Stockholders' equity:
  Common stock, $.01 par value. Authorized 49,000,000 shares;
     issued and outstanding 10,653,000 shares at December 31,
     1995, 15,253,000 shares at December 31, 1996, and
     15,372,288 shares at March 31, 1997........................        106,530         152,530         153,723
Additional paid-in capital......................................      3,225,615      90,952,737      93,468,544
Retained earnings...............................................     26,501,070       2,412,344       9,401,974
                                                                   ------------    ------------    ------------
     Total stockholders' equity.................................     29,833,215      93,517,611     103,024,241
                                                                   ------------    ------------    ------------
                                                                   $139,612,038    $232,736,213    $257,356,197
                                                                   ------------    ------------    ------------
                                                                   ------------    ------------    ------------
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                      F-3

<PAGE>

                   DELTA FINANCIAL CORPORATION AND SUBSIDIARY

                       CONSOLIDATED STATEMENTS OF INCOME
 
<TABLE>
<CAPTION>
                                                       YEAR ENDED                     THREE MONTHS ENDED
                                                      DECEMBER 31,                         MARCH 31,
                                         ---------------------------------------   -------------------------
                                            1994          1995          1996          1996          1997
                                         -----------   -----------   -----------   -----------   -----------
                                                                                          (UNAUDITED)
<S>                                      <C>           <C>           <C>           <C>           <C>
Revenues:
  Net gain on sale of mortgage loans...  $ 6,661,163   $15,382,960   $46,525,042   $   103,391   $17,313,852
  Interest.............................    9,839,484    13,587,807    16,372,115     3,966,572     5,558,889
  Servicing fees.......................    2,182,568     2,855,642     5,368,488     1,015,295     1,391,633
  Other................................    3,113,692     4,308,985     5,266,109       219,090     3,040,487
                                         -----------   -----------   -----------   -----------   -----------
                                          21,796,907    36,135,394    73,531,754     5,304,348    27,304,861
                                         -----------   -----------   -----------   -----------   -----------
Expenses:
  Payroll and related costs............    8,815,355    12,875,714    16,508,756     1,373,085     7,495,992
  Interest expense.....................    3,734,877     7,963,613    11,298,224     2,400,922     3,170,226
  General and administrative...........    7,238,140    10,710,179    12,236,260     1,841,865     4,398,410
                                         -----------   -----------   -----------   -----------   -----------
                                          19,788,372    31,549,506    40,043,240     5,615,872    15,064,628
                                         -----------   -----------   -----------   -----------   -----------
Income (loss) before income taxes and
  extraordinary item...................    2,008,535     4,585,888    33,488,514      (311,524)   12,240,233
Provision for income taxes.............           --            --     9,466,381        44,332     5,250,603
                                         -----------   -----------   -----------   -----------   -----------
Income (loss) before extraordinary
  item.................................    2,008,535     4,585,888    24,022,133      (355,856)    6,989,630
Extraordinary item:
  Gain on extinguishment of debt.......           --            --     3,167,828            --            --
                                         -----------   -----------   -----------   -----------   -----------
  Net income (loss)....................  $ 2,008,535   $ 4,585,888   $27,189,961   $  (355,856)  $ 6,989,630
                                         -----------   -----------   -----------   -----------   -----------
                                         -----------   -----------   -----------   -----------   -----------

Unaudited pro forma information:
  Provision for pro forma income taxes
     (benefit) before extraordinary
     item..............................      863,670     1,971,932    14,400,061      (133,955)          n/a
                                         -----------   -----------   -----------   -----------
                                         -----------   -----------   -----------   -----------
  Pro forma income (loss) before
     extraordinary item................  $ 1,144,865   $ 2,613,956   $19,088,453   $  (177,569)          n/a
                                         -----------   -----------   -----------   -----------
                                         -----------   -----------   -----------   -----------
Per share data (1):
  Earnings (loss) per share............           --            --            --         (0.01)         0.45
  Weighted average number of shares
     outstanding.......................           --            --            --    12,629,182    15,420,883
</TABLE>
 
------------------
(1) March 31, 1996 is presented on a pro forma basis.
 
          See accompanying notes to consolidated financial statements.
 
                                      F-4

<PAGE>

                   DELTA FINANCIAL CORPORATION AND SUBSIDIARY

           CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995, 1996 AND THREE MONTHS ENDED MARCH 31, 1997
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                         ADDITIONAL
                                                                           PAID-IN       RETAINED
                                                     CAPITAL STOCK(1)    CAPITAL(1)      EARNINGS         TOTAL
                                                     ----------------    -----------    -----------    ------------
<S>                                                  <C>                 <C>            <C>            <C>
Balance at December 31, 1993......................       $106,530        $ 3,225,615    $25,018,190    $ 28,350,335
  Net income......................................             --                 --      2,008,535       2,008,535
  Distributions...................................             --                 --     (2,195,056)     (2,195,056)
                                                     ----------------    -----------    -----------    ------------
Balance at December 31, 1994......................        106,530          3,225,615     24,831,669      28,163,814
  Net income......................................             --                 --      4,585,888       4,585,888
  Distributions...................................             --                 --     (2,916,487)     (2,916,487)
                                                     ----------------    -----------    -----------    ------------
Balance at December 31, 1995......................        106,530          3,225,615     26,501,070      29,833,215
  Proceeds from initial public offering of common
     stock........................................         46,000         69,655,435             --      69,701,435
  Net income......................................             --                 --     27,189,961      27,189,961
  Distributions...................................             --                 --    (33,207,000)    (33,207,000)
  Reclassification of undistributed
     S corporation earnings.......................             --         18,071,687    (18,071,687)             --
                                                     ----------------    -----------    -----------    ------------
Balance at December 31, 1996......................        152,530         90,952,737      2,412,344      93,517,611
  Issuance of common stock for Fidelity Mortgage
     acquisition..................................          1,193          2,515,807             --       2,517,000
  Net income......................................             --                 --      6,989,630       6,989,630
                                                     ----------------    -----------    -----------    ------------
Balance at March 31, 1997 (Unaudited).............       $153,723        $93,468,544    $ 9,401,974    $103,024,241
                                                     ----------------    -----------    -----------    ------------
                                                     ----------------    -----------    -----------    ------------
</TABLE>
 
------------------
 
(1) Restated to reflect share exchange in connection with the October 1996
    reorganization.
 
          See accompanying notes to consolidated financial statements.
 
                                      F-5

<PAGE>

                   DELTA FINANCIAL CORPORATION AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                              YEAR ENDED                      THREE MONTHS ENDED
                                                             DECEMBER 31,                         MARCH 31,
                                                ---------------------------------------   --------------------------
                                                   1994          1995          1996           1996          1997
                                                -----------   -----------   -----------   ------------   -----------
                                                                                                 (UNAUDITED)
<S>                                             <C>           <C>           <C>           <C>            <C>
Cash flows from operating activities:
Net income (loss).............................  $ 2,008,535   $ 4,585,888   $27,189,961   $   (355,856)  $ 6,989,630
  Adjustments to reconcile net income to net
    cash used in operating activities:
    Provision for loan losses.................      169,867        99,761       101,158         24,940        24,999
    Depreciation and amortization.............      277,956       564,310       996,875        148,097       444,068
    Capitalized mortgage servicing rights, net
       of amortization........................    1,069,652    (1,409,683)   (7,580,638)       296,927    (2,036,290)
    Deferred origination fees.................      147,522       (61,239)   (2,399,299)    (4,421,195)       24,814
    Interest-only and residual certificates
       received in securitization
       transactions, net......................   (5,309,550)  (17,795,998)  (57,763,229)        (7,458)  (18,785,520)
  Changes in operating assets and liabilities:
    Increase in accounts receivable, net......   (2,365,992)   (1,136,618)   (1,808,938)      (358,458)     (676,741)
    Decrease (increase) in loans held for
       sale, net..............................   (7,447,873)  (15,021,532)  (17,562,578)  (103,786,484)    5,858,241
    Increase in accrued interest and late
       charges receivable.....................   (1,783,978)   (3,225,276)   (4,211,965)      (155,685)   (1,840,820)
    Decrease (increase) in cash held for
       advance payments.......................      141,478       166,924       631,340        234,058       (96,990)
    Decrease (increase) in real estate
       owned..................................      650,121       448,839       116,158        (42,759)           --
    Decrease (increase) in prepaid and other
       assets.................................      183,781     1,753,633      (243,876)       (56,147)       17,447
    Decrease in due from stockholders.........      165,000     2,165,000       990,000             --            --
    Increase (decrease) in accounts payable
       and accrued expenses...................     (354,737)    1,901,895     2,357,955        418,137      (430,939)
    Increase (decrease) in investor payable...    2,403,676     3,181,005     8,296,763       (633,936)   (1,799,139)
    Increase (decrease) in advance payments by
       borrowers for taxes and insurance......     (115,629)     (119,683)     (551,773)      (184,037)       83,295
    Increase in income taxes payable..........           --            --     9,416,784             --       786,760
                                                -----------   -----------   -----------   ------------   -----------
Net cash used in operating activities.........  (10,160,171)  (23,902,774)  (42,025,302)  (108,879,856)  (11,437,185)
                                                -----------   -----------   -----------   ------------   -----------

Cash flows used in investing activities:
  Acquisition of Fidelity Mortgage............           --            --            --             --    (3,674,845)
  Purchase of equipment.......................     (917,512)   (1,207,560)   (2,283,136)      (227,829)     (660,369)
                                                -----------   -----------   -----------   ------------   -----------
Net cash used in investing activities.........     (917,512)   (1,207,560)   (2,283,136)      (227,829)   (4,335,214)
                                                -----------   -----------   -----------   ------------   -----------
Cash flows from financing activities:
  Net proceeds from initial public offering...           --            --    69,701,435             --            --
  Proceeds from warehouse financing and other
    borrowings, net...........................   15,710,632    30,265,588    12,725,395    102,208,160    16,793,785
  Increase (decrease) in bank payable, net....      (11,954)    4,125,325    (2,805,345)      (165,266)     (650,891)
  Distributions...............................   (2,195,056)   (2,916,487)  (33,207,000)      (180,000)           --
  Payments (made to) received from
    affiliates................................      (43,366)      913,870            --             --            --
                                                -----------   -----------   -----------   ------------   -----------
Net cash provided by financing activities.....   13,460,256    32,388,296    46,414,485    101,862,894    16,142,894
                                                -----------   -----------   -----------   ------------   -----------
Net increase (decrease) in cash...............    2,382,573     7,277,962     2,106,047     (7,244,791)      370,495
Cash at beginning of period...................    6,974,600     9,357,173    16,635,135     16,635,135    18,741,182
                                                -----------   -----------   -----------   ------------   -----------
Cash at end of period.........................  $ 9,357,173   $16,635,135   $18,741,182   $  9,390,344   $19,111,677
                                                -----------   -----------   -----------   ------------   -----------
                                                -----------   -----------   -----------   ------------   -----------
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                      F-6

<PAGE>

                   DELTA FINANCIAL CORPORATION AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     DECEMBER 31, 1994, 1995, 1996 AND MARCH 31, 1996 AND 1997 (UNAUDITED)
 
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  (a) Organization
 
     Delta Financial Corporation (the 'Company') is a Delaware corporation which
was organized in August 1996. On October 31, 1996, the Company acquired all of
the outstanding common stock of Delta Funding Corporation ('Delta Funding'), a
New York corporation and the Company's subsidiary, which had been organized on
January 8, 1982 for the purpose of originating, selling, servicing and investing
in residential first and second mortgages, and completed an initial public
offering (see note 2).
 
  (b) Principles of Consolidation
 
     The consolidated financial statements include the accounts of Delta
Financial Corporation and its wholly-owned subsidiary. All significant
intercompany accounts and transactions have been eliminated.
 
  (c) Origination Fees
 
     The Company accounts for origination fee income on mortgages held for sale
in conformity with Statement of Financial Accounting Standards (SFAS) No. 91.
This Statement requires that origination fees be offset by their direct loan
costs and the net deferred fees be recognized over the life of the loan or upon
sale of the loan, if earlier.
 
  (d) Loans held for sale
 
     Loans held for sale are carried at the lower of cost or market, determined
on a net aggregate basis. Adjustments to market are made by charges or credits
to income.
 
  (e) Income Taxes
 
     Through October 30, 1996, the Company elected for both Federal and State
income tax purposes to be treated as an S corporation (effective July 1, 1985).
As an S corporation, the net earnings of the Company were taxed directly to the
stockholders rather than the Company.
 
     On October 31, 1996, the Company became a C corporation. All income earned
from that date is subject to corporate tax at statutory rates for both Federal
and State income tax purposes. The Company accounts for income taxes from that
date in conformity with SFAS No. 109, 'Accounting for Income Taxes,' which
requires an asset and liability approach for accounting and reporting of income
taxes.
 
  (f) Sale of Mortgage Loans

 
     The Company sells whole loans with servicing retained. Gains or losses on
such sales are recognized at the time of sale and are determined by the
differences between net sales proceeds and the unpaid principal balance of the
loans sold adjusted for the present value of any yield differential.
 
  (g) Securitization
 
     The Company sells pools of loans on a servicing retained basis. Gains or
losses are determined at the time of sale by the differences between the net
sales proceeds and the present value of the future stream of servicing fees,
adjusted for estimated losses and prepayments. The Company continues to service
these loans for a normal servicing fee.
 
     Included in the gain on sale of loans is gain on securitization
representing the fair value of the interest-only and residual certificates
received by the Company. Fair value of these certificates is determined based on
various
 
                                      F-7

<PAGE>

                   DELTA FINANCIAL CORPORATION AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

economic factors, including loan types, sizes, interest rates, dates of
origination, terms and geographic locations. The Company also uses other
available information such as reports on prepayment rates, collateral value,
discount rates, economic forecasts and historical default and prepayment rates
of the portfolio under review. The Company reviews these factors and, if
necessary, adjusts the remaining assets to the fair value of the interest-only
and residual certificates.
 
  (h) Real Estate Acquired Through Foreclosure
 
     Properties acquired through foreclosure or a deed in lieu of foreclosure
are recorded at the lower of the unpaid loan balance, or fair value, at the date
of acquisition. The carrying value of the individual properties is subsequently
adjusted to the extent it exceeds estimated fair value less costs to sell, at
which time a provision for losses on such real estate is charged to operations.
 
  (i) Equipment
 
     Equipment, including leasehold improvements, is stated at cost, less
accumulated depreciation and amortization. Depreciation of equipment is computed
using the straight-line or accelerated method over the estimated useful lives of
three to five 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.
 
  (j) Interest-Only and Residual Certificates

 
     Interest-only and residual certificates are carried at fair value in
accordance with SFAS No. 115, 'Accounting for Certain Investments in Debt and
Equity Securities.' Unrealized gains and losses are included in the statement of
operations.
 
  (k) Capitalized Mortgage Servicing Rights
 
     Effective January 1, 1995 the Company adopted SFAS No. 122 'Accounting for
Mortgage Servicing Rights.' The Statement amends SFAS No. 65 to require that a
mortgage banking enterprise recognize as separate assets the rights to service
mortgage loans for others, however those servicing rights are acquired. The
Statement requires the assessment of capitalized Mortgage Servicing Rights for
impairment. Mortgage Servicing Rights are amortized in proportion to and over
the period of the estimated net servicing income.
 
     Effective January 1, 1997, the Company adopted SFAS No. 125, 'Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities,' which supersedes SFAS No. 122, 'Accounting for Mortgage Servicing
Rights' and amends SFAS No. 65, 'Accounting for Certain Mortgage Banking
Activities.' SFAS No. 125 requires that a mortgage banking enterprise
distinguish between the transfer of financial assets that are sale transactions
from the transfer of financial assets that are secured borrowings. Because
Delta's transfers of loans made in connection with its securitizations qualify
as sales under SFAS No. 125, the required accounting is an allocation of basis
approach.
 
     SFAS No. 125 also requires impairment evaluations of all amounts
capitalized as servicing rights, including those purchased before the adoption
of SFAS No. 125, based upon the fair value of the underlying servicing rights.
The Company periodically performs these evaluations on a disaggregated basis.
The continuing effects of SFAS No. 125 on the Company's financial position and
results of operations will depend on several factors, including, among other
things, the amount of acquired or originated loans sold or securitized, the
type, term and credit quality of loans and estimates of future prepayment rates.
 
                                      F-8

<PAGE>

                   DELTA FINANCIAL CORPORATION AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  (l) Fair Value of Financial Instruments
 
     SFAS No. 107, 'Disclosure About Fair Value of Financial Instruments'
requires the Company to disclose the fair value of financial instruments for
which is practicable to estimate fair value. Fair value is defined as the amount
at which a financial instrument could be exchanged in a current transaction
between willing parties, other than in a forced sale or liquidation and is best
evidenced by a quoted market price. Other than interest-only and residual
certificates, substantially all the Company's assets and liabilities deemed to
be financial instruments are carried at cost, which approximates their fair

value.
 
  (m) Use of Estimates
 
     Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
 
  (n) Servicing Income
 
     Servicing income includes servicing fees, prepayment penalties and late
payment charges earned for servicing mortgage loans owned by investors. All fees
and charges are recognized into income when earned.
 
  (o) Earnings Per Share
 
     Earnings per share data for periods prior to October 31, 1996 have not been
presented in the accompanying consolidated financial statements because the
Company was not a public company.
 
     Earnings per share data for the period November 1, 1996 to December 31,
1996 have not been presented in the accompanying consolidated financial
statements because management believes that such data would not be meaningful
given the relatively short period and the impact of the recognition of a
deferred tax liability in connection with the change in tax status.
 
  (p) Stock Option Plan
 
     During 1996, the Company adopted SFAS No. 123, 'Accounting for Stock-Based
Compensation,' which permits entities to continue to apply the provisions of APB
Opinion No. 25, 'Accounting for Stock Issued to Employees,' and provide pro
forma net income and pro forma earnings per share disclosures for employee stock
option grants as if the fair-value based method defined in SFAS No. 123 had been
applied. The Company elected to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123 (see Note 15).
 
  (q) Unaudited Pro Forma Information
 
     The pro forma financial information has been presented to show what the
significant effects on the historical results of operations before extraordinary
item might have been had the Company been treated as a C corporation for income
tax purposes as of the beginning of the earliest period presented and assumes an
effective tax rate of 43%.
 
  (r) Unaudited Interim Financial Information
 
     The accompanying unaudited consolidated financial statements for the three
months ended March 31, 1997 and 1996 have been prepared in accordance with
generally accepted accounting principles for interim financial information and
the instructions to Form 10-Q and do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments consisting

of normal recurring accruals, considered necessary for a fair presentation of
the results for the interim period have been included.
 
                                      F-9

<PAGE>

                   DELTA FINANCIAL CORPORATION AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
(2) REORGANIZATION AND INITIAL PUBLIC OFFERING
 
     On October 31, 1996, the Company acquired all of the outstanding stock of
Delta Funding in exchange for 10,653,000 shares of common stock of the Company.
Prior to the exchange, Delta Funding was treated for Federal income tax purposes
as an S corporation under Subchapter S of the Internal Revenue Code, and as
such, the historical earnings of Delta Funding through October 31, 1996 were
taxed directly to the stockholders of Delta Funding. As a result of the
exchange, the Company and Delta Funding, which became a wholly-owned subsidiary
of the Company, became subject to Federal and State income taxes and the Company
recorded a deferred tax liability on its balance sheet relating to the tax
effect of temporary differences between book and tax accounting, principally
relating to recognition of gain on sale of mortgage loans.
 
     On November 1, 1996, the Company completed an initial public offering (IPO)
of 4,600,000 shares of common stock at an offering price of $16.50 per share.
The net proceeds of the offering to the Company, exclusive of underwriting
discounts and commissions and other expenses, was $69,701,435. In November 1996,
$32,607,000 of the proceeds raised in the offering was distributed to the former
S corporation shareholders with respect to declared distributions of
undistributed S corporation earnings. Remaining undistributed S corporation
earnings of $18,071,687 were reclassified to additional paid-in capital.
 
(3) LOANS HELD FOR SALE
 
     The Company owns first and second mortgages which had a weighted average
interest rate of 11.2% at December 31, 1996. These mortgages are being held as
inventory for future sale at the lower of cost or market. Certain of these
mortgages are pledged as collateral for a portion of the warehouse financing and
other borrowings.
 
     Included in loans held for sale are deferred origination fees and purchase
premiums in the amount of $1,013,658, $3,412,957 and $3,388,143 and an allowance
for loan losses of $750,000, $850,000 and $874,999 at December 31, 1995, 1996
and March 31, 1997 (unaudited), respectively.
 
     Mortgages are payable in monthly installments of principal and interest and
have due dates varying from five to thirty years.
 
     The changes in the allowance for loan losses are as follows:
 
<TABLE>
<CAPTION>

                                                               YEAR ENDED DECEMBER 31,
                                                          ---------------------------------    THREE MONTHS ENDED
                                                            1994         1995        1996        MARCH 31, 1997
                                                          ---------    --------    --------    ------------------
                                                                                                  (UNAUDITED)
<S>                                                       <C>          <C>         <C>         <C>
Balance at beginning of period.........................   $ 650,000    $700,000    $750,000         $850,000
Provisions.............................................     169,867      99,761     101,158           24,999
Charge-offs............................................    (119,867)    (49,761)     (1,158)              --
                                                          ---------    --------    --------    ------------------
Balance at end of period...............................   $ 700,000    $750,000    $850,000         $874,999
                                                          ---------    --------    --------    ------------------
                                                          ---------    --------    --------    ------------------
</TABLE>
 
(4) ACCOUNTS RECEIVABLE
 
     Accounts receivable consist of the following:
 
<TABLE>
<CAPTION>
                                                                              DECEMBER 31,          MARCH 31, 1997
                                                                        ------------------------    --------------
                                                                           1995          1996        (UNAUDITED)
                                                                        ----------    ----------
<S>                                                                     <C>           <C>           <C>
Securitization.......................................................   $3,168,100    $4,390,694      $4,374,025
Escrow receivable....................................................      662,572       764,381         988,631
Insurance premiums...................................................    1,003,285     1,244,130       1,304,578
Other................................................................    2,011,990     2,255,680       2,695,186
                                                                        ----------    ----------    --------------
                                                                        $6,845,947    $8,654,885      $9,362,420
                                                                        ----------    ----------    --------------
                                                                        ----------    ----------    --------------
</TABLE>
 
                                      F-10

<PAGE>

                   DELTA FINANCIAL CORPORATION AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
(5) WAREHOUSE FINANCING AND OTHER BORROWINGS
 
     The Company has two warehouse credit facilities for a combined amount of
$350,000,000. These lines are collateralized by specific mortgage receivables,
which are equal or greater than the outstanding balances under the line at any
point in time. Both of these lines expire in February 1998.
 
     The first warehouse line of credit is in the aggregate amount of
$250,000,000. At December 31, 1996 and March 31, 1997 (unaudited), the interest
rate was 0.80% and 0.75% above LIBOR, respectively. At December 31, 1995 and

1996, the Company had $0 and $45,813,382 outstanding under this agreement,
respectively. At March 31, 1997 (unaudited), the Company had $51,762,974
outstanding under this agreement.
 
     The second warehouse line of credit is in the aggregate amount of
$100,000,000. At December 31, 1996 the interest rate was 1% above LIBOR. On
February 14, 1997, this warehouse line of credit was increased to $200,000,000
and the interest rate was changed to 0.75% above LIBOR. At December 31, 1995 and
1996, the Company had $30,132,844 and $0 outstanding under this agreement,
respectively. At March 31, 1997 (unaudited), the Company had $0 outstanding
under this agreement.
 
     The Company had a warehouse line of credit in the aggregate amount of
$45,000,000. The line was collateralized by specific mortgage receivables, which
were equal to or greater than the outstanding balances under the line at any
point in time. The interest rate was 2% above LIBOR. At December 31, 1995, the
Company had $30,498,168 outstanding. In May 1996 the Company extinguished this
line of credit at a discount. An extraordinary gain of $3,167,828 was recorded
in connection with this extinguishment of debt.
 
     At December 31, 1995, the Company had lines of credit in the aggregate
amount of $3,500,000 with separate banks. The individual lines available, and
their interest rates, were as follows: $2,500,000 at 1/2% above prime and
$1,000,000 at 2.9% above the 30-day dealer commercial paper rate. At December
31, 1995, the Company had $2,500,000 and $981,843, drawn down from these
sources. During 1996, the $2,500,000 line of credit expired and, at the
Company's option, was not renewed. At December 31, 1996, the Company had $5,367
outstanding on the $1,000,000 line of credit. At March 31, 1997 (unaudited), the
Company had $0 outstanding on this line. Subsequent to March 31, 1997, the
Company obtained an additional credit line in the amount of $7.5 million with a
variable interest rate.
 
     At December 31, 1995 and 1996, the Company had a term loan with $879,710
and $486,710 outstanding, respectively. The interest rate is 1% above New York
Prime (as defined in the loan agreement) and the loan matures in April 1998. At
March 31, 1997 (unaudited), the Company had $388,460 outstanding.
 
     At December 31, 1995 and 1996, the Company had $1,586,935 and $2,160,990
outstanding, respectively, from two leasing companies for financing of capital
assets. At March 31, 1997 (unaudited), the Company had $2,023,753 outstanding.
These capital leases are amortized at fixed rates ranging from 7.11% to 10.41%
and mature between September 1998 and August 2001.
 
     The Company has obtained financing facilities for its interest-only and
residual certificates. As of December 31, 1995 and 1996, the aggregate
outstanding balance on these facilities was $16,176,732 and $47,015,178,
respectively. At March 31, 1997 (unaudited), the aggregate balance was
$57,454,193. These facilities have variable interest rates which ranged from
6.44% to 7.75% at December 31, 1996 and mature between October 1997 and December
1999, and ranged from 6.44% to 7.94% at March 31, 1997 (unaudited) and mature
between October 1997 and March 2000.
 
(6) BANK PAYABLE
 

     In order to maximize its cash management practices, the Company has
instituted a procedure whereby checks written against its operating account are
covered as they are presented to the bank for payment, either by drawing down
its lines of credit or from subsequent deposits of operating cash.
 
                                      F-11

<PAGE>

                   DELTA FINANCIAL CORPORATION AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
(7) INVESTOR PAYABLE
 
     Investor payable represent the collection of mortgage payments by the
Company, from mortgagors, which were remitted to investors subsequent to the
period end.
 
(8) CAPITALIZED MORTGAGE SERVICING RIGHTS
 
     The Company sells mortgage loans to generate servicing income and provide
funds for additional investment and lending activities. Prior to January 1,
1995, the Company accounted for the sale of mortgage loans in conformity with
SFAS No. 65, 'Accounting for Certain Mortgage Banking Activities.' Effective
January 1, 1995, the Company adopted SFAS No. 122, 'Accounting for Mortgage
Servicing Rights' which prospectively changed the methodology for capitalized
Mortgage Servicing Rights and the methodology used to measure impairment of its
capitalized Mortgage Servicing Rights asset. These Statements require that the
gain on sale be recognized at the time of sale, using the present value of the
future servicing cash flows. The cash flow has been computed over the average
estimated life of the mortgages, adjusted for prepayments and recorded as
capitalized Mortgage Servicing Rights.
 
     The Company measures impairment of its servicing rights on a disaggregate
basis based on the predominate risk characteristics of the portfolio and
discounts the asset's estimated future cash flow using a current market rate.
The Company has determined the predominant risk characteristics to be prepayment
risk and interest rate risk. The fair value of the existing Mortgage Servicing
Rights as of December 31, 1995 and 1996 and March 31, 1997 (unaudited)
approximated its book value and did not require a valuation allowance to be
established. To determine the fair value of Mortgage Servicing Rights, the
Company estimates the expected future net servicing revenue based on common
industry assumptions, as well as on the Company's historical experience.
 
     SFAS No. 122 was superseded on January 1, 1997 by SFAS No. 125, 'Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities'. The Company adopted SFAS No. 125 on January 1, 1997.
 
     SFAS No. 125 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996, and is to
be applied prospectively. SFAS No. 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial-components approach

that focuses on control. SFAS No. 125 distinguishes transfers of financial
assets that are sales from transfers that are secured borrowings.
 
     SFAS No. 125 requires mortgage banking entities that acquire or originate
loans and subsequently sell or securitize those loans and retain the Mortgage
Servicing Rights to allocate the total cost of the loans to the Mortgage
Servicing Rights and the mortgage loans without the Mortgage Servicing Rights.
The Company determines fair value based upon the present value of estimated net
future servicing revenues less the estimated cost that would fairly compensate a
substitute servicer to service the loans. The servicing asset is then recorded
on the balance sheet and accounted for under SFAS No. 125 using the allocation
of cost relative to fair value approach. The assumptions used to calculate fair
value are the same assumptions used to determine the fair value of the
interest-only certificates. The cost allocated to the servicing rights is
amortized in proportion to and over the period of estimated net future cash
flows related to servicing income.
 
(9) INTEREST-ONLY AND RESIDUAL CERTIFICATES
 
     The interests that the Company receives upon the sales through
securitizations are in the form of interest-only and residual mortgage
securities which are classified as interest-only and residual certificates.
 
     In accordance with SFAS No. 115, the Company classifies the interest-only
and residual certificates as 'trading securities' and, as such, they are
recorded at their fair value. Fair value of these certificates has been
determined by the Company based on various economic factors, including loan
type, sizes, interest rates, dates of origination, terms and geographic
locations. The Company also uses other available information such as reports
 
                                      F-12

<PAGE>

                   DELTA FINANCIAL CORPORATION AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

on prepayment rates, interest rates, collateral value, economic forecasts and
historical default and prepayment rates of the portfolio under review. If the
fair value of the interest-only and residual certificates is different from the
recorded value, the unrealized gain or loss will be reflected on the statement
of operations.
 
     In connection with loans sold through these securitization vehicles, the
Company has recorded interest-only and residual certificates totaling $25.3
million, $83.1 million and 101.9 million which represents their fair market
value at December 31, 1995 and 1996 and March 31, 1997 (unaudited),
respectively.
 
     Although the Company believes it has made reasonable estimates of the fair
value of the interest-only and residual certificates likely to be realized, the
rate of prepayments and the amount of defaults utilized by the Company are
estimates and actual experience may vary from its estimate. The gain on

securitization recognized by the Company upon the sale of loans through
securitizations will have been overstated if prepayments or losses are greater
than anticipated. Higher than anticipated rates of loan prepayments or losses
would require the Company to write down the fair value of the interest-only and
residual certificates, adversely impacting earnings. Similarly, if
delinquencies, liquidations or interest rates were to be greater than was
initially assumed, the fair value of the interest-only and residual certificates
would be negatively impacted which would have an adverse effect on income for
the period in which such events occurred. Should the estimated loan life assumed
for this purpose be shorter than the actual life, the amount of cash actually
received over the lives of the loans would exceed the gain previously recognized
at the time the loans were sold through securitizations and would result in
additional income.
 
     The activity in the interest-only and residual certificates is summarized
as follows:
 
<TABLE>
<CAPTION>
                                                                                        THREE MONTHS ENDED
                                                YEAR ENDED DECEMBER 31,                   MARCH 31, 1997
                                        ----------------------------------------    ---------------------------
                                           1994          1995           1996           1996            1997
                                        ----------    -----------    -----------    -----------    ------------
                                                                                            (UNAUDITED)
<S>                                     <C>           <C>            <C>            <C>            <C>
Balance, beginning of period.........   $2,204,000    $ 7,513,550    $25,309,548    $25,309,548    $ 83,072,777
Additions............................    4,159,550     16,750,157     57,456,342             --      21,902,393
Cash remittances, accretion of
  discount and fair value
  adjustments, net...................    1,150,000      1,045,841        306,887          7,458      (3,116,873)
                                        ----------    -----------    -----------    -----------    ------------
Balance, end of period...............   $7,513,550    $25,309,548    $83,072,777    $25,317,006    $101,858,297
                                        ----------    -----------    -----------    -----------    ------------
                                        ----------    -----------    -----------    -----------    ------------
</TABLE>
 
(10) HEDGING TRANSACTIONS
 
     The Company regularly securitizes and sells fixed rate mortgage loans. To
offset the effects of interest rate fluctuations on the value of its fixed-rate
loans held for sale, the Company in certain cases will hedge its interest rate
risk related to loans held for sale through the use of treasury rate lock
contracts, which function similar to a short sale of U.S. Treasury securities.
The Company accounts for these contracts as hedges of specific loans held for
sale. The gains or losses derived from these contracts are deferred and
recognized as an adjustment to gains on sales of loans when the loans are sold
or securitized.
 
     As of December 31, 1994, 1995 and 1996, the Company had no open hedge
positions. The Company included gains (losses) of $137,871, ($1,721,860) and
($519,192) on the short sale of U.S. Treasury securities as part of gains on
sale of loans in 1994, 1995 and 1996, respectively.
 

     As of March 31, 1996 (unaudited) and 1997 (unaudited), the Company had open
hedge positions of $105 million and $30 million, respectively. The Company
included gains (losses) of $0 and $931,082 on the short sale of U.S. Treasury
securities as part of gains on sale of loans for the three months ended March
31, 1996 (unaudited) and 1997 (unaudited), respectively.
 
                                      F-13

<PAGE>

                   DELTA FINANCIAL CORPORATION AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
(11) RELATED PARTY TRANSACTIONS
 
     The Company had notes due from stockholders in the amount of $990,000 at
December 31, 1995. These notes were repaid during 1996.
 
(12) EMPLOYEE BENEFIT PLANS
 
     The Company has an employee profit-sharing plan covering all eligible
employees, as defined, with at least 30 months of service. The Company
contributed $90,000, $120,000, and $220,000 to the plan for the years ended
December 31, 1994, 1995 and 1996, respectively.
 
     The Company sponsors a 401(k) Retirement Savings Plan. Substantially all
employees of the Company are eligible to participate in the plan after
completing one year of service and who are at least 21 years old. Contributions
are made from employees' elected salary deferrals. The Company may elect to make
a discretionary contribution to the Plan each year. There were no contributions
to the plan by the Company in 1994, 1995 or 1996.
 
(13) COMMITMENTS AND CONTINGENCIES
 
     The Company has repurchase agreements with certain institutions that have
purchased mortgages. Currently, some of the agreements provide for the
repurchase by the Company of any of the mortgage loans that go to actual
foreclosure sale. At the foreclosure sale, the Company will repurchase the
mortgage, if necessary, and make the institution whole. The dollar amount of the
Company's exposure is approximately $20.0 million at December 31, 1996 and $18.0
million at March 31, 1997 (unaudited).
 
     The Company previously subleased its Woodbury, New York offices from an
affiliated company. In August 1996, the lease was assigned to the Company. This
lease provides for rent to be paid on a month-to-month basis. Rental expense,
net of sublease income, for the years ended December 31, 1994, 1995 and 1996
amounted to $382,702, $476,674 and $967,258, respectively.
 
     Minimum future rentals under non-cancelable operating leases as of December
31, 1996 and March 31, 1997 are as follows:
 
<TABLE>
<CAPTION>

                                                       AMOUNT (000'S)
                                                 ---------------------------
                                                 DECEMBER 31,     MARCH 31,
                                                 ------------    -----------
                                                                 (UNAUDITED)
                                                                 -----------
<S>                                              <C>             <C>
1997..........................................      $1,138         $ 1,071
1998..........................................       1,151           1,405
1999..........................................       1,179           1,331
2000..........................................       1,219           1,240
2001..........................................       1,224           1,224
Thereafter....................................       2,695           2,695
                                                 ------------    -----------
  Total.......................................      $8,606         $ 8,966
                                                 ------------    -----------
                                                 ------------    -----------
</TABLE>
 
     In the normal course of business, the Company is subject to various legal
proceedings and claims, the resolution of which, in management's opinion, will
not have a material adverse effect on the financial position or the results of
operations of the Company.
 
     Several class-action lawsuits have been filed recently against a number of
consumer finance companies alleging that the compensation of mortgage brokers
through the payment of yield spread premiums violates various federal and state
consumer protection laws. On March 18, 1997 (unaudited), the Company received
notice that it had been named in a lawsuit filed in Federal District Court,
E.D.N.Y., alleging that the Company's compensation of mortgage brokers by means
of yield spread premiums violates, among other things, the Federal Real Estate
Settlement Procedures Act. The complaint seeks (i) certification of a class of
plaintiffs, (ii) an
 
                                      F-14

<PAGE>

                   DELTA FINANCIAL CORPORATION AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

injunction against payment of yield spread premiums by the Company and (iii)
unspecified compensatory and punitive damages (including attorney's fees).
Management believes the Company has meritorious defenses and intends to defend
this suit, but the Company has not yet answered the complaint and cannot
estimate with any certainty its ultimate legal or financial liability, if any,
with respect to the alleged claims. On May 2, 1997, the Company filed a motion
to dismiss for failure to join a necessary party.
 
(14) SUPPLEMENTAL CASH FLOW INFORMATION
 
     The Company paid $3,796,047, $7,659,000 and $10,452,616 for interest during
the years ended December 31, 1994, 1995 and 1996, respectively. The Company paid

$1,855,922 and $3,901,246 for interest during the three months ended March 31,
1996 (unaudited) and 1997 (unaudited), respectively.
 
     The Company paid $4,463,843 for income taxes during the three
months ended March 31, 1997 (unaudited).
 
     During the three months ended March 31, 1997 (unaudited), in connection
with the acquisition of Fidelity Mortgage, the Company issued 119,288 shares of
common stock, valued at $2.5 million, to the former owners of Fidelity Mortgage.
 
(15) STOCK OPTION PLAN
 
     On October 4, 1996, the board of directors ratified the 1996 Stock Option
Plan and authorized the reserve of 2,200,000 shares of authorized but unissued
common stock for issuance pursuant to the plan. The majority of options issued
during 1996 in connection with the IPO vest over a five year period at 20% per
year and the expiration dates range from five to seven years from grant date.
 
     As of December 31, 1996, there were 466,850 options granted at an exercise
price of $16.50. Of the options granted, 6,000 were exercisable at the end of
the year. No options were exercised, forfeited or expired during the year.
 
     The Company applies APB Opinion No. 25, 'Accounting for Stock Issued to
Employees,' and related interpretations in accounting for its stock option plan.
There was no intrinsic value of the options granted as the exercise price was
equal to the quoted market price at grant date. Accordingly, no compensation
cost has been recognized for the year ended December 31, 1996.
 
     Had compensation cost for the stock option plan been determined based on
the fair value at the grant dates for awards under that plan consistent with the
method of SFAS No. 123, 'Accounting for Stock-Based Compensation,' the Company's
net income for 1996 would have been $25,481,126.
 
     The weighted-average fair value of options granted during 1996 was $6.31.
For purposes of the pro forma calculation under SFAS No. 123, the fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions used for
the 1996 grant:
 
<TABLE>
<CAPTION>
                                                                    1996
                                                                   -------
<S>                                                                <C>
Dividend yield..................................................        0%
Expected volatility.............................................       51%
Risk-free interest rate.........................................        6%
Expected life...................................................   5 years
</TABLE>
 
     On March 4, 1997 (unaudited), the board of directors ratified the grant of
an additional 165,000 shares to various employees under the 1996 Stock Option
Plan. The options granted vest over a five year period at 20% per year and have
an expiration date of seven years from grant date. There was no intrinsic value

of the options granted as the exercise price was equal to the quoted market
price at grant date. Accordingly, no compensation cost has been recognized for
the quarter ending March 31, 1997.
 
                                      F-15

<PAGE>

                   DELTA FINANCIAL CORPORATION AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
(16) INCOME TAXES
 
     The income tax provision for the year ended December 31, 1996 is comprised
of the following components:
 
<TABLE>
<CAPTION>
                                                                            CURRENT       DEFERRED       TOTAL
                                                                           ----------    ----------    ----------
<S>                                                                        <C>           <C>           <C>
Ordinary tax provision
  Federal...............................................................   $3,305,242    $  825,832    $4,131,074
  State.................................................................    1,150,463       284,348     1,434,811
                                                                           ----------    ----------    ----------
                                                                            4,455,705     1,110,180     5,565,885
                                                                           ----------    ----------    ----------
Change in tax status
  Federal...............................................................           --     2,901,470     2,901,470
  State.................................................................           --       999,026       999,026
                                                                           ----------    ----------    ----------
                                                                                   --     3,900,496     3,900,496
                                                                           ----------    ----------    ----------
     Total tax provision................................................   $4,455,705    $5,010,676    $9,466,381
                                                                           ----------    ----------    ----------
                                                                           ----------    ----------    ----------
</TABLE>
 
     As discussed in Note 1, the Company was an S corporation through October
30, 1996 pursuant to the Internal Revenue Code of 1986, as amended, and as such
did not incur any federal income tax expense. The Company was liable for New
York State minimum tax and that provision is included above under current state
provision.
 
     On October 31, 1996, the Company became a C corporation for federal and
state income tax purposes and as such is subject to federal and state income tax
on its taxable income for the months of November and December 1996. In
connection with the change in tax status from an S corporation to a C
corporation, the Company incurred deferred income tax expense of $3,900,496 as
of October 31, 1996.
 
     The liability for income taxes at December 31, 1996 reflected on the
consolidated balance sheet includes a deferred tax liability of $5,010,676. This

represents the tax effect of differences between the tax basis and financial
statement carrying amounts of assets and liabilities. The major sources of
temporary differences and their deferred tax effect at December 31, 1996 are as
follows:
 
<TABLE>
<S>                                                            <C>
Deferred tax liabilities:
  Capitalized cost of future servicing income...............   $4,814,213
  Book/tax difference in interest-only residual certificate
     valuation..............................................      966,481
                                                               ----------
Total deferred tax liabilities..............................    5,780,694
                                                               ----------
                                                               ----------
Deferred tax assets:
  Book over tax depreciation................................       86,291
  Book over tax basis in mortgage servicing asset...........      326,906
  Loss reserves.............................................      356,821
                                                               ----------
Total deferred tax assets...................................      770,018
                                                               ----------
Net deferred tax liability..................................   $5,010,676
                                                               ----------
                                                               ----------
</TABLE>
 
                                      F-16

<PAGE>

                   DELTA FINANCIAL CORPORATION AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
A reconciliation of the statutory income tax provision to the effective income
tax provision, as applied to income for the period November 1, 1996 to December
31, 1996, is as follows:
 
<TABLE>
<CAPTION>
                                                                 AMOUNT
                                                               ----------
<S>                                                            <C>
Tax at statutory rate.......................................   $4,161,394
Change in tax status........................................    3,900,000
State and local taxes.......................................      835,127
S corporation state and local tax...........................      150,000
Non-deductible expenses and other...........................      419,860
                                                               ----------
  Total provision...........................................   $9,466,381
                                                               ----------
                                                               ----------
</TABLE>

 
(17) ACQUISITIONS (UNAUDITED)
 
     In February 1997, the Company acquired Fidelity Mortgage, Inc. and Fidelity
Mortgage (Florida), Inc. (together referred to herein as 'Fidelity Mortgage')
for a combination of cash and stock. These transactions were accounted for under
the purchase method of accounting. Accordingly, the results of operations of
Fidelity Mortgage starting from the date of purchase have been included in the
Company's consolidated financial statements. In connection with these
acquisitions the Company recorded goodwill of approximately $6.3 million, which
is being amortized on a straight-line basis over seven years. The acquired
operations will continue to operate as separate legal entities under the names
Fidelity Mortgage, Inc. and Fidelity Mortgage (Florida), Inc.
 
                                      F-17

<PAGE>

            ------------------------------------------------------
            ------------------------------------------------------
 
     NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY
PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
 
                          ---------------------------
 
                               TABLE OF CONTENTS

                          ---------------------------
 
<TABLE>
<CAPTION>
                                                  PAGE
                                                  ----
<S>                                               <C>
Prospectus Summary.............................     3
Summary Consolidated Financial Information.....     9
Risk Factors...................................    11
Use of Proceeds................................    21
Capitalization.................................    22
Selected Consolidated Financial Data...........    23
Management's Discussion and Analysis of
  Financial Condition and Results of
  Operations...................................    26
Business.......................................    39
Management.....................................    56
Certain Relationships and Related Party
  Transactions.................................    62
Principal Stockholders.........................    64
Description of the Notes.......................    65
Underwriting...................................    86
Legal Matters..................................    87
Experts........................................    87
Additional Information.........................    87
Index to Consolidated Financial Statements.....   F-1
</TABLE>

            ------------------------------------------------------
            ------------------------------------------------------

            ------------------------------------------------------
            ------------------------------------------------------
 
                                  $150,000,000
 
                                DELTA FINANCIAL
                                  CORPORATION
                                 % SENIOR NOTES
                                    DUE 2004

                            ------------------------

                                   PROSPECTUS

                            ------------------------

                         DONALDSON, LUFKIN & JENRETTE
                            SECURITIES CORPORATION

                               LEHMAN BROTHERS

                              SMITH BARNEY INC.


                                             , 1997
 
            ------------------------------------------------------
            ------------------------------------------------------

<PAGE>

                                    PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 13.  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
 
     The Registrants estimates that expenses payable by them in connection with
the offering described in this registration statement (other than the
underwriting discount and commissions) will be as follows:
 
<TABLE>
<S>                                                              <C>
SEC registration fee..........................................   $ 45,455
Legal fees and expenses.......................................      *
Accounting fees and expenses..................................      *
Printing and engraving........................................      *
Blue sky qualification fees and expenses......................     11,000
Rating Agency fees and expenses...............................      *
Trustee's fees................................................      *
NASD fees and expenses........................................     15,500
Miscellaneous.................................................      *
                                                                 --------
  Total.......................................................   $      *
                                                                 --------
                                                                 --------
</TABLE>
 
------------------
* To be completed by amendment.
 
ITEM 14.  INDEMNIFICATION OF DIRECTORS AND OFFICERS.
 
     The Certificates of Incorporation of each of Delta Financial Corporation,
DF Special Holdings Corporation, Fidelity Mortgage, Inc. and Fidelity Mortgage
(Florida), Inc. eliminates, to the fullest extent permitted by the law of the
State of Delaware, personal liability of directors to those companies and their
stockholders for monetary damages for breach of fiduciary duty as directors.
 
     Section 145(a) of the Delaware General Corporation Law ('DGCL') provides in
relevant part that 'a corporation may indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.'

With respect to derivative actions, Section 145(b) of the DGCL provides in
relevant part that '[a] corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor. . . [by reason of his service in one of the capacities
specified in the preceding sentence] against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the defense or
settlement or such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.'
 
     Article EIGHTH of the Certificates of Incorporation of each of Delta
Financial Corporation, Fidelity Mortgage, Inc. and Fidelity Mortgage (Florida),
Inc. provides:
 
          'To the fullest extent that the General Corporation Law of the State
     of Delaware, as it exists on the date hereof or as it may hereafter be
     amended, permits the limitation or elimination of the liability of
 
                                      II-1

<PAGE>

     directors, no director of this Corporation shall be personally liable to
     this Corporation or its stockholders for monetary damages for breach of
     fiduciary duty as a director. Notwithstanding the foregoing, a director
     shall be liable to the extent provided by applicable law (1) for any breach
     of the directors' duty of loyalty to the Corporation or its stockholders,
     (2) for acts or omissions not in good faith or which involve intentional
     misconduct or a knowing violation of law, (3) under Section 174 of the
     General Corporation Law of the State of Delaware, or (4) for any
     transaction from which the director derived any improper personal benefit.
     Neither the amendment or repeal of this Article, nor the adoption of any
     provision of this Certificate of Incorporation inconsistent with this
     Article shall adversely affect any right or protection of a director of the
     Corporation existing at the time of such amendment, repeal or adoption.'
 
     Article 12 of the Certificate of Incorporation of DF Special Holdings
     Corporation provides:
 
          'No director shall have any personal liability to the Corporation or
     its stockholders for any monetary damages for breach of fiduciary duty as a
     director, except that this Article 12 shall not eliminate or limit the
     liability of each director (i) for any breach of such director's duty of
     loyalty to the Corporation or its stockholders, (ii) for acts or omissions
     not in good faith or which involve intentional misconduct or a knowing
     violation of law, (iii) under Section 174 of the Delaware General

     Corporation Law, or (iv) for any transaction from which such director
     derived an improper personal benefit. If the Delaware General Corporation
     Law is amended to authorize corporate action further eliminating or
     limiting the personal liability of directors, then the liability of a
     director of the corporation shall be eliminated or limited to the fullest
     extent permitted by the Delaware General Corporation Law, as so amended.
     Any repeal or modification of this provision shall not adversely affect any
     right or protection of a director of the Corporation existing at the time
     of such repeal or modification.'
 
     With respect to Delta Funding Corporation, the New York Business
Corporation Law ('NYBCL') authorizes a New York corporation to indemnify any
person who is, or is threatened to be made, a party in any civil or criminal
proceeding (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another entity, against judgments,
fines, amounts paid in settlement and reasonable expenses (including attorneys'
fees), actually and reasonably incurred by such person as a result of such
action or proceeding or any appeal therein. With respect to actions by or in the
rights of the corporation, the NYBCL authorizes indemnification of such person
against reasonable expenses, including attorneys' fee and amounts paid in
settlement. To be entitled to indemnification, a person must have acted in good
faith and in a manner he reasonably believed to be in, or not opposed to, the
best interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. Court
approval is required as a prerequisite to indemnification of expenses in respect
of any claim as to which a person has been adjudged liable to the corporation.
The NYBCL requires indemnification against expenses actually and reasonably
incurred by any director, officer, employee or agent in connection with a
proceeding against such person for action in such capacity to the extent that
the person has been successful on the merits or otherwise. Advancement of
expenses (i.e., payment prior to a determination on the merits) is permitted,
but not required, by the NYBCL, which further requires that any director or
officer must undertake to repay such expenses if it is ultimately determined
that he is not entitled to indemnification. The disinterested members of the
board of directors (or independent legal counsel or the shareholders) must
determine, in each instance where indemnification is not required by the NYBCL,
that such director, officer, employee or agent is entitled to indemnification.
The NYBCL provides that the indemnification provided by statute is not
exclusive.
 
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
 
None.
 
                                      II-2

<PAGE>

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
 
     (a) Exhibits:
 

<TABLE>
<CAPTION>
      EXHIBIT
      NUMBER          DESCRIPTION
-------------------   -----------------------------------------------------------------------------------------------------------
<S>                   <C>   
              *1.      --   Form of Underwriting Agreement
              +3.1     --   Certificate of Incorporation of Delta Financial Corporation
              +3.2     --   Bylaws of Delta Financial Corporation
            ***3.3     --   Certificate of Incorporation of Delta Funding Corporation
            ***3.4     --   Bylaws of Delta Funding Corporation
              *3.5     --   Certificate of Incorporation of Fidelity Mortgage, Inc.
              *3.6     --   Bylaws of Fidelity Mortgage, Inc.
              *3.7     --   Certificate of Incorporation of Fidelity Mortgage (Florida), Inc.
              *3.8     --   Bylaws of Fidelity Mortgage (Florida), Inc.
              *3.9     --   Certificate of Incorporation of DF Special Holdings Corporation
              *3.10    --   Bylaws of DF Special Holdings Corporation
             **5.      --   Opinion of Stroock & Stroock & Lavan LLP
             +10.1     --   Employment Agreement dated October 1, 1996 between the Registrant and Sidney A. Miller
             +10.2     --   Employment Agreement dated October 1, 1996 between the Registrant and Hugh Miller
             +10.3     --   Employment Agreement dated October 1, 1996 between the Registrant and Christopher Donnelly
             +10.4     --   Employment Agreement dated October 1, 1996 between the Registrant and Randall F. Michaels
            ++10.5     --   Employment Agreement dated March 4, 1997 between the Registrant and Richard Blass
             +10.6     --   Lease Agreement between Delta Funding Corporation and the Tilles Investment Company
             +10.7     --   1996 Stock Option Plan of Delta Financial Corporation
            **10.8     --   Indenture dated as of             , 1997 between Delta Financial Corporation and
            **10.9     --   Form of Guarantee by Delta Funding Corporation
            **10.10    --   Form of Guarantee by Fidelity Mortgage, Inc.
            **10.11    --   Form of Guarantee by Fidelity Mortgage (Florida), Inc.
            **10.12    --   Form of Guarantee by DF Special Holdings Corporation
             *23.1     --   Consent of KPMG Peat Marwick LLP
            **23.2     --   Consent of Stroock & Stroock & Lavan LLP (contained in 5.1)
             *24.      --   Power of Attorney (included in the signature page)
            **25.      --   Statement of Eligibility and Qualification of Trustee (Form T-1)
</TABLE>
 
------------------
  * Filed herewith
 
 ** To be filed by amendment
 
*** Incorporated by reference from Delta Funding Corporation's Registration
    Statement on Form S-3 (File No. 333-3418) filed with the Commission on
    August 5, 1996.
 
  + Incorporated by reference from the Company's Registration Statement on Form
    S-1 (No. 333-11289) filed with the Commission on October 9, 1996.
 
 ++ Incorporated by reference from the Company's Quarterly Report on Form 10-Q
    for the quarter ended March 31, 1997 (File No. 1-12109) filed with the
    Commission on May 15, 1997.
 
                                      II-3


<PAGE>

ITEM 17. UNDERTAKINGS.
 
     (a)  Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrants pursuant to the foregoing provisions, or otherwise,
the Registrants have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrants of expenses incurred or paid by a director, officer
or controlling person of the Registrants in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, each of the
Registrants will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
 
     (b)  Each of the undersigned Registrants hereby undertakes that:
 
          (1) For purposes of determining any liability under the Securities Act
              of 1933, the information omitted from the form of prospectus filed
              as part of this Registration Statement in reliance upon Rule 430A
              and contained in a form of prospectus filed by the Registrants
              pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities
              Act of 1933 shall be deemed to be part of this Registration
              Statement as of the time it was declared effective.
 
          (2) For the purpose of determining any liability under the Securities
              Act of 1933, each post-effective amendment that contains a form of
              prospectus shall be deemed to be a new registration statement
              relating to the securities offered therein, and the offering of
              such securities at that time shall be deemed to be the initial
              bona fide offering thereof.
 
                                      II-4

<PAGE>

                                   SIGNATURES
 
     PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANTS HAVE DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON THEIR
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE STATE OF NEW YORK
ON THE 6TH DAY OF JUNE, 1997.
 
                                          DELTA FINANCIAL CORPORATION ('DFC')
                                          and the Guarantors listed on Annex A
                                          (the 'Guarantors')
 
                                          By:           /s/ HUGH MILLER
                                              ----------------------------------
                                                         Hugh Miller
                                               President and Chief Executive
                                                      Officer of DFC
                                                 and each of the Guarantors
 
                               POWER OF ATTORNEY
 
     KNOW ALL MEN BY THESE PRESENTS, THAT EACH INDIVIDUAL WHOSE SIGNATURE
APPEARS BELOW CONSTITUTES AND APPOINTS HUGH MILLER AND RICHARD BLASS, OR ANY OF
THEM, HIS TRUE AND LAWFUL ATTORNEY-IN-FACT AND AGENT WITH FULL POWER OF
SUBSTITUTION AND RESUBSTITUTION, FOR HIM OR HER AND IN HIS NAME, PLACE AND
STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS (INCLUDING
POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT, AND TO FILE THE SAME
WITH ALL EXHIBITS THERETO, AND ALL DOCUMENTS IN CONNECTION THEREWITH, WITH THE
SECURITIES AND EXCHANGE COMMISSION, GRANTING SAID ATTORNEY-IN-FACT AND AGENT AND
EACH OF THEM, FULL POWER AND AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND
THING REQUISITE AND NECESSARY TO BE DONE IN AND ABOUT THE PREMISES, AS FULLY TO
ALL INTENTS AND PURPOSES AS HE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND
CONFIRMING ALL THAT SAID ATTORNEY-IN-FACT AND AGENT OR ANY OF THEM, OR THEIR OR
HIS SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE
HEREOF.
 
     PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSON IN THE
CAPACITIES AND ON THE DATES INDICATED.
 
<TABLE>
<CAPTION>
                SIGNATURE                               CAPACITY IN WHICH SIGNED                     DATE
------------------------------------------  -------------------------------------------------   --------------
<S>                                         <C>                                                 <C>
           /s/ SIDNEY A. MILLER             Chairman of the Board of Directors of DFC             June 6, 1997
------------------------------------------
             Sidney A. Miller
 

             /s/ HUGH MILLER                Director, Chief Executive Officer and President       June 6, 1997
------------------------------------------  of DFC and each of the Guarantors (Principal
               Hugh Miller                  Executive Officer)

 

            /s/ RICHARD BLASS               Director, Chief Financial Officer, Senior Vice        June 6, 1997
------------------------------------------  President and Treasurer (Principal Accounting
              Richard Blass                 Officer) of DFC, Treasurer (Principal Accounting
                                            Officer) of DF Special Holdings Corporation and
                                            Director of each of the Guarantors
 

           /s/ MARTIN D. PAYSON             Director of DFC                                       June 6, 1997
------------------------------------------
             Martin D. Payson
</TABLE>
 
                                      II-5

<PAGE>

<TABLE>
<C>                                         <S>                                                 <C>
          /s/ ARNOLD B. POLLARD             Director of DFC                                       June 3, 1997
------------------------------------------
            Arnold B. Pollard
 

            /s/ MARC E. MILLER              Director of all Guarantors and Vice President,        June 6, 1997
------------------------------------------  Secretary and Treasurer (Principal Accounting
              Marc E. Miller                Officer) of Fidelity Mortgage, Inc. and Fidelity
                                            Mortgage (Florida), Inc.
 

             /s/ JONATHAN NEW               Director of Fidelity Mortgage, Inc. and Fidelity      June 6, 1997
------------------------------------------  Mortgage (Florida), Inc.
               Jonathan New
 

              /s/ LEE MILLER                Director of DF Special Holdings Corporation           June 6, 1997
------------------------------------------
                Lee Miller
 

           /s/ WILLIAM J. HORAN             Director of DF Special Holdings Corporation           June 6, 1997
------------------------------------------
             William J. Horan
</TABLE>
 
                                      II-6

<PAGE>

                                    ANNEX A
 
Delta Funding Corporation
DF Special Holdings Corporation
Fidelity Mortgage, Inc.
Fidelity Mortgage (Florida), Inc.
 
                                      A-1

<PAGE>

                                                     REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                            ------------------------
 
                                    EXHIBITS
                                   FILED WITH
                                    FORM S-1

                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
 
                            ------------------------
 
                          DELTA FINANCIAL CORPORATION
                           DELTA FUNDING CORPORATION
                        DF SPECIAL HOLDINGS CORPORATION
                            FIDELITY MORTGAGE, INC.
                       FIDELITY MORTGAGE (FLORIDA), INC.
           (EXACT NAME OF REGISTRANTS AS SPECIFIED IN THEIR CHARTER)
 
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<PAGE>

                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
EXHIBIT                                                                                                     SEQUENTIAL
NUMBER    DESCRIPTION                                                                                        PAGE NO.
-------   -----------------------------------------------------------------------------------------------   -----------
<S>       <C>                                                                                               <C>
  *1.      --   Form of Underwriting Agreement
  +3.1     --   Certificate of Incorporation of Delta Financial Corporation
  +3.2     --   Bylaws of Delta Financial Corporation
***3.3     --   Certificate of Incorporation of Delta Funding Corporation
***3.4     --   Bylaws of Delta Funding Corporation
  *3.5     --   Certificate of Incorporation of Fidelity Mortgage, Inc.
  *3.6     --   Bylaws of Fidelity Mortgage, Inc.
  *3.7     --   Certificate of Incorporation of Fidelity Mortgage (Florida), Inc.
  *3.8     --   Bylaws of Fidelity Mortgage (Florida), Inc.
  *3.9     --   Certificate of Incorporation of DF Special Holdings Corporation
  *3.10    --   Bylaws of DF Special Holdings Corporation
 **5.      --   Opinion of Stroock & Stroock & Lavan LLP
 +10.1     --   Employment Agreement dated October 1, 1996 between the Registrant and Sidney A. Miller
 +10.2     --   Employment Agreement dated October 1, 1996 between the Registrant and Hugh Miller
 +10.3     --   Employment Agreement dated October 1, 1996 between the Registrant and Christopher
                Donnelly
 +10.4     --   Employment Agreement dated October 1, 1996 between the Registrant and Randall F. Michaels
++10.5     --   Employment Agreement dated March 4, 1997 between the Registrant and Richard Blass
 +10.6     --   Lease Agreement between Delta Funding Corporation and the Tilles Investment Company
 +10.7     --   1996 Stock Option Plan of Delta Financial Corporation
**10.8     --   Indenture dated as of             , 1997 between Delta Financial Corporation and
**10.9     --   Form of Guarantee by Delta Funding Corporation
**10.10    --   Form of Guarantee by Fidelity Mortgage, Inc.
**10.11    --   Form of Guarantee by Fidelity Mortgage (Florida), Inc.
**10.12    --   Form of Guarantee by DF Special Holdings Corporation
 *23.1     --   Consent of KPMG Peat Marwick LLP
**23.2     --   Consent of Stroock & Stroock & Lavan LLP (contained in 5.1)
 *24.      --   Power of Attorney (included in the signature page).
**25.      --   Statement of Eligibility and Qualification of Trustee (Form T-1)
</TABLE>
 
------------------
  * Filed herewith
 
 ** To be filed by amendment
 
*** Incorporated by reference from Delta Funding Corporation's Registration
    Statement on Form S-3 (File No. 333-3418) filed with the Commission on
    August 5, 1996.
 
  + Incorporated by reference from the Company's Registration Statement on Form
    S-1 (No. 333-11289) filed with the Commission on October 9, 1996.
 
 ++ Incorporated by reference from the Company's Quarterly Report on Form 10-Q
    for the quarter ended March 31, 1997 (File No. 1-12109) filed with the
    Commission on May 15, 1997.
[{"type": "S-1", "sequence": "1", "description": "REGISTRATION STATEMENT", "secsgml_size_bytes": 522140}]
[{"company-data": {"conformed-name": "DELTA FINANCIAL CORP", "cik": "0001021848", "assigned-sic": "6163", "irs-number": "113336165", "state-of-incorporation": "DE", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-28643", "film-number": "97620184"}, "business-address": {"street1": "1000 WOODBURY", "street2": "STE 200", "city": "WOODBURY", "state": "NY", "zip": "11797", "phone": "5163648500"}, "mail-address": {"street1": "1000 WOODBURY", "street2": "STE 200", "city": "WOODBURY", "state": "NY", "zip": "11797"}}, {"company-data": {"conformed-name": "DELTA FUNDING CORP /DE/", "cik": "0000862026", "assigned-sic": "6770", "irs-number": "112609517", "state-of-incorporation": "DE", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-28643-01", "film-number": "97620185"}, "business-address": {"street1": "1000 WOODBURY ROAD", "street2": "SUITE 200", "city": "WOODBURY", "state": "NY", "zip": "11797", "phone": "5163648500"}}, {"company-data": {"conformed-name": "FIDELITY MORTGAGE INC", "cik": "0001040527", "assigned-sic": "", "irs-number": "113360263", "state-of-incorporation": "DE", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-28643-02", "film-number": "97620186"}, "business-address": {"street1": "C/O DELTA FINANCIAL CORP", "street2": "1000 WOODBURY RD STE 200", "city": "WOODBURY", "state": "NY", "zip": "11797", "phone": "5163648500"}, "mail-address": {"street1": "1000 WOODBURY RD", "street2": "STE 200", "city": "WOODBURY", "state": "NY", "zip": "11797"}}, {"company-data": {"conformed-name": "FIDELITY MORTGAGE FLORIDA INC", "cik": "0001040528", "assigned-sic": "", "irs-number": "113360266", "state-of-incorporation": "DE"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-28643-03", "film-number": "97620187"}, "business-address": {"street1": "C/O DELTA FINANCIAL CORP", "street2": "1000 WOODBURY RD STE 200", "city": "WOODBURY", "state": "NY", "zip": "11797", "phone": "5163648500"}, "mail-address": {"street1": "1000 WOODBURY RD", "street2": "STE 200", "city": "WOODBURY", "state": "NY", "zip": "11797"}}, {"company-data": {"conformed-name": "DF SPECIAL HOLDINGS CORP", "cik": "0001040529", "assigned-sic": "", "irs-number": "113360266", "state-of-incorporation": "DE"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-28643-04", "film-number": "97620188"}, "business-address": {"street1": "C/O DELTA FINANCIAL CORP", "street2": "1000 WOODBURY RD STE 200", "city": "WOODBURY", "state": "NY", "zip": "11797", "phone": "5163648500"}, "mail-address": {"street1": "1000 WOODBURY RD", "street2": "STE 200", "city": "WOODBURY", "state": "NY", "zip": "11797"}}]
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 6, 1997
                                                     REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                            ------------------------

                                    FORM S-1
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933

                            ------------------------

                          DELTA FINANCIAL CORPORATION
                    AND THE GUARANTORS LISTED ON SCHEDULE A
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
SEE SCHEDULE A                                 6162                                 SEE SCHEDULE A
    (STATE OR OTHER JURISDICTION OF             (PRIMARY STANDARD INDUSTRIAL                    (I.R.S. EMPLOYER
     INCORPORATION OR ORGANIZATION)             CLASSIFICATION CODE NUMBER)                  IDENTIFICATION NUMBER)
------------------------
 
                         1000 WOODBURY ROAD, SUITE 200
                         WOODBURY, NEW YORK 11797-9003
                                  516-364-8500
              (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
       INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

                            ------------------------
 
                      HUGH MILLER, CHIEF EXECUTIVE OFFICER
                          DELTA FINANCIAL CORPORATION
                         1000 WOODBURY ROAD, SUITE 200
                         WOODBURY, NEW YORK 11797-9003
                                  516-364-8500
           (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
                   INCLUDING AREA CODE, OF AGENT FOR SERVICE)

                            ------------------------
 
                                   Copies to:
JAMES R. TANENBAUM                                             MARK A. STEGEMOELLER
                STROOCK & STROOCK & LAVAN LLP                                          LATHAM & WATKINS
                       180 MAIDEN LANE                                             SEARS TOWER, SUITE 5800
                NEW YORK, NEW YORK 10038-4982                                       233 SOUTH WACKER DRIVE
                                                                                 CHICAGO, ILLINOIS 60606-6401
------------------------
 
    APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
 
    If the only securities being registered on this form offered pursuant to
dividend or interest reinvestment plans, please check the following box: / /
 
    If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, other than securities offered only in connection with dividend
or interest reinvestment plans, please check the following box: / /
 
    If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: / /
 
    If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
 
    If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /

                            ------------------------
 
                        CALCULATION OF REGISTRATION FEE
PROPOSED
                                                                MAXIMUM OFFERING         PROPOSED
             TITLE OF SECURITIES                AMOUNT TO BE    PRICE PER UNIT(1)   MAXIMUM AGGREGATE         AMOUNT OF
              BEING REGISTERED                   REGISTERED            (2)          OFFERING PRICE(1)      REGISTRATION FEE
% Senior Notes due 2004....................   $150,000,000          100%             $150,000,000           $45,454.55
Subsidiary Guarantees ('Guarantees')(3)......        n/a               n/a                 n/a                   n/a
(1) Estimated solely for the purpose of calculating the registration fee in
    accordance with Rule 457 under the Securities Act of 1933.
(2) Exclusive of accrued interest, if any.
(3) No separate consideration will be received for any Guarantees. The
    Guarantees include the rights of Holders of the Notes (as defined) under the

    Guarantees.

                            ------------------------
 
    THIS REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SCHEDULE A
STATE OR OTHER JURISDICTION
             OF                                                              I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION                                             IDENTIFICATION NUMBER
-----------------------------                                          ----------------------------
Delaware                    Delta Financial Corporation                  11-3336165
       New York                    Delta Funding Corporation                    11-2609517
       Delaware                    Fidelity Mortgage, Inc.                      11-3360263
                                   Fidelity Mortgage (Florida),
       Delaware                    Inc.                                         11-3360266
       Delaware                    DF Special Holdings Corporation              11-3374284
DELTA FINANCIAL CORPORATION

                             CROSS REFERENCE SHEET
                            PURSUANT TO ITEM 501(B)
ITEMS AND CAPTIONS                                     CAPTION OR LOCATION
                           IN FORM S-1                                            IN PROSPECTUS
      ------------------------------------------------------  ------------------------------------------------------
1.   Forepart of Registration Statement and Outside Front
        Cover Page of Prospectus............................  Outside Front Cover Page
 
 2.   Inside Front and Outside Back Cover Pages of
        Prospectus..........................................  Inside Front and Outside Back Cover Page
 
 3.   Summary Information, Risk Factors and Ratio of
        Earnings to Fixed Charges...........................  Prospectus Summary; Summary Consolidated Financial
                                                                Data; Risk Factors; Selected Consolidated
                                                                Financial Data; Management's Discussion and Analysis
                                                                of Financial Condition and Results of Operations
 
 4.   Use of Proceeds.......................................  Prospectus Summary; Use of Proceeds
 
 5.   Determination of Offering Price.......................  Outside Front Cover Page; Underwriting
 
 6.   Dilution..............................................  Dilution
 
 7.   Selling Security Holders..............................  Not Applicable
 
 8.   Plan of Distribution..................................  Outside Front Cover Page; Description of the Notes;
                                                                Underwriting
 
 9.   Description of Securities to be Registered............  Prospectus Summary; Capitalization; Description of the
                                                                Notes
 
10.   Interests of Named Experts and Counsel................  Not Applicable
 
11.   Information with Respect to Registrant................  Outside Front Cover Page; Prospectus Summary; Risk
                                                                Factors; Capitalization; Selected Consolidated
                                                                Financial Data; Management's Discussion and Analysis
                                                                of Financial Condition and Results of Operations;
                                                                Business; Management; Principal Stockholders;
                                                                Description of the Notes; Legal Matters; Experts;
                                                                Additional Information
 
12.   Disclosure of Commission Position on Indemnification
        for Securities Act Liabilities......................  Not Applicable
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION.  THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE.  THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

                  SUBJECT TO COMPLETION,                , 1997

PROSPECTUS
                                  $150,000,000
 
                          DELTA FINANCIAL CORPORATION
                            % SENIOR NOTES DUE 2004
 
                            ------------------------
 
    The   % Senior Notes due 2004 (the 'Notes') are being offered (the
'Offering') by Delta Financial Corporation ('Delta' or the 'Company') and will
mature on             , 2004. The Notes will bear interest at a rate of     %
per annum, payable semi-annually on             and             , commencing on
            , 1997. On or after             , 2001, the Notes are redeemable at
the option of the Company, in whole or in part, at the redemption price set
forth herein plus accrued and unpaid interest to the date of redemption. Upon a
Change of Control (as defined), each holder of the Notes (a 'Holder') may
require the Company to repurchase the Notes held by such Holder at 101% of the
principal amount thereof plus accrued and unpaid interest to the date of
repurchase.
 
    The Notes will be general unsecured obligations of the Company and will rank
pari passu in right of payment with all existing and future unsecured
unsubordinated Indebtedness (as defined) of the Company and senior in right of
payment to all existing and future subordinated Indebtedness of the Company. In
addition, the obligations of the Company under the Notes will be fully and
unconditionally guaranteed on a joint and several basis (each, a 'Guarantee') by
each of the Company's existing and future Subsidiaries (as defined), other than
Subsidiaries designated as 'Unrestricted Subsidiaries' in accordance with the
Indenture (collectively, the 'Subsidiary Guarantors'). The Guarantees will rank
pari passu in right of payment with all existing and future unsubordinated
Indebtedness of the Subsidiary Guarantors and senior in right of payment to all
existing and future subordinated Indebtedness of the Subsidiary Guarantors. See
'Description of the Notes.' The Notes and the Guarantees will be effectively
subordinated to all existing and future secured Indebtedness of the Company and
the Subsidiary Guarantors (to the extent of the assets securing such
Indebtedness). As of March 31, 1997, after giving pro forma effect to the
Offering, the Company and the Subsidiary Guarantors had approximately $3.3
million of secured Indebtedness outstanding. See 'Description of the Notes.'
 
    There is no existing market for the Notes and the Company does not intend to

list the Notes on any national securities exchange. See 'Risk Factors--Absence
of Public Market for the Notes.'
 
                            ------------------------
 
    SEE 'RISK FACTORS' BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES OFFERED
HEREBY.
 
                            ------------------------
 
 THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
     EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
          SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
           COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
                    PROSPECTUS. ANY REPRESENTATION TO THE
                       CONTRARY IS A CRIMINAL OFFENSE.
PRICE              UNDERWRITING            PROCEEDS
                                                   TO THE            DISCOUNTS AND             TO THE
                                                 PUBLIC(1)           COMMISSIONS(2)        COMPANY(1)(3)
Per Note.................                               %                     %                     %
Total....................                       $                     $                     $
(1) Plus accrued interest, if any, from the date of issuance.
(2) See 'Underwriting' for indemnification arrangements with the Underwriters.
(3) Before deducting expenses payable by the Company estimated to be $         .
 
                            ------------------------
 
    The Notes are offered by the Underwriters, subject to prior sale, when, as
and if delivered to and accepted by the Underwriters and subject to certain
prior conditions, including the right of the Underwriters to reject any order in
whole or in part. It is expected that delivery of the Notes will be made in New
York, New York, on or about             , 1997.
 
                            ------------------------
 
DONALDSON, LUFKIN & JENRETTE
      SECURITIES CORPORATION
 
                                LEHMAN BROTHERS
 
                                                               SMITH BARNEY INC.

              THE DATE OF THIS PROSPECTUS IS                , 1997
[GRAPHIC DESCRIPTION: A MAP OF THE EASTERN HALF OF THE UNITED STATES SHOWING THE
STATES IN WHICH THE COMPANY ORIGINATED OR PURCHASED AT LEAST $3 MILLION OF LOANS
IN THE LAST TWELVE MONTHS AND THE SITES OF THE COMPANY'S OFFICES AND ITS
HEADQUARTERS.]
 
                            ------------------------
 
          CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES
OFFERED HEREBY, INCLUDING PURCHASES OF THE NOTES TO STABILIZE THEIR MARKET
PRICE, PURCHASES OF THE NOTES TO COVER SOME OR ALL OF A SHORT POSITION IN THE
NOTES MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE 'UNDERWRITING.'

                            ------------------------
 
          CERTAIN INFORMATION CONTAINED IN THIS PROSPECTUS CONSTITUTES
'FORWARD-LOOKING STATEMENTS' WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED (THE 'SECURITIES ACT'), AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE 'EXCHANGE ACT'), WHICH CAN BE
IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS 'MAY,' 'WILL,'
'EXPECT,' 'ANTICIPATE,' 'ESTIMATE' OR 'CONTINUE' OR THE NEGATIVES THEREOF OR
OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. THE STATEMENTS IN 'RISK
FACTORS' ON PAGES 11 TO 20 OF THIS PROSPECTUS CONSTITUTE CAUTIONARY STATEMENTS
IDENTIFYING IMPORTANT FACTORS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES, WITH
RESPECT TO SUCH STATEMENTS THAT COULD CAUSE THE ACTUAL RESULTS, PERFORMANCE OR
ACHIEVEMENTS OF THE COMPANY TO DIFFER MATERIALLY FROM THOSE REFLECTED IN SUCH
FORWARD-LOOKING STATEMENTS.
 
                                       2
PROSPECTUS SUMMARY
 
     The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. Unless the context
indicates otherwise, all references herein to the 'Company' or 'Delta' refer to
Delta Financial Corporation and its wholly-owned subsidiaries. All financial
information gives pro forma effect to the termination of the S corporation
status of Delta Funding Corporation, a wholly-owned subsidiary, and the
transactions described in the 'Selected Consolidated Financial Data' and the
related notes thereto and in 'Management's Discussion and Analysis of Financial
Condition and Results of Operations--Termination of S Corporation Status and
Income Taxes.'
 
                                  THE COMPANY
 
     Delta is a specialty consumer finance company that has engaged in
originating, acquiring, selling and servicing home equity loans since 1982.
Throughout its 15 years of operating history, Delta has focused on lending to
individuals who generally have impaired or limited credit profiles or higher
debt to income ratios and typically have substantial equity in their homes.
Management believes that these borrowers have been largely unsatisfied by the
more traditional sources of mortgage credit which underwrite loans to
conventional guidelines established by the Federal National Mortgage Association
('FNMA') and the Federal Home Loan Mortgage Corporation ('FHLMC'). The Company
makes loans to these borrowers for such purposes as debt consolidation, home
improvement, mortgage refinancing or education, and these loans are primarily
secured by first mortgages on one- to four-family residential properties.
 
     Through its wholly-owned subsidiary, Delta Funding Corporation, the Company
originates home equity loans indirectly through licensed brokers and other real
estate professionals who submit loan applications on behalf of the borrower
('Brokered Loans') and also purchases loans from mortgage bankers and smaller
financial institutions that satisfy Delta's underwriting guidelines
('Correspondent Loans'). Delta Funding Corporation currently originates and
purchases the majority of its loans in 21 states, through its network of
approximately 1,000 brokers and correspondents. The Company believes that it has
a competitive advantage in serving brokers and correspondents in the
nonconforming home equity market that stems from its substantial experience in
this sector and its emphasis on providing quality service that is prompt,
responsive and consistent. The 19 members of Delta Funding Corporation's senior
management have an average of over 13 years of nonconforming mortgage loan
experience. Management believes this industry-specific experience, coupled with
the systems and programs it has developed over the past 15 years, enable the
Company to provide quality services that include preliminary approval of most
Brokered Loans and certain Correspondent Loans within one day, consistent
application of its underwriting guidelines and funding or purchasing of loans
within 14 to 21 days of preliminary approval. In addition, the Company seeks to
establish and maintain productive relationships with its network of brokers and
correspondents by servicing each one with a business development representative,
a team of experienced underwriters and, in the case of Brokered Loans, a team of
loan officers and processors assigned to specific brokers to process all

applications submitted by such brokers.
 
     The Company currently originates and purchases the majority of its loans
through the Company's main office in Woodbury, New York, its full service office
in Atlanta, Georgia, its full processing offices in St. Louis, Missouri,
Chicago, Illinois and Warwick, Rhode Island and from seven business development
offices located in Michigan (2), New Jersey, Ohio (2), Pennsylvania and
Virginia. The Company historically made loans primarily in New York, New Jersey
and Pennsylvania. Commencing in 1995, the Company implemented a program to
expand its geographic presence into the New England, Mid-Atlantic, Midwest and
Southeast regions. As a consequence of its expansion into new markets, as well
as its further penetration of existing markets, the Company increased its loan
production substantially in 1995 and 1996. Total loan originations and purchases
increased $168.1 million, or 140%, from $119.7 million in 1994 to $287.8 million
in 1995, and increased $371.0 million, or 129%, in 1996 to $658.8 million.
 
     In February 1997, in an effort to broaden its origination sources and to
expand its geographic presence in the Company's new markets, the Company
acquired two related retail originators of home equity loans, Fidelity Mortgage,
Inc., based in Cincinnati, Ohio, and Fidelity Mortgage (Florida), Inc., based in
West Palm Beach, Florida (together, 'Fidelity Mortgage'). The Company acquired
Fidelity Mortgage with the expectation that the
 
                                       3
acquisition would result in beneficial synergies, with Fidelity Mortgage
providing a dedicated source of mortgage loans for Delta Funding Corporation's
securitization pools and for its servicing arm, and Delta Financial Corporation
providing capital to Fidelity Mortgage for the expansion of its retail network.
Fidelity Mortgage develops retail loan leads primarily through its telemarketing
system and its network of seven retail offices located in Florida (2), Georgia,
Indiana and Ohio (3). Two of these offices were opened in the second quarter of
1997, and the Company intends to expand the Fidelity Mortgage network further,
with three new branch offices scheduled to open by the end of the second
quarter.
 
     The Company has been profitable in each of its 15 years of operation. The
Company's results of operations have improved significantly in recent periods as
a result of increased loan production and improved operating efficiencies. Total
revenues increased $37.4 million, or 103%, to $73.5 million in 1996 from $36.1
million in 1995, and pro forma income before extraordinary item increased 630%
to $19.1 million in 1996 from $2.6 million in 1995. During 1995 compared to
1994, the Company's total revenues increased 66% from $21.8 million to $36.1
million and pro forma income increased 128% from $1.1 million to $2.6 million.
See 'Management's Discussion and Analysis of Financial Condition and Results of
Operations.'
 
     The Company generates earnings and cash flow primarily through the
origination, purchase, securitization and servicing of home equity loans. In a
securitization, the Company sells the loans that it originates or purchases to a
trust for cash and records certain assets and income based upon (a) the
difference between all principal and interest received from the mortgage loans

sold and (i) all principal and interest required to be passed through to the
asset-backed bond investors, (ii) all contractual servicing fees, (iii) other
recurring fees and (iv) an estimate of losses on the loans (the 'Excess
Servicing') and (b) the difference between the contractual and estimated
ancillary servicing revenue with respect to the loans and the estimated cost to
service them ('Mortgage Servicing Rights'). At the time of the securitization,
the Company estimates these amounts based upon a declining principal balance of
the underlying loans, adjusted by an estimated prepayment rate, and capitalizes
these amounts using a discount rate that market participants would use for
similar financial instruments. These capitalized assets are recorded on the
Company's balance sheet as interest-only and residual certificates and
capitalized Mortgage Servicing Rights, respectively, and are aggregated and
reported on the income statement as net gain on sale of mortgage loans, after
being reduced (increased) by (i) loan acquisition premiums paid to
correspondents and brokers, (ii) costs of securitization and (iii) any hedge
losses (gains).
 
     The Company typically begins to receive Excess Servicing cash flow eight to
twelve months from the date of securitization, although this time period may be
shorter or longer depending upon the structure and performance of the
securitization. Prior to such time, the monoline insurer requires a reserve
provision to be created within the securitization trust which uses Excess
Servicing cash flows to retire the securitization bond debt until the spread
between the outstanding principal balance of the mortgage loans in the
securitization trust and the securitization bond debt equals 2 to 3% of the
initial securitization principal balance (hereinafter, the
'overcollateralization limit'). Once this overcollateralization limit is met,
excess cash flows are distributed to Delta. The Company begins to receive
contractual mortgage servicing cash flows in the month following the
securitization.
 
     Since 1991, Delta has sold approximately $1.5 billion of its mortgage loans
through 14 real estate mortgage investment conduit ('REMIC') securitizations.
Each of these securitizations has been credit-enhanced by an insurance policy
provided through a monoline insurance company to receive ratings of 'Aaa' from
Moody's Investors Service, Inc. ('Moody's') and 'AAA' from Standard & Poor's
Ratings Group, a division of The McGraw-Hill Companies, Inc. ('Standard &
Poor's'). The Company sells loans through securitizations and, from time to
time, on a whole loan basis, to enhance its operating leverage and liquidity, to
minimize financing costs and to reduce its exposure to fluctuations in interest
rates.
 
     In addition to the excess cash flow from securitizations and proceeds from
whole loan sales, the Company earns the net interest spread on loans held for
sale, origination fees on its Brokered Loans and retail loans (which are
included in other income) and servicing fees of between 0.50% and 0.65% per
annum of the outstanding balance of the loans it services. Since its inception,
the Company has serviced substantially all of the loans it has originated and
purchased, including all of those that it has subsequently sold through
securitizations. Management believes that servicing this loan portfolio enhances
certain operating efficiencies and provides an
 
                                       4
additional and profitable revenue stream that is less cyclical than the business
of originating and purchasing loans. As of March 31, 1997, Delta had a servicing
portfolio of $1.1 billion of loans. See 'Business--Loans.'
 
     The Company's business objective is to increase profitably the volume of
its loan originations and purchases and the size of its servicing portfolio by
implementing the following strategies:
 
     Continuing to Provide Quality Service.  The Company believes its commitment
to service provides it with a competitive advantage in establishing and
maintaining productive broker and correspondent relationships. The Company's
loan officers and underwriters endeavor to respond promptly and consistently on
every loan submission. In addition, through its business development
representatives, Delta regularly communicates with brokers and correspondents in
order to better understand and respond to their needs.
 
     Maintaining Underwriting Standards.  The Company believes the depth and
experience of its underwriting staff, coupled with consistent application of its
underwriting procedures and criteria, provide the infrastructure needed to
manage and sustain the Company's recent growth, while maintaining the quality of
loans originated or purchased. The depth and experience in the Company's
underwriting department provide two significant competitive advantages. First,
it ensures that the Company's underwriting standards and subjective judgments
required in the non-conforming market are consistently applied and enables the
Company to effectively implement a risk-based pricing strategy. Second, it
provides the opportunity to expand underwriting activities beyond the Company's
headquarters while maintaining consistent underwriting standards.
 
     Further Penetrating Existing and Recently Entered Markets and Expanding
into New Markets.  The Company intends to continue to increase the volume of its
loan originations and purchases through a three-pronged strategy that includes
greater originations and purchases from its existing brokers and correspondents,
establishment of new broker and correspondent relationships in both existing and
recently-entered markets and expansion into new markets.
 
     Expanding its Retail Origination Capabilities.  The Company intends to
devote management and capital resources to expanding its retail network in order
to continue to broaden its origination capabilities and strengthen its
geographic presence. Since the acquisition of Fidelity Mortgage and its five
retail offices, the Company has opened additional Fidelity Mortgage branch
offices in Atlanta, Georgia and Fort Lauderdale, Florida and intends to open
three more branch offices of Fidelity Mortgage by the end of the second quarter
in Illinois, North Carolina and Ohio.
 
     Expanding Through Acquisitions.  Management believes acquisitions can be a
means of cost effectively increasing or diversifying the Company's loan
production capabilities. The Company continually considers acquisition
candidates which operate in geographic or product areas that complement the
Company's existing business.
 
     Leveraging its Information and Processing Technologies.  In recent years,
the Company has made significant capital investments to upgrade and expand its
information and processing technologies. These investments have included the

acquisition and implementation of a new servicing system and have enabled the
Company to achieve operational efficiencies and cost savings. The Company's
recent and anticipated geographic expansion and growth in originations and
servicing portfolio were considered when these systems were designed, and
management believes its strategic plans can be met by leveraging its existing
systems without substantial additional investment in the near future. See
'Business--Business Strategy.'
 
     All of the Company's operations are conducted through its wholly-owned
subsidiaries, Delta Funding Corporation, DF Special Holdings Corporation,
Fidelity Mortgage, Inc. and Fidelity Mortgage (Florida), Inc. In November 1996,
Delta completed the initial public offering of its common stock which trades on
the New York Stock Exchange under the symbol 'DFC.'
 
     The principal executive offices of the Company are located at 1000 Woodbury
Road, Suite 200, Woodbury, New York 11797, and its telephone number is (516)
364-8500.
 
                                       5
RECENT DEVELOPMENTS
 
     Delta Funding Corporation is currently negotiating with the First National
Bank of Chicago ('First Chicago') the terms of a $100 million syndicated credit
agreement (the 'Credit Agreement'). Delta Funding Corporation and First Chicago
expect to sign a definitive Credit Agreement prior to the Issue Date (as
defined). However, there can be no assurance that the Credit Agreement will be
entered into prior to the Issue Date or at all. The execution and delivery of
the Credit Agreement is not a condition to this Offering. See 'Risk Factors--
Dependence on Funding Sources.'
 
     The Credit Agreement will be used primarily to finance mortgage loans held
for sale and to fund servicer advances by Delta Funding Corporation. The Credit
Agreement will provide for a $100 million secured revolving credit facility with
various borrowing base sublimits, including, but not limited to, a $15 million
secured recoverable advance sublimit. Delta Funding Corporation's obligations
under the Credit Facility will be guaranteed by the Company. Advances under the
Credit Facility will be secured by a first priority lien on warehouse collateral
and receivables created from recoverable servicer advances.
 
     In connection with the Credit Agreement, Delta Funding Corporation will
agree to certain standard affirmative covenants, including corporate existence,
maintenance of its properties and insurance coverage, prompt payment of taxes
and other claims and maintenance of a standard accounting system. Delta Funding
Corporation will also be required to make certain negative covenants which,
among other things, will require it to (i) maintain a specified leverage ratio,
(ii) limit its ability to incur additional indebtedness, (iii) maintain a
minimum net worth, (iv) limit its ability to pledge, mortgage or encumber its
assets and (v) limit its ability to merge with another entity or dispose of more
than a specified percentage of its total assets.
 
                                       6
THE OFFERING
Securities Offered........................  $150,000,000 aggregate principal amount of        % Senior Notes due
                                            2004.
 
Maturity Date.............................              , 2004.
 
Interest Payment Dates....................  Each              , and              , commencing              ,
                                            1997.
 
Guarantees................................  The obligations of the Company under the Notes will be fully and
                                            unconditionally guaranteed on a joint and several basis by each of
                                            the existing and future Subsidiaries of the Company, other than
                                            Subsidiaries designated as 'Unrestricted Subsidiaries' in accordance
                                            with the Indenture. See 'Description of the Notes-- Guarantees.'
 
Optional Redemption.......................  On or after              , 2001, the Notes will be redeemable at the
                                            option of the Company, in whole or in part, at the redemption prices
                                            set forth herein, plus accrued and unpaid interest to the date of
                                            redemption. See 'Description of the Notes--Optional Redemption.'
 
Change of Control.........................  Upon a Change of Control (as defined), each Holder of the Notes may
                                            require the Company to repurchase the Notes held by such Holder at
                                            101% of the principal amount thereof plus accrued and unpaid interest
                                            to the date of repurchase. See 'Description of the Notes--Repurchase
                                            at the Option of Holders--Change of Control.'
 
Asset Sales...............................  The Indenture relating to the Notes (the 'Indenture') requires that
                                            the proceeds of certain Asset Sales (as defined) be applied as
                                            specified in the Indenture or be used to repurchase the Notes, at
                                            the option of the Holder thereof, at 100% of the principal amount thereof
                                            plus accrued and unpaid interest thereon to the date of purchase.
 
Ranking...................................  The Notes will be general unsecured obligations of the Company and
                                            will rank pari passu in right of payment with all existing and future
                                            unsecured unsubordinated Indebtedness of the Company and senior in
                                            right of payment to all existing and future subordinated Indebtedness
                                            of the Company. The Guarantee of each of the Subsidiary Guarantors
                                            will rank pari passu in right of payment with all existing and future
                                            unsubordinated Indebtedness of such Subsidiary Guarantor and senior
                                            in right of payment to all existing and future subordinated
                                            Indebtedness of the Subsidiary Guarantors. However, the Notes and
                                            Guarantees will be effectively subordinated to all existing and
                                            future secured Indebtedness of the Company and the Subsidiary
                                            Guarantors (to the extent of the value of the collateral securing
                                            such indebtedness). As of March 31, 1997, after giving pro forma
                                            effect to the Offering, the Company and the Subsidiary Guarantors had
                                            approximately $3.3 million of secured Indebtedness outstanding.
7
Certain Covenants.........................  The Indenture will contain certain covenants, including, but not
                                            limited to, covenants with limitations on the following matters: (i)
                                            restricted payments; (ii) incurrence of additional indebtedness;
                                            (iii) issuance of preferred stock; (iv) incurrence of additional
                                            liens; (v) dividends and other payment restrictions affecting
                                            subsidiaries; (vi) restrictions on distributions from subsidiaries;
                                            (vii) merger, consolidation or sale of assets; (viii) transactions
                                            with affiliates; and (ix) lines of business. However, all these
                                            limitations are subject to a number of important exceptions and
                                            qualifications. See 'Description of the Notes--Certain Covenants.'
 
Use of Proceeds...........................  The net proceeds will be used (i) to pay off all residual financing
                                            agreements (approximately $57.5 million at March 31, 1997), (ii) to
                                            repay amounts outstanding under certain of the Company's warehouse
                                            lines of credit (lines of credit used to finance, and secured by, a
                                            portion of the Company's inventory of mortgage loans) (approximately
                                            $51.8 million as of March 31, 1997), (iii) to fund future loan 
                                            originations and purchases, (iv) to support securitization transactions,
                                            (v) to fund expansion of Fidelity Mortgage's retail network and (vi) for 
                                            general corporate purposes, including to fund acquisitions. See 'Use of 
                                            Proceeds' and 'Underwriting.'
8
SUMMARY CONSOLIDATED FINANCIAL DATA
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
                                             ---------------------------------------------------------------------------
                                                1992            1993            1994            1995            1996
                                             -----------     -----------     -----------     -----------     -----------
INCOME STATEMENT DATA:
Revenues:
 Net gain on sale of mortgage loans......    $     4,757     $     7,639     $     6,661     $    15,383     $    46,525
 Interest................................         13,402           9,156           9,839          13,588          16,372
 Servicing fees..........................          1,892           2,101           2,183           2,855           5,368
 Other...................................          5,413           3,617           3,114           4,309           5,266
                                             -----------     -----------     -----------     -----------     -----------
   Total revenues........................    $    25,464     $    22,513     $    21,797     $    36,135     $    73,531
                                             -----------     -----------     -----------     -----------     -----------
   Total expenses........................    $    22,154     $    18,853     $    19,788     $    31,549     $    40,043
                                             -----------     -----------     -----------     -----------     -----------
Income (loss) before income taxes and
 extraordinary item......................    $     3,310     $     3,660     $     2,009     $     4,586     $    33,488
Provision for income taxes(1)............             --              --              --              --           9,466
Extraordinary item:
 Gain on extinguishment of debt..........             --              --              --              --           3,168
                                             -----------     -----------     -----------     -----------     -----------
Net income (loss)........................    $     3,310     $     3,660     $     2,009     $     4,586     $    27,190
                                             -----------     -----------     -----------     -----------     -----------
                                             -----------     -----------     -----------     -----------     -----------
UNAUDITED PRO FORMA INFORMATION:
Provision for pro forma income taxes
 before extraordinary item(1)(2).........    $     1,423     $     1,574     $       864     $     1,972     $    14,400
                                             -----------     -----------     -----------     -----------     -----------
Pro forma income (loss) before
 extraordinary item(1)(2)................    $     1,887     $     2,086     $     1,145     $     2,614     $    19,088
                                             -----------     -----------     -----------     -----------     -----------
                                             -----------     -----------     -----------     -----------     -----------
PER SHARE DATA:
Pro forma earnings (loss) per share of
 common stock(1)(2)(3)(4)................    $      0.15     $      0.17     $      0.09     $      0.21     $      1.46
                                             -----------     -----------     -----------     -----------     -----------
                                             -----------     -----------     -----------     -----------     -----------
Pro forma weighted average number of
 shares outstanding(3)(4)................     12,629,182      12,629,182      12,629,182      12,629,182      13,083,327
                                             -----------     -----------     -----------     -----------     -----------
                                             -----------     -----------     -----------     -----------     -----------
CASH FLOW DATA:
(Used in) provided by operating
 activities..............................    $    (5,057)    $     8,780     $   (10,160)    $   (23,903)    $   (42,025)
(Used in) provided by investing
 activities..............................            (44)            (64)           (917)         (1,207)         (2,283)
Provided by (used in) financing

 activities..............................          2,893          (7,139)         13,460          32,388          46,414
Net increase (decrease) in cash and cash
 equivalents.............................         (2,208)          1,577           2,383           7,278           2,106
 
OPERATING DATA:
Loans originated or purchased:
 Brokered Loans(5).......................    $    66,553     $    76,220     $    81,407     $   175,738     $   321,733
 Correspondent Loans.....................         10,080          26,844          38,341         112,065         337,033
                                             -----------     -----------     -----------     -----------     -----------
   Total.................................    $    76,633     $   103,064     $   119,748     $   287,803     $   658,766
                                             -----------     -----------     -----------     -----------     -----------
                                             -----------     -----------     -----------     -----------     -----------
Average principal balance per loan.......             51              60              67              74              78
Weighted average interest rate...........           13.5%           12.9%           12.1%           11.8%           11.4%
Combined weighted average initial
 loan-to-value ratio.....................           47.8            51.7            55.2            63.2            68.8
Percent of loans secured by first
 mortgages...............................           71.5            81.1            88.0            89.6            93.8
Loan Sales:
 Loans sold through securitizations......    $    64,102     $    88,943     $    90,000     $   229,998     $   615,000
 Whole loan sales........................          1,031           8,708          11,950          17,615          15,273
                                             -----------     -----------     -----------     -----------     -----------
   Total.................................    $    65,133     $    97,651     $   101,950     $   247,613     $   630,273
                                             -----------     -----------     -----------     -----------     -----------
 Total loans serviced....................    $   273,788     $   292,700     $   310,229     $   468,846     $   932,958
                                             -----------     -----------     -----------     -----------     -----------
                                             -----------     -----------     -----------     -----------     -----------
THREE MONTHS
                                                      ENDED
                                                    MARCH 31,
                                           ---------------------------
                                              1996            1997
                                           -----------     -----------
INCOME STATEMENT DATA:
Revenues:
 Net gain on sale of mortgage loans......  $       103     $    17,314
 Interest................................        3,967           5,559
 Servicing fees..........................        1,015           1,392
 Other...................................          219           3,040
                                           -----------     -----------
   Total revenues........................  $     5,304     $    27,305
                                           -----------     -----------
   Total expenses........................  $     5,616     $    15,065
                                           -----------     -----------
Income (loss) before income taxes and
 extraordinary item......................  $      (312)    $    12,240
Provision for income taxes(1)............           44           5,250
Extraordinary item:
 Gain on extinguishment of debt..........           --              --
                                           -----------     -----------
Net income (loss)........................  $      (356)    $     6,990
                                           -----------     -----------
                                           -----------     -----------
UNAUDITED PRO FORMA INFORMATION:
Provision for pro forma income taxes
 before extraordinary item(1)(2).........  $      (134)            n/a
                                           -----------
Pro forma income (loss) before
 extraordinary item(1)(2)................  $      (178)            n/a
                                           -----------
                                           -----------
PER SHARE DATA:
Pro forma earnings (loss) per share of
 common stock(1)(2)(3)(4)................  $     (0.01)    $      0.45
                                           -----------     -----------
                                           -----------     -----------
Pro forma weighted average number of
 shares outstanding(3)(4)................   12,629,182      15,420,883
                                           -----------     -----------
                                           -----------     -----------
CASH FLOW DATA:
(Used in) provided by operating
 activities..............................  $  (108,880)    $   (11,437)
(Used in) provided by investing
 activities..............................         (228)         (4,335)
Provided by (used in) financing
 activities..............................      101,863          16,142
Net increase (decrease) in cash and cash
 equivalents.............................       (7,245)            370

OPERATING DATA:
Loans originated or purchased:
 Brokered Loans(5).......................  $    66,389     $   114,063
 Correspondent Loans.....................       49,373         122,679
                                           -----------     -----------
   Total.................................  $   115,762     $   236,742
                                           -----------     -----------
                                           -----------     -----------
Average principal balance per loan.......           78              81
Weighted average interest rate...........         11.0%           11.3%
Combined weighted average initial
 loan-to-value ratio.....................         67.4            71.0
Percent of loans secured by first
 mortgages...............................         94.1            93.6
Loan Sales:
 Loans sold through securitizations......  $        --     $   235,000
 Whole loan sales........................        6,899              --
                                           -----------     -----------
   Total.................................  $     6,899     $   235,000
                                           -----------     -----------
 Total loans serviced....................  $   536,864     $ 1,110,999
                                           -----------     -----------
                                           -----------     -----------
9
THREE MONTHS
                                                                                                       ENDED
                                                       YEAR ENDED DECEMBER 31,                       MARCH 31,
                                          --------------------------------------------------     -----------------
                                           1992       1993       1994       1995       1996       1996       1997
                                          ------     ------     ------     ------     ------     ------     ------
DELINQUENCY DATA:
Total delinquencies as a percentage of
 loans serviced (period end)(6).......     19.96%     13.49%     11.44%     10.64%      8.37%      7.50%      7.98%
Defaults as a percentage of loans
 serviced (period end)(7).............      3.76%      5.35%      7.32%      5.87%      4.33%      5.91%      4.35%
Net losses as a percentage of average
 loans serviced.......................      0.02%      0.03%      0.24%      0.66%      0.43%      0.15%      0.09%
 
FINANCIAL RATIOS:
 Ratio of earnings to fixed
   charges(8).........................      1.73       2.26       1.54       1.58       3.96       0.87       4.86
 Ratio of indebtedness to total
   capitalization(9)..................      0.58       0.56       0.60       0.64       0.35       0.64       0.37
 Pre-tax interest coverage
   ratio(10)..........................      1.73       2.26       1.54       1.58       3.96       0.87       4.86
AT MARCH 31, 1997
                                                                                              ---------------------
                                                                                                          PRO FORMA
                                                                                               ACTUAL    AS ADJUSTED
                                                                                              --------    ---------
BALANCE SHEET DATA:                                                                    
Loans held for sale.......................................................................    $ 77,769     $ 77,769   
Interest-only and residual certificates...................................................     101,858      101,858   
Capitalized mortgage servicing rights.....................................................      13,448       13,448   
Total assets..............................................................................     257,356      298,139   
Warehouse financing and other borrowings(11)..............................................     112,507        3,290   
  % Senior Notes due 2004.................................................................          --      150,000   
Investor payables.........................................................................      20,770       20,770   
Total liabilities.........................................................................     154,332      195,115   
Stockholders' equity......................................................................     103,024      103,024
------------------
 (1) Prior to October 31, 1996, Delta Funding Corporation was treated as an S
     corporation for federal and state income tax purposes. As a result, the
     Company's historical earnings prior to such date had been taxed directly to
     the former shareholders of Delta Funding Corporation (the 'Former
     Shareholders') and not to the Company. See 'Management's Discussion and

     Analysis of Financial Condition and Results of Operations--Termination of S
     Corporation Status and Income Taxes.'
 
 (2) Pro forma presentation reflects a provision for income taxes, as if the
     Company had been a C corporation since inception, at an assumed tax rate of
     43%.
 
 (3) Figures for the three months ended March 31, 1997 are actual.
 
 (4) Reflects the effect of 10,653,000 shares of common stock issued to the
     Former Shareholders and the effect of the issuance of 4,600,000 shares of
     common stock issued in the Company's initial public offering, 1,976,182 of
     which are treated as if they had always been outstanding to give effect to
     certain distributions paid to the Former Shareholders in connection with
     termination of S corporation status.
 
 (5) Includes $8.1 million of retail loans originated by Fidelity Mortgage
     during the three months ended March 31, 1997.
 
 (6) Represents the percentages of account balances contractually past due 30
     days or more, exclusive of loans in foreclosure and real estate owned
     ('REO').
 
 (7) Represents the percentages of account balances on loans in foreclosure and
     REO.
 
 (8) For the purpose of determining the ratio of earnings to fixed charges,
     earnings consist of income before income taxes and fixed charges; fixed
     charges consist of interest expense.
 
 (9) Represents the ratio of (i) total debt, exclusive of warehouse financing,
     to (ii) the sum of total stockholders' equity and total debt, exclusive of
     warehouse financing.
 
(10) Amounts represent the ratio of (i) the sum of income before income taxes
     plus interest expense to (ii) interest expense.
 
(11) Includes $57.5 million in residual financing.
 
     THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN 'RISK
FACTORS' AND IN 'MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--LIQUIDITY AND CAPITAL RESOURCES.'
 
                                       10
RISK FACTORS
 
     An investment in the Notes involves certain risks. Prospective investors
should carefully consider the following risk factors, which constitute all the

material risk factors, in addition to the other information contained in this
Prospectus, in evaluating an investment in the Notes offered hereby.
 
LEVERAGE; ASSET ENCUMBRANCE
 
     The Company currently has substantial outstanding indebtedness, and,
subsequent to the Offering, the Company will be significantly leveraged.
Although the covenants under the Indenture will restrict the incurrence of
Indebtedness by the Company and its Restricted Subsidiaries, the Indenture does
not limit the amount of Indebtedness under the Company's warehouse facilities
that qualifies as Permitted Warehouse Debt (as defined). With respect to the
Company's existing warehouse facilities, Permitted Warehouse Debt generally
means indebtedness used exclusively to finance or refinance the origination or
purchase of mortgage loans by the Company or a Subsidiary, up to the lesser
of (i) the amount advanced by the warehouse lender or (ii) 100% of the principal
amount of such loans. See 'Description of the Notes--Certain Definitions.' All
Permitted Warehouse Debt is secured by the mortgage loans financed thereby.
Although lenders under Permitted Warehouse Debt in a default or bankruptcy
situation can be expected to seek payment first out of the collateral securing
such Indebtedness, such existing Indebtedness is recourse to the Subsidiaries
incurring such Indebtedness and certain of such Indebtedness is unconditionally
guaranteed by the Company. Similarly, although the Company intends to use a
portion of the proceeds from this Offering to pay off all its residual
facilities, the Indenture will limit but not prohibit the Company's incurrence
of Indebtedness secured by interest-only and residual certificates, and such
Indebtedness would also be recourse to the Subsidiaries incurring such
Indebtedness. Thus, if the value of the collateral securing any such
Indebtedness was to be insufficient to repay such Indebtedness in full, the
lenders could be entitled to seek payment of the shortfall, if any, from the
Subsidiary incurring such Indebtedness, and in some cases, from the Company. See
'--Dependence on Funding Sources--Dependence on Warehouse and Other Financing
Sources.' The Indenture also will permit the Company and its Restricted
Subsidiaries to incur substantial amounts of additional secured Indebtedness. At
March 31, 1997 on an 'as adjusted basis' to give effect to the Offering and the
application of the net proceeds therefrom, aggregate outstanding consolidated
Indebtedness (including the current maturities thereof) of the Company would
have been approximately $153.7 million, of which $3.3 million would have been
secured Indebtedness to which the Notes and the Guarantees are effectively
subordinated, and the Company would have been able to incur (based upon
available collateral) an additional $76.6 million of Indebtedness (all of which
is secured) under its existing credit facilities and warehouse facilities. In
addition, assuming additional financing was available to the Company, it could
have incurred an additional $51.1 million of Indebtedness (excluding Permitted
Warehouse Debt) and complied with the covenants of the Indenture that will
restrict incurrence of Indebtedness. See 'Capitalization.'
 
     The degree to which the Company is leveraged could have important
consequences to the Holders of the Notes, including: (i) the Company may be more
vulnerable to adverse general economic and industry conditions; (ii) the Company
may find it more difficult to obtain additional financing for future working
capital, capital expenditures, acquisitions, general corporate purposes or other
purposes; and (iii) the Company will have to dedicate a substantial portion of
the Company's cash flow from operations to the payment of principal and interest
on Indebtedness (a substantial portion of which may become due prior to the

maturity of the Notes), thereby reducing the funds available for operations and
future business opportunities.
 
     The Company's ability to sustain its growth and make payments of principal
or interest on, or to refinance, its Indebtedness (including the Notes) will
depend on its future operating performance, and its ability to effect additional
securitizations and debt and/or equity financing, which to a certain extent is
subject to economic, financial, competitive and other factors beyond its
control. If the Company is unable to generate sufficient cash flow in the future
to service its debt, it may be required to refinance all or a portion of its
existing debt, including the Notes, or to obtain additional financing. There can
be no assurance that any such refinancing would be available or that any
additional financing could be obtained on terms reasonably satisfactory to the
Company. The inability to obtain additional financing could have a material
adverse effect on the Company and on its ability to service debt, including the
Notes. See '--Ability to Service Debt; Negative Cash Flows; Access to Capital
Markets' and '--Dependence on Funding Sources--Dependence on Warehouse and Other
Financing Sources.'
 
                                       11
ABILITY TO SERVICE DEBT; NEGATIVE CASH FLOWS; ACCESS TO CAPITAL MARKETS
 
     There can be no assurance that the cash available from operations and
financing activities will be sufficient to enable the Company to make required
interest payments on the Notes and its other debt obligations and required
payments. The Company may encounter liquidity problems which could affect its
ability to meet such obligations while attempting to withstand competitive
pressures or adverse economic conditions. In such circumstances, the value of
the Notes could be materially adversely affected.
 
     The Company requires substantial amounts of cash to fund its loan
origination, loan purchase and securitization activities. The Company has
operated, and expects to continue to operate, on a negative cash flow basis due
to increases in the volume of loan originations and purchases and due to the
growth of its securitization program. In a securitization, the Company
recognizes a gain on sale for the loans securitized upon the closing of the
securitization and incurs significant associated taxes (both current and
deferred) and expenses but does not receive the cash representing such gain
until it receives the cash flows from the interest-only and residual
certificates and from servicing of the loans, which are payable over the actual
life of the loans securitized. For the three months ended March 31, 1997 and the
year ended December 31, 1996, the Company operated on this negative cash flow
basis using $11.4 million and $42.0 million, respectively, in operating
activities; this negative cash flow is expected to increase for the foreseeable
future as the Company continues to grow.
 
     Currently, the Company's primary cash requirements include the funding of
(i) loan originations and purchases pending their pooling and sale, (ii) the
points and expenses paid in connection with the acquisition of Brokered and
Correspondent Loans, (iii) interest expense on warehouse, residual and other
financing, (iv) fees, expenses and tax payments incurred in connection with its

securitization program and (v) ongoing administrative and other operating
expenses. The Company funds these cash requirements primarily through warehouse
and other financing facilities, securitizations and whole loan sales, interest,
servicing and other cash income and, subject to market conditions, debt and
equity financings. The Company believes that the sources of liquidity, including
the funds raised in this Offering, available to it should be sufficient to fund
the Company's liquidity requirements for the next 12 months if the Company's
future operations are consistent with management's current growth expectations.
However, because the Company expects to continue to require substantial amounts
of cash for the foreseeable future, it anticipates that it will need to effect
debt or equity financings regularly, in addition to quarterly securitizations.
The type, timing and terms of financing selected by the Company will be
dependent upon the Company's cash needs, the availability of other financing
sources and the prevailing conditions in the financial markets. There can be no
assurance that any such sources will be available to the Company at any given
time or as to the favorableness of the terms on which such sources may be
available. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources.'
 
DEPENDENCE ON FUNDING SOURCES
 
     Dependence on Warehouse and Other Financing Sources.  The Company funds
substantially all of the loans which it originates and purchases through
borrowings under warehouse financing facilities and through repurchase
agreements. The Company's borrowings are in turn repaid with the proceeds
received by the Company from selling such loans through securitizations or whole
loan sales. The Company's ability to implement its business strategy will
require increased financing. Historically, the Company has relied upon a few
lenders to provide the primary credit facilities for its loan originations and
purchases. There can be no assurance that such financings will be available on
terms reasonably satisfactory to the Company or at all. Any failure to renew or
obtain adequate funding under these warehouse financing facilities or other
financing arrangements, or any substantial reduction in the size of or increase
in the cost of such facilities, could have a material adverse effect on the
Company's financial condition and results of operations. Furthermore, the
Indenture will impose certain restrictions on the Company's ability to incur
additional warehouse financing and will require the Company to achieve, and
thereafter maintain, a specified amount of unencumbered interest-only and
residual certificates, thereby precluding the Company's ability to access
residual financing for a specified period and limiting its access to such
financing until the Company reaches predetermined levels in accordance with the
Indenture. Historically, the Company has relied upon residual financing
agreements (credit facilities secured by interest-only and residual
certificates) to fund the tax consequences of the recognition of the gains on
sale when a securitization occurs and other working capital needs prior to
receipt of any cash flow from the interest-only and
 
                                       12
residual certificates retained by the Company in its securitizations. To the
extent that the Company is not successful in maintaining or replacing adequate
financing, it would not be able to hold a large volume of loans pending

securitization and therefore would have to curtail its loan production
activities or sell loans either through whole loan sales or in smaller
securitizations, thereby having a material adverse effect on the Company's
financial condition and results of operations. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources.'
 
     Delta Funding Corporation is currently negotiating the terms of the Credit
Agreement with First Chicago. The Credit Agreement will be used primarily to
finance mortgage loans held for sale and to fund servicer advances by Delta
Funding Corporation, subject to specified sublimits to be set forth therein.
Delta Funding Corporation expects to enter into the definitive Credit Agreement
prior to the Issue Date. However, there can be no assurance that the Credit
Agreement will be entered into prior to the Issue Date or at all. The execution
and delivery of the Credit Agreement is not a condition to this Offering. See
'Prospectus Summary--Recent Developments.'
 
     Dependence on Securitizations.  The Company relies significantly upon
securitizations to generate cash proceeds for repayment of its warehouse
facilities and to create availability to originate and purchase additional
loans. Further, gains on sale of loans generated by the Company's
securitizations represent a significant portion of the Company's revenues. The
Company anticipates effecting loan securitizations on at least a quarterly
basis. Several factors affect the Company's ability to complete securitizations,
including conditions in the securities markets generally, conditions in the
asset-backed securities market specifically, the credit quality of the Company's
portfolio of loans and the Company's ability to obtain credit enhancement.
Accordingly, if the Company were unable to securitize profitably a sufficient
number of loans in a particular financial reporting period, then the Company's
revenue, representing gain on sale, for such period would decline and could
result in lower income or a loss for such period. In addition, unanticipated
delays in closing the securitizations could increase the Company's costs
associated with carrying its loans during the warehousing period, including
hedging costs. Any impairment of, or delay in, the Company's ability to complete
securitizations could result in a material adverse effect on the Company's
financial condition and results of operations.
 
     The Company has relied on credit enhancements provided by monoline
insurance carriers to guarantee outstanding investor certificates in the related
trusts to enable it to obtain an AAA/Aaa rating for such investor certificates.
The Company has not attempted to structure a mortgage loan pool for sale through
a securitization based solely on the internal credit enhancements of the pool or
the Company's credit. Any substantial reductions in the size or availability of
such insurance policies, or increases in the price charged by, or required level
of protection to be provided to, the insurance companies issuing such policies,
could have a material adverse effect on the Company's financial condition and
results of operations. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources' and
'Business--Loans-- Loan Sales.'
 
POTENTIAL CHANGE IN VALUATION OF INTEREST-ONLY AND RESIDUAL CERTIFICATES AND
MORTGAGE SERVICING RIGHTS
 
     The Company sells substantially all of the loans that it originates or

purchases through securitizations. The Company derives a substantial portion of
its income by recording a gain on sale when loans are sold in such a manner. In
a securitization, the Company receives as an investment the interest-only and
residual certificates created as a result of such securitization. In addition,
under Statement of Financial Accounting Standards ('SFAS') No. 125, 'Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities' ('SFAS No. 125'), the Company also recognizes as an asset the
capitalized value of Mortgage Servicing Rights (including normal servicing and
other ancillary fees). The Company calculates the value of its interest-only and
residual certificates and Mortgage Servicing Rights based upon their fair
values. The fair value of these assets is determined based on various economic
factors, including loan types, balances, interest rates, dates of origination,
terms and geographic locations. The Company also uses other available
information applicable to the types of loans the Company originates and
purchases, such as reports on prepayment rates, interest rates, collateral
value, economic forecasts and historical default and prepayment rates of the
portfolio under review. The Company estimates the expected cash flows that it
will receive over the life of a portfolio of loans. These expected cash flows
constitute the excess of the interest rate payable by the obligors of loans over
 
                                       13
the interest rate passed through to the purchasers of the related securities,
less applicable recurring fees and credit losses. The Company discounts the
expected cash flows using an interest rate that market participants would use
for similar financial instruments. As of March 31, 1997, the Company's balance
sheet reflected the fair value of interest-only and residual certificates of
$101.9 million and Mortgage Servicing Rights of $13.4 million.
 
     Realization of the value of these interest-only and residual certificates
and Mortgage Servicing Rights in cash is subject to the prepayment and loss
characteristics of the underlying loans and to the timing and ultimate
realization of the stream of cash flows associated with such loans. Significant
prepayment or loss experience would impair the future cash flows of the
interest-only and residual certificates and Mortgage Servicing Rights. If actual
experience differs from the assumptions used in determination of the asset
value, future cash flows and earnings could be negatively impacted and the
Company could be required to write down the value of its interest-only and
residual certificates and Mortgage Servicing Rights. No assurance can be given
that the Company's receivables will not experience significant prepayments or
losses or as to whether, and in what amounts, the Company in the future may have
to write down the value of the interest-only and residual certificates or
Mortgage Servicing Rights from its securitization transactions. In addition, if
the prevailing interest rate rose, the required discount rate might also rise,
resulting in impairment of the value of the interest-only and residual
certificates and Mortgage Servicing Rights. The Company believes that there is
no active market for the sale of its interest-only and residual certificates or
its Mortgage Servicing Rights. No assurance can be given that these assets could
be sold at their stated value on the balance sheet, if at all. See 'Management's
Discussion and Analysis of Financial Condition and Results of Operations.'
 
DELINQUENCIES; RIGHT TO TERMINATE SERVICING RIGHTS

 
     The forms of pooling and servicing agreements entered into in connection
with the Company's securitizations set forth certain conditions under which the
insurer or the trustee of a particular securitization can terminate the
Company's right to act as servicer. If, at any measuring date, the loss and
delinquency performance of the mortgage loans in the securitization exceeds
certain levels, the monoline insurance company may terminate the Company's
servicing rights. Although the insurer has the right to terminate servicing with
respect to three of the Company's securitizations (including one in which the
Company sold all of the residual interests), to date, no servicing rights have
been terminated. There can be no assurance that the Company's servicing rights
with respect to the mortgage loans in such securitizations, or any other
securitization which exceeds the specified limits in future periods, will not be
terminated in the future. The monoline insurer has other rights to terminate
servicing if the Company were to breach its obligations under the pooling and
servicing agreements, losses on foreclosure were to exceed specified limits, the
insurance company was required to make payments under its policy or the Company
failed to meet certain financial tests, including a minimum net worth test.
Under some of the Company's servicing agreements, a failure by the Miller family
to continue to own, directly or indirectly, a majority of the Company's
outstanding voting stock, may result in a termination event. None of these
events has occurred with respect to any of the Company's securitizations. Any
termination of the Company's right to act as servicer under a securitization
would materially and adversely affect its ability to engage in future
securitizations which would have a material adverse effect on the Company's
financial condition and results of operations.
 
     In addition, high delinquency rates have a negative impact on cash flows.
Provisions in the pooling and servicing agreements have the effect of requiring
the overcollateralization account, which is primarily funded by Excess Servicing
from the loans held in the trust, to be increased to certain specified levels
when delinquency rates exceed predetermined limits. As of March 31, 1997, the
Company was required to maintain an additional $1.8 million in
overcollateralization accounts as a result of delinquency rates in loans sold in
two securitizations being higher than the predetermined limits set in the
pooling and servicing agreements.
 
CONTINGENT RISKS
 
     Although the Company sells substantially all of the loans that it
originates and purchases on a nonrecourse basis, the Company retains some degree
of credit risk on all loans originated or purchased. During the period of time
that loans are held pending sale, the Company is subject to the various business
risks associated with lending, including the risk of borrower default, the risk
of foreclosure and the risk that an increase in interest rates would result in a
decline in the value of loans to potential purchasers. The Company's
securitizations generally
 
                                       14
require the use of the excess cash flow distributions related to the residual
certificates to accelerate the amortization of certificate holders' principal

balances relative to the amortization of the mortgage loans held by the trust up
to certain pre-set levels. The resulting overcollateralization amounts serve as
credit enhancement for the related trust and therefore are available to absorb
losses realized on loans held by such trust. Generally, the form of credit
enhancement agreement entered into in connection with securitization
transactions contains specified limits on the delinquency, default and loss
rates on the receivables included in each trust. If, at any measuring date, the
delinquency, default or loss rate with respect to any trust were to exceed the
specified delinquency, default and loss rates, excess cash flow from the trust,
if any, would be used to fund the increased overcollateralization limit instead
of being distributed to the Company, which would have an adverse effect on the
Company's cash flow. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations.' In addition, when borrowers are delinquent
in making monthly payments on loans included in a securitization, the Company is
required to advance interest payments with respect to such delinquent loans to
the extent that the Company deems such advances ultimately recoverable. These
advances require funding from the Company's capital resources but have priority
of repayment from the succeeding month's collections. Lastly, agreements
governing securitizations, including the Company's securitizations, require the
seller to commit to repurchase or replace loans that do not conform to the
representations and warranties made by the seller at the time of sale. To date,
the Company has not been required to repurchase or replace a loan due to a
violation of a representation or warranty; however, there can be no assurance
that in future the Company will not be required to repurchase or replace a loan.
 
     Prior to 1991, the Company combined mortgage loans into pools and sold
these pools as well as individual mortgage loans directly to a network of
commercial banks, savings and loans, insurance companies, pension funds and
accredited investors. The Company generally sold these pools or individual loans
with recourse whereby the Company is obligated to repurchase any loan if it
defaults and the related mortgaged property becomes a REO property. This
obligation is subject to various terms and conditions, including, in some
instances, a time limit. At March 31, 1997, $18.0 million, or 1.6%, of the
Company's $1.1 billion servicing portfolio was subject to be repurchased in the
future should such loans become REO properties.
 
     In the ordinary course of its business, the Company is subject to claims
made against it by borrowers and private investors arising from, among other
things, losses that are claimed to have been incurred as a result of alleged
breaches of fiduciary obligations, misrepresentations, errors and omissions of
employees, officers and agents of the Company (including its appraisers),
incomplete documentation and failures by the Company to comply with various laws
and regulations applicable to its business. The Company believes that the
liability with respect to any currently asserted claims or legal actions is not
likely to be material to the Company's financial condition or results of
operations; however, any claims asserted in the future may result in legal
expenses or liabilities which could have a material adverse effect on the
Company's financial condition and results of operations.
 
RESTRICTIVE COVENANTS
 
     The instruments governing the Indebtedness of the Company, including the
Indenture, impose significant operating and financial restrictions on the
Company. Such restrictions will affect, and in many respects significantly limit

or prohibit, among other things, the ability of the Company to incur additional
Indebtedness, pay dividends, repay Indebtedness prior to its stated maturity,
sell assets or engage in mergers or acquisitions. See 'Description of the
Notes--Certain Covenants.' These restrictions could also limit the ability to
the Company to effect future financings, make needed capital expenditures,
withstand a future downturn in the business or the economy, or otherwise conduct
necessary corporate activities.
 
FRAUDULENT CONVEYANCES CONSIDERATIONS
 
     Under applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent conveyance law, if, among other things, the
Company or any of the Subsidiary Guarantors, at the time it incurred the
indebtedness evidenced by the Notes or its Guarantee, as the case may be, (i)
(a) was or is insolvent or rendered insolvent by reason of such occurrence or
(b) was or is engaged in a business or transaction for which the assets
remaining with the Company or such debts as they mature, and (ii) the Company or
such Subsidiary Guarantor received or receives less than the reasonably
equivalent value of fair consideration for the incurrence
 
                                       15
of such indebtedness, the Notes and the Guarantees could be voided, or claims in
respect of the Notes or such Guarantees could be subordinated to all other debts
of the Company or such Subsidiary Guarantors, as they case may be. In addition,
the payment of interest and principal by the Company pursuant to the Notes or
the payment of amounts by a Subsidiary Guarantor pursuant to a Guarantee could
be voided and required to be returned to the person making such payment, or to
fund for the benefit of the creditors of the Company or such Subsidiary
Guarantor, as the case may be.
 
     The measures of insolvency for purposes of the foregoing considerations
will vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, the Company or a Subsidiary Guarantor would be
considered insolvent if (i) the sum of its debts, including contingent
liabilities, were greater than the saleable value of all of its assets at a fair
valuation or if the present saleable value of its assets were less than the
amount of its probable liability on its existing debts, including contingent
liabilities, as they become absolute and mature or (ii) it could not pay its
debts as they become due.
 
     To the extent any Guarantees were voided as a fraudulent conveyance or held
unenforceable for an other reason, Holders of the Notes would cease to have any
claim in respect of such Subsidiary Guarantor and would be creditors solely of
the Company and any Subsidiary Guarantor whose Guarantee was not avoided or held
unenforceable. In such event, the claims of the Holders of the Notes against the
issuer of an invalid Guarantee would be subject to the prior payment of all
liabilities and preferred stock claims of such Subsidiary Guarantor. There can
be no assurance that, after providing for all prior claims and preferred stock
interests, if any, there would be sufficient assets to satisfy the claims of the
Holders of the Notes relating to any voided portions of any Guarantees. The
Company is a holding company whose material assets consist primarily of the

capital stock of the Subsidiary Guarantors. Consequently the Company is
dependent upon dividends paid by the Subsidiary Guarantors to pay its operating
expenses, service its debt obligations, including the Notes, and satisfy any
mandatory repurchase obligations relating to the Notes, as a result of a Change
of Control or sale or other disposition of certain assets. See 'Description of
the Notes' and 'Management's Discussion and Analysis of Financial Condition and
Results of Operations.'
 
     On the basis of historical financial information, recent operating history
as discussed in 'Management's Discussion and Analysis of Financial Condition and
Results of Operations' and other factors, the Company and each Subsidiary
Guarantor believes that, after giving effect to the indebtedness incurred in
connection with the Offering, it (i) will not be insolvent, will not have
unreasonably small capital for the businesses in which it is engaged and will
not incur debts beyond its ability to pay such debts as they mature and (ii)
will have sufficient assets to satisfy any probable money judgment against it in
any pending action. There can be no assurance, however, as to what standard a
court would apply in making such determination.
 
ECONOMIC CONDITIONS
 
     General.  The Company's business may be adversely affected by periods of
economic slowdown or recession which may be accompanied by decreased demand for
consumer credit and declining real estate values. In the mortgage business, any
material decline in real estate values reduces the ability of borrowers to use
the equity in their homes to support borrowings and increases the loan-to-value
ratios of loans previously made by the Company, thereby weakening collateral
coverage and increasing the possibility of a loss in the event of default.
Delinquencies, foreclosures and losses generally increase during economic
slowdowns or recessions.
 
     Because of the Company's focus on credit-impaired borrowers in the home
equity loan market, the actual rates of delinquencies, foreclosures and losses
on such loans could be higher under adverse economic conditions than
delinquencies, foreclosures and losses currently experienced in the mortgage
lending industry in general. In addition, in an economic slowdown or recession,
the Company's actual costs of servicing the loans may increase without an
increase in the servicing fee paid to the Company under its securitizations. Any
sustained period of increased delinquencies, foreclosures, losses or increased
costs could adversely affect the Company's ability to sell, and could increase
the cost of selling, loans through securitization or on a whole loan basis,
which could adversely affect the Company's financial condition and results of
operations.
 
     Interest Rates.  The Company's profitability may be directly affected by
the levels of and fluctuations in interest rates, which affect the Company's
ability to earn a spread between interest received on its loans and the costs of
borrowing. The profitability of the Company is likely to be adversely affected
during any period of
 
                                       16
unexpected or rapid changes in interest rates. For example, a substantial or
sustained increase in interest rates could adversely affect the ability of the
Company to originate and purchase loans and would reduce the value of loans that
were originated prior to such increase. A significant decline in interest rates
could decrease the size of the Company's loan servicing portfolio by increasing
the level of loan prepayments. Higher than anticipated rates of loan prepayments
or losses could require the Company to write down the value of such Excess
Servicing, adversely impacting earnings and the Company's financial condition
and results of operations.
 
     Fluctuating interest rates also may affect the net interest income earned
by the Company, resulting from the difference between the yield to the Company
on fixed rate loans held pending sale and the interest paid by the Company for
funds borrowed at variable rates under the Company's warehouse financing
facilities. While the Company monitors the interest rate environment and
currently employs a hedging strategy designed to mitigate the impact of changes
in interest rates, there can be no assurance that the profitability of the
Company would not be adversely affected during any period of changes in interest
rates. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources--Hedging' and
'--Inflation and Interest Rates.'
 
MANAGEMENT OF RAPID GROWTH
 
     Since January 1, 1995, the Company has expanded into new geographic regions
and products and substantially increased its volume of loans originated and
purchased. The Company recently completed its initial public offering and the
Fidelity Mortgage acquisition. In light of such growth, the historical financial
performance of the Company may be of limited relevance in predicting future
performance. Any credit or other problems associated with the large number of
loans originated and purchased in the recent past would not become apparent
until sometime in the future. The Company's continued growth and expansion will
place additional pressures on the Company's personnel and systems. Any future
growth may be limited by, among other things, the Company's need for continued
funding sources, access to capital markets, ability to retain and attract
qualified personnel, sensitivity to economic slowdowns, fluctuations in interest
rates and competition from other consumer finance companies and from new market
entrants. There can be no assurance that the Company will successfully obtain or
apply the human, operational and financial resources needed to manage a
developing and expanding business. Failure by the Company to manage its growth
effectively, or to sustain its historical levels of performance in credit
analysis and transaction structuring with respect to the increased loan
origination and purchase volume, could have a material adverse effect on the
Company's financial condition and results of operations. See 'Management's
Discussion and Analysis of Financial Condition and Results of Operations' and
'Business--Business Strategy.'
 
     With its acquisition of Fidelity Mortgage during the first quarter of 1997,
the Company expanded its origination network to include the retail solicitation
of home equity loans. The Company acquired Fidelity Mortgage with the
expectation that the acquisition would result in beneficial synergies, with
Fidelity Mortgage providing a dedicated source of mortgage loans for Delta
Funding Corporation's securitization pools and for its servicing arm, and Delta
Financial Corporation providing capital to Fidelity Mortgage for the expansion

of its retail network. There is no assurance that the integration of these
operations will be accomplished smoothly or successfully. Although all the key
senior managers of Fidelity Mortgage have remained with Fidelity Mortgage and
entered into employment contracts, the integration of the operations of Fidelity
Mortgage will require the dedication of certain management resources of Delta.
The inability to integrate successfully the Fidelity Mortgage business in a
timely manner could adversely affect the Company's financial condition and
results of operations.
 
COMPETITION
 
     As an originator and purchaser of mortgage loans, the Company faces intense
competition, primarily from mortgage banking companies, commercial banks, credit
unions, savings and loans, credit card issuers and finance companies. Many of
these competitors in the financial services business are substantially larger
and have more capital and other resources than the Company. Competition can take
many forms, including convenience in obtaining a loan, service, marketing and
distribution channels and interest rates. 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,
 
                                       17
competitors may solicit the Company's borrowers to refinance their loans. During
economic slowdowns or recessions, the Company's borrowers may have new financial
difficulties and may be receptive to offers by the Company's competitors.
Furthermore, the current level of gains realized by the Company and its
competitors on the sale of the type of loans originated and purchased is
attracting additional competitors into this market with the effect of lowering
the gains that may be realized by the Company on future loan sales. In addition,
greater investor acceptance of securities backed by loans comparable to the
Company's mortgage loans and greater availability of information regarding the
prepayment and default experience of such loans creates greater efficiencies in
the market for such securities. Such efficiencies may create a desire for even
larger transactions giving companies with greater volumes of originations a
competitive advantage. In addition, a more efficient market for such securities
may lead certain investors to purchase securities backed by other types of
assets where potential returns may be greater.
 
     Furthermore, certain large national finance companies, with greater
capitalization and financial resources, and conforming mortgage originators have
announced their intention to adapt their conforming origination programs and
allocate resources to the origination of non-conforming loans. In addition,
certain of these larger mortgage companies, commercial banks and savings and
loans have begun to offer products similar to those offered by the Company,
targeting customers similar to those of the Company. The entrance of these
competitors into the Company's market could have a material adverse effect on
the Company's financial condition and results of operations. See
'Business--Competition.'
 
DEPENDENCE ON BROKERS AND CORRESPONDENTS

 
     The Company depends primarily on brokers and correspondents for its
originations and purchases of new loans. None of these brokers or correspondents
is contractually obligated to do business with the Company. Further, the
Company's competitors also have relationships with the Company's brokers and
correspondents and actively compete with the Company in its efforts to expand
its broker and correspondent networks. Accordingly, there can be no assurance
that the Company will be successful in maintaining its existing relationships or
expanding its broker and correspondent networks.
 
     The Company currently originates and purchases loans from a network of
approximately 1,000 brokers and correspondents. However, the top 20 brokers and
correspondents and the top broker accounted for approximately 48.2% and 11.4%,
respectively, and 48.2% and 8.9%, respectively, of the total volume of loans
originated and purchased for the year ended December 31, 1996 and for the three
months ended March 31, 1997. Accordingly, the loss of a significant number of
any of these brokers or correspondents could have a material adverse impact on
the volume of loan originations and purchases and a resulting material adverse
effect on the Company's financial condition and results of operations. See
'Business--Loans.'
 
CONCENTRATION OF OPERATIONS
 
     For the three months ended March 31, 1997 and the year ended December 31,
1996, 85.7% and 87.6%, respectively, of the aggregate principal balance of the
mortgage loans originated or purchased by the Company were secured by properties
located in 10 states, with New York and New Jersey together accounting for 56.1%
and 62.0%, respectively, of total originations and purchases. Although the
Company continues to expand its mortgage origination network in other regions of
the country, the Company's origination business is likely to remain concentrated
in the Northeast for the foreseeable future. Consequently, the Company's
financial condition and results of operations are dependent upon general trends
in the economy and the residential real estate market in the Northeast. See
'Business--Loans.'
 
CREDIT-IMPAIRED BORROWERS
 
     The Company targets credit-impaired borrowers. Loans made to such borrowers
generally entail a higher risk of delinquency and possibly higher losses than
loans made to more creditworthy borrowers. No assurance can be given that the
Company's underwriting policies and collection procedures will alleviate such
risks. In the event that pools of loans warehoused, sold and serviced by the
Company experience higher delinquencies, foreclosures or losses than
anticipated, the Company's financial condition and results of operations would
be adversely affected. See 'Business--Loans.'
 
                                       18
LEGISLATIVE AND REGULATORY RISK; LEGAL PROCEEDINGS
 
     Members of Congress and government officials from time to time have
suggested the elimination of the mortgage interest deduction for federal income

tax purposes, either entirely or in part, based on borrower income, type of loan
or principal amount. Because many of the Company's loans are made to borrowers
for the purpose of consolidating consumer debt or financing other consumer
needs, the competitive advantages of tax deductible interest, when compared with
alternative sources of financing, could be eliminated or seriously impaired by
such government action. Accordingly, the reduction or elimination of these tax
benefits could have a material adverse effect on the demand for loans of the
kind offered by the Company.
 
     The Company's business is subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and is subject to
various laws and judicial and administrative decisions imposing requirements and
restrictions on part or all of its operations. The Company's consumer lending
activities are subject to the Federal Truth-in-Lending Act and Regulation Z
(including the Home Ownership and Equity Protection Act of 1994), the Federal
Equal Credit Opportunity Act and Regulation B, as amended ('ECOA'), the Fair
Credit Reporting Act of 1994, as amended, the Federal Real Estate Settlement
Procedures Act ('RESPA') and Regulation X, the Home Mortgage Disclosure Act and
the Federal Debt Collection Practices Act, as well as other federal and state
statutes and regulations affecting the Company's activities. The Company is also
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, underwriting, selling and servicing loans.
These rules and regulations, among other things, impose licensing obligations on
the Company, establish eligibility criteria for mortgage loans, prohibit
discrimination, provide for inspections and appraisals of properties, require
credit reports on loan applicants, regulate assessment, collection, foreclosure
and claims handling, investment and interest payments on escrow balances and
payment features, mandate certain disclosures and notices to borrowers and, in
some cases, fix maximum interest rates, fees and mortgage loan amounts. Failure
to comply with these requirements can lead to loss of approved status,
termination or suspension of servicing contracts without compensation to the
servicer, demands for indemnifications or mortgage loan repurchases, certain
rights of rescission for mortgage loans, class action lawsuits and
administrative enforcement actions. There can be no assurance that the Company
will maintain compliance with these requirements in the future without
additional expenses, or that more restrictive local, state or federal laws,
rules and regulations will not be adopted that would make compliance more
difficult for the Company. See 'Business--Regulation.'
 
     Several class-action lawsuits have been filed recently against a number of
consumer finance companies, including one against the Company, alleging that the
compensation of mortgage brokers through the payment of yield spread premiums
violates various federal and state consumer protection laws. Although management
believes the Company has meritorious defenses and intends to defend this suit,
the Company cannot estimate with any certainty its ultimate legal or financial
liability, if any, with respect to the alleged claims. No assurance can be given
that a negative outcome in this suit will not have a material adverse effect on
the Company's financial condition and results of operations. See
'Business--Legal Proceedings.'
 
DEPENDENCE ON KEY PERSONNEL
 
     The Company's growth and development to date has been largely dependent

upon the services of Sidney A. Miller, Hugh Miller and other key members of
management. The Company has employment agreements with both persons, as well as
with certain other members of senior management. Although the Company has been
able to hire and retain other qualified and experienced management personnel,
the loss for any reason of the services of one or more key members of management
could have a material adverse effect on the Company's financial condition and
results of operations. See 'Management--Employment Agreements; Key-Man Life
Insurance.'
 
CONTROL BY PRINCIPAL STOCKHOLDERS
 
     The Company's principal stockholders, members of the Miller family,
beneficially own an aggregate of 68.8% of the outstanding shares of the
Company's common stock. Accordingly, such persons, if they were to act in
concert, would have majority control of the Company with the ability to approve
certain fundamental corporate transactions (including mergers, consolidations
and asset sales), to elect all members of the Board of Directors
 
                                       19
and to appoint new management. As long as the Millers are the controlling
stockholders of the Company, third parties will not be able to gain control of
the Company through purchases of common stock not beneficially owned or
otherwise controlled by the Millers. The directors elected by the Millers will
have the authority to effect decisions affecting the capital structure of the
Company, including the issuance of additional capital stock, the implementation
of stock repurchase programs and the declaration of dividends. See 'Description
of the Notes--Repurchase at the Option of Holders--Change of Control' and
'Principal Stockholders.'
 
POSSIBLE ENVIRONMENTAL LIABILITIES
 
     In the ordinary course of its business, the Company from time to time
forecloses on properties securing loans. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real estate may be required to investigate and clean up hazardous or
toxic substances or chemical releases at such property 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. Such laws typically impose cleanup responsibility. Liability
under such laws has been interpreted to be joint and several unless the harm is
divisible, and there is a reasonable basis for allocation of responsibility. The
costs of investigation, remediation or removal of such substances may be
substantial, and the presence of such substances, or the failure to properly
remediate such property, may adversely affect the owner's ability to sell or
rent such property or to borrow using such property as collateral. Persons who
arrange for the disposal or treatment of hazardous or toxic substances also may
be liable for the costs of removal or remediation of such substances at a
disposal or treatment facility, whether or not the facility is owned or operated
by such person. 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. See

'Business--Environmental Matters.'
 
ABSENCE OF PUBLIC MARKET FOR THE NOTES
 
     There is no public market for the Notes, and the Company does not intend to
list the Notes on any national securities exchange. The Company has been advised
by the Underwriters that, following completion of the Offering, they intend to
make a market in the Notes; however, they are under no obligation to do so and
market-making activities with respect to the Notes may be discontinued at any
time without notice. There can be no assurance as to the liquidity of the
trading market for the Notes or that an active public market for the Notes will
develop. If such a market were to develop, the Notes could trade at prices that
may be higher or lower than the initial offering price thereof depending on a
number of factors, including prevailing interest rates, the Company's operating
results and markets for similar securities. If an active public market for the
Notes does not develop, the market price and liquidity of the Notes may be
adversely affected. See 'Underwriting.'
 
                                       20
USE OF PROCEEDS
 
     The net proceeds to the Company from the sale of the Notes offered hereby
are estimated to be $            , after deducting the underwriting discounts
and commissions and estimated offering expenses.
 
     The net proceeds will be used (i) to pay off all residual financing
agreements (approximately $57.5 million as of March 31, 1997), (ii) to repay
amounts outstanding under certain of Company's warehouse lines of credit 
(approximately $51.8 million as of March 31, 1997), (iii) to fund future loan
originations and purchases, (iv) to support securitization transactions, (v) to
fund expansion of Fidelity Mortgage's retail network and (vi) for general
corporate purposes, including to fund acquisitions. Currently, the Company has
no agreement or understanding with respect to any acquisition. See
'Underwriting.'
 
     Pending their ultimate application, net proceeds will be invested in
short-term, investment grade, interest-bearing securities and deposit accounts.
 
                                       21
CAPITALIZATION
 
     The following table shows the capitalization of the Company at March 31,
1997 and as adjusted, to give pro forma effect to the Offering and the
anticipated application of the net proceeds therefrom. See 'Use of Proceeds.'
This table should be read in conjunction with the Company's consolidated
financial statements and the notes thereto included elsewhere herein.
MARCH 31, 1997
                                                          ---------------------------
                                                        ACTUAL            PRO FORMA AS ADJUSTED
                                                ----------------------    ----------------------
                                                             (DOLLARS IN THOUSANDS)
DEBT:
Warehouse financing and other
  borrowings(1)..............................          $112,507                  $  3,290
Bank payable.................................             1,696                     1,696
      % Senior Notes due 2004................                --                   150,000
                                                    -----------               -----------
  Total debt.................................          $114,203                  $154,986
                                                    -----------               -----------
                                                    -----------               -----------
 
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value; 49,000,000
  shares authorized; 15,372,288 shares
  outstanding, actual and pro forma..........               154                       154
Preferred Stock, $.01 par value; 1,000,000
  shares authorized; no shares outstanding...                --                        --
Additional paid-in capital...................            93,468                    93,468
Retained earnings............................             9,402                     9,402
                                                    -----------               -----------
  Total stockholders' equity.................           103,024                   103,024
                                                    -----------               -----------
     Total capitalization....................          $217,227                  $258,010
                                                    -----------               -----------
                                                    -----------               -----------
------------------
(1) Includes aggregate residual financing of $57,454 and $0 outstanding under
    working capital lines of credit.
 
                                       22
SELECTED CONSOLIDATED FINANCIAL DATA
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
     The following table sets forth historical selected consolidated financial
and operating data of the Company as of December 31, 1992, 1993, 1994, 1995 and
1996 and for each of the years in the five year period ended December 31, 1996
and as of March 31, 1996 and 1997 and for each of the three month periods then
ended.
 
     The following selected consolidated income statement data for the years
ended December 31, 1994, 1995 and 1996 and the consolidated balance sheet data
as of December 31, 1995 and 1996 are derived from the Company's audited
consolidated financial statements and notes thereto included elsewhere herein

audited by KPMG Peat Marwick LLP, independent public accountants, as set forth
in their report also included elsewhere herein. The selected consolidated income
statement data for the year ended December 31, 1992 and 1993 and the selected
consolidated balance sheet data as of December 31, 1992, 1993 and 1994 are
derived from the Company's audited consolidated financial statements not
included herein.
 
     The financial data for the Company as of and for the three months ended
March 31, 1996 and 1997 have been derived from unaudited consolidated financial
statements of the Company. The consolidated unaudited financial statements have
been prepared on the same basis as the audited consolidated financial statements
and include all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation of the financial information for the interim periods.
Results of operations for the three months ended March 31, 1997 are not
necessarily indicative of the results to be expected for 1997.
 
     The information set forth below should be read in conjunction with
'Management's Discussion and Analysis of Financial Condition and Results of
Operations' and all of the consolidated financial statements, notes thereto and
other financial information included elsewhere in this Prospectus.
THREE MONTHS
                                                                                                 ENDED
                                                      YEAR ENDED DECEMBER 31,                  MARCH 31,
                                          -----------------------------------------------   ----------------
                                           1992      1993      1994      1995      1996      1996     1997
                                          -------   -------   -------   -------   -------   ------   -------
                                                    (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Revenues:
  Net gain on sale of mortgage loans....  $ 4,757   $ 7,639   $ 6,661   $15,383   $46,525   $  103   $17,314
  Interest..............................   13,402     9,156     9,839    13,588    16,372    3,967     5,559
  Servicing fees........................    1,892     2,101     2,183     2,855     5,368    1,015     1,392
  Other.................................    5,413     3,617     3,114     4,309     5,266      219     3,040
                                          -------   -------   -------   -------   -------   ------   -------
    Total revenues......................  $25,464   $22,513   $21,797   $36,135   $73,531   $5,304   $27,305
                                          -------   -------   -------   -------   -------   ------   -------
Expenses:
  Payroll and related costs.............  $10,713   $ 9,268   $ 8,815   $12,876   $16,509   $1,373   $ 7,496
  Interest..............................    4,536     2,915     3,735     7,964    11,298    2,401     3,170
  General and administrative............    6,905     6,670     7,238    10,709    12,236    1,842     4,399
                                          -------   -------   -------   -------   -------   ------   -------
    Total expenses......................  $22,154   $18,853   $19,788   $31,549   $40,043   $5,616   $15,065
                                          -------   -------   -------   -------   -------   ------   -------
  Income (loss) before income taxes and
    extraordinary item..................  $ 3,310   $ 3,660   $ 2,009   $ 4,586   $33,488   $ (312)  $12,240
  Provision for income taxes(1).........       --        --        --        --     9,466       44     5,250
                                          -------   -------   -------   -------   -------   ------   -------
  Income (loss) before extraordinary
    item................................  $ 3,310   $ 3,660   $ 2,009   $ 4,586   $24,022   $ (356)  $ 6,990
  Extraordinary item:

    Gain on extinguishment of debt......       --        --        --        --     3,168       --        --
                                          -------   -------   -------   -------   -------   ------   -------
  Net income (loss).....................  $ 3,310   $ 3,660   $ 2,009   $ 4,586   $27,190   $ (356)  $ 6,990
                                          -------   -------   -------   -------   -------   ------   -------
                                          -------   -------   -------   -------   -------   ------   -------
 
UNAUDITED PRO FORMA INFORMATION:
Provision for pro forma income taxes
  before extraordinary item(1)(2).......  $ 1,423   $ 1,574   $   864   $ 1,972   $14,400   $ (134)      n/a
                                          -------   -------   -------   -------   -------   ------
Pro forma income (loss) before
  extraordinary item(1)(2)..............  $ 1,887   $ 2,086   $ 1,145   $ 2,614   $19,088   $ (178)      n/a
                                          -------   -------   -------   -------   -------   ------
                                          -------   -------   -------   -------   -------   ------
23
THREE MONTHS ENDED
                                                     YEAR ENDED DECEMBER 31,                                    MARCH 31,
                             -----------------------------------------------------------------------    --------------------------
                                1992           1993           1994           1995           1996           1996           1997
                             -----------    -----------    -----------    -----------    -----------    -----------    -----------
                                                         (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
PER SHARE DATA:
Pro forma earnings (loss)
  per share of common
  stock(1)(2)(3)(4).......   $      0.15    $      0.17    $      0.09    $      0.21    $      1.46    $     (0.01)   $      0.45
                             -----------    -----------    -----------    -----------    -----------    -----------    -----------
                             -----------    -----------    -----------    -----------    -----------    -----------    -----------
Pro forma weighted average
  number of shares
  outstanding(4)..........    12,629,182     12,629,182     12,629,182     12,629,182     13,083,327     12,629,182     15,420,883
                             -----------    -----------    -----------    -----------    -----------    -----------    -----------
                             -----------    -----------    -----------    -----------    -----------    -----------    -----------
CASH FLOW DATA:
(Used in) provided by
  operating activities....   $    (5,057)   $     8,780    $   (10,160)   $   (23,903)   $   (42,025)   $  (108,880)   $   (11,437)
(Used in) investing
  activities..............           (44)           (64)          (917)        (1,207)        (2,283)          (228)        (4,335)
Provided by (used in)
  financing activities....         2,893         (7,139)        13,460         32,388         46,414        101,863         16,142
Net increase (decrease) in
  cash and cash
  equivalents.............        (2,208)         1,577          2,383          7,278          2,106         (7,245)           370
 
OPERATING DATA:

Loans originated or
  purchased:
  Brokered Loans(5).......   $    66,553    $    76,220    $    81,407    $   175,738    $   321,733    $    66,389    $   114,063
  Correspondent Loans.....        10,080         26,844         38,341        112,065        337,033         49,373        122,679
                             -----------    -----------    -----------    -----------    -----------    -----------    -----------
    Total.................   $    76,633    $   103,064    $   119,748    $   287,803    $   658,766    $   115,762    $   236,742
                             -----------    -----------    -----------    -----------    -----------    -----------    -----------
                             -----------    -----------    -----------    -----------    -----------    -----------    -----------
Average principal balance
  per loan................            51             60             67             74             78             78             81
Weighted average interest
  rate....................         13.5%          12.9%          12.1%          11.8%          11.4%          11.0%          11.3%
Combined weighted average
  initial loan-to-value
  ratio...................         47.8%          51.7%          55.2%          63.2%          68.8%          67.4%          71.0%
Percent of loans secured
  by first mortgages......         71.5%          81.1%          88.0%          89.6%          93.8%          94.1%          93.6%
Loan sales:
  Loans sold through
    securitizations.......   $    64,102    $    88,943    $    90,000    $   229,998    $   615,000    $        --    $   235,000
  Whole loan sales........         1,031          8,708         11,950         17,615         15,273          6,899             --
                             -----------    -----------    -----------    -----------    -----------    -----------    -----------
    Total.................   $    65,133    $    97,651    $   101,950    $   247,613    $   630,273    $     6,899    $   235,000
                             -----------    -----------    -----------    -----------    -----------    -----------    -----------
Total loans serviced......   $   273,788    $   292,700    $   310,229    $   468,846    $   932,958    $   536,864    $ 1,110,999
                             -----------    -----------    -----------    -----------    -----------    -----------    -----------
                             -----------    -----------    -----------    -----------    -----------    -----------    -----------
 
DELINQUENCY DATA:
Total delinquencies as a
  percentage of loans
  serviced (period
  end)(6).................        19.96%         13.49%         11.44%         10.64%          8.37%          7.50%          7.98%
Defaults as a percentage
  of loans serviced
  (period end)(7).........         3.76%          5.35%          7.32%          5.87%          4.33%          5.91%          4.35%
Net losses as a percentage
  of average loans
  serviced................         0.02%          0.03%          0.23%          0.57%          0.43%          0.15%          0.09%
 
FINANCIAL RATIOS:
Ratio of earnings to fixed
  charges(8)..............          1.73           2.26           1.54           1.58           3.96           0.87           4.86
Ratio of indebtedness to
  total
  capitalization(9).......          0.58           0.56           0.60           0.64           0.35           0.64           0.37
Pre-tax interest coverage
  ratio(10)...............          1.73           2.26           1.54           1.58           3.96           0.87           4.86
DECEMBER 31,                                          MARCH 31,
                             -----------------------------------------------------------------------    --------------------------

                                1992           1993           1994           1995           1996           1996           1997
                             -----------    -----------    -----------    -----------    -----------    -----------    -----------
                                                         (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET DATA:
Loans held for sale.......     $47,079        $41,703        $48,833       $  63,816      $  83,677      $ 171,999      $  77,769
Interest-only and residual
  certificates............          --          2,204          7,514          25,310         83,073         25,317        101,858
Capitalized mortgage
  servicing rights........       5,705          3,491          2,421           3,831         11,412          3,534         13,448
Total assets..............      80,775         81,143         98,589         139,612        232,736        240,719        257,356
Warehouse financing and
  other
  borrowings..............      42,659         36,780         52,491          82,756         95,482        184,964        112,507
Investor payables.........       4,959          8,687         11,091          14,272         22,569         13,638         20,770
Total liabilities.........      54,891         52,793         70,425         109,779        139,218        211,422        154,332
Stockholders' equity......      25,884         28,350         28,164          29,833         93,518         29,297        103,024
------------------
 (1) Prior to October 31, 1996, Delta Funding Corporation was treated as an S
     corporation for federal and state income tax purposes. As a result, the
     Company's historical earnings prior to such date had been taxed directly to
     the Former Shareholders and not to the Company. See
 
                                              (Footnotes continued on next page)
 
                                       24
(Footnotes continued from previous page)

     'Management's Discussion and Analysis of Financial Condition and Results of
     Operations--Termination of S Corporation Status and Income Taxes.'
 
 (2) Pro forma presentation reflects a provision for income taxes, as if the
     Company had been a C corporation since inception, at an assumed tax rate of
     43%.
 
 (3) Figures for the three months ended March 31, 1997 are actual.
 
 (4) Reflects the effect of 10,653,000 shares of common stock issued to the
     Former Shareholders and the effect of the issuance of 4,600,000 shares of
     common stock issued in the Company's initial public offering; 1,976,182 of
     which are treated as if they had always been outstanding to give effect to
     certain distributions paid to the Former Shareholders in connection with
     termination of S corporation status.
 
 (5) Includes $8.1 million of retail loans originated by Fidelity Mortgage
     during the three months ended March 31, 1997.
 
 (6) Represents the percentages of account balances contractually past due 30
     days or more, exclusive of loans in foreclosure and REO.

 
 (7) Represents the percentages of account balances on loans in foreclosure and
     REO.
 
 (8) For the purpose of determining the ratio of earnings to fixed charges,
     earnings consist of income before income taxes and fixed charges; fixed
     charges consist of interest expense.
 
 (9) Represents the ratio of (i) total debt, exclusive of warehouse financing,
     to (ii) the sum of total stockholders' equity and total debt, exclusive of
     warehouse financing.
 
(10) Amounts represent the ratio of (i) the sum of income before income taxes
     plus interest expense to (ii) interest expense.
 
                                       25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS
 
     The following discussion should be read in conjunction with the
consolidated financial statements of the Company and the notes thereto.
 
GENERAL
 
  Overview
 
     The Company is a specialty consumer finance company engaged in the business
of originating, acquiring, selling and servicing mortgage loans secured
primarily by one- to four-family residences. Delta has focused on lending to
individuals who generally have impaired or limited credit profiles or higher
debt to income ratios and typically have substantial equity in their homes. The
Company primarily generates revenue from gain on sale of loans sold through
securitizations, gains recognized from premiums on loans sold through whole loan
sales, interest earned on loans held for sale, origination fees received as part
of the loan application process and fees earned from servicing loans.
 
  Recent Growth
 
     The Company has experienced significant growth in the last few years,
particularly since January 1, 1995. Management believes that this growth is
primarily attributable to (i) the Company's geographic expansion of its
operations, (ii) the Company's further penetration into its established markets
and (iii) the Company's increased access to additional funding sources through
larger warehouse agreements which enabled the Company to accumulate larger pools
of loans for sales through securitizations.
 
     In connection with its geographic expansion, the Company has continued to
focus on developing loan production from brokers and correspondents. The Company
has followed a two-pronged approach to increase the volume of loan originations
from these sources. The Company employs business development representatives to
initiate and expand relationships with brokers and correspondents. In addition,

the Company uses its loan officers and correspondent underwriters to maintain
and strengthen existing relationships. The Company is also committed to
developing and growing the Fidelity Mortgage retail origination network. There
can be no assurance that the Company will continue to grow significantly in the
future. Any future growth will be limited by, among other things, the Company's
need for continued funding sources, access to capital markets, sensitivity to
economic slowdowns, ability to attract and retain qualified personnel,
fluctuations in interest rates and competition from other consumer finance
companies and from new market entrants. To date, the Company has not experienced
any significant seasonal variations in loan originations and purchases.
 
     The Company's recent and rapid growth may have a somewhat distortive impact
on certain of the Company's ratios and financial statistics and may make
period-to-period comparisons difficult. In light of the Company's growth,
historical performance of the Company's earnings may be of limited relevance in
predicting future performance. Furthermore, the Company's financial statistics
may not be indicative of the Company's results in future periods. Any credit or
other problems associated with the large number of loans originated and
purchased in the recent past may not become apparent until sometime in the
future.
 
  Operating Cash Flow
 
     The Company has operated and expects to continue to operate, on a negative
cash flow basis due to increases in the volume of loans purchased and originated
and due to the growth of its securitization program. Currently, the Company's
primary operating cash uses include the funding of (i) mortgage originations and
purchases pending their pooling and sale, (ii) the points and expenses paid in
connection with the acquisition of Correspondent Loans, (iii) interest expense
on warehouse, residual and other financing, (iv) fees, expenses and tax payments
incurred in connection with the securitization program and (v) ongoing
administrative and other operating expenses. The Company's primary operating
sources of cash are (i) Excess Servicing received in each period, (ii) cash
payments of contractual and ancillary servicing revenues received by the Company
in its capacity as servicer for securitized loans, (iii) interest income on
loans held for sale and certain cash balances and (iv) income received in
connection with its broker and retail originations.
 
                                       26
The table below summarizes cash flows generated by and used in operating
activities:
THREE MONTHS ENDED
                                                                 YEAR ENDED DECEMBER 31,               MARCH 31,
                                                             --------------------------------    ---------------------
                                                               1994        1995        1996        1996         1997
                                                             --------    --------    --------    ---------    --------
                                                                              (DOLLARS IN THOUSANDS)
OPERATING CASH INCOME:
  Excess cash flow from securitization trusts.............   $    912    $  1,612    $  3,238    $     888    $  3,676
  Servicing fees received.................................      2,267       2,539       5,012          956       1,568
  Interest received.......................................      6,742       9,969      14,791        3,046       4,945
  Securitization premium (discount) and hedge gain
    (loss)................................................      2,711       1,199        (600)          --         907
  Other cash income.......................................      3,004       5,112       6,138        1,537       2,759
                                                             --------    --------    --------    ---------    --------
    Total operating cash income...........................   $ 15,636    $ 20,431    $ 28,579    $   6,427    $ 13,855
                                                             --------    --------    --------    ---------    --------
OPERATING CASH EXPENSES:
  Securitization and loan acquisition costs...............       (655)     (5,169)    (20,712)      (2,860)     (8,029)
  Cash operating expenses.................................    (14,918)    (22,563)    (27,559)      (6,292)    (10,451)
  Interest on warehouse financing.........................     (3,045)     (6,581)     (7,945)      (1,375)     (3,055)
  Interest on non-warehouse financing.....................       (537)     (1,423)     (2,508)        (480)       (847)
  Taxes paid..............................................       (138)         (2)       (250)          --      (4,464)
                                                             --------    --------    --------    ---------    --------
    Total operating cash expenses.........................    (19,293)    (35,738)    (58,974)     (11,007)    (26,846)
                                                             --------    --------    --------    ---------    --------
  Cash flow due to operating cash income and expenses.....     (3,657)    (15,307)    (30,395)      (4,580)    (12,991)
  Cash (used in) provided by other payables and
    receivables...........................................        945       6,426       5,933         (514)     (4,304)
  Cash provided by (used in) loans held for sale..........     (7,448)    (15,022)    (17,563)    (103,786)      5,858
                                                             --------    --------    --------    ---------    --------
  Net cash used in operating activities...................   $(10,160)   $(23,903)   $(42,025)   $(108,880)   $(11,437)
                                                             --------    --------    --------    ---------    --------
                                                             --------    --------    --------    ---------    --------
TERMINATION OF S CORPORATION STATUS AND INCOME TAXES
 
     On October 31, 1996, in contemplation of the Company's initial public
offering, Delta Funding Corporation, one of the Subsidiaries, terminated its S
corporation status. The Former Shareholders, pursuant to the terms of a
contribution agreement, contributed their shares of capital stock of Delta
Funding Corporation to the Company, thereby becoming a wholly-owned subsidiary
of the Company, in exchange for 10,653,000 shares of common stock, which
constituted all of the then outstanding shares of common stock of the Company
(the 'Exchange'). Simultaneous with the Exchange, Delta Funding Corporation
ceased to be treated as an S corporation.
 
     In connection with termination of its S corporation status, Delta Funding
Corporation made final S corporation distributions to the Former Shareholders
and the Company used $32.6 million of its net proceeds of its initial public
offering to pay such distributions.
 
     As an S corporation, the Company's income, whether or not distributed, was
taxed at the shareholder level for federal and state tax purposes. The pro forma
provision for income taxes in the Company's statements of income shows results
as if the Company had always been fully subject to federal and state taxes at an
assumed tax rate of 43%. The Company incurred a $3.9 million deferred tax
liability as a result of its conversion from an S corporation to a C corporation
on October 31, 1996.
 

RESULTS OF OPERATIONS
 
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1996
 
  Revenues
 
     Total revenues increased $22.0 million, or 415% to $27.3 million for the
three months ended March 31, 1997, from $5.3 million for the three months ended
March 31, 1996. The increase in revenues was primarily due to the fact that the
Company completed a securitization during the three months ended March 31, 1997
but did
 
                                       27
not complete a securitization during the corresponding period of the prior year.
To a lesser extent, the increase was due to the increase in total loan
originations and purchases and a corresponding increase in the Company's
servicing portfolio. As a result, the Company generated an increased amount of
origination fees, servicing fees and interest income on loans held for sale.
 
     Net Gain on Sale of Mortgage Loans.  Net gain on sale of mortgage loans
represents the sum of (i) the present value of Excess Servicing of loans
securitized in each period, (ii) the present value of Mortgage Servicing Rights
associated with loans securitized in each period and (iii) premiums earned on
whole loan sales less the (a) premiums paid to originate or acquire mortgage
loans, (b) cost associated with securitizations and (c) any hedge loss (gain).
Net gain on sale of mortgage loans increased $17.2 million to $17.3 million in
three months ended March 31, 1997, from $0.1 million in the corresponding period
of the prior year. The Company completed a $235.0 million securitization, with a
weighted average net gain on sale of 7.4%, during the three months ended March
31, 1997 but did not complete a securitization during the corresponding period
of the prior year.
 
     Interest Income.  Interest income primarily represents the sum of (i)
interest earned on loans held for sale, (ii) interest earned on cash collection
balances and (iii) Excess Servicing received in each period less the accumulated
discount on previously recorded interest-only and residual certificates.
Interest income increased $1.6 million, or 40%, to $5.6 million in the three
months ended March 31, 1997, from $4.0 million in the corresponding period of
the prior year. The increase in interest income was primarily due to higher
interest rates on mortgage loans and to a higher average balance of mortgage
loans held for sale during the three months ended March 31, 1997 resulting from
the increase in loan originations and purchases. The weighted average interest
rate on loans held for sale was 11.3% and 11.0% for the quarters ended March 31,
1997 and 1996, respectively.
 
     Servicing Income.  Servicing income represents all contractual and
ancillary servicing revenue earned by the Company less (a) the amortization of
capitalized Mortgage Servicing Rights and (b) prepaid interest shortfalls.
Servicing income increased $0.4 million, or 40%, to $1.4 million in the three
months ended March 31, 1997, from $1.0 million in the corresponding period of

the prior year. This increase was primarily due to higher average loan servicing
volume, which resulted in the increased contractual and ancillary service fees.
During the three months ended March 31, 1997, the average balance of mortgage
loans serviced by the Company increased 103% to $1,048.6 million from $517.2
million during the corresponding period of the prior year. Servicing fees
increased at a slower rate than average mortgage loans serviced primarily
because the Company lowered its contractual servicing fee rate to conform with
industry standards, and due to amortization of the capitalized servicing asset
in accordance with SFAS No. 125.
 
     Other Income.  Other income primarily represents origination fees earned on
brokered and retail loans and ancillary revenue associated with loan production.
Other income increased $2.8 million to $3.0 million in the three months ended
March 31, 1997 from $0.2 million in the corresponding period of the prior year.
This increase was primarily due to an increase in loan origination fees, which
is the primary component of other income. The Company generates loan origination
fees on loans originated through its broker network and from its Fidelity
Mortgage's retail operations. During the three months ended March 31, 1997,
Brokered Loan originations (excluding Fidelity Mortgage) increased by $39.6
million, or 60%, to $106.0 million from $66.4 million in the corresponding
period of the prior year. Fidelity Mortgage's originations were $8.1 million for
the period from February 11, 1997 through March 31, 1997. The Company did not
originate any retail loans during the corresponding period of the prior year.
 
  Expenses
 
     Total expenses increased $9.5 million, or 170%, to $15.1 million for the
three months ended March 31, 1997, from $5.6 million in the corresponding period
of the prior year. The increase in expenses was primarily the result of higher
operating expenses associated with the additional personnel required to process
a greater number of loan originations and purchases, the acquisition of Fidelity
Mortgage and increased interest expense on loans held for sale, as well as the
deferral of direct origination costs to a greater extent in the three months
ended March 31, 1996 in accordance with SFAS No. 91 (as defined). See '--Certain
Accounting Considerations-- SFAS No. 91.'
 
     Payroll Expense.  Payroll expense increased $6.1 million to $7.5 million
for the three months ended March 31, 1997, from $1.4 million for the
corresponding period of the prior year. The increase was primarily due
 
                                       28
to (a) increased staffing in the Company's originations area associated with
increases in loan originations and purchases and the acquisition of Fidelity
Mortgage, and (b) the deferral of payroll related direct origination costs to a
greater extent in the three months ended March 31, 1996 in accordance with SFAS
No. 91. At March 31, 1997, the Company employed 530 full-and part-time persons,
including 383 employees of Delta Funding Corporation and 147 employees of
Fidelity Mortgage, compared to of 268 full- and part-time persons as of March
31, 1996.
 
     Interest Expense.  Interest expense increased $0.8 million, or 33%, to $3.2

million in the three months ended March 31, 1997, from $2.4 million in the
corresponding period of the prior year. The increase in interest expense was
attributable to the interest costs associated with both a higher balance of
loans pending sale during the three months ended March 31, 1997, resulting from
increases in loan originations and purchases during the period, and an increase
in interest-only and residual financings during the three months ended March 31,
1997. The Company had interest-only and residual certificate financings of $57.5
million as of March 31, 1997, compared to $15.7 million as of March 31, 1996.
 
     General and Administrative Expenses.  General and administrative expenses,
which consist primarily of office and administrative, rent, and health care and
insurance expenses increased $2.6 million, or 144%, to $4.4 million in the three
months ended March 31, 1997 from $1.8 million in the corresponding period of the
prior year. The increase in general and administrative expenses was primarily
due to (a) expenses incurred in connection with increases in loan originations
and purchases, increased employee benefit expenses and the Company's acquisition
of Fidelity Mortgage, and (b) the deferral of general and administrative related
direct origination costs to a greater extent in the three months ended March 31,
1996 in accordance with SFAS No. 91.
 
     Income Taxes.  Prior to October 31, 1996, Delta Funding Corporation was
treated as an S corporation for federal and state income tax purposes. As a
result, the Company's historical earnings prior to such date had been taxed
directly to the Former Shareholders and not the Company. For the three months
ended March 31, 1997, the Company recorded a tax provision of $5.3 million
compared to $0.04 million the corresponding period of the prior year.
 
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
 
  Revenues
 
     Total revenues increased $37.4 million, or 103%, to $73.5 million in 1996
from $36.1 million in 1995. The increase in revenues was primarily due to the
increase in loan originations and purchases and corresponding increase in the
amount of loans sold through securitizations.
 
     Net Gain on Sale of Mortgage Loans.  Net gain on sale of mortgage loans
increased $31.1 million, or 202%, to $46.5 million in 1996 from $15.4 million in
1995. This increase was the result of higher loan originations and purchases,
resulting in an increased amount of loans sold through securitizations. Total
loan originations and purchases increased $371.0 million, or 129%, to $658.8
million in 1996 from $287.8 million in 1995. The Company sold or securitized
$630.4 million of loans in 1996 compared to $247.6 million in 1995, with a
weighted average net gain on sale of 7.4% and 6.2%, respectively.
 
     Interest Income.  Interest income increased $2.8 million, or 20%, to $16.4
million in 1996 from $13.6 million in 1995. The increase in interest income was
primarily due to a higher average balance of loans held for sale during 1996
resulting from the increases in loan originations and purchases, but was
partially offset due to the shorter holding period during which the mortgage
loans remained in inventory during 1996. The Company completed three
securitizations during 1996 compared to two securitizations in 1995. The
weighted average interest rate on loans held for sale was 11.40% for both 1996
and 1995.

 
     Servicing Income.  Servicing income increased $2.5 million, or 88%, to $5.4
million in 1996 from $2.9 million in 1995. This increase was primarily due to
higher loan servicing volume, which resulted in increased contractual and
ancillary service fees. During 1996, the average balance of mortgage loans
serviced by the Company increased 79% to $667.4 million from $373.4 million
during 1995.
 
     Other Income.  Other income increased $1.0 million, or 22%, to $5.3 million
in 1996 from $4.3 million in 1995. This increase was primarily due to an
increase in loan origination fees, which is the primary component of
 
                                       29
other income. The Company generates loan origination fees on loans originated
through its broker network. During 1996, Brokered Loan originations increased by
$146.0 million, or 83%, to $321.7 million from $175.7 million in 1995. Loan
origination fees increased at a slower rate than Brokered Loan originations
primarily because the Company earned lower average origination fees per loan.
 
  Expenses
 
     Total expenses increased $8.5 million, or 27%, to $40.0 million for 1996
from $31.5 million in 1995. The increase in expenses was primarily the result of
increased interest expense on loans held for sale and higher operating expenses
associated with the additional personnel required to process the greater number
of loan originations and purchases. Total expenses increased at a much slower
rate than total revenues, primarily due to efficiencies realized from the
Company's investment in technology, experienced staff and economies of scale.
 
     Payroll Expense.  Payroll expense increased $3.6 million, or 28%, to $16.5
million for 1996, from $12.9 million for 1995. The increase was primarily due to
increased staffing in the Company's originations area associated with the
increase in loan originations and purchases, as well as the Company's expansion
into new and existing markets. As of December 31, 1996, the Company employed 346
full- and part-time persons compared to 255 full- and part-time persons as of
December 31, 1995.
 
     Interest Expense.  Interest expense increased $3.3 million, or 42%, to
$11.3 million in 1996 from $8.0 million in 1995. The increase in interest
expense was attributable to the interest costs associated with both a higher
balance of loans pending sale during 1996, resulting from increases in loan
originations and purchases during the period, and an increase in the Excess
Servicing receivable financing during 1996. The Company had financings against
its Excess Servicing receivables (interest-only and residual certificates) of
$47.0 million as of December 31, 1996 compared to $16.2 million as of December
31, 1995. Interest expense was partially offset by lower cost of funds on the
Company's floating rate borrowings which are based on one-month London Interbank
Offered Rate ('LIBOR'). The average one-month LIBOR was on average 0.52% lower
during 1996 than during 1995.
 
     General and Administrative Expenses.  General and administrative expenses,

which consist primarily of office and administrative, rent, and health care and
insurance expenses, increased $1.5 million, or 14%, to $12.2 million in 1996
from $10.7 million in 1995. The increase in general and administrative expenses
was primarily due to expenses incurred in connection with the increases in loan
originations and purchases and increased employee benefit expenses.
 
  Extraordinary Gain
 
     In May 1996, the Company closed out its long-term $31.7 million warehouse
facility with a European financial institution at a 10% discount. As a result,
the Company realized an extraordinary gain of $3.17 million for the year ended
December 31, 1996.
 
  Income Taxes
 
     On October 31, 1996, in conjunction with the Exchange, Delta Funding
Corporation's status as an S corporation was terminated and the Company became a
C corporation for federal and state income tax purposes and as such was subject
to federal and state income tax on its taxable income for the months of November
and December 1996. During 1996, the Company recorded a tax provision of $9.5
million. This includes a $4.2 million provision for November and December
earnings at the statutory rate of 42% and a deferred tax expense of $3.9 million
in connection with the change in tax status from an S corporation to a C
corporation.
 
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
 
  Revenues
 
     Total revenues increased $14.3 million, or 66%, to $36.1 million in 1995
from $21.8 million in 1994. The increase in revenues was primarily due to the
combined effect of increases in loan originations and purchases, the effects of
certain accounting changes and higher gains realized on the sale of loans
through securitizations.
 
                                       30
Net Gain on Sale of Loans.  Net gain on sale of mortgage loans increased
$8.7 million, or 131%, to $15.4 million in 1995 from $6.7 million in 1994. This
increase was primarily due to the combined effect of increased loan originations
and purchases and subsequent sales of loans through securitizations and the
effects of certain accounting changes. Total loan originations and purchases
increased $168.1 million, or 140%, to $287.8 million in 1995 from $119.7 million
in 1994. The Company sold or securitized $247.6 million of loans in 1995
compared to $102.0 million in 1994, with a weighted average net gain on sale of
6.2% and 6.5%, respectively. Included in the gain on sale of loans in 1995 was
$2.1 million which represents the present value of Mortgage Servicing Rights
that the Company receives over time, as it sells loans through securitizations
on a servicing-retained basis.
 
     Interest Income.  Interest income increased $3.8 million, or 38%, to $13.6
million in 1995 from $9.8 million in 1994. The increase in interest income was

primarily due to a higher average balance of loans held for sale during 1995
resulting from the increases in loan originations and purchases and, to a lesser
extent, to unrealized gains on interest-only and residual certificates held in
the amount of $1.0 million.
 
     Servicing Income.  Servicing income increased $0.7 million, or 31%, to $2.9
million in 1995 from $2.2 million in 1994. This increase was primarily the
result of higher loan servicing volume which resulted in larger contractual and
ancillary service fees. During 1995, the average balance of mortgage loans
serviced by the Company increased 24% to $373.4 million, compared to $300.7
million in 1994. During 1995, the Company also increased its ancillary servicing
income by charging prepayment penalties in states where such charges are
allowed.
 
     Other Income.  Other income increased $1.2 million, or 38%, to $4.3 million
in 1995 from $3.1 million in 1994. This increase was primarily due to the
increase in loan origination fees, which is the largest component of other
income. During 1995, Brokered Loan originations increased by $94.3 million, or
116%, to $175.7 million from $81.4 million in 1994.
 
  Expenses
 
     Total expenses increased $11.7 million, or 59%, to $31.5 million for 1995
from $19.8 million in 1994. The increase in expenses was primarily the result of
increased interest expense on loans held for sale, the increased expense
associated with additional personnel required to process the greater number of
loan originations and purchases and higher operating expenses related to
increased loan volume during 1995 compared to 1994.
 
     Payroll Expense.  Payroll expense increased $4.1 million, or 46%, to $12.9
million for 1995, from $8.8 million for 1994. The increase was due primarily to
bonus increases granted to certain members of senior management and, to a lesser
extent, due to increased staffing in the Company's originations area. As of
December 31, 1995, the Company employed 255 persons as compared to 197 persons
as of December 31, 1994.
 
     Interest Expense.  Interest expense increased $4.3 million, or 113%, to
$8.0 million in 1995 from $3.7 million in 1994. The increase in interest expense
was attributable to the interest costs associated with a higher balance of loans
pending sale during 1995, resulting from increases in loan originations and
purchases during the period, and a higher balance of loans held for sale at the
beginning of the period ($48.8 million compared to $41.7 million for 1995 and
1994, respectively). The Company's cost of funds on its floating rate warehouse
facilities where it holds mortgage loans until the time of sale, was, on
average, 1.51% higher in 1995 compared to 1994.
 
     General and Administrative Expenses.  General and administrative expenses
increased $3.5 million, or 48%, to $10.7 million in 1995 from $7.2 million in
1994. The increase in general and administrative expenses was primarily due to
expenses incurred in connection with the increases in loan originations and
purchases and associated increases in personnel expenses and the direct costs
relating to the transfer of the Company's prior servicing system to its current
servicing system.
 

                                       31
FINANCIAL CONDITION
 
MARCH 31, 1997 COMPARED TO DECEMBER 31, 1996
 
     Cash and interest-bearing deposits increased $0.4 million, or 2%, to $19.1
million at March 31, 1997 from $18.7 million at December 31, 1996. The increase
was primarily due to additional moneys held in securitization trust accounts
related to the Company's ongoing securitization program.
 
     Accounts receivable increased $0.7 million, or 8%, to $9.4 million at March
31, 1997 from $8.7 million at December 31, 1996. This increase was primarily due
to higher average loan servicing volume, which resulted in increased
reimbursable servicing advances made by the Company, acting as servicer on its
securitization.
 
     Loans held for sale decreased $5.9 million, or 7%, to $77.8 million at
March 31, 1997 from $83.7 million at December 31, 1996. This decrease was
primarily the result of the Company securitizing a larger percentage of the
loans it originated and purchased during the three months ended March 31, 1997
as compared to the three months ended December 31, 1996.
 
     Accrued interest and late charges receivable increased $1.8 million, or 9%,
to $22.0 million at March 31, 1997 from $20.2 million at December 31, 1996. This
increase was primarily due to a higher average loan servicing portfolio during
the first quarter of 1997. The Company's average servicing portfolio increased
22% to $1.05 billion during the first quarter of 1997 from $859.6 million during
the fourth quarter of 1996.
 
     Capitalized Mortgage Servicing Rights increased $2.0 million, or 18%, to
$13.4 million at March 31, 1997 from $11.4 million at December 31, 1996. This
increase was primarily attributable to the Company's 1997-1 securitization.
 
     Interest-only and residual certificates increased $18.8 million, or 23%, to
$101.9 million at March 31, 1997 from $83.1 million at December 31, 1996,
primarily due to interest-only and residual certificates acquired in connection
with the Company's 1997-1 securitization and recorded at fair value in
accordance with SFAS No. 125. See '--Certain Accounting Considerations.'
 
     Warehouse financing and other borrowings increased $17.0 million, or 18%,
to $112.5 million at March 31, 1997 from $95.5 million at December 31, 1996,
primarily due to additional borrowings to finance loans held for sale and
additional financing secured by interest-only and residual certificates. During
the fourth quarter of 1996, the Company used $38.0 million in net proceeds from
its initial public offering to pay down amounts outstanding on a warehouse
facility.
 
     Investor payable decreased $1.8 million, or 8%, to $20.8 million at March
31, 1997 from $22.6 million at December 31, 1996. The decrease was primarily due
to a decline in the amount of principal collected by the Company acting as
servicer, which must be remitted to the various trusts for the following

distribution period. Investor payable is comprised of all principal collected on
mortgage loans, either due to principal amortization or principal repayment, and
accrued certificate interest. Variability in this account is primarily due to
the principal prepayments collected within a given collection period.
 
     Stockholders' equity increased $9.5 million, or 10%, to $103.0 million at
March 31, 1997 from $93.5 million at December 31, 1996. This increase is
primarily due to net income for the quarter of $7.0 million, as well as the
issuance of 119,288 additional shares of common stock valued at $2.5 million in
connection with the Company's acquisition of Fidelity Mortgage.
 
DECEMBER 31, 1996 COMPARED TO DECEMBER 31, 1995
 
     Cash and interest-bearing deposits increased $2.1 million, or 13%, to $18.7
million at December 31, 1996 from $16.6 million at December 13, 1995. The
increase was primarily due to additional moneys held in securitization trust
accounts related to the Company's ongoing securitization program.
 
     Accounts receivable increased $1.8 million, or 26%, to $8.6 million at
December 31, 1996 from $6.8 million at December 31, 1995. This increase was
primarily due to higher average loan servicing volume, which resulted in
increased reimbursable servicing advances made by the Company, acting as
servicer on its securitizations.
 
                                       32
Loans held for sale increased $19.9 million, or 31%, to $83.7 million at
December 31, 1996 from $63.8 million at December 31, 1995. This increase was a
result of increases in loan originations and purchases in the fourth quarter of
1996 versus the fourth quarter of 1995, and a corresponding increase in the
amount of loans remaining in inventory subsequent to the Company's 1996-3
securitization. Loan originations and purchases increased $142.6 million, or
141%, to $243.7 million in the fourth quarter of 1996 from $101.1 million in the
fourth quarter of 1995.
 
     Accrued interest and late charges receivable increased $4.3 million, or
26%, to $20.2 million at December 31, 1996 from $15.9 million at December 31,
1995. This increase was primarily due to higher loan servicing volume during
1996. The Company's average servicing portfolio increased 79% to $667.4 million
in 1996 from $373.4 million in 1995.
 
     Capitalized Mortgage Servicing Rights increased $7.6 million, or 198%, to
$11.4 million at December 31, 1996 from $3.8 million at December 31, 1995. This
increase was directly attributable to certain accounting changes, which allows
the Company to capitalize the fair market value of the servicing retained asset
after its completes a securitization. The Company's securitization issuance
amount increased 167% to $615 million from $230 million in 1995. In 1996, the
Company began to capitalize ancillary servicing fee income which was not
previously recognized in prior periods.
 
     Interest-only and residual certificates increased $57.8 million, or 228%,
to $83.1 million at December 31, 1996 from $25.3 million at December 31, 1995,

primarily due to interest-only and residual certificates acquired in connection
with securitizations during the year. The Company securitized $615 million in
1996 compared to $230 million in 1995.
 
     Warehouse financing and other borrowings increased $12.7 million, or 15%,
to $95.5 million at December 31, 1996 from $82.8 million at December 31, 1995,
primarily due to additional loans held for sale and additional financing secured
by interest-only and residual certificates. The Company initially used $38.0
million of net proceeds from its initial public offering to pay down amounts
outstanding on a warehouse facility.
 
     Investor payable increased $8.3 million, or 58%, to $22.6 million at
December 31, 1996 from $14.3 million at December 31, 1995. The increase was
primarily due to the higher loan servicing volume which resulted in an increase
in the amount of principal collected by the Company acting as servicer, which
must be remitted to the various trusts for the following distribution period.
Investor payable is comprised of all principal collected on mortgage loans,
either due to principal amortization or principal repayment, and accrued
certificate interest. Variability in this account is primarily due to the
principal prepayments collected within a given collection period.
 
     Stockholders' equity increased $63.7 million, or 213%, to $93.5 million at
December 31, 1996 from $29.8 million at December 31, 1995. This increase is
primarily due to the net proceeds of $69.7 million received in connection with
the Company's initial public offering at November 1, 1996, as well as net income
for the year of $27.2 million, offset by distributions of $33.2 million made to
the Former Shareholders in connection with the initial public offering.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     The Company has operated, and expects to continue to operate, on a negative
cash flow basis due to increases in the volume of loan originations and
purchases and due to the growth of its securitization program. During 1994,
1995, 1996 and the three months ended March 31, 1997, the Company used cash in
operations of approximately $10.2 million, $23.9 million, $42.0 million and
$11.4 million, respectively.
 
     Historically, the Company has utilized various financing facilities and an
equity financing to offset negative operating cash flows and support the
continued growth in loan volumes, securitizations and general operating
expenses. The Company's primary sources of liquidity are its warehouse and other
financing facilities, securitizations and whole loan sales and, subject to
market conditions, sales of additional debt and equity securities.
 
     The Company securitized and sold in the secondary market $90.0 million,
$230.0 million, $615.0 million and $235.0 million of loans in 1994, 1995, 1996
and the three months ended March 31, 1997, respectively. In
 
                                       33
connection with each securitization transaction completed during these periods,
the Company has or is utilizing Excess Servicing cash flow from such

securitization to prepay an overcollateralization limit and generally did or
does not receive any such Excess Servicing cash flow from the securitization
until such level was or is prepaid.
 
     In addition, the increasing use of securitization transactions as a funding
source by the Company has resulted in a significant increase in the amount of
gain on sale recognized by the Company. During 1994, 1995, 1996 and the three
months ended March 31, 1997, the Company recognized net gain on sale of mortgage
loans in the amounts of $6.7 million, $15.4 million, $46.5 million and $17.3
million, respectively. The recognition of this gain has a negative impact on the
cash flow of the Company since the Company is required to pay federal and state
taxes on a portion of the gain in the period recognized although it does not
receive the cash representing the gain until later periods. The Company also
incurs certain expenses in connection with securitizations, including
underwriting fees, rating agency fees, legal fees, accounting fees, shelf
registration fees, credit enhancement fees, trustee fees, hedging and other
costs.
 
     To accumulate loans for securitization, the Company borrows money on a
short-term basis through warehouse lines of credit. To date, substantially all
of the loans which the Company has purchased and originated have been funded
through borrowing under those warehouse lines. The Company has two warehouse
lines of credit for this purpose. One warehouse facility is a committed
revolving line for $250 million with a variable rate of interest and a maturity
date of February 1998. The Company's second warehouse facility is a $200 million
committed revolving line with a variable rate of interest and a maturity date of
February 1998. This facility was obtained subsequent to December 31, 1996 and
replaced a $100 million uncommitted credit facility previously maintained by the
Company with the warehouse lender. The outstanding balance on the $250 million
facility and $200 million facility as of March 31, 1997 was $51.8 million and
$0, respectively.
 
     The Company has obtained financing facilities for interest-only and
residual certificates acquired as part of its securitizations. As of March 31,
1997, the outstanding balance on these facilities was $57.5 million. These
facilities have variable interest rates and mature between October 1997 and
December 1999.
 
     In addition, the Company has lines of credit with two financial
institutions to support its daily operating requirements. One is a one-year
renewable credit line in the amount of $1.0 million with a variable interest
rate, renewable in September 1997. The Company's second line of credit is in the
amount of $7.5 million with a variable interest rate, which was obtained
subsequent to March 31, 1997. The outstanding balance on the credit lines was $0
as of March 31, 1997.
 
     On October 31, 1996, the Company issued to the public 4,600,000 shares of
common stock and received net proceeds of approximately $69.7 million. $37.1
million of the net proceeds were used to repay amounts outstanding under the
Company's warehouse lines, and $32.6 million was used to pay S corporation
distributions to the Former Shareholders.
 
     Delta Funding Corporation is currently negotiating the terms of the Credit
Agreement with First Chicago. The Credit Agreement will be used primarily to

finance mortgage loans held for sale and to fund servicer advances by Delta
Funding Corporation, subject to specified sublimits to be set forth therein.
Delta Funding Corporation expects to enter into the definitive Credit Agreement
prior to the Issue Date. However, there can be no assurance the Credit Agreement
will be entered into prior to the Issue Date or at all. The execution and
delivery of the Credit Agreement is not a condition to this Offering. See
'Prospectus Summary--Recent Developments.'
 
     The Company is required to comply with various operating and financial
covenants as provided in the agreements described above which are customary for
agreements of their type. The Company does not believe that its existing
financial covenants will restrict its operations or growth. Continued
availability of funds under these agreements is subject to the Company's
compliance with such covenants. Management believes the Company is in compliance
with all such covenants under these agreements.
 
     The Company's ability to make payments of principal of or interest on, or
to refinance its Indebtedness (including the Notes) depends on its future
operating performance, and its ability to effect additional debt and/or equity
financings, which to a certain extent is subject to economic, financial,
competitive and other factors beyond its control. If the Company is unable to
generate sufficient cash flow in the future to service its debt, it may be
required to refinance all or a portion of its existing debt, including the
Notes, or to obtain additional
 
                                       34
financing. There can be no assurance that any such refinancing would be possible
or that any additional financing could be obtained. The inability to obtain
additional financing could have a material adverse effect on the Company. See
'Risk Factors--Leverage; Asset Encumbrance,' '--Ability to Service Debt;
Negative Cash Flows; Access to Capital Markets' and '-- Dependence on Funding
Sources--Dependence on Warehouse and Other Financing Sources.' The Company
believes that the sources of liquidity, including the funds raised in this
Offering, available to it should be sufficient to fund the Company's liquidity
requirements for the next 12 months if the Company's future operations are
consistent with management's current growth expectations. However, because the
Company expects to continue to require substantial amounts of cash for the
foreseeable future, it anticipates that it will need to effect debt or equity
financings regularly, in addition to quarterly securitizations. The type, timing
and terms of financing selected by the Company will be dependent upon the
Company's cash needs, the availability of other financing sources and the
prevailing conditions in the financial markets. There can be no assurance that
any such sources will be available to the Company at any given time or as to the
favorableness of the terms on which such sources may be available.
 
  Hedging
 
     The Company originates and purchases mortgage loans and then sells them
primarily through securitization. At the time of securitization and delivery of
the loans, the Company recognizes gain on sale based on a number of factors
including the difference or 'spread' between the interest rate on the loans and

the interest rate on treasury securities with maturities corresponding to the
anticipated life of the loans. If interest rates rise between the time the
Company originates or purchases the loans and the time the loans are priced at
securitization, the Excess Spread narrows, resulting in a loss in value of the
loans. To protect against such losses, the Company currently hedges the value of
the loans through the use of treasury rate lock contracts which function similar
to the short sale of securities. Prior to hedging, the Company performs an
analysis of its loans taking into account such factors as interest rates,
maturities, durations, inventory of loans and amount of loans held for sale to
determine the proportion of contracts to sell so that the risk to the value of
the loans is most effectively hedged. The Company will enter into treasury lock
rate contracts through one of its warehouse lenders and/or one of the investment
bankers which underwrite the Company's securitizations. These contracts are
designated as hedges in the Company's records and are closed out when the loans
are sold through securitization.
 
     If the value of the hedges decrease, offsetting an increase in the value of
the loans, the Company, upon settlement with its counterparty, will pay the
hedge loss in cash and realize the corresponding increase in the value of the
loans as part of its interest-only and residual certificates. Conversely, if the
value of the hedges increase, offsetting a decrease in the value of the loans,
the Company, upon settlement with its counterparty, will receive the hedge gain
in cash and realize the corresponding decrease in the value of the loans through
a reduction in the value of the corresponding interest-only and residual
certificates.
 
     The Company believes that its current hedging strategy of using treasury
rate lock contracts is the most effective way to manage its interest rate risk
on loans prior to securitization.
 
INFLATION AND INTEREST RATES
 
     Inflation affects the Company most significantly in the area of loan
originations and can have a substantial effect on interest rates. Interest rates
normally increase during periods of high inflation and decrease during periods
of low inflation. Profitability may be directly affected by the level and
fluctuation in interest rates which affect the Company's ability to earn a
spread between interest received on its loans and the costs of its borrowings.
The profitability of the Company is likely to be adversely affected during any
period of unexpected or rapid changes in interest rates. A substantial and
sustained increase in interest rates could adversely affect the ability of the
Company to originate and purchase loans and affect the mix of first and second
mortgage loan products. Generally, first mortgage production increases relative
to second mortgage production in response to low interest rates and second
mortgage production increases relative to first mortgage production during
periods of high interest rates. A significant decline in interest rates could
decrease the size of the Company's loan servicing portfolio by increasing the
level of loan prepayments. Additionally, to the extent servicing rights,
interest-only and residual classes of certificates have been capitalized on the
books of the Company, higher than anticipated rates of loan prepayments or
losses could require the Company to write down the value of such servicing
rights, interest-only and residual certificates, adversely impacting earnings.
Fluctuating interest rates
 

                                       35
also may affect the net interest income earned by the Company resulting from the
difference between the yield to the Company on loans held pending sales and the
interest paid by the Company for funds borrowed under the Company's warehouse
facilities.
 
CERTAIN ACCOUNTING CONSIDERATIONS
 
  Interest-Only and Residual Certificates
 
     The Company derives a substantial portion of its income by recognizing gain
on sale of loans sold through securitization, represented by the interest-only
and residual certificates that the Company retains. In securitizations, the
Company sells loans that it has originated or purchased to a trust for a cash
purchase price and the interest-only and residual certificates. The cash
purchase price is raised through an offering by the trust of pass-through
certificates representing regular interests in the trust. Following the
securitizations, the purchasers of the pass-through certificates receive the
principal collected and the investor pass-through interest rate on the principal
balance, while the Company receives the excess of the interest rate payable by
an obligor on a loan over the interest rate passed through to the purchasers of
the regular-interest certificates (with respect to the interest-only and
residual certificates), as well as the Company's normal servicing fee and other
recurring fees. The interest-only and residual certificates which are
capitalized on the Company's balance sheet are reduced as cash distributions are
received. The interest-only and residual certificates are accounted for as
trading securities in accordance with SFAS No. 115, 'Accounting for Certain
Investments in Debt and Equity Securities,' and as such they are recorded at
their fair value. Changes in fair value of the interest-only and residual
certificates are reflected in the statement of operations. Fair value of the
interest-only and residual certificates is determined based on various economic
factors, including considerations of loan type, size, date of origination,
interest rate, term, collateral value and geographic location. Higher than
anticipated rates of loan prepayments or losses would require the Company to
write down the fair value of the interest-only and residual certificates,
adversely impacting earnings. Similarly, if delinquencies, liquidations or
interest rates were greater than initially assumed by the Company, the fair
value of the interest-only and residual certificates would be negatively
impacted resulting in an adverse effect on interest income for the periods
during which such events occurred. The residual certificates held by the Company
are subject to losses on liquidated loans which flow through each securitization
trust. Since the calculation of the fair value of these certificates at the time
of securitization included certain assumptions concerning losses, any additional
losses from such assumptions will have an adverse effect on interest income.
 
  SFAS No. 91
 
     In December 1986, the Financial Accounting Standards Board ('FASB') issued
SFAS No. 91, 'Accounting for Non-Refundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases' ('SFAS No.
91'). SFAS No. 91 establishes the accounting for non-refundable fees and costs

associated with lending, committing to lend, or purchasing a loan or a group of
loans.
 
     Under SFAS No. 91, direct loan origination costs, net of loan origination
fees, are recognized as a reduction of the loan's yield over the earlier of the
life of the related loan or the sale of the loan. In effect, SFAS No. 91
requires that origination fees be offset by their related direct loan costs and
that net deferred fees be recognized over the earlier of the life of the loan or
the sale of the loan, whether the loan is sold through securitization or on a
whole loan basis.
 
     Prior to the second quarter of 1996, the Company generally sold loans
through securitization on a semiannual basis and, as such, carried a larger
inventory of loans on its books from quarter to quarter and from year to year,
which resulted in SFAS No. 91 adjustments being made during those periods. The
Company contemplates that in the future it will sell substantially all of its
loan originations and purchases on a quarterly basis primarily through
securitizations and, to a lesser extent, on a whole loan basis. This should
minimize the amount of loans being held in inventory and, therefore, minimize
the effects of SFAS No. 91 on the Company's financial statements.
 
                                       36
SFAS No. 125
 
     In June 1996, FASB issued SFAS No. 125 which provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a financial-
components approach that focuses on control. SFAS No. 125 distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. SFAS No. 125 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996, and
is to be applied prospectively. Effective January 1, 1997, the Company adopted
SFAS No. 125, which supersedes SFAS No. 122, 'Accounting for Mortgage Servicing
Rights.'
 
     Securitization of a financial asset, a portion of a financial asset, or a
pool of financial assets in which the transferor surrenders control over the
assets transferred, is accounted for as a sale. If the transfer does not qualify
as a sale, the transferred assets will remain on the balance sheet and the
proceeds raised will be accounted for as a secured borrowing with no gain or
loss recognition. Because Delta's transfers of loans made in connection with its
securitizations qualify as sales under this pronouncement, the required
accounting will be an allocation of basis approach.
 
     After the securitization of mortgage loans held for sale, the
mortgage-backed security (or any retained interests in REMIC securitizations of
loans held for sale, whether they are subordinate classes or interest-only or
residual certificates) shall be classified as a trading security and reported at
fair value under SFAS No. 115, 'Accounting for Certain Investments in Debt and
Equity Securities.'
 

     Servicing assets created in a securitization (contractually specified
servicing fees which are due the servicer in exchange for servicing those
assets) shall initially be measured at their allocated carrying amount, based
upon the relative fair value at the date of securitization. Servicing assets are
to be amortized in proportion to, and over the period of, estimated net
servicing income (the excess of servicing revenues over servicing costs).
 
     SFAS No. 125 requires mortgage banking entities that acquire or originate
loans and subsequently sell or securitize those loans and retain the Mortgage
Servicing Rights to allocate the total cost of the loans to the Mortgage
Servicing Rights and the mortgage loans without the Mortgage Servicing Rights.
The Company determines fair value based upon the present value of estimated net
future servicing revenues less the estimated cost that would fairly compensate a
substitute servicer to service the loans. The servicing asset is then recorded
on the balance sheet and accounted for under SFAS No. 125 using the allocation
of cost relative to fair value approach. The assumptions used to calculate fair
value are the same assumptions used to determine the fair value of the
interest-only strip. The cost allocated to the servicing rights is amortized in
proportion to and over the period of estimated net future cash flows related to
servicing income.
 
     SFAS No. 125 also requires impairment evaluations of all amounts
capitalized as servicing rights, including those purchased before the adoption
of SFAS No. 125, based upon the fair value of the underlying servicing rights.
The Company periodically performs these evaluations on a disagregated basis for
the predominant risk characteristics of the underlying loans which are loan
type, term, credit quality and interest rate. The continuing effects of SFAS No.
125 on the Company's financial position and results of operations will depend on
several factors, including, among other things, the amount of acquired or
originated loans sold or securitized, the type, term and credit quality of loans
and estimates of future prepayment rates.
 
  SFAS No. 123
 
     In October 1995, FASB issued SFAS No. 123, 'Accounting for Stock-Based
Compensation' ('SFAS No. 123'). SFAS No. 123 establishes financial accounting
and reporting standards for stock-based employee compensation plans. Those plans
include all arrangements by which employees receive shares of stock or other
equity instruments of the employer or the employer incurs liabilities to
employees in amounts based on the price of the employer's stock. Examples are
stock purchase plans, stock options, restricted stock awards, and stock
appreciation rights. This statement also applies to transactions in which an
entity issues its equity instruments to acquire goods or services from
non-employees. Those transactions must be accounted for, or at least disclosed
in the case of stock options, based on the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is more
reliably measurable. The accounting requirements of SFAS No. 123 are effective
for financial statements for fiscal years beginning after December 15, 1995, or
for an earlier fiscal year
 
                                       37
for which SFAS No. 123 is initially adopted for recognizing compensation cost.
The statement permits a company to choose either a new fair value-based method
or the current APB Opinion No. 25 intrinsic value-based method of accounting for
its stock-based compensation arrangements. The Company applies APB Opinion No.
25 in accounting for its stock option plan. Further, the Company provides in a
footnote to its financial statements pro forma disclosures of net earnings and
earnings per share computed as if the fair value-based method had been applied
in accordance with SFAS No. 123.
 
  Earnings Per Share
 
     SFAS No. 128, 'Earnings per Share' ('SFAS No. 128') specifies the
computation, presentation and disclosure requirements for earnings per share.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997 and the pronouncement supersedes APB Opinion No. 15,
'Earnings per Share.' The objectives of SFAS No. 128 are to simplify the
computation of earnings per share and make financial statements more useful for
investors and creditors by increasing the international comparability of
accounting standards concurrent with improving the quality of accounting
standards. The Company has not completed its analysis of SFAS No. 128.
 
  Disclosure of Information about Capital Structure
 
     SFAS No. 129, 'Disclosure of Information about Capital Structure' ('SFAS
No. 129') was issued in February 1997 and is effective for financial statements
for periods ending after December 15, 1997. SFAS No. 129 requires disclosure of
pertinent rights and privileges of the various securities outstanding. The
statement also requires disclosure of the number of shares issued upon
conversion, exercise, or satisfaction of required conditions during at least the
most recent annual fiscal period and any subsequent interim period presented.
The Company has not completed its analysis of SFAS No. 129.
 
                                       38
BUSINESS
 
     Delta is a specialty consumer finance company that has engaged in
originating, acquiring, selling and servicing home equity loans since 1982.
Throughout its 15 years of operating history, Delta has focused on lending to
individuals who generally have impaired or limited credit profiles or higher
debt to income ratios and typically have substantial equity in their homes.
Management believes that these borrowers have been largely unsatisfied by the
more traditional sources of mortgage credit which underwrite loans to
conventional guidelines established by FNMA and FHLMC. The Company makes loans
to these borrowers for such purposes as debt consolidation, home improvement,
mortgage refinancing or education, and these loans are primarily secured by
first mortgages on one- to four-family residential properties.
 
     Through its wholly-owned subsidiary, Delta Funding Corporation, the Company
originates Brokered Loans and also purchases Correspondent Loans. Delta Funding
Corporation currently originates and purchases the majority of its loans in 21
states, through its network of approximately 1,000 brokers and correspondents.

The Company believes that it has a competitive advantage in serving brokers and
correspondents in the nonconforming home equity market that stems from its
substantial experience in this sector and its emphasis on providing quality
service that is prompt, responsive and consistent. The 19 members of Delta
Funding Corporation's senior management have an average of over 13 years of
nonconforming mortgage loan experience. Management believes this
industry-specific experience, coupled with the systems and programs it has
developed over the past 15 years, enable the Company to provide quality services
that include preliminary approval of most Brokered Loans and certain
Correspondent Loans within one day, consistent application of its underwriting
guidelines and funding or purchasing of loans within 14 to 21 days of
preliminary approval. In addition, the Company seeks to establish and maintain
productive relationships with its network of brokers and correspondents by
servicing each one with a business development representative, a team of
experienced underwriters and, in the case of Brokered Loans, a team of loan
officers and processors assigned to specific brokers to process all applications
submitted by such brokers.
 
     The Company currently originates and purchases the majority of its loans
through the Company's main office in Woodbury, New York, its full service office
in Atlanta, Georgia, its full processing offices in St. Louis, Missouri,
Chicago, Illinois and Warwick, Rhode Island and from seven business development
offices located in Michigan (2), New Jersey, Ohio (2), Pennsylvania, and
Virginia. The Company historically made loans primarily in New York, New Jersey
and Pennsylvania. Commencing in 1995, the Company implemented a program to
further expand its geographic presence into the New England, Mid-Atlantic,
Midwest and Southeast regions. As a consequence of its expansion into new
markets, as well as its further penetration of existing markets, the Company
increased its loan production substantially in 1995 and 1996. Total loan
originations and purchases increased $168.1 million, or 140%, from $119.7
million in 1994 to $287.8 million in 1995, and increased $371.0 million or 129%,
in 1996 to $658.8 million.
 
     In February 1997, in an effort to broaden its origination sources and to
expand its geographic presence in the Company's new markets, the Company
acquired Fidelity Mortgage. The Company acquired Fidelity Mortgage with the
expectation that the acquisition would result in beneficial synergies, with
Fidelity Mortgage providing a dedicated source of mortgage loans for Delta
Funding Corporation's securitization pools and for its servicing arm, and Delta
Financial Corporation providing capital to Fidelity Mortgage for the expansion
of its retail network. Fidelity Mortgage develops retail loan leads primarily
through its telemarketing system and its network of seven retail offices located
in Florida (2), Georgia, Indiana and Ohio (3). Two of these offices were opened
in the second quarter of 1997, and the Company intends to expand the Fidelity
Mortgage network further, with three new branch offices scheduled to open by the
end of the second quarter.
 
     The Company has been profitable in each of its 15 years of operation. The
Company's results of operations have improved significantly in recent periods as
a result of increased loan production and improved operating efficiencies. Total
revenues increased $37.4 million, or 103%, to $73.5 million in 1996 from $36.1
million in 1995, and pro forma income before extraordinary item increased 630%
to $19.1 million in 1996 from $2.6 million in 1995. During 1995 compared to
1994, the Company's total revenues increased 66% from $21.8 million to $36.1

million and pro forma income increased 128% from $1.1 million to $2.6 million.
See 'Management's Discussion and Analysis of Financial Condition and Results of
Operations.'
 
                                       39
The Company generates earnings and cash flow primarily through the
origination, purchase, securitization and servicing of home equity loans. In a
securitization, the Company sells the loans that it originates or purchases to a
trust for cash and records certain assets and income based upon the Excess
Servicing and the Mortgage Servicing Rights. At the time of the securitization,
the Company estimates these amounts based upon a declining principal balance of
the underlying loans, adjusted by an estimated prepayment rate, and capitalizes
these amounts using a discount rate that market participants would use for
similar financial instruments. These capitalized assets are recorded on the
Company's balance sheet as interest-only and residual certificates and
capitalized Mortgage Servicing Rights, respectively and are aggregated and
reported on the income statement as net gain on sale of mortgage loans, after
being reduced (increased) by (i) loan acquisition premiums paid to
correspondents and brokers, (ii) cost of securitization and (iii) any hedge
losses (gains).
 
     The Company typically begins to receive Excess Servicing cash flow eight to
twelve months from the date of securitization, although this time period may be
shorter or longer depending upon the structure and performance of the
securitization. Prior to such time, the monoline insurer requires a reserve
provision to be created within the securitization trust which uses Excess
Servicing cash flows to retire the securitization bond debt until the spread
between the outstanding principal balance of the mortgage loans in the
securitization trust and the securitization bond debt equals 2-3% of the initial
securitization principal balance. Once this overcollateralization limit is met,
excess cash flows are distributed to Delta. The Company begins to receive
contractual mortgage servicing cash flows in the month following the
securitization.
 
     Since 1991, Delta has sold approximately $1.5 billion of its mortgage loans
through 14 REMIC securitizations. Each of these securitizations has been
credit-enhanced by an insurance policy provided through a monoline insurance
company to receive ratings of 'Aaa' from Moody's and 'AAA' from Standard &
Poor's. The Company sells loans through securitizations and, from time to time,
on a whole loan basis, to enhance its operating leverage and liquidity, to
minimize financing costs and to reduce its exposure to fluctuations in interest
rates.
 
     In addition to the excess cash flow from securitizations and proceeds from
whole loan sales, the Company earns the net interest spread on loans held for
sale, origination fees on its Brokered Loans and retail loans (which are
included in other income) and servicing fees of between 0.50% and 0.65% per
annum of the outstanding balance of the loans it services. Since its inception,
the Company has serviced substantially all of the loans it has originated and
purchased, including all of those that it has subsequently sold through
securitizations. Management believes that servicing this loan portfolio enhances

certain operating efficiencies and provides an additional and profitable revenue
stream that is less cyclical than the business of originating and purchasing
loans. As of March 31, 1997, Delta had a servicing portfolio of $1.1 billion of
loans. See '--Loans.'
 
BUSINESS STRATEGY
 
     The Company's business objective is to increase profitably the volume of
its loan originations and purchases and the size of its servicing portfolio by
(i) continuing to provide top quality service to its network of brokers and
correspondents, (ii) maintaining its underwriting standards, (iii) further
penetrating its established markets and recently-entered markets and expanding
into new geographic markets, (iv) expanding its retail origination capabilities,
(v) expanding through acquisitions and (vi) leveraging its information and
processing technologies.
 
  Continuing to Provide Quality Service
 
     The Company provides a high level of service to its network of brokers and
correspondents that includes preliminary approval of most Brokered Loans and
certain Correspondent Loans within one day, consistent application of its
underwriting guidelines and funding or purchase of loans generally within 14 to
21 days of preliminary approval. In addition, the Company services each broker
and correspondent with a team of professionals that includes a business
development representative, a team of experienced underwriters and, in the case
of Brokered Loans, a team of loan officers working on a primarily commission
basis with processors assisting them to handle applications submitted by each
broker. The Company's loan officers and underwriters respond promptly and
consistently on every loan submission. In addition, through its business
development representatives, Delta regularly communicates with brokers and
correspondents in order to better understand and
 
                                       40
respond to their needs. The Company believes that this commitment to service
provides it with a competitive advantage in establishing and maintaining
productive broker and correspondent relationships.
 
  Maintaining Underwriting Standards
 
     Over its 15 years in existence, the Company has developed an underwriting
process designed to thoroughly, but efficiently, review and underwrite each
prospective loan. The Company underwrites loans on a highly centralized basis
from its Woodbury, New York headquarters, as well as from its newly opened
underwriting office in Atlanta, Georgia and its Fidelity Mortgage Cincinnati,
Ohio headquarters. Based on its belief that an experienced staff provides a more
effective means of assessing credit risk, the Company employs 51 underwriters,
with an average of seven and one-half years of nonconforming mortgage loan
experience, to ensure that all originated or purchased loans satisfy the
Company's underwriting criteria. The Company's experienced personnel use
underwriting standards developed by the Company in accordance with its
risk-based approach to structuring loans. Each loan must be approved by at least

two underwriters, undergo a full appraisal review and is subject to pre- and
post-funding reviews to confirm compliance with the underwriting procedures and
guidelines. The Company believes that the depth and experience of its
underwriting staff, coupled with consistent application of its underwriting
procedures and criteria provide the infrastructure needed to manage and sustain
the Company's recent growth, while maintaining the quality of loans originated
or purchased. The depth and experience in the Company's underwriting department
has provided two significant competitive advantages. First, it has ensured that
the Company's underwriting standard and subjective judgments sometimes required
in the non-conforming market are consistently applied, enabling the Company to
implement a risk-based pricing strategy. Second, the Company's extensive
training produces experienced underwriters, some of whom are relocated to the
Company's new offices to ensure the same consistency in recently-entered
markets.
 
  Further Penetrating Existing and Recently Entered Markets and Expanding into
  New Markets
 
     The Company intends to continue to increase the volume of its Brokered and
Correspondent Loan originations and purchases through a three-pronged strategy
that includes greater originations and purchases from its existing brokers and
correspondents, establishment of new broker and correspondent relationships in
both existing and recently-entered markets and expansion into new markets.
 
     The Company currently originates and purchases loans through its network of
approximately 1,000 brokers and correspondents. Of these, the top 20 brokers and
correspondents and the top broker accounted for 48.2% and 8.9%, respectively, of
the total loans originated and purchased for the three months ended March 31,
1997. Accordingly, the Company believes that there is an opportunity to increase
loan volume from its existing brokers and correspondents.
 
     Prior to 1995, the Company concentrated its efforts on serving brokers and
correspondents in New York, New Jersey and Pennsylvania. Commencing in 1995, the
Company began to implement a program to expand its geographic focus into the New
England, Mid-Atlantic (outside of the tri-state area), Midwest and Southeast
regions. To increase its network of brokers and correspondents in these new
markets, the Company opened four new regional branch offices--including a full
service office in Atlanta, Georgia staffed by two members of Delta's senior
management, three full processing offices in St. Louis, Missouri, Warwick, Rhode
Island and Chicago, Illinois and five business development offices in Ohio (2),
Michigan (2) and Virginia. Although these steps enabled the Company to increase
production in the Midwest, New England, Mid-Atlantic and Southeast regions from
$6.6 million in 1994 to $221.9 million in 1996, production in such regions for
1996 represented only 33.7% of total production, and the Company believes that
it can continue to increase loan volume from brokers and correspondents in these
markets.
 
     The Company will continue to consider expansion into new markets. Potential
new markets include those with demographic statistics and regulatory
requirements comparable to or more favorable than those in the Company's
established markets and markets in which the Company is able to hire a business
development representative with substantial contacts with the local brokers and
correspondents.
 

                                       41
Expanding its Retail Origination Capabilities
 
     The Company intends to continue to increase the volume of its retail loan
originations by expanding its Fidelity Mortgage operations through new branch
openings in new geographic markets and by further penetrating its existing and
newly entered markets. Since the acquisition of Fidelity Mortgage and its five
retail offices, the Company has opened two additional Fidelity Mortgage offices
in Atlanta, Georgia and Fort Lauderdale, Florida and expects to open three new
offices by the end of the second quarter in Illinois, North Carolina and Ohio.
 
  Expanding Through Acquisitions
 
     Management believes acquisitions can be a means of cost effectively
increasing or diversifying the Company's loan production capabilities. Given the
highly competitive and fragmented nature of the non-conforming mortgage finance
industry, acquisitions present an attractive opportunity for growth. During the
first quarter of 1997, the Company completed its acquisition of Fidelity
Mortgage, which represents Delta's entrance into the retail mortgage origination
market. The Company continually considers acquisition candidates which operate
in geographic or product areas that complement the Company's existing business.
 
  Leveraging its Information and Processing Technologies
 
     In its continued effort to increase efficiency, the Company has added a new
servicing system, purchased a secondary marketing system and a new general
ledger system and upgraded all of its computer hardware within the last year.
The Company's recent and anticipated geographic expansion and growth in
originations and servicing portfolio were considered when these systems were
designed, and management believes its strategic plans can be met without
substantial additional investment in informational systems in the near future.
Management also believes that as the Company further develops the capabilities
of these new systems, further cost savings will be realized.
 
LOANS
 
  Overview
 
     Delta's consumer finance activities consist of originating, acquiring,
selling and servicing non-conforming mortgage loans. These loans are primarily
secured by first mortgages on one- to four-family residences. Once loan
applications have been received, the underwriting process completed and the
loans funded or purchased, Delta typically packages the loans in a portfolio and
sells the portfolio through a securitization. Delta retains the right to service
the loans that it securitizes. To a lesser extent, the Company sells loans on a
whole loan basis with servicing released.
 
     The Company focuses on providing its customers with an array of loan
products designed to meet customer needs. The Company implements a risk-based
pricing strategy and, as such, has developed products for the various risk
categories. Historically, the Company offered fixed rate loan products. As the

Company has expanded geographically, it has expanded its product offerings to
include adjustable rate mortgage and fixed/adjustable mortgages.
 
     Historically, the Company conducted substantially all of its broker and
correspondent lending operations out of its Woodbury, New York headquarters.
Recently, the Company has begun opening regional branch offices, which include
loan processing, underwriting and business development functions, to bring it in
closer contact with brokers and correspondents and enhance customer service
while underscoring Delta's long-term commitment in newer regions. Typically,
these offices are staffed with a combination of experienced Delta personnel who
oversee implementation of Delta's operating methods and local employees with
established relationships in, and specific knowledge of, the local market.
Currently, the Company's Southeast regional office (Atlanta, Georgia), which
is staffed by two members of Delta's senior management including a Vice
President of Underwriting, is the only 'full service' regional branch, i.e., it
has full underwriting authority. Delta's Midwest (St. Louis, Missouri and
Chicago, Illinois) and New England (Warwick, Rhode Island) regional offices are
'full processing' regional branches, i.e., final underwriting approval is
required from the Woodbury, New York headquarters for all mortgage loans. As
these branches mature and demonstrate their ability to meet operating standards,
Delta intends to further strengthen their operations by delegating full
underwriting authority,
 
                                       42
thereby increasing the Company's long-term growth potential. The Fidelity
Mortgage offices have full underwriting authority.
 
     The following chart illustrates the Company's principal consumer finance
activities:
 
                                    [CHART]

                                   BORROWER
                             Applies for loan from
                                       |
               ________________________|________________________
               |                       |                       |
               |                       |                       |
         CORRESPONDENT               BROKER            FIDELITY MORTGAGE
      Closes loan in own         Refers loan to    Retail loan organization
    name and sells loan to             |                       |
               |                       |                       |
               |                       |                       |
              D E L T A    F U N D I N G    C O R P O R A T I O N
                                       |
                                       |
                          DELTA'S LOAN HELD FOR SALE
                                 |           |
 Sells loan through securitiza-  |           | Sells loan on whole loan basis,
tion and recognizes gain on sale |           | without recourse, to institu-
represented by interest-only and |           | tional purchasers for a cash
           residual certificates |           | gain on sale
                                 |           |
                       SECURITIZATION     WHOLE LOAN SALE
                             |          SERVICING RELEASED
     Services all loans sold |
     through securitization, |
  earning a fixed, recurring |
 servicing fee and ancillary |
              service income |
                             |
                       LOAN SERVICING
                         PORTFOLIO

 
  Loan Originations and Purchases
 
     The Company has increased its loan originations and purchases by 129% to
$658.8 million in 1996 from $287.8 million in 1995, which was an increase of
140% over 1994 production of $119.7 million.
 
                                       43
As Delta has expanded into new markets, Correspondent Loans as a percentage

of all originations and purchases has increased because the average
correspondent generates significantly more production than the average broker.
Delta initially establishes itself in these new markets primarily through
purchases of loans, after which it focuses on broker development which often
leads to establishing a physical presence in the market. Due to Delta's growth
and the repositioning of its portfolio of loans, in recent years the weighted
average loan-to-value ratios have increased while weighted average interest
rates have decreased. The Company believes that a decreased interest rate
environment, coupled with increased lending to 'A' and 'B' borrowers relative to
'C' and 'D' borrowers, has resulted in higher loan-to-value ratios and lower
interest rates. Also, since the late 1980's and early 1990's, home equity
lenders in general have become more comfortable with the stability of home
values.
 
     Delta currently originates and acquires the majority of its loans in 21
states and the District of Columbia through its network of approximately 1,000
brokers and correspondents.
 
     The following table shows certain information regarding the Company's loan
originations and purchases by source for the periods shown:
THREE MONTHS ENDED
                                                            YEAR ENDED DECEMBER 31,              MARCH 31,
                                                        --------------------------------    --------------------
                                                          1994        1995        1996        1996        1997
                                                        --------    --------    --------    --------    --------
                                                                         (DOLLARS IN THOUSANDS)
BROKER:
  Principal balance..................................   $ 81,407    $175,738    $321,733    $ 66,389    $114,063
  Average principal balance per loan.................         66          76          85          85          87
  Combined weighted average initial loan-to-value
     ratio(1)........................................       54.8%       62.3%       67.7%       66.8%       70.1%
  Weighted average interest rate.....................       11.7%       11.4%       11.1%       10.4%       11.0%
CORRESPONDENT:
  Principal balance..................................   $ 38,341    $112,065    $337,033    $ 49,373    $122,679
  Average principal balance per loan.................         68          70          73          70          76
  Combined weighted average initial loan-to-value
     ratio(1)........................................       56.2%       64.5%       69.8%       68.1%       71.9%
  Weighted average interest rate.....................       13.0%       12.4%       11.7%       11.8%       11.6%
TOTAL LOAN ORIGINATIONS AND PURCHASES:
  Principal balance..................................   $119,748    $287,803    $658,766    $115,762    $236,742
  Average principal balance per loan.................         67          74          78          78          81
  Combined weighted average initial loan-to-value
     ratio(1)........................................       55.2%       63.2%       68.8%       67.4%       71.0%
  Weighted average interest rate.....................       12.1%       11.8%       11.4%       11.0%       11.3%
PERCENTAGE OF LOANS SECURED BY:
  First mortgage.....................................       88.0%       89.6%       93.8%       94.1%       93.6%
  Second mortgage....................................       12.0%       10.4%        6.2%        5.9%        6.4%
------------------

(1) The weighted average initial loan-to-value ratio of a loan secured by a
    first mortgage is determined by dividing the amount of the loan by the
    lesser of the purchase price or the appraised value of the mortgage property
    at origination. The weighted average initial loan-to-value ratio of loan
    secured by a second mortgage is determined by taking the sum of the loan
    secured by the first and second mortgages and dividing by the lesser of the
    purchase price or the appraised value of the mortgage property at
    origination.
 
     The following table shows the geographic distribution of loan originations
and purchases for the periods indicated:
YEAR ENDED                  YEAR ENDED                  YEAR ENDED          
                               DECEMBER 31, 1994           DECEMBER 31, 1995           DECEMBER 31, 1996      
                           -------------------------   -------------------------   -------------------------  
REGION                     PERCENTAGE   DOLLAR VALUE   PERCENTAGE   DOLLAR VALUE   PERCENTAGE   DOLLAR VALUE   
-------------------------  ----------   ------------   ----------   ------------   ----------   ------------
NY, NJ and PA............     94.5%        $113.2         86.2%        $248.0         66.3%        $436.9      
Midwest..................      2.4            2.9          5.4           15.7         17.0          112.0      
Southeast................      0.3            0.3          0.8            2.2          4.2           27.6      
New England..............      1.7            2.1          2.2            6.2          5.9           38.6      
Mid-Atlantic*............      1.0            1.2          5.4           15.7          6.6           43.7
THREE MONTHS ENDED
                               MARCH 31, 1997
                           ------------------------
REGION                     PERCENTAGE  DOLLAR VALUE
-------------------------  ----------  ------------
NY, NJ and PA............     60.6%       $143.5
Midwest..................     18.2          43.1
Southeast................      9.4          22.2
New England..............      6.4          15.2
Mid-Atlantic*............      5.4          12.7
------------------
* Excluding New York (NY), New Jersey (NJ) and Pennsylvania (PA).
 
                                       44
Broker and Correspondent Marketing. Throughout its history Delta has been
successful in establishing and maintaining relationships with brokers and
correspondents interested in offering non-conforming mortgage products to their
clientele, and management believes that this success is primarily attributable
to the quality of service the Company provides to its network of brokers and

correspondents.
 
     Delta typically initiates contact with a broker or correspondent through
Delta's Business Development Department, comprised of 20 business development
representatives supervised by a senior officer with over ten years of sales and
marketing experience in the industry. The Company usually hires business
development representatives who have contacts with brokers and correspondents
that originate nonconforming mortgage loans within their geographic territory.
The business development representatives are responsible for developing and
maintaining the Company's broker and correspondent networks within their
geographic territory by frequent visits to the broker or correspondent,
communicating the Company's underwriting guidelines, disseminating new product
information and pricing changes, and by a continuing commitment to understanding
the needs of the customer. The business development representatives attend
industry trade shows and are a source of information to Delta concerning
products and pricing offered by competitors and new market entrants, all of
which assists Delta in refining its programs and product offerings in order to
offer competitive service. Business development representatives are compensated
with a base salary and commissions based on the volume of loans originated or
purchased as a result of their efforts.
 
     Approval Process. Before a broker or correspondent becomes part of Delta's
network, it must go through an approval process. Once approved, brokers and
correspondents may immediately begin submitting applications and/or loans to
Delta.
 
     To be approved, a broker must demonstrate that it is properly licensed and
registered in the state in which it seeks to transact business, submit to a
credit check, and sign a standard broker agreement with Delta. A correspondent
is eligible to submit loans to Delta for purchase only after an extensive
investigation of the prospective correspondent's lending operations including an
on-site visit, a review of the correspondent's financial statements for the
prior two years, a credit report on the correspondent, a review of sample loan
documentation and business references provided by the correspondent. Once
approved, Delta requires that each correspondent sign an Agreement of Purchase
and Sale in which the correspondent makes representations and warranties
governing both the mechanics of doing business with Delta and the quality of the
loan submissions themselves. Delta also performs an annual review of each
approved correspondent in order to ensure continued compliance with legal
requirements and that lending operations and financial information continue to
meet Delta's standards. In addition, Delta regularly reviews the performance of
loans originated or purchased through its brokers or correspondents.
 
     Brokers. For the three months ended March 31, 1997, the Company's broker
network accounted for $114.1 million, or 48.2%, of Delta's loan originations and
purchases compared to $66.4 million, or 57.3% of Delta's loan originations and
purchases for the three months ended March 31, 1996, compared to $27.8 million
or 65.8% of Delta's loan originations and purchases for the three months ended
March 31, 1995. No single broker contributed more than 8.9%, 13.5% or 7.4% of
Delta's total originations and purchases for the three months ended March 31,
1997, 1996 or 1995, respectively.
 
     Once approved, a broker may submit loan applications for prospective
borrowers to Delta. To process broker submissions, Delta's broker originations

area is organized into teams, consisting of loan officers and processors, which
are generally assigned to specific brokers. Because Delta operates in a highly
competitive environment where brokers may submit the same loan application to
several prospective lenders simultaneously, Delta strives to provide brokers
with a rapid and informed response. Loan officers analyze the application and
provide the broker with a preliminary approval, subject to final underwriting
approval, or a denial, typically within one business day. If the application is
approved by the Company's underwriters, a 'conditional approval' will be issued
to the broker with a list of specific conditions to be met and additional
documents to be supplied prior to funding the loan. The loan officer and
processor team will then work directly with the submitting broker to collect the
requested information and meet all underwriting conditions. In most cases, the
Company funds loans within 14 to 21 days after preliminary approval of the loan
application. In the case of a denial, Delta will make all reasonable attempts to
ensure that there is no missing information concerning the borrower or the
application that might change the decision on the loan.
 
     The Company compensates its loan officers, who on a loan-by-loan basis are
the primary relationship contacts with the brokers, predominantly on a
commission basis. The Company believes its primarily commission based
 
                                       45
compensation for loan officers gives it a competitive advantage over its
competitors, who, the Company believes, typically assign non- or
lower-commissioned processors to handle this function. Furthermore, all of the
Company's loan officers must complete an extensive 9 to 12 month training
program to attain the level of knowledge and experience integral to the
Company's commitment to providing the highest quality service for brokers.
Management believes that by maintaining an efficient, trained and experienced
staff, it has addressed three central factors which determine where a broker
sends its business: (i) the speed with which a lender closes loans and (ii) the
lender's knowledge concerning the broker and his business and (iii) the support
a lender provides.
 
     Correspondents. For the three months ended March 31, 1997, respectively,
Delta's correspondent network accounted for $122.7 million or 51.8% of Delta's
loan originations and purchases compared to $49.4 million or 42.7% of Delta's
loan originations and purchases for the three months ended March 31, 1996 and
$14.5 million or 34.2% of Delta's loan originations and purchases for the three
months ended March 31, 1995. No single correspondent contributed more than 6.2%,
4.4% or 13.3% of Delta's total loan originations and purchases for the three
months ended March 31, 1997, 1996 or 1995, respectively.
 
     An approved correspondent is a licensed mortgage banker or savings and loan
who sells loans to Delta which the correspondent has originated, processed,
closed and funded in its own name in conformity with Delta's underwriting
standards. The loans are sold to Delta either on an individual flow basis or in
block sales. When selling on a flow basis, a correspondent will typically seek a
preapproval from Delta prior to closing the loan, and Delta will approve the
loan based on a partial or full credit package, stipulating for any items needed
to complete the package in adherence to Delta's underwriting guidelines. On a

block sale, a correspondent will offer a group of loans to Delta for sale (not
necessarily loans that have been preapproved), and Delta will underwrite and
purchase those loans in the block that meet Delta's underwriting criteria. As
with the broker network, Delta's Correspondent Division has a commitment to
quick and knowledgeable service, and is staffed by some of the most capable
mortgage professionals within the Company.
 
     Retail Loans. Fidelity Mortgage is able, through its marketing efforts, to
identify, locate and focus on individuals who, based on its historic customer
profiles, are likely customers for the Company's products. Fidelity Mortgage's
telemarketing representatives identify interested customers and refer these to
loan officers at the retail branch offices who, then, proceed to determine the
applicant's qualifications for the Company's loan products, negotiate loan terms
with the borrower and process the loan through completion.
 
  Loan Underwriting
 
     All of Delta's brokers, correspondents and retail offices are provided with
the Company's underwriting guidelines. Loan applications received from brokers
and correspondents or retail customers are classified according to certain
characteristics, including but not limited to: condition and location of the
collateral, credit history of the applicant, ability to pay, loan-to-value ratio
and general stability of the applicant in terms of employment history and time
in residence. Delta has established classifications with respect to the credit
profile of the applicant, and each loan is placed into one of four letter
ratings 'A' through 'D', with subratings within those categories. Terms of loans
made by Delta, as well as maximum loan-to-value ratios and debt-to-income
ratios, vary depending on the applicant's classification. Loan applicants with
less favorable credit ratings are generally offered loans with higher interest
rates and lower loan-to-value ratios than applicants with more favorable credit
ratings. The general criteria used by Delta's underwriting staff in classifying
loan applicants are set forth below.
 
                                       46
DELTA'S UNDERWRITING CRITERIA
'A' RISK
                         EXCELLENT CREDIT           'B' RISK               'C' RISK               'D' RISK
                              HISTORY          GOOD OVERALL CREDIT    GOOD TO FAIR CREDIT    FAIR TO POOR CREDIT
                       ---------------------  ---------------------  ---------------------  ---------------------
Existing mortgage
  history............  Current at             Current at             Up to 30 days          Mortgage rating not a
                       application time and   application time and   delinquent at          factor
                       a maximum of two       a maximum of four      application time and
                       30-day late payments   30-day late payments   a maximum of four
                       in the last 12 months  in the last 12 months  30-day late payments,
                                                                     two 60-day late
                                                                     payments and one
                                                                     90-day late payment
                                                                     in the last 12 months
 
Other credit.........  Minor 30-day late      Some slow pays         Slow pays, some open   Not a factor.
                       items allowed with a   allowed but majority   delinquencies          Derogatory credit
                       letter of              of credit and          allowed. Isolated      must be paid with
                       explanation; no open   installment debt paid  charge-offs,           proceeds. Must
                       collection accounts,   as agreed. Small       collection accounts    demonstrate ability
                       charge-offs,           isolated charge-offs,  or judgments case-     to pay
                       judgments              collections, or        by-case
                                              judgments allowed
                                              case-by-case

Bankruptcy
  filings............  Discharged more than   Discharged more than   Discharged more than   May be open at
                       four years prior to    three years prior to   one year prior to      closing, but must be
                       closing and excellent  closing and excellent  closing and good       paid off with
                       reestablished credit   reestablished credit   reestablished credit   proceeds

Debt service to
  income ratio.......  Generally 45% or less  Generally 50% or less  Generally 50% or less  Generally 50% or less

Maximum loan-to-value
  ratio:
Owner-occupied.......  Generally 80% (up to   Generally 80% (up to   Generally 75% (up to   Generally 65% (up to
                       90%*) for a one- to    85%*) for a one- to    80%*) for a one- to    70%*) for a one- to
                       four-family residence  four-family residence  four-family residence  four-family residence

Non-owner occupied...  Generally 70% (up to   Generally 70% (up to   Generally 65% (up to   Generally 55% (up to
                       80%*) for a one- to    80%*) for a one- to    75%*) for a one- to    60%*) for a one- to
                       four-family residence  four-family residence  four-family residence  four-family residence
 
Employment...........  Minimum 2 years        Minimum 2 years        No minimum required    No minimum required
                       employment in the      employment in the
                       same field             same field
------------------
 
* On an exception basis.
 
                                       47
Delta uses the foregoing categories and characteristics as guidelines only.
On a case-by-case basis, the Company may determine that the prospective borrower
warrants an exception, if sufficient compensating factors exist. Examples of
such compensating factors are: low loan-to-value ratio, low debt ratio,
long-term stability of employment and/or residence, excellent payment history on
past mortgages, or a significant reduction in monthly housing expenses.
 
     The following table sets forth certain information with respect to Delta's
originations and purchases of first and second mortgage loans by borrower
classification, along with weighted average coupons, for the periods shown.
YEAR                 CREDIT      TOTAL       PERCENT OF TOTAL     WAC(1)     WLTV(2)
------------------------------    -------    --------     ----------------     ------     -------
1994                    A       $ 35,121            29.4%          10.8%       58.9%
                                     B         38,575            32.2%          11.7%       56.4%
                                     C         25,562            21.3%          12.8%       52.9%
                                     D         20,490            17.1%          14.3%       49.3%
                                             --------          ------          ------     -------
            Totals                           $119,748           100.0%          12.1%       55.2%
                                             --------          ------          ------     -------
                                             --------          ------          ------     -------
 
             1995                    A       $ 89,830            31.3%          10.7%       66.8%
                                     B        124,954            43.4%          11.6%       64.5%
                                     C         37,190            12.9%          12.8%       59.6%
                                     D         35,831            12.4%          14.5%       53.2%
                                             --------          ------          ------     -------
            Totals                           $287,805           100.0%          11.8%       63.2%
                                             --------          ------          ------     -------
                                             --------          ------          ------     -------
 
             1996                    A       $219,550            33.4%          10.6%       72.1%
                                     B        234,589            35.6%          11.2%       70.2%
                                     C        156,296            23.7%          12.2%       65.7%
                                     D         48,331             7.3%          13.8%       56.9%
                                             --------          ------          ------     -------
            Totals                           $658,766           100.0%          11.4%       68.8%
                                             --------          ------          ------     -------
                                             --------          ------          ------     -------
 
Three Months

ended March 31, 1997                 A       $109,829            46.4%          10.8%       74.2%
                                     B         65,786            27.8%          11.2%       71.2%
                                     C         46,192            19.5%          12.1%       67.8%
                                     D         14,944             6.3%          13.5%       56.9%
                                             --------          ------          ------     -------
            Totals                           $236,751           100.0%          11.3%       71.0%
                                             --------          ------          ------     -------
                                             --------          ------          ------     -------
------------------
(1) Weighted Average Coupon ('WAC').
 
(2) Weighted Average Initial Loan-to-Value Ratio ('WLTV').
 
     Delta employs experienced nonconforming mortgage loan credit underwriters
to scrutinize the applicant's credit profile and to evaluate whether an impaired
credit history is a result of adverse circumstances or a continuing inability or
unwillingness to meet credit obligations in a timely manner. Personal
circumstances including divorce, family illnesses or deaths and temporary job
loss due to layoffs and corporate downsizing will often impair an applicant's
credit record. Assessment of an applicant's ability and willingness to pay is
one of the principal elements that distinguishes Delta's lending practices from
methods employed by traditional lenders, such as savings and loans and
commercial banks. All lenders utilize debt ratios and loan-to-value ratios in
the approval process. In contrast, many lenders simply use software packages to
score an applicant for loan approval and fund the loan after auditing the data
provided by the borrower.
 
     Delta has a staff of 51 underwriters, with an average of more than seven
and one-half years of non-conforming underwriting experience. Delta does not
delegate underwriting authority to any broker or correspondent. Delta's
Underwriting Department functions independently of its Business Development and
Mortgage Origination Departments and does not report to any individual directly
involved in the origination process. No underwriter at Delta is compensated on
an incentive or commission basis.
 
                                       48
Delta has instituted underwriting checks and balances that are designed to
ensure that every loan is reviewed and approved by a minimum of two
underwriters, with certain higher loan amounts requiring a third approval.
Management believes that by requiring each file be seen by a minimum of two
underwriters, a high degree of accuracy and quality control is ensured
throughout the underwriting process.
 
     Delta's underwriting of every loan submitted consists not only of a
thorough credit review, but also (i) a separate appraisal review conducted by
Delta's Appraisal Review Department and (ii) a full compliance review to ensure
that all documents have been properly prepared, all applicable disclosures have
been given in a timely fashion, proper compliance with all federal and state
regulations, the existence of title insurance insuring Delta's interest as

mortgagee and evidence of adequate homeowner's insurance naming Delta as an
additional insured party. Appraisals are performed by third party, fee-based
appraisers or by the Company's staff appraisers and generally conform to current
FNMA/FHLMC secondary market requirements for residential property appraisals.
Each such appraisal includes, among other things, an inspection of the exterior
of the subject property and, where available, data from sales within the
preceding 12 months of similar properties within the same general location as
the subject property.
 
     Delta performs a thorough appraisal review on each loan prior to closing or
prior to purchasing. While Delta recognizes that the general practice by
conventional mortgage lenders is to perform only drive-by appraisals after
closings, management believes this practice does not provide sufficient
protection. In addition to reviewing each appraisal for accuracy, the Company
accesses other sources to validate sales used in the appraisal to determine
market value. These sources include: interfacing with Multiple Listing Services,
Comps, Inc. and other similar databases to access current sales and listing
information and other sources for verification, including broker price opinions
and market analyses by local real estate agents.
 
     Post closing, in addition to its normal due diligence, the Company selects
one out of every ten appraisals and performs its own drive-by appraisal. This
additional step helps to give the Company an added degree of comfort with
respect to appraisers with which the Company has had limited experience. Delta
actively tracks all appraisers from which it accepts appraisals for quality
control purposes and does not accept work from appraisers who have not conformed
to its review standards.
 
     The Company performs a post-funding quality control review to monitor and
evaluate the Company's loan origination policies and procedures. At least 10% of
all loan originations and purchases are subjected to a full quality control
re-underwriting and review, the results of which are reported to senior
management. Discrepancies noted by this review are analyzed and corrective
actions are instituted. However, to date, this important quality control process
has not revealed material deficiencies in the Company's loan underwriting
procedures. A typical quality control review currently includes: (a) obtaining a
new drive-by appraisal for each property; (b) running a new credit report from a
different credit report agency; (c) reviewing loan applications for
completeness, signatures, and for consistency with other processing documents;
(d) obtaining new written verification of income and employment; (e) obtaining
new written verification of mortgage to re-verify any outstanding mortgages; and
(f) analyzing the underwriting and program selection decisions. The quality
control process is updated from time to time as the Company's policies and
procedures change.
 
  Loan Sales
 
     Delta sells substantially all the loans it originates or purchases through
one of two methods: (i) securitizations, which involve the private placement or
public offering of pass-through mortgage-backed securities, and (ii) whole loan
sales, which include the sale of blocks of individual loans to institutional or
individual investors. Since 1991, the Company has sold $1.5 billion of the loans
it originated or purchased through securitizations and $54.6 million of loans
through whole loan sales.

 
                                       49
Securitizations.  The following table sets forth certain information with
respect to Delta's securitizations (all of which have been insured by monoline
insurance companies and have been rated AAA/Aaa by Standard & Poor's and
Moody's, respectively) by offering size, which includes prefunded amounts,
weighted average pass-through rate and credit rating of securities sold.
REMAINING
                                          OFFERING SIZE       PRINCIPAL BALANCE        WEIGHTED AVERAGE
         SECURITIZATION     COMPLETED      (MILLIONS)         AT MARCH 31, 1997        PASS-THROUGH RATE
         --------------     ---------     -------------     ----------------------     -----------------
1991-1         02/22/91         $  92.4                $ 15.5                   9.000%
             1991-2         12/12/91         $  50.6                $  9.1                   7.850%
             1992-1         11/25/92         $  64.1                $ 14.7                   7.875%
             1993-1         03/31/93         $  27.4                $  6.9                   6.850%
             1993-3         08/31/93         $  31.6                $  8.6                   6.180%
             1993-4         12/15/93         $  30.0                $  8.8                   6.380%
             1994-1         03/30/94         $  30.0                $ 12.1                   6.950%
             1994-2         10/26/94         $  60.0                $ 21.3                   8.310%
             1995-1         05/10/95         $  80.0                $ 45.8                   7.527%
             1995-2         11/30/95         $ 150.0                $109.1                   6.791%
             1996-1         06/12/96         $ 225.0                $193.5                   6.598%
             1996-2         09/26/96         $ 180.0                $167.0                   6.658%
             1996-3         12/27/96         $ 210.0                $203.9                   6.299%
             1997-1         03/21/97         $ 235.0                $235.0                   6.724%
When Delta securitizes loans, it sells a portfolio of loans to a trust (the
'Home Equity Loan Trust') and issues classes of certificates representing an
undivided ownership interest in the Home Equity Loan Trust. In its capacity as
servicer for each securitization, the Company collects and remits principal and
interest payments to the appropriate Home Equity Loan Trust which in turn passes
through payments to certificate holders. In the 1995-2, 1996-1, 1996-2, 1996-3
and 1997-1 transactions, Delta retained 100% of the interests in the
interest-only and residual classes of certificates. The Company will continue to
retain the interest-only and residual certificates as long as, in management's
opinion, this practice maximizes earnings and is consistent with the Company's
liquidity requirements.
 
     Each Home Equity Loan Trust has the benefit of a financial guaranty
insurance policy from a monoline insurance company, which insures the timely
payment of interest and the ultimate payment of principal of the investor
certificate. In addition to such insurance policies, the Excess Servicing is
applied as an additional payment of principal of the investor certificates,
thereby accelerating the amortization of the investor certificates relative to
the amortization of the loans. This use of the Excess Servicing creates
overcollateralization. Once the overcollateralization limit is reached, the use

of Excess Servicing to create overcollateralization stops unless it subsequently
becomes necessary to again obtain or maintain the required overcollateralization
limit. Overcollateralization is intended to create a source of cash (the
payments on the 'extra' loans) to absorb losses prior to making a claim on the
financial guaranty insurance policy. To date, no claims have been made on the
financial guarantee insurance policies for any of the Company's securitizations.
 
     Delta may be required either to repurchase or to replace loans which do not
conform to the representations and warranties made by Delta in the pooling and
servicing agreement entered into when the portfolio of loans are sold through a
securitization. To date, Delta has not had to make any such repurchases or
replacements. Delta intends to continue to conduct loans sales through
securitization, either in private placements or in public offerings, when market
conditions are attractive for such loan sales.
 
     Whole Loan Sales Without Recourse.  The Company has determined from time to
time that some of its 'A' loans and higher loan-to-value ratio loans receive
better execution by being sold on a whole loan, servicing released, non-recourse
basis to third party institutions. The Company does not incur any future loss on
loans sold through this method. The Company intends to continue this practice as
long as it is deemed to be more profitable for the Company. For the three months
ended March 31, 1997, and the years ended 1996 and 1995, Delta sold $0 million,
$15.3 million and $17.6 million, respectively, which represents 0%, 6.1% and
9.9%, respectively, of its originations and purchases.
 
                                       50
Whole Loan Sales With Recourse.  Prior to 1991, Delta combined mortgage
loans into pools and sold those pools as well as individual mortgage loans
directly to a network of commercial banks, savings and loans, insurance
companies, pension funds and accredited investors. Delta generally sold these
pools or individual loans for 100% of the principal balance and negotiated the
pass-through rate of interest to be paid to the investor with the excess
interest retained by Delta. Delta sold loans to investors with recourse whereby
Delta would repurchase any loan which became REO property. This obligation is
subject to various terms and conditions, including, in some instances, a time
limit. At March 31, 1997, there were approximately $18.0 million of loans which
Delta could be required to repurchase in the future should such loans become REO
property.
 
  Loan Servicing and Collections
 
     Delta has been servicing loans since its inception in 1982, and Delta has
serviced or is servicing substantially all of the loans that it has originated
or purchased. Servicing involves, among other things, collecting payments when
due, remitting payments of principal and interest and furnishing reports to the
current owners of the loans and enforcing such owner's rights with respect to
the loans, including, recovering delinquent payments, instituting foreclosure
and liquidating the underlying collateral. The Company receives a servicing fee
for servicing residential mortgage loans of 0.50% per annum (0.65% per annum on
all securitizations completed before and including the 1996-1 securitization) on
the declining principal balance of all loans sold through securitization and on

the declining principal balance of the loans sold to investors on a recourse
basis, which servicing fees are collected out of the monthly mortgage payments.
Management believes that servicing the Company's own portfolio enhances certain
operating efficiencies and provides an additional and profitable revenue stream
that is less cyclical than the business of originating and purchasing loans. As
of March 31, 1997, Delta had a servicing portfolio of $1.1 billion of loans.
 
     Delta services all loans out of its headquarters in Woodbury, New York,
utilizing a leading in-house loan servicing system ('LSAMS') which it
implemented in 1995. LSAMS replaced Delta's former 'service bureau' loan
servicing system, and has provided Delta with considerably more flexibility to
adapt the system to Delta's specific needs as a nonconforming home equity
lender. As such, Delta has achieved significant cost efficiencies by automating
a substantial number of previously manual servicing procedures and functions
since its conversion to LSAMS on July 1, 1995. Management believes that even
greater cost efficiencies can be realized through further automation provided by
LSAMS.
 
     At the same time that it upgraded its primary servicing system, Delta
purchased a default management sub-servicing system ('TPLS') with separate
'modules' for foreclosure, bankruptcy and REO to provide it with the ability to
more efficiently monitor and service loans in default. These sub-servicing
modules provide detailed tracking of all key events in foreclosure and
bankruptcy on a loan-by-loan and portfolio-wide basis; the ability to track and
account for all pre- and post-petition payments received in bankruptcy from the
borrower and/or trustee; and the ability to monitor, market and account for all
aspects necessary to liquidate a REO property after foreclosure. These features
have led to cost savings through greater automation and system upgrades and have
helped mitigate loan losses as the Servicing Department has been able to
identify problem loans earlier, thus allowing for earlier corrective action.
Additionally, Delta's Management Information Systems Department has created a
market value analysis program to run with LSAMS, which provides Delta with the
ability to monitor its equity position on a loan-by-loan and/or portfolio-wide
basis.
 
     Delta's collections policy is designed to identify payment problems
sufficiently early to permit Delta to quickly address delinquency problems and,
when necessary, to act to preserve equity in a pre-foreclosure property. Delta
believes that these policies, combined with the experience level of independent
appraisers engaged by Delta, help to reduce the incidence of charge-offs of a
first or second mortgage loan.
 
     Centralized controls and standards have been established by Delta for the
servicing and collection of mortgage loans in its portfolio. Delta revises such
policies and procedures from time to time in connection with changing economic
and market conditions and changing legal and regulatory requirements.
 
     Borrowers are billed on a monthly basis in advance of the due date.
Collection procedures commence upon identification of a past due account by
Delta's automated servicing system. If timely payment is not received, LSAMS
automatically places the loan in the assigned collector's 'auto queue' and
collection procedures are generally initiated on the day immediately following
the payment due date for chronic late payers, or the day
 

                                       51
immediately following the end of the grace period for those borrowers who
usually pay within the grace period or shortly thereafter. LSAMS automatically
queues up each loan in the assigned collector's 'auto queue' at one of these two
dates based upon a particular borrower's payment history over the prior 12
months. The account remains in the queue unless and until a payment is received,
at which point LSAMS automatically removes the loan from that collector's auto
queue until the next month's payment is due and/or becomes delinquent.
 
     When a loan appears in a collector's auto queue, a collector will telephone
to remind the borrower that a payment is due. Follow-up telephone contacts are
attempted until the account is current or other payment arrangements have been
made. Standard form letters are utilized when attempts to reach the borrower by
telephone fail and/or, in some circumstances, to supplement the phone contacts.
During the delinquency period, the collector will continue to contact the
borrower. Company collectors have computer access to telephone numbers, payment
histories, loan information and all past collection notes. All collection
activity, including the date collection letters were sent and detailed notes on
the substance of each collection telephone call, is entered into a permanent
collection history for each account on LSAMS. Additional guidance with the
collection process is derived through frequent communication with Delta's senior
management.
 
     For those loans in which collection efforts have been exhausted without
success, the Pre-foreclosure Manager recommends the loans be sent to foreclosure
at one of two Foreclosure Committee Meetings held each month. At each such
committee meeting, the Pre-foreclosure Manager meets with the Foreclosure
Manager and a member of the Executive Department, to determine whether
foreclosure proceedings are appropriate based upon their analysis of all
relevant factors, including a market value analysis, reason for default and
efforts by the borrower to cure the default.
 
     Regulations and practices regarding the liquidation of properties (e.g.,
foreclosure) and the rights of a borrower in default vary greatly from state to
state. As such, all foreclosures are assigned to outside counsel, located in the
same state as the secured property. Bankruptcies filed by borrowers are
similarly assigned to appropriate local counsel. All aspects of foreclosures and
bankruptcies are closely monitored by Delta through its TPLS sub-servicing loan
system described above and through monthly status reports from attorneys.
 
     Prior to foreclosure sale, Delta performs an in-depth market value analysis
on all defaulted loans. This analysis includes: (i) a current valuation of the
property obtained through a drive-by appraisal or broker's price opinion
conducted by an independent appraiser and/or a broker from Delta's network of
real estate brokers, complete with a description of the condition of the
property, recent price lists of comparable properties, recent closed
comparables, estimated marketing time and required or suggested repairs and an
estimate of the sales price; (ii) an evaluation of the amount owed, if any, for
real estate taxes; (iii) an evaluation of the amount owed, if any, to a senior
mortgagee and (iv) estimated carrying costs, broker's fee, repair costs and
other related costs associated with REO properties. Delta bases the amount it

will bid at foreclosure sales on this analysis.
 
     If Delta acquires title to a property at a foreclosure sale or otherwise,
the REO Department immediately begins working the file by obtaining an estimate
of the sale price of the property by sending at least two local real estate
brokers to inspect the premises, and then hiring one to begin marketing the
property. If the property is not vacant when acquired, local eviction attorneys
are hired to commence eviction proceedings and/or negotiations are held with
occupants in an attempt to get them to vacate without incurring the additional
time and cost of eviction. Repairs are performed if it is determined that they
will increase the net liquidation proceeds, taking into consideration the cost
of repairs, the carrying costs during the repair period and the marketability of
the property both before and after the repairs.
 
     Delta's loan servicing software also tracks and maintains homeowners'
insurance information and tax and insurance escrow information. Expiration
reports are generated bi-weekly listing all policies scheduled to expire within
the next 15 days. When policies lapse, a letter is issued advising the borrower
of such lapse and notifying the borrower that Delta will obtain force-placed
insurance at the borrower's expense. Delta also has an insurance policy in place
that provides coverage automatically for Delta in the event that Delta fails to
obtain force-placed insurance.
 
                                       52
The following table sets forth information relating to the delinquency and
loss experience of Delta for its servicing portfolio of mortgage loans for the
periods indicated.
YEAR ENDED DECEMBER 31,                THREE MONTHS ENDED MARCH 31,
                                   --------------------------------------------    ------------------------------
                                       1994            1995            1996            1996             1997
                                   ------------    ------------    ------------    ------------    --------------
Total Outstanding Principal
  Balance (at period end).......   $310,228,743    $468,846,079    $932,958,188    $536,863,662    $1,110,998,901
Average Outstanding (1).........   $300,678,046    $373,384,417    $667,368,565    $517,153,985    $1,048,629,760
DELINQUENCY (at period end)
30-59 Days:
  Principal Balance.............   $ 22,569,938    $ 35,052,951    $ 54,582,550    $ 27,846,676    $   60,469,078
  Percent(2)....................           7.28%           7.48%           5.85%           5.19%             5.44%
60-89 Days:
  Principal Balance.............   $  6,398,055    $  8,086,230    $ 14,272,587    $  7,543,965    $   15,092,040
  Percent.......................           2.06%           1.72%           1.53%           1.41%             1.36%
90 Days or More:
  Principal Balance.............   $  6,517,506    $  6,748,061    $  9,224,525    $  4,860,781    $   13,131,534
  Percent.......................           2.10%           1.44%           0.99%           0.91%             1.18%
Total Delinquencies:
  Principal Balance.............   $ 35,485,499    $ 49,887,242    $ 78,079,663    $ 40,251,422    $   88,692,651
  Percent.......................          11.44%          10.64%           8.37%           7.50%             7.98%

FORECLOSURES
  Principal Balance.............   $ 20,768,336    $ 23,506,751    $ 34,765,638    $ 27,722,786    $   41,892,909
  Percent of Foreclosures by
    Dollar......................           6.69%           5.01%           3.73%           5.16%             3.77%
REO (at period end).............   $  1,926,922    $  4,020,295    $  5,672,811    $  4,019,817    $    6,426,415
Net losses on liquidated loans..   $   (687,090)   $ (2,142,099)   $ (2,866,204)   $   (799,130)   $     (993,559)
Percentage of net losses on
  liquidated loans (based on
  Average Outstanding Principal
  Balance)......................          (0.23)%         (0.57)%         (0.43)%         (0.15)%           (0.09)%
------------------
(1) Calculated by summing the actual outstanding principal balances at the end
    of each month and dividing the total by the number of months in the
    applicable period.
 
(2) Percentages are expressed based upon the total outstanding principal balance
    at the end of the indicated period.
 
                                       53
COMPETITION
 
     As an originator and purchaser of mortgage loans, the Company faces intense
competition, primarily from mortgage banking companies, commercial banks, credit
unions, savings and loans, credit card issuers and finance companies. Many of
these competitors in the financial services business are substantially larger
and have more capital and other resources than the Company. Competition can take
many forms, including convenience in obtaining a loan, service, marketing and
distribution channels and interest rates. Furthermore, the current level of
gains realized by the Company and its competitors on the sale of the type of
loans originated and purchased is attracting additional competitors into this
market with the effect of lowering the gains that may be realized by the Company
on future loan sales. In addition, greater investor acceptance of securities
backed by loans comparable to the Company's mortgage loans and greater
availability of information regarding the prepayment and default experience of
such loans creates greater efficiencies in the market for such securities. Such
efficiencies may create a desire for even larger transactions giving companies
with greater volumes of originations a competitive advantage. In addition, a
more efficient market for such securities may lead certain investors to purchase
securities backed by other types of assets where potential returns may be
greater. Competition may be affected by fluctuations in interest rates and
general economic conditions. During periods of rising rates, competitors which
have 'locked in' low borrowing costs may have a competitive advantage. During
periods of declining rates, competitors may solicit the Company's borrowers to
refinance their loans. During economic slowdowns or recessions, the Company's
borrowers may have new financial difficulties and may be receptive to offers by
the Company's competitors.
 
     Furthermore, certain large national finance companies and conforming
mortgage originators have announced their intention to adapt their conforming

origination programs and allocate resources to the origination of nonconforming
loans. In addition, certain of these larger mortgage companies and commercial
banks have begun to offer products similar to those offered by the Company,
targeting customers similar to those of the Company. The entrance of these
competitors into the Company's market could have a material adverse effect on
the Company's financial condition and results of operations.
 
REGULATION
 
     Delta's business is subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and is subject to
various laws and judicial and administrative decisions imposing requirements and
restrictions on part or all of its operations. Delta's consumer lending
activities are subject to the Federal Truth-in-Lending Act and Regulation Z
(including the Home Ownership and Equity Protection Act of 1994), ECDA, the Fair
Credit Reporting Act of 1970, as amended, RESPA, and Regulation X, the Home
Mortgage Disclosure Act and the Federal Debt Collection Practices Act, as well
as other federal and state statutes and regulations affecting Delta's
activities. Delta is also subject to the rules and regulations of, and
examinations by HUD and state regulatory authorities with respect to
originating, processing, underwriting and servicing loans. These rules and
regulations, among other things, impose licensing obligations on Delta,
establish eligibility criteria for mortgage loans, prohibit discrimination,
provide for inspections and appraisals of properties, require credit reports on
loan applicants, regulate assessment, collection, foreclosure and claims
handling, investment and interest payments on escrow balances and payment
features, mandate certain disclosures and notices to borrowers and, in some
cases, fix maximum interest rates, fees and mortgage loan amounts. Failure to
comply with these requirements can lead to loss of approved status, termination
or suspension of servicing contracts without compensation to the servicer,
demands for indemnifications or mortgage loans repurchases, certain rights of
rescission for mortgage loan repurchases, certain rights of rescission for
mortgage loans, class action lawsuits and administrative enforcement actions.
Delta believes it is in compliance in all material respects with applicable
federal and state laws and regulations.
 
ENVIRONMENTAL MATTERS
 
     To date, Delta has not been required to perform any investigation or
cleanup activities, nor has it been subject to any environmental claims. There
can be no assurance, however, that this will remain the case in the future. In
the ordinary course of its business, Delta from time to time forecloses on
properties securing loans. Although Delta primarily lends to owners of
residential properties, there is a risk that Delta could be required to
investigate and clean-up hazardous or toxic substances or chemical releases at
such properties after acquisition by
 
                                       54
Delta, and may be held liable to a governmental entity or to third parties for
property damage, personal injury and investigation and clean-up 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 March 31, 1997, Delta had a total of 530 employees (full and
part-time). None of Delta's employees is covered by a collective bargaining
agreement. Delta considers its relations with its employees to be good.
 
PROPERTIES
 
     Delta's executive and administrative offices are located at 1000 Woodbury
Road, Suite 200, Woodbury, New York 11797, where Delta leases approximately
63,600 square feet of office space at an aggregate annual rent of approximately
$1.2 million. The lease provides for certain scheduled rent increases and
expires in 2004.
 
     Delta Funding Corporation maintains a full service office in Atlanta,
Georgia, full processing offices in St. Louis, Missouri, Chicago, Illinois and
Warwick, Rhode Island, and business development offices in Michigan (2), New
Jersey, Ohio (2), Pennsylvania and Virginia. Fidelity Mortgage maintains seven
retail mortgage origination offices in Florida (2), Georgia, Indiana and Ohio
(3). The terms of the leases vary as to duration and escalation provisions, with
the latest expiring in 2001.
 
LEGAL PROCEEDINGS
 
     Because the nature of the Company's business involves the collection of
numerous accounts, the validity of liens and compliance with state and federal
lending laws, the Company is subject to numerous claims and legal actions in the
ordinary course of its business. While it is impossible to estimate with
certainty the ultimate legal and financial liability with respect to such claims
and actions, the Company believes that the aggregate amount of such liabilities
will not result in monetary damages which in the aggregate would have a material
adverse effect on the financial condition or results of the Company.
 
     Several class-action lawsuits have been filed recently against a number of
consumer finance companies alleging that the compensation of mortgage brokers
through the payment of yield spread premiums violates various federal and state
consumer protection laws. On March 18, 1997, the Company received notice that it
had been named in a lawsuit filed in Federal District Court, E.D.N.Y., alleging
that the Company's compensation of mortgage brokers by means of yield spread
premiums violates, among other things, RESPA. The complaint seeks (i)
certification of a class of plaintiffs, (ii) an injunction against payment of
yield spread premiums by the Company and (iii) unspecified compensatory and
punitive damages (including attorney's fees). Management believes the Company
has meritorious defenses and intends to defend this suit, but the Company has
not yet answered the complaint and cannot estimate with any certainty its
ultimate legal or financial liability, if any, with respect to the alleged
claims. On May 2, 1997, the Company filed a motion to dismiss for failure to
join a necessary party.
 
                                       55
MANAGEMENT
 
DIRECTORS AND EXECUTIVE OFFICERS
 
     The following table sets forth certain information regarding the current
directors and executive officers of the Company.
NAME                                               AGE   POSITION WITH THE COMPANY
------------------------------------------------   ---   ------------------------------------------------
Sidney A. Miller................................   62    Chairman of the Board of Directors
Hugh Miller.....................................   33    Chief Executive Officer, President and Director
Richard Blass...................................   33    Senior Vice President, Chief Financial Officer,
                                                           Treasurer and Director
Martin D. Payson................................   61    Director
Arnold B. Pollard...............................   54    Director
Christopher Donnelly............................   36    Senior Vice President
Teresa E. Ginter................................   58    Senior Vice President and Secretary
Randall F. Michaels.............................   37    Senior Vice President
Franklin E. Pellegrin, Jr.......................   46    Senior Vice President
References to positions held by persons named below covering periods before
the Company's incorporation in 1996 are references to positions held by such
persons at Delta Funding Corporation.
 
     SIDNEY A. MILLER founded the Company and has been Chairman of the Board of
Directors of the Company since its inception. He was President and Chief
Executive Officer from 1982 to 1991 and has been involved in the mortgage
banking industry since 1974. He is also a chartered life insurance underwriter.
Mr. Miller is a director of the Home Equity Lenders Leadership Organization and
the National Home Equity Mortgage Association, as well as an Associate Trustee
of North Shore University Hospital.
 
     HUGH MILLER has been the President and Chief Executive Officer of the
Company since 1991. He has been associated with the Company in various
capacities since 1985 and has been primarily responsible for the day-to-day
operations of the Company since 1985.
 
     RICHARD BLASS is a Senior Vice President and Treasurer of the Company and,
in March 1997, became the Chief Financial Officer. He has served in various
capacities since joining the Company in 1992. Prior thereto, Mr. Blass was a
money market and derivatives trader at Citicorp Securities Markets Inc.
 
     MARTIN D. PAYSON became a Director of the Company in 1996. Mr. Payson
formerly served as Vice Chairman of Time Warner, Inc. from 1990 to 1992, and
prior to the merger of Time Inc. and Warner Communications, Inc., Mr. Payson
held the position of Office of the President and General Counsel of Warner
Communications, Inc., of which he also was a Director for 14 years. Mr. Payson

also serves on the Board of Directors of Renaissance Communications, Corp., a
communications company, Meridian Sports Incorporated, a boating and sports
equipment company, Unapix Entertainment Inc., a media/communications company,
all publicly held companies, and these privately held companies: Latin
Communications Group Inc., Ithaca Holdings Inc., and SCUUL Ltd.
 
     ARNOLD B. POLLARD, PH.D. became a Director of the Company in 1996. Dr.
Pollard has been the President and Chief Executive Officer of Chief Executive
Group, which publishes Chief Executive magazine, since 1993 and, for nearly 20
years, Dr. Pollard has been President of Decision Associates. Dr. Pollard was
also a founding member of the Strategic Decision Analysis Group of SRI and
previously served as Chairman and Chief Executive Officer of Biopool
International. Dr. Pollard also serves on the Board of Directors of GKN
Securities, Inc., a brokerage firm, a public company, and The Landry Service
Co., Inc. and is on the advisory board of Simply Interactive, Inc.
 
                                       56
CHRISTOPHER DONNELLY has been a Senior Vice President of the Company since
1995 and was a Vice President of the Company from 1992 to 1995. Mr. Donnelly
joined the Company in 1987 and since 1991, has been primarily responsible for
supervising all aspects of credit and underwriting, including the Broker and
Correspondent Divisions and Appraisal Review. Since joining the Company in 1987,
Mr. Donnelly has served in a variety of positions, including Assistant Manager
of Originations.
 
     TERESA E. GINTER has been a Senior Vice President of the Company since 1992
and was a Vice President of the Company from 1986 to 1992. Ms. Ginter's primary
responsibilities include supervising the internal operations of the Broker
Division. Ms. Ginter has been with the Company since its inception and has
served in a variety of positions.
 
     RANDALL F. MICHAELS has been a Senior Vice President of the Company since
1996 and has been the National Sales Manager since he joined the Company in 1995
as a Vice President. Mr. Michaels is primarily responsible for supervising all
aspects of sales and marketing for the Company. Mr. Michaels has over 14 years
experience in the non-conforming mortgage loan markets. Prior to joining Delta,
Mr. Michaels was Regional Sales Manager of Quality Mortgage/Express Funding
Inc., a mortgage finance company, for two years and, before that, Regional Sales
Manager of American Funding Group, a mortgage finance company, for six years.
 
     FRANKLIN E. PELLEGRIN, JR. has been a Senior Vice President of the Company
since 1996 and has been the Servicing Manager since he joined the Company in
1996 as a Vice President. Mr. Pellegrin has been involved in the mortgage
banking industry for 24 years. From 1979 to 1995, Mr. Pellegrin served as Senior
Vice President in charge of servicing and data processing of Mid-Coast Mortgage
Company, a mortgage finance company.
 
     The directors are divided into three classes, denominated Class I, Class II
and Class III, with the terms of office of each class expiring at the 1997, 1998
and 1999 annual meeting of stockholders, respectively. At each annual meeting
following such initial classification and election, directors elected to succeed

those directors whose terms expire will be elected for a term to expire at the
third succeeding annual meeting of stockholders after their election. The
directors in each class are as follows: Class I--Arnold B. Pollard and Richard
Blass, Class II--Martin D. Payson and Sidney A. Miller, and Class III--Hugh
Miller. All officers are appointed by and serve, subject to the terms of their
employment agreements, if any, at the discretion of the Board of Directors.
 
FAMILY RELATIONSHIPS
 
     Hugh Miller is Sidney A. Miller's son. No other family relationship exists
among any of the Directors or executive officers of the Company. No arrangement
or understanding exists between any Director or executive officer or any other
person pursuant to which any Director or executive officer was selected as a
Director or executive officer of the Company. Subject to rights under applicable
employment agreements, each executive officer serves at the pleasure of the
Board of Directors.
 
COMMITTEES OF THE BOARD OF DIRECTORS
 
     The Board of Directors has three standing committees: the Executive
Committee, the Compensation Committee and the Audit Committee. Sidney A. Miller
and Hugh Miller serve on the Executive Committee which is authorized to exercise
the powers of the Board of Directors between meetings. However, the Executive
Committee may not (i) amend the Certificate of Incorporation or the By-laws of
the Company, (ii) adopt an agreement of merger or consolidation, (iii) recommend
to the stockholders the sale, lease, or exchange of all or substantially all of
the Company's property and assets, (iv) recommend to the stockholders a
dissolution of the Company or revoke a dissolution, (v) elect a director or
(vi) declare a dividend or authorize the issuance of stock. Messrs. Payson and
Pollard serve on the Compensation Committee and the Audit Committee. The
Compensation Committee is responsible for recommending to the Board of Directors
the Company's executive compensation policies for senior officers and
administering the 1996 Employee Stock Option Plan (the 'Stock Option Plan'). See
'--Stock Option Plan.' The Audit Committee is responsible for recommending
independent auditors, reviewing the audit plan, the adequacy of internal
controls, the audit report and the management letter and performing such other
duties as the Board of Directors may from time to time prescribe.
 
                                       57
EMPLOYMENT AGREEMENTS; KEY-MAN LIFE INSURANCE
 
  Employment Agreements
 
     Effective October 1, 1996, the Company entered into employment agreements
with Sidney A. Miller, Hugh Miller, Christopher Donnelly and Randall F.
Michaels, and on March 4, 1997, the Company entered into an employment agreement
with Richard Blass. Sidney A. Miller's and Hugh Miller's employment agreements
are for terms of five years, and Richard Blass', Christopher Donnelly's and
Randall F. Michaels' employment agreements are for terms of three years.
 
     Under the terms of the respective employment agreements, the Company pays

Sidney A. Miller a minimum base salary of $350,000 per year, Hugh Miller a
minimum base salary of $350,000 per year, Richard Blass a minimum base salary of
$160,000 per year, Christopher Donnelly a minimum base salary of $150,000 per
year and Randall F. Michaels a minimum base salary of $125,000 per year. Each of
these officers is entitled to participate generally in the Company's employee
benefit plans, including the Stock Option Plan, and is eligible for an incentive
bonus from the Company's executive bonus pool. The cash bonuses available to
Christopher Donnelly and Randall F. Michaels are made at the discretion of the
Board of Directors and are based on subjective performance criteria. Under the
terms of their employment agreements, Sidney A. Miller, Hugh Miller and Richard
Blass are eligible for cash bonuses in any one fiscal year of up to 400% of
their annual salary for Messrs. Miller and Miller and up to 50% of his annual
salary for Richard Blass, payable on a quarterly basis 60 days after the
relevant quarter. The amount of such quarterly cash bonus is calculated under
the agreements as follows: for each 1% increase in net earnings per share for
the relevant fiscal quarter greater than 10% as measured against the
corresponding quarter in the prior fiscal year, each of Sidney A. Miller and
Hugh Miller will receive a quarterly cash bonus of 15% of his respective current
annual salary and Richard Blass will receive a quarterly cash bonus of 1.875% of
his current annual salary.
 
     Under the terms of their respective employment agreements, Sidney A. Miller
and Hugh Miller also are granted benefits covering life insurance (Sidney A.
Miller receives coverage up to $25,000,000, and Hugh Miller receives coverage of
up to $1,000,000), medical expenses not covered by insurance (up to $100,000 per
year) and allowances for business related travel and entertainment (up to
$25,000 per year).
 
     If any of these five executive officers is terminated 'for cause,' which
definition generally includes termination by the Company due to the executive's
willful failure to perform his duties under the employment agreement, the
executive's personal dishonesty, or the executive's breach of his fiduciary
duties or the employment agreement to which he is a party, then the Company is
obligated to pay the executive so terminated only his base salary up to the date
of his termination 'for cause.' However, if either Richard Blass, Christopher
Donnelly or Randall F. Michaels is terminated without cause, the Company is
obligated to pay such executive officer certain amounts set forth in the
agreement which would be paid to Mr. Blass, Mr. Donnelly or Mr. Michaels in
equal installments over the six months following any such termination without
cause. If either Sidney A. Miller or Hugh Miller is terminated without cause,
the Company is obligated to pay such executive officer his base salary, bonus
and benefits for the remaining term of his employment agreement. If either
Sidney A. Miller or Hugh Miller resigns for 'good reason,' which generally
includes the executive officer's resignation due to a breach by the Company of
his employment agreement or a change of control in the ownership of the Company,
the Company must pay such executive officer his salary, bonus and benefits for
the remaining term of the employment agreement.
 
  Key-Man Life Insurance
 
     The Company maintains a key-man life insurance policy in the amount of
approximately $1,000,000 on Hugh Miller, on which the Company is named as
beneficiary. The Company does not maintain key-man life insurance policies on
any of its other executive officers, however, the Company would be reimbursed

from Sidney A. Miller's split-dollar life insurance policy for the lesser of the
cash value or all premiums paid during the term of the policy. See 'Certain
Relationships and Related Party Transactions.'
 
                                       58
COMPENSATION OF DIRECTORS
 
     The Company pays each nonemployee director compensation of $20,000 per
annum and a fee of $1,000 for each meeting of the Board of Directors that he
attends. The Company initially granted 10,000 options to each nonemployee
director, one-quarter of which will vest immediately, with an additional
one-quarter vesting each year thereafter. The Company reimburses each director
for ordinary and necessary travel expenses related to such director's attendance
at Board of Directors and committee meetings.
 
EXECUTIVE COMPENSATION
 
     The Summary Compensation Table below provides certain summary information
concerning compensation paid or accrued during the years ended December 31,
1996, 1995 and 1994 by the Company to or on behalf of the Chief Executive
Officer and the four other highest paid executive officers of the Company.
 
                           SUMMARY COMPENSATION TABLE
LONG-TERM
                                                                                     COMPENSATION
                                                                                        AWARDS
                                                ANNUAL COMPENSATION                  ------------
                                   ----------------------------------------------     SECURITIES
                                                                     OTHER ANNUAL     UNDERLYING        ALL OTHER
NAME AND PRINCIPAL POSITION        YEAR     SALARY       BONUS       COMPENSATION      OPTIONS       COMPENSATION(1)
--------------------------------   ----    --------    ----------    ------------    ------------    ---------------
Sidney A. Miller................   1996    $ 53,846    $  350,000           --           25,000          $ 5,218
  Chairman of the Board            1995          --     3,000,000           --               --            4,672
                                   1994     624,000       150,000           --               --            2,669
 
Hugh Miller.....................   1996     408,554       350,000           --          100,000            5,218
  Chief Executive Officer          1995     419,200       275,000           --               --            4,675
                                   1994     520,000        50,000           --               --            2,752
 
Richard Blass...................   1996     108,173        50,000       $2,038           25,000            5,218
  Chief Financial Officer          1995      68,062         6,000           --               --            2,308
                                   1994      61,308         2,000        1,112               --            1,182
 
Christopher Donnelly............   1996     138,462        16,000        5,288           25,000            5,218
  Senior Vice President            1995      91,019         9,500          488               --            3,148
                                   1994      68,851         4,950          747               --            1,368
 

Randall F. Michaels.............   1996     120,739       143,054           --           25,000               --
  Senior Vice President            1995      32,298         7,155           --               --               --
                                   1994          --            --           --               --               --
------------------
(1) Consists of contributions by the Company to the executive officers'
    respective accounts pursuant to the Delta Funding Corporation Profit-Sharing
    Plan.
 
STOCK OPTION PLAN
 
     The Company adopted the Stock Option Plan in October 1996. The Stock Option
Plan is administered by the Compensation Committee. All employees and directors
of, and consultants to, the Company as may be determined from time to time by
the Compensation Committee are eligible to receive options under the Stock
Option Plan.
 
     A total of 2,200,000 shares of common stock were authorized for issuance
under the Stock Option Plan. Not more than 1,000,000 shares of common stock may
be the subject of options granted to any individual during the duration of the
Stock Option Plan. As of March 31, 1997, the Company granted options to purchase
an aggregate of 631,850 shares of its common stock to certain eligible
participants under the Stock Option Plan.
 
     The exercise price of an incentive stock option and a non-qualified stock
option is fixed by the Compensation Committee at the date of grant; however, the
exercise price under an incentive stock option must
 
                                       59
be at least equal to the fair market value of the common stock at the date of
grant, and 110% of the fair market value of the common stock at the date of
grant for any incentive stock option granted to a member of the Miller family.
 
     Stock options are exercisable for a duration determined by the Compensation
Committee, but in no event more than ten years after the date of grant. Options
shall be exercisable at such rate and times as may be fixed by the Compensation
Committee on the date of grant. The aggregate fair market value (determined at
the time the option is granted) of the common stock with respect to which
incentive stock options are exercisable for the first time by a participant
during any calendar year (under all stock option plans of the Company) shall not
exceed $100,000; to the extent this limitation is exceeded, such excess options
shall be treated as non-qualified stock options for purposes of the Stock Option
Plan and the Code (as defined).
 
     At the time a stock option is granted, the Compensation Committee may, in
its sole discretion, designate whether the stock option is to be considered an
incentive stock option or non-qualified stock option. Stock options with no such
designation shall be deemed non-qualified stock options.
 
     Payment of the purchase price for shares acquired upon the exercise of

options may be made by any one or more of the following methods: in cash, by
check, by delivery to the Company of shares of common stock already owned by the
option holder, or by such other method as the Compensation Committee may permit
from time to time. However, a holder may not use previously owned shares of
common stock to pay the purchase price under an option, unless the holder has
beneficially owned such shares for at least six months.
 
     Stock options become immediately vested and exercisable in full upon the
occurrence of such special circumstances as in the opinion of the Board of
Directors merit special consideration.
 
     Stock options terminate at the end of the 30th business day following the
holder's termination of employment or service. This period is extended to one
year in the case of the disability or death of the holder and, in the case of
death, the stock option is exercisable by the holder's estate. The
post-termination exercise period for any individual may be extended by the Board
of Directors, but not beyond the expiration of the original term of the option.
 
     The options granted under the Stock Option Plan contain anti-dilution
provisions which will automatically adjust the number of shares subject to the
option in the event of a stock dividend, split-up, conversion, exchange,
reclassification or substitution. In the event of any other change in the
corporate structure or outstanding shares of common stock, the Compensation
Committee may make such equitable adjustments to the number of shares and the
class of shares available under the Stock Option Plan or to any outstanding
option as it shall deem appropriate to prevent dilution or enlargement of
rights.
 
     The Company shall obtain such consideration for granting options under the
Stock Option Plan as the Compensation Committee in its discretion may request.
 
     Each option may be subject to provisions to assure that any exercise or
disposition of common stock will not violate federal and state securities laws.
 
     No option may be granted under the Stock Option Plan after the day
preceding the tenth anniversary of the adoption of the Stock Option Plan.
 
     The Board of Directors or the Compensation Committee may at any time
withdraw or amend the Stock Option Plan and may, with the consent of the
affected holder of an outstanding option at any time withdraw or amend the terms
and conditions of outstanding options. Any amendment which would increase the
number of shares issuable pursuant to the Stock Option Plan or to any individual
thereunder or change the class of individuals to whom options may be granted
shall be subject to the approval of the stockholders of the Company.
 
401(K) SAVINGS PLAN
 
     In 1994, Delta Funding Corporation established a 401(k) Profit-Sharing Plan
(the 'Plan'), which is intended to comply with Sections 401(a) and 401(k) of the
Code, and the applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended. Amounts contributed to the Plan are held under a trust
intended to be exempt from income tax pursuant to Section 501(a) of the Code.
All employees of Delta Funding
 

                                       60
Corporation that have completed at least one year of service and who are at
least 21 years old are eligible to participate in the Plan. Participating
employees are entitled to make pre-tax contributions to their accounts, subject
to certain maximum annual limits imposed by law, in 1996), and certain other
limitations. Delta Funding Corporation may elect to make a discretionary
contribution to the Plan each year. Employees are always fully vested in their
own contributions, Delta Funding Corporation's contributions vest in
participating employees over a six-year period. Distributions generally are
payable in a lump-sum after retirement, disability or death and, in certain
circumstances, upon termination of employment with Delta Funding Corporation for
other reasons.
 
OPTION GRANTS
 
     The following table shows all grants of options in 1996 to the executive
officers of the Company named in the Summary Compensation Table. The options
were granted under the Stock Option Plan. Pursuant to the rules of the
Securities and Exchange Commission (the 'Commission'), the table also shows the
value of the options granted at the end of the option terms (seven years) if the
stock price were to appreciate annually by 5% and 10%, respectively. There is no
assurance that the stock price will appreciate at the rates shown in the table.
The table also indicates that if the stock price does not appreciate, there will
be no increase in the potential realizable value of the options granted.
INDIVIDUAL GRANTS(1)
                             --------------------------------------------------------    POTENTIAL REALIZABLE VALUE AT
                               NO. OF      PERCENT OF                                       ASSUMED ANNUAL RATES OF
                             SECURITIES   TOTAL OPTIONS                                     STOCK PRICE APPRECIATION
                             UNDERLYING    GRANTED TO                                           FOR OPTION TERM
                              OPTIONS     EMPLOYEES IN    EXERCISE PRICE   EXPIRATION   --------------------------------
NAME                          GRANTED         1996            ($/SH)          DATE         0%         5%         10%
---------------------------  ----------   -------------   --------------   ----------   --------   --------   ----------
Sidney A. Miller...........     25,000         5.36%          $16.50        11-01-03       --      $167,929   $  391,346
Hugh Miller................    100,000        21.42            16.50        11-01-03       --       671,716    1,565,383
Richard Blass..............     25,000         5.36            16.50        11-01-03       --       167,929      391,346
Christopher Donnelly.......     25,000         5.36            16.50        11-01-03       --       167,929      391,346
Randall F. Michaels .......     25,000         5.36            16.50        11-01-03       --       167,929      391,346
------------------
(1) No stock appreciation rights were granted to executive officers in 1996.
 
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
 
     There were no options exercised by any of the executive officers of the
Company named in the Summary Compensation Table during 1996. No stock

appreciation rights ('SARs') have ever been granted to executive officers.
NUMBER OF SECURITIES               VALUE OF UNEXERCISED
                                                                   UNDERLYING UNEXERCISED            IN-THE-MONEY OPTIONS AT
                                     SHARES                     OPTIONS AT DECEMBER 31, 1996            DECEMBER 31, 1996
                                   ACQUIRED ON     VALUE      --------------------------------   --------------------------------
NAME                               EXERCISE(#)  REALIZED($)   EXERCISABLE(#)  UNEXERCISABLE(#)   EXERCISABLE($)  UNEXERCISABLE($)
---------------------------------- -----------  -----------   --------------  ----------------   --------------  ----------------
Sidney A. Miller..................      0           $ 0              0              25,000             $0           $   37,500
Hugh Miller.......................      0             0              0             100,000              0              150,000
Richard Blass.....................      0             0              0              25,000              0               37,500
Christopher Donnelly..............      0             0              0              25,000              0               37,500
Randall F. Michaels...............      0             0              0              25,000              0               37,500
61
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
     Prior to the Company's initial public offering, the Company had not had a
compensation committee or any other committee of the Board of Directors
performing similar functions. Prior to the Company's initial public offering,
decisions concerning executive compensation were made by the Board of Directors,
including Sidney A. Miller and Hugh Miller, who were and continue to be
executive officers of the Company and participated in deliberations of the Board
of Directors regarding executive officer compensation. The Board of Directors of
the Company established a Compensation Committee on November 1, 1996. See
'--Committees of the Board of Directors.'
 
     None of the executive officers of the Company currently serves on the
compensation committee of another entity or any other committee of the board of
directors of another entity performing similar functions. For other related
party transactions, see 'Certain Relationships and Related Party Transactions.'
 
              CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
 
     In October 1996, the Company's subsidiary, Delta Funding Corporation,
issued certain S corporation distribution notes in the amount of $23,400,000 to
the Former Shareholders. Said notes were repaid in November 1996.
 
     A note due from Hugh Miller in the amount of $990,000 which had an interest
rate of 7.5% per annum and a maturity date in 2001 was repaid in full in June
1996.
 
     A note due from Sidney A. Miller in the amount of $2,000,000 which had an
interest rate of 7.8% per annum was repaid in full when it matured in December
1995.
 
     The Company previously sub-leased its Woodbury, New York office space from

Commercial Capital Corp. of New York ('Commercial Capital'), a corporation which
is wholly-owned by Rona V. Miller (Sidney A. Miller's wife). This lease was
assigned to the Company on August 2, 1996. Prior to this assignment, the Company
always paid rent to Commercial Capital in an amount equal to that which
Commercial Capital paid the landlord.
 
     Long Island Closing Corporation, a company wholly-owned by Rona V. Miller,
is hired by title abstract companies as closing agent to clear titles on
substantially all of the Company's Brokered Loan closings held at the Company's
headquarters. All fees for these services are paid by the borrowers, which
amounted to $96,213 for 1995, $126,672 for 1996 and $29,660 for the three months
ended March 31, 1997.
 
     Miller Planning Corporation, a company which is wholly-owned by Sidney A.
Miller, acts as the Company's agent in procuring the Company's group health,
disability and life insurance policies from independent insurance carriers and
receives commissions from the insurance companies on the same; which, in 1995,
totaled $29,240 and in 1996, totaled $25,455. This same affiliate previously
offered life and disability credit insurance to the Company's borrowers for
which this affiliate received commissions.
 
     The Company pays the annual premium on a $25,000,000 split-dollar life
insurance policy for Sidney A. Miller. The beneficiaries on the policy are
certain members of the Miller family; however, in the event of Sidney A.
Miller's demise, the Company is first reimbursed out of the proceeds of the
policy for the lesser of the cash value or all premiums it has paid during the
term of the policy.
 
     Certain members of the Miller family guaranteed two of the Company's lines
of credit with unaffiliated financial institutions in 1996. A $1,000,000 line
was personally guaranteed by Sidney A. Miller and a $2,500,000 line was
personally guaranteed, jointly and severally, by Sidney A. Miller and Hugh
Miller. Currently, none of the Company's credit facilities are personally
guaranteed. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources.'
 
TRANSACTIONS IN CONNECTION WITH TERMINATION OF S CORPORATION STATUS
 
     On October 31, 1996, the Company acquired all of the outstanding stock of
Delta Funding Corporation in exchange for 10,653,000 shares of common stock of
the Company. Prior to the Exchange, Delta Funding Corporation was treated for
federal income tax purposes as an S corporation under Subchapter S of the Code,
and
 
                                       62
as such, the historical earnings of Delta Funding Corporation through October
31, 1996 were taxed directly to the shareholders of Delta Funding Corporation.
As a result of the Exchange, the Company and Delta Funding Corporation, which
became a wholly-owned subsidiary of the Company, became subject to federal and
state income taxes and the Company recorded a deferred tax liability on its
balance sheet relating to the tax effect of temporary differences between book

and tax accounting, principally relating to recognition of gain on sales of
mortgage loans.
 
     On November 1, 1996, the Company completed its initial public offering of
4,600,000 shares of common stock at an offering price of $16.50 per share. The
net proceeds of the offering to the Company, exclusive of underwriting discounts
and commissions and other expenses, were $69,701,435. In November 1996,
$32,607,000 of the proceeds raised in the offering was distributed to the Former
Shareholders to make distributions of S corporation earnings. Remaining
undistributed S corporation earnings of $18,071,687 were reclassified as
additional paid-in capital.
 
     On October 31, 1996, the Company became a C corporation for federal and
state income tax purposes and as such was subject to federal and state income
tax on its taxable income for the months of November and December 1996. In
connection with the change in tax status from an S corporation to a C
corporation, the Company incurred a deferred income tax expense of $3,900,496 as
of October 31, 1996. The liability for income taxes at December 31, 1996
reflected on the consolidated balance sheet includes a deferred tax liability of
$5,010,676. This represents the tax effect of differences between the tax basis
and financial statement carrying amounts of assets and liabilities.
 
     Prior to the Exchange, Delta Funding Corporation and the Former
Shareholders entered into a tax agreement relating to their respective income
tax liabilities. Because the Company became fully subject to corporate income
taxation after the termination of the Company's S corporation status, the
reallocation of income and deduction between the period during which the Company
was treated as an S corporation and the period after which the Company became
subject to corporate income taxation may increase the taxable income of one
party while decreasing that of another party. Accordingly, the tax agreement is
intended to assure that taxes are borne by the Company on the one hand and the
Former Shareholders on the other, only to the extent that such parties received
the related income. The tax agreement generally provides that, if an adjustment
is made to the taxable income of the Company for a year in which it was treated
as an S corporation, the Company will indemnify the Former Shareholders and the
Former Shareholders will indemnify the Company against any increase in the
indemnified party's income tax liability (including interest and penalties and
related costs and expenses), with respect to any tax year to the extent such
increase results in a related decrease in the income tax liability of the
indemnifying party for that year. However, the tax agreement specifically
provides that the Former Shareholders will not be responsible for any portion of
any deferred tax liability recorded on the balance sheet of Delta Funding
Corporation upon termination of the S corporation status. The Company will also
indemnify the Former Shareholders for all taxes imposed upon them as the result
of their receipt of an indemnification payment under the tax agreement. Any
payment made by the Company to the Former Shareholders pursuant to the tax
agreement may be considered by the Internal Revenue Service or state taxing
authorities to be non-deductible by the Company for income tax purposes. Neither
parties' obligations under the tax agreement are secured, and, as such, there
can be no assurance that the Former Shareholders or the Company will have funds
available to make any payments which may become due under the tax agreement. To
date, no payments have been made under the tax agreement.
 
                                       63
PRINCIPAL STOCKHOLDERS
 
     The following table provides information at May 31, 1997, with respect to
(i) any person known to the Company to be the beneficial owner of five percent
or more of the common stock, (ii) all Directors (both continuing and nominees)
of the Company, (iii) each of the five most highly compensated executive
officers of the Company, and (iv) all directors and executive officers as a
group. Unless otherwise indicated, the beneficial ownership disclosed consists
of sole voting and investment power.
NAME OF BENEFICIAL OWNER(1)                                            NUMBER OF SHARES    PERCENT OF CLASS
--------------------------------------------------------------------   ----------------    ----------------
Hugh Miller(2)......................................................       5,618,319             36.6%
Sidney A. Miller....................................................       4,957,027             32.2%
Marc E. Miller(3)...................................................       4,120,645             26.8%
Lee Miller(4).......................................................       4,120,645             26.8%
Richard Blass.......................................................           1,517                *
Martin D. Payson....................................................          12,500(5)             *
Arnold B. Pollard...................................................           2,500(6)             *
Randall F. Michaels.................................................           2,064                *
Christopher Donnelly................................................             508                *
All Directors and executive officers as a group.....................      10,597,010             68.9%
------------------
 * Less than one percent
 
(1) Unless otherwise indicated, the address of each beneficial owner is c/o
    Delta Financial Corporation, 1000 Woodbury Road, Woodbury, New York 11797.
 
(2) Includes (i) 4,119,451 shares of common stock owned by two grantor retained
    annuity trusts, of which Mr. Hugh Miller is a trustee and has shared voting
    and investment power (Mr. Hugh Miller disclaims beneficial ownership of
    these shares of common stock); and (ii) 2,388 shares of common stock of
    which he has sole voting and investment power for the benefit of two family
    members under the Uniform Gifts for Minor's Act (Mr. Hugh Miller disclaims
    beneficial ownership of these shares of common stock).
 
(3) Includes 4,119,451 shares of common stock owned by two grantor retained
    annuity trusts, of which Mr. Marc Miller is a trustee and has shared voting
    and investment power (Mr. Marc Miller disclaims beneficial ownership of
    these shares of common stock).
 
(4) Includes 4,119,451 shares of common stock owned by two grantor retained
    annuity trusts, of which Mr. Lee Miller is a trustee and has shared voting
    and investment power (Mr. Lee Miller disclaims beneficial ownership of these
    shares of common stock).
 

(5) Includes 2,500 options held by Mr. Payson which are currently exercisable.
    Mr. Payson's address is 750 Lexington Avenue, New York, New York 10022.
 
(6) Includes 2,500 options held by Dr. Pollard which are currently exercisable.
    Dr. Pollard's address is c/o Chief Executive Group, 733 Third Avenue, New
    York, New York 10017.
 
                                       64
DESCRIPTION OF THE NOTES
 
GENERAL
 
     The Notes will be issued pursuant to an Indenture dated as of the Issue
Date (the 'Indenture'), among the Company, the Subsidiary Guarantors and
              , as trustee (the 'Trustee'). The terms of the Notes include those
stated in the Indenture and those made part of the Indenture by reference to the
Trust Indenture Act of 1939, as amended (the 'Trust Indenture Act'). The Notes
are subject to all such terms, and Holders of the Notes are referred to the
Indenture and the Trust Indenture Act for a statement thereof. The following
summary of certain provisions of the Indenture does not purport to be complete
and is qualified in its entirety by reference to the Indenture, including the
definitions therein of certain terms used below. A copy of the form of Indenture
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The definitions of certain terms used in the following
summary are set forth below under 'Certain Definitions.' For purposes of this
summary, the term 'Company' refers only to Delta Financial Corporation and not
to any of its Subsidiaries.
 
     The Notes will be general unsecured obligations of the Company and will
rank pari passu in right of payment with all current and future unsecured
unsubordinated Indebtedness of the Company. However, the Notes will be
effectively subordinated to secured Indebtedness of the Company and the
Subsidiary Guarantors, and interests (including Indebtedness) of Securitization
Trusts which rank senior in right of payment to the Company's right to receive
excess cash flow of such trusts. The operations of the Company are conducted
through its Subsidiaries and, therefore, the Company is dependent upon the cash
flow of its Subsidiaries to meet its obligations, including its obligations
under the Notes. All of the Company's current and future Restricted Subsidiaries
will guarantee the Company's payment obligations under the Notes on a senior
unsecured basis. See 'Risk Factors--Fraudulent Conveyance Considerations.' As of
the Issue Date, all of the Subsidiaries will be Restricted Subsidiaries.
However, under certain circumstances, the Company will be able to designate
current or future Subsidiaries as Unrestricted Subsidiaries. Unrestricted
Subsidiaries will not be subject to many of the restrictive covenants set forth
in the Indenture.
 
     As of March 31, 1997, after giving effect to this Offering and the
application of the proceeds thereof, the Company and the Subsidiary Guarantors
had approximately $3.3 million of secured Indebtedness outstanding under credit
facilities and an additional $76.6 million was available for borrowing
thereunder. The Indenture will permit substantial additional borrowings by the

Company and the Subsidiary Guarantors under its credit facilities in the future,
subject to certain restrictions. See 'Risk Factors--Leverage; Asset
Encumbrances.'
 
PRINCIPAL, MATURITY AND INTEREST
 
     The Notes will be limited in aggregate principal amount to $150.0 million
and will mature on             , 2004. Interest on the Notes will accrue at the
rate of      % per annum and will be payable semi-annually in arrears on
            and             , commencing on             , 1997, to Holders of
record on the immediately preceding             and             . Interest on
the Notes will accrue from the most recent date to which interest has been paid
or, if no interest has been paid, from the date of original issuance. Interest
will be computed on the basis of a 360-day year comprised of twelve 30-day
months. Principal, premium, if any, and interest on the Notes will be payable at
the office or agency of the Company maintained for such purpose within the City
and State of New York or, at the option of the Company, payment of interest may
be made by check mailed to the Holders of the Notes at their respective
addresses set forth in the register of Holders of the Notes; provided that all
payments of principal, premium, if any, and interest with respect to the Notes
the Holders of which have given valid, timely and complete wire transfer
instructions to the Company and the Trustee will be required to be made by wire
transfer of immediately available funds to the accounts specified by the Holders
thereof in such instructions. Until otherwise designated by the Company, the
Company's office or agency in New York will be the office of the Trustee
maintained for such purpose. The Notes will be issued in denominations of $1,000
and integral multiples thereof.
 
                                       65
GUARANTEES
 
     The Company's payment obligations under the Notes will be jointly and
severally guaranteed on a senior unsecured basis by the Subsidiary Guarantors.
The obligations of each Subsidiary Guarantor under its Guarantee will be limited
so as not to constitute a fraudulent conveyance under applicable law. See,
however, 'Risk Factors--Fraudulent Conveyance Considerations.' The Company is a
holding company and substantially all of its assets and liabilities are held,
and its operations are conducted, by such Restricted Subsidiaries. Consequently,
separate financial statements of the Subsidiary Guarantors are not presented
because management has determined that they would not be material to investors.
 
     The Indenture will provide that no Subsidiary Guarantor may consolidate
with or merge with or into (whether or not such Subsidiary Guarantor is the
surviving Person), another Person whether or not affiliated with such Subsidiary
Guarantor unless (i) subject to the provisions of the following paragraph, the
Person formed by or surviving any such consolidation or merger (if other than
such Subsidiary Guarantor) assumes all the obligations of such Subsidiary
Guarantor pursuant to a supplemental indenture in form and substance reasonably
satisfactory to the Trustee, under the Notes and the Indenture and (ii)
immediately after giving effect to such transaction, no Default or Event of
Default exists.

 
     The Indenture will provide that, subject to the covenant described below
under 'Certain Covenants-- Merger, Consolidation or Sale of Assets', in the
event of a sale or other disposition of all of the assets of any Subsidiary
Guarantor, by way of merger, consolidation or otherwise, or a sale or other
disposition of all of the capital stock of any Subsidiary Guarantor, then such
Subsidiary Guarantor (in the event of a sale or other disposition, by way of
such a merger, consolidation or otherwise, of all of the capital stock of such
Subsidiary Guarantor) or the Person acquiring the property (in the event of a
sale or other disposition of all of the assets of such Subsidiary Guarantor)
will be released and relieved of its obligations under its Guarantee; provided
that the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the Indenture. In addition, the
Indenture will provide that, in the event the Company designates a Restricted
Subsidiary to be an Unrestricted Subsidiary in accordance with the Indenture,
then such Restricted Subsidiary shall be released from its obligations under its
Guarantee. See 'Repurchase at the Option of Holders--Asset Sales.'
 
OPTIONAL REDEMPTION
 
     The Notes will not be redeemable at the option of the Company prior to
            , 2001. Thereafter, the Notes will be redeemable at the Company's
option, in whole or in part, at any time or from time to time, upon not less
than 30 nor more than 60 days' prior notice to each Holder, at the following
redemption prices (expressed in percentages of principal amount), plus accrued
and unpaid interest thereon to the applicable redemption date, if redeemed
during the twelve-month period commencing on             of the years set forth
below:
YEAR                                                             PERCENTAGE
--------------------------------------------------------------   ----------
2001..........................................................          %
2002..........................................................          %
2003 and thereafter...........................................          %
MANDATORY REDEMPTION
 
     The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
 
REPURCHASE AT THE OPTION OF HOLDERS
 
  Change of Control
 
     The Indenture will provide that, upon the occurrence of a Change of
Control, each Holder of the Notes will have the right to require the Company to
repurchase all or any part (equal to $1,000 or an integral multiple thereof) of
such Holder's Notes pursuant to the offer described below (the 'Change of
Control Offer') at an offer price in cash equal to 101% of the aggregate
principal amount thereof plus accrued and unpaid interest

 
                                       66
thereon, if any, to the date of purchase (the 'Change of Control Payment').
Within ten days following any Change of Control, the Company will mail a notice
to each Holder describing the transaction or transactions that constitute the
Change of Control and offering to repurchase the Notes on the date specified in
such notice, which date shall be no earlier than the earliest date permitted
under Rule 14e-1 under the Exchange Act ('Rule 14e-1') and no later than 60 days
from the date such notice is mailed (the 'Change of Control Payment Date'),
pursuant to the procedures required by the Indenture and described in such
notice. The Company will comply with the requirements of Rule 14e-1 and any
other securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Notes as a
result of a Change of Control. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of the covenant
described hereunder, the Company shall comply with the applicable securities
laws and regulations and shall not be deemed to have breached its obligations
under the covenant described hereunder by virtue thereof.
 
     Pursuant to the Indenture, on the Change of Control Payment Date, the
Company will, to the extent lawful, (1) accept for payment all the Notes or
portions thereof properly tendered pursuant to the Change of Control Offer, (2)
deposit with the Paying Agent an amount equal to the Change of Control Payment
in respect of all the Notes or portions thereof so tendered and (3) deliver or
cause to be delivered to the Trustee the Notes so accepted together with an
Officers' Certificate stating the aggregate principal amount of the Notes or
portions thereof being purchased by the Company. The Paying Agent is required to
promptly mail to each Holder of the Notes so tendered the Change of Control
Payment for such Notes, and the Trustee is required to promptly authenticate and
mail (or cause to be transferred by book entry) to each Holder a new Note equal
in principal amount to any unpurchased portion of the Notes surrendered, if any;
provided that each such new Note will be in a principal amount of $1,000 or an
integral multiple thereof. The Company will publicly announce the results of the
Change of Control Offer on or as soon as practicable after the Change of Control
Payment Date.
 
     The Change of Control provisions described above will be applicable whether
or not the covenant described below under '--Certain Covenants--Merger,
Consolidation or Sale of Assets' is applicable. Except as described above with
respect to a Change of Control, the Indenture does not contain provisions that
permit the Holders of the Notes to require that the Company repurchase or redeem
the Notes in the event of a takeover, recapitalization or similar transaction.
 
     The Company's Warehouse Facilities contain, and future Indebtedness of the
Company may contain, prohibitions of certain events that could constitute a
Change of Control. In addition, the financial effect on the Company of the
exercise by the Holders of the Notes of their right to require the Company to
repurchase the Notes could cause a default under outstanding Indebtedness, even
if the Change of Control itself does not. In addition, the Company's ability to
pay cash to the Holders of the Notes upon a repurchase may be limited by the
Company's then existing financial resources.

 
     The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer and purchases all the
Notes validly tendered and not withdrawn under such Change of Control Offer.
 
     The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of 'all or substantially all'
of the assets of the Company and its Restricted Subsidiaries taken as a whole.
Although there is a developing body of case law interpreting the phrase
'substantially all,' there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a Holder of the Notes to
require the Company to repurchase such Notes as a result of a sale, lease,
transfer, conveyance or other disposition of less than all of the assets of the
Company and its Restricted Subsidiaries, taken as a whole, to another Person or
group may be uncertain.
 
  Asset Sales
 
     The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by an Officers' Certificate delivered to the Trustee and, with
respect to any Asset Sale involving consideration in excess of $5.0 million, a
resolution of the Company's Board of Directors) of the assets or Equity
Interests issued or sold or
 
                                       67
otherwise disposed of and (ii) at least 85% (or, in the case of the sale or
other disposition of any Residual Receivables (or interest therein), 50%) of the
consideration therefor received by the Company or such Restricted Subsidiary is
in the form of Cash Equivalents; provided that the amount of (x) any liabilities
(as shown on the Company's or such Restricted Subsidiary's most recent balance
sheet) of the Company or any Restricted Subsidiary (other than contingent
liabilities and liabilities that are by their terms subordinated to the Notes or
any Guarantee thereof) that are expressly assumed by the transferee of any such
assets pursuant to a customary novation agreement that releases the Company or
such Restricted Subsidiary from further liability and (y) any currencies,
securities, notes or other obligations received by the Company or any such
Restricted Subsidiary from such transferee that are converted by the Company or
such Restricted Subsidiary into Cash Equivalents within 30 days after receipt
(to the extent of the cash received), shall be deemed to be Cash Equivalents for
purposes of this provision.
 
     The Indenture will permit the Company or the Restricted Subsidiary, as the
case may be, within 180 days after the receipt of any Net Proceeds from an Asset
Sale subject to this covenant, to apply an amount equal to 100% of such Net
Proceeds to (i) an Investment (other than in Receivables that, at the time of
purchase, are not Eligible Receivables), or (ii) the purchase of Receivables

that are, at the time of purchase, Eligible Receivables, or (iii) the making of
any capital expenditure, or (iv) the acquisition of any other tangible assets,
in each case, in or with respect to a Permitted Business. Pending the final
application of any such Net Proceeds, the Company or such Restricted Subsidiary
may temporarily reduce outstanding Indebtedness or otherwise invest such Net
Proceeds in any manner not prohibited by the Indenture. Any Net Proceeds from
Asset Sales not applied or invested as provided in the preceding sentence of
this paragraph will be deemed to constitute 'Excess Proceeds.' When the
aggregate amount of Excess Proceeds exceeds $10.0 million, the Indenture will
require the Company to make an offer to all Holders of the Notes (an 'Asset Sale
Offer') to purchase the maximum principal amount of the Notes that may be
purchased out of the Excess Proceeds, at an offer price in cash in an amount
equal to 100% of the principal amount thereof plus accrued and unpaid interest
thereon to the date of purchase, in accordance with the procedures set forth in
the Indenture.
 
     Notwithstanding the foregoing, the Indenture will further provide that the
Company will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly sell or otherwise convey or dispose of any Residual
Receivables or interest therein for consideration of which less than 85% is in
the form of Cash Equivalents, unless: (i) from and after the Issue Date, upon
the creation of any Senior Residual Receivables by the Company or any Restricted
Subsidiary, the Company shall designate, by an Officers' Certificate delivered
to the Trustee, Senior Residual Receivables with an aggregate book value equal
to 25% of the book value of the Senior Residual Receivables so created as
Retained Residual Receivables ('Retained Residual Receivables') and no such
designation shall have been revoked except as provided below; (ii) none of the
Residual Receivables sold, conveyed or otherwise disposed of constitute Retained
Residual Receivables unless after giving effect to such sale, conveyance or
other disposition the aggregate amount of Senior Residual Receivables of the
Company and its Restricted Subsidiaries which are unencumbered by any Lien (of
which no more than 25% of the aggregate book value thereof shall constitute
Retained Residual Receivables) would be greater than or equal to 250% of all
Senior Indebtedness of the Company and its Restricted Subsidiaries; and (iii)
after giving effect to any such sale, conveyance or other disposition of
Residual Receivables the aggregate amount of Senior Residual Receivables of the
Company and its Restricted Subsidiaries which are unencumbered by any Lien (of
which not more than 25% of the aggregate book value thereof shall constitute
Retained Residual Receivables) would be greater than or equal to 150% of all
Senior Indebtedness of the Company and its Restricted Subsidiaries. The
Indenture will provide that from time to time the Company may revoke the
designation of any Senior Residual Receivable as a Retained Residual Receivable
if the Company simultaneously designates as Retained Residual Receivables (in
addition to any other such designation otherwise required by the Indenture)
Senior Residual Receivables (not subject to any Lien) with an aggregate book
value equal to or greater than that of the Senior Residual Receivables as to
which such designation has been revoked. Any determination of the amount of
Residual Receivables shall be based on the consolidated balance sheet of the
Company and its Restricted Subsidiaries for the most recently ended fiscal
quarter for which financial statements are available, after giving pro forma
effect to the Asset Sale for which such determination is being made and to any
other sale of or Lien on or reduction of Residual Receivables since the date of
such balance sheet.
 

                                       68
To the extent that the aggregate amount of the Notes tendered pursuant to
an Asset Sale Offer is less than the Excess Proceeds, the Company or the
Restricted Subsidiary, as the case may be, may use any remaining Excess Proceeds
for general corporate purposes. If the aggregate principal amount of the Notes
surrendered by Holders thereof exceeds the amount of Excess Proceeds, the
Trustee is required to select the Notes to be purchased on a pro rata basis.
Upon completion of such Asset Sale Offer, the amount of Excess Proceeds shall be
reset at zero.
 
     Under the Indenture, the Asset Sale Offer is required to remain open for
the minimum period of time required by Rule 14e-1 and no longer (the 'Asset Sale
Offer Period'). Under the Indenture, no later than five Business Days after
termination of the Asset Sale Offer Period (the 'Asset Sale Purchase Date'), the
Company is required to purchase the principal amount of the Notes required to be
purchased pursuant to this covenant (the 'Asset Sale Offer Amount') or, if less
than the Asset Sale Offer Amount has been tendered, all the Notes tendered in
response to the Asset Sale Offer.
 
     If the Asset Sale Purchase Date is on or after an interest payment record
date and on or before the related interest payment date, any accrued and unpaid
interest will be paid to the Person in whose name a Note is registered at the
close of business on such record date, and no additional interest will be
payable to Holders who tender the Notes pursuant to the Asset Sale Offer.
 
     Under the Indenture, on or before the Asset Sale Purchase Date, the Company
is required, to the extent lawful, to accept for payment, on a pro rata basis,
to the extent necessary, the Asset Sale Offer Amount of the Notes or portions
thereof tendered pursuant to the Asset Sale Offer, or if less than the Asset
Sale Offer Amount has been tendered, all such Notes tendered, and to deliver to
the Trustee an Officers' Certificate stating that such Notes or portions thereof
were accepted for payment by the Company in accordance with the terms of this
covenant. The Company, the Depositary or the Paying Agent, as the case may be,
is required, not later than five days after the Asset Sale Purchase Date, to
mail or deliver to each tendering Holder an amount equal to the purchase price
of the Notes tendered by such Holder and accepted by the Company for purchase,
and the Company is required to issue a new Note, and the Trustee, upon delivery
of an Officers' Certificate from the Company, is required to authenticate and
mail or deliver such new Note to such Holder, in a principal amount equal to any
unpurchased portion of any Note surrendered. Any Note not so accepted is
required to be promptly mailed or delivered by the Company to the Holder
thereof. The Company will publicly announce the results of the Asset Sale Offer
on the Asset Sale Purchase Date.
 
     The Company will comply, to the extent applicable, with the requirements of
Rule 14e-1 and any other securities laws or regulations in connection with the
repurchase of any Notes pursuant to the covenant described hereunder. To the
extent that the provisions of any securities laws or regulations conflict with
the provisions of the covenant described hereunder, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under the covenant described hereunder by virtue

thereof.
 
CERTAIN COVENANTS
 
  Restricted Payments
 
     The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or
pay any dividend or make any other payment or distribution on account of the
Company's or any of its Restricted Subsidiaries' Equity Interests (including,
without limitation, any payment in connection with any merger or consolidation
involving the Company) other than dividends or other payments or distributions
payable in Equity Interests (other than Disqualified Stock) of the Company or
dividends or other payments or distributions payable to the Company or any
Wholly-Owned Restricted Subsidiary of the Company; (ii) purchase, redeem or
otherwise acquire or retire for value (including, without limitation, any
payment in connection with any merger or consolidation involving the Company)
any Equity Interests of the Company (other than any such Equity Interests owned
by any Wholly-Owned Restricted Subsidiary of the Company) or any direct or
indirect parent of the Company; (iii) make any principal payment on or with
respect to, purchase, redeem, defease or otherwise acquire or retire for value
any Indebtedness that is subordinated to the Notes or any Guarantee (other than
intercompany Indebtedness payable to the Company or a Restricted Subsidiary by
any
 
                                       69
Restricted Subsidiary), except at its stated maturity; or (iv) make any
Restricted Investment (all such payments and other actions set forth in clauses
(i) through (iv) above being collectively referred to as 'Restricted Payments'),
unless, at the time of and after giving effect to such Restricted Payment:
 
          (a)  no Default or Event of Default shall have occurred and be
     continuing or would occur as a consequence thereof; and
 
          (b)  the Company would, at the time of such Restricted Payment and
     after giving pro forma effect thereto, have been permitted to incur at
     least $1.00 of additional Indebtedness pursuant to the test set forth in
     the first paragraph of the covenant described below under '--Incurrence of
     Indebtedness and Issuance of Preferred Stock'; and
 
          (c)  such Restricted Payment, together with the aggregate amount of
     all other Restricted Payments made by the Company and its Restricted
     Subsidiaries after the Issue Date (excluding Restricted Payments permitted
     by clauses (ii) and (iii) of the next succeeding paragraph), is less than
     the sum of (i) 25% of the aggregate cumulative Consolidated Net Income of
     the Company for the period (taken as one accounting period) from and after
     the last day of the first fiscal quarter ending immediately following the
     Issue Date to the end of the Company's most recently ended fiscal quarter
     for which internal financial statements are available at the time of such
     Restricted Payment (or, if such Consolidated Net Income for such period is
     a deficit, less 100% of such deficit); plus (ii) 100% of the aggregate net

     cash proceeds received by the Company from the issue or sale since the
     Issue Date of Equity Interests of the Company (other than Disqualified
     Stock) or of Disqualified Stock or Indebtedness represented by securities
     of the Company that have been converted into such Equity Interests (other
     than Equity Interests (or Disqualified Stock or convertible debt
     securities) sold to a Subsidiary of the Company and other than Disqualified
     Stock or other Indebtedness represented by securities that have been
     converted into Disqualified Stock); plus (iii) to the extent that any
     Restricted Investment that was made after the Issue Date is sold for cash
     or otherwise liquidated or repaid for cash, the lesser of (A) the cash
     return of capital with respect to such Restricted Investment (less the cost
     of disposition, if any) and (B) the initial amount of such Restricted
     Investment.
 
     The foregoing provisions will not prohibit the following Restricted
Payments: (i) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would have
complied with the provisions of the Indenture; (ii) the purchase, redemption or
other acquisition or retirement for value of any Equity Interests of the Company
in exchange for, or out of the proceeds of, the substantially concurrent sale
(other than to a Subsidiary of the Company) of other Equity Interests of the
Company (other than any Disqualified Stock); provided, that the amount of any
such net cash proceeds that are utilized for such redemption, repurchase,
retirement or other acquisition shall be excluded from clause (c)(ii) of the
preceding paragraph; (iii) the payment of principal on, or purchase, redemption,
defeasance or other acquisition or retirement for value of Indebtedness with the
net cash proceeds from an incurrence of, Permitted Refinancing Indebtedness or
the substantially concurrent sale (other than to a Subsidiary of the Company) of
Equity Interests of the Company (other than Disqualified Stock); provided, that
the amount of any such net cash proceeds from any such sale of Equity Interests
that are utilized for such redemption, repurchase, retirement or other
acquisition shall be excluded from clause (c)(ii) of the preceding paragraph;
(iv) payments in an amount not to exceed $500,000 in the aggregate during any
fiscal year of the Company (plus any such amount not utilized in the preceding
fiscal year) in connection with the repurchase, redemption or other acquisition
or retirement for value of any Equity Interests of the Company held by an
employee or director of the Company or any of its Subsidiaries, related to
compensation or severance arrangements; (v) advances to a Securitization Trust
required to be made by the Company or any Restricted Subsidiary (in its capacity
or the holder of the residual interest in such trust) if such advances rank
senior in right of payment to all other interests in, and Indebtedness of, such
trust; and (vi) the making and consummation of any offer to repurchase any
Indebtedness upon the occurrence of a change of control under and as defined in
the documents governing such Indebtedness; provided, that in connection with
Indebtedness incurred after the Issue Date, the definition of 'change of
control' is the same in all material respects as the definition of 'Change of
Control' set forth in the Indenture and payments pursuant thereto are not
required to be made prior to the date on which the Change of Control Payment is
required to be made under the Indenture and, with respect to any Indebtedness
subordinated in right of payment to the Notes, no sooner than 30 days after the
date such Change of Control Offer is required to be made.
 
                                       70
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash) in
the Subsidiary so designated will be deemed to be Restricted Payments at the
time of such designation and will reduce the amount available for Restricted
Payments under the first paragraph of this covenant. All such outstanding
Investments will be deemed to constitute Investments in an amount equal to the
fair market value of such Investments at the time of such designation. Such
designation will only be permitted if such Restricted Payment would be permitted
at such time and if such Restricted Subsidiary otherwise meets the definition of
an Unrestricted Subsidiary.
 
     The amount of all Restricted Payments other than cash shall be the fair
market value (evidenced by an Officers' Certificate on the date of the
Restricted Payment) of the asset(s) or securities proposed to be transferred or
issued by the Company or such Restricted Subsidiary, as the case may be,
pursuant to the Restricted Payment. The fair market value of any non-cash
Restricted Payment in excess of $1.0 million shall be determined by the Board of
Directors whose resolution with respect thereto shall be delivered to the
Trustee, such determination to be based upon an opinion or appraisal issued by
an accounting, appraisal or investment banking firm of national standing if such
fair market value exceeds $10.0 million. Not later than the date of making any
Restricted Payment, the Company shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by the covenant 'Restricted
Payments' were computed.
 
  Incurrence of Indebtedness and Issuance of Preferred Stock
 
     The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guaranty or otherwise become directly or indirectly liable, contingently
or otherwise, with respect to (collectively, 'incur') any Indebtedness
(including Acquired Debt) or issue Disqualified Stock, and that the Company will
not permit any of its Restricted Subsidiaries to issue any shares of preferred
stock except for preferred stock issued to and held by the Company or any
Wholly-Owned Restricted Subsidiary of the Company, provided that any subsequent
issuance or transfer of Capital Stock that results in such Wholly-Owned
Restricted Subsidiary ceasing to be a Wholly-Owned Restricted Subsidiary of the
Company or any subsequent transfer of such preferred stock (other than to the
Company or any of its Wholly-Owned Restricted Subsidiaries) will be deemed, in
each case, to constitute the issuance of such preferred stock by the issuer
thereof; provided, however, that the Company or any Subsidiary Guarantor may
incur Indebtedness (including Acquired Debt) or issue Disqualified Stock and any
Subsidiary Guarantor may issue preferred stock if, on the date of such
incurrence or issuance and after giving effect thereto, the Consolidated
Leverage Ratio does not exceed 2.0 to 1.0.
 
     The foregoing provisions will not apply to:
 
          (1)  the incurrence by the Company or any Restricted Subsidiary of

     Indebtedness represented by Capital Lease Obligations, mortgage financings
     or purchase money obligations, in each case incurred for the purpose of
     financing all or any part of the purchase price or cost of construction or
     improvement of property used in the business of the Company or such
     Restricted Subsidiary, in an aggregate principal amount not to exceed $15.0
     million in the aggregate since the Issue Date;
 
          (2)  the existence of Warehouse Facilities, regardless of amount, and
     the incurrence of Permitted Warehouse Debt by the Company or any of its
     Restricted Subsidiaries; provided, however, that to the extent any such
     Indebtedness of the Company or a Restricted Subsidiary of the Company
     ceases to constitute Permitted Warehouse Debt, to such extent such
     Indebtedness shall be deemed to be incurred by the Company or such
     Restricted Subsidiary of the Company, as the case may be, at such time;
 
          (3)  the incurrence by the Company or any of its Restricted
     Subsidiaries of intercompany Indebtedness owing to the Company or any of
     its Restricted Subsidiaries; provided, however, that (i)(A) any subsequent
     issuance or transfer of any Capital Stock which results in any such
     Indebtedness being held by a Person other than a Restricted Subsidiary of
     the Company and (B) any sale or transfer of any such Indebtedness to a
     Person that is not either the Company or a Restricted Subsidiary of the
     Company, shall be deemed, in each case, to constitute the incurrence of
     such Indebtedness by the Company or such Restricted Subsidiary, as the
 
                                       71
case may be, and (ii) any Indebtedness of the Company to any Restricted
     Subsidiary is permitted by the covenant described above under '--Restricted
     Payments;'
 
          (4) the incurrence by the Company of Indebtedness represented by the
     Notes and the incurrence by the Subsidiary Guarantors of Guarantees;
 
          (5) Indebtedness of the Company and its Restricted Subsidiaries
     outstanding on the Issue Date;
 
          (6) the incurrence by the Company or any of its Restricted
     Subsidiaries of Permitted Refinancing Indebtedness with respect to
     Indebtedness that was permitted by the Indenture to be incurred or that was
     outstanding at the Issue Date;
 
          (7) the incurrence by the Company or any of its Restricted
     Subsidiaries of Hedging Obligations directly related to (i) Indebtedness of
     the Company or a Restricted Subsidiary of the Company that was permitted by
     the Indenture to be incurred, (ii) Receivables held by the Company or a
     Restricted Subsidiary pending sale in a Securitization, (iii) Receivables
     of the Company or a Restricted Subsidiary that have been sold pursuant to a
     Warehouse Facility; or (iv) Receivables that the Company or a Restricted
     Subsidiary reasonably expects to purchase or commit to purchase, finance or
     accept as collateral; provided, however, that, in the case of each of the
     foregoing clauses (i) through (iv), such Hedging Obligations are eligible

     to receive hedge accounting treatment in accordance with GAAP as applied by
     the Company and its Restricted Subsidiaries on the Issue Date;
 
          (8) the incurrence of Acquired Debt by the Company or any Subsidiary
     Guarantor in a principal amount not to exceed $15.0 million in the
     aggregate since the Issue Date (reduced by the amount of Acquired Debt
     repaid with Net Proceeds of Asset Sales of the Restricted Subsidiary
     acquired subject to such Acquired Debt) that is without recourse to the
     Company or any of its Restricted Subsidiaries or any of their respective
     assets (other than the Subsidiary Guarantor acquired subject to such
     Acquired Debt), and is not guaranteed by any such Person;
 
          (9)  the Guarantee by the Company or any of the Subsidiary Guarantors
     of the Indebtedness of the Company or another Subsidiary Guarantor that was
     permitted to be incurred by another provision of this covenant;
 
          (10)  the incurrence by the Company and the Subsidiary Guarantors of
     Indebtedness in an aggregate principal amount at any time outstanding not
     to exceed $10.0 million; and
 
          (11)  (A) the incurrence by an Unrestricted Subsidiary of the Company
     of Non-Recourse Debt (including, without limitation, Non-Recourse Debt that
     would constitute Permitted Warehouse Debt if incurred by a Restricted
     Subsidiary of the Company); provided, however, that if any such
     Indebtedness ceases to be Non-Recourse Debt of the Unrestricted Subsidiary,
     such event shall be deemed to constitute an incurrence of Indebtedness by a
     Restricted Subsidiary and (B) the issuance by an Unrestricted Subsidiary of
     the Company of preferred stock.
 
     The Indenture will also provide that the Company will not, and will not
permit any Subsidiary Guarantor to, incur any Indebtedness that is contractually
subordinated to any Indebtedness of the Company or any such Subsidiary Guarantor
unless such Indebtedness is also contractually subordinated to the Notes, or the
Guarantee of such Subsidiary Guarantor (as applicable), on substantially
identical terms; provided, however, that no Indebtedness shall be deemed to be
contractually subordinated to any other Indebtedness solely by virtue of being
unsecured or of limited recourse.
 
     For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Indebtedness described in clauses (1) through (11) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Company shall, in its sole discretion, classify such item of Indebtedness in any
manner that complies with this covenant and such item of Indebtedness will be
treated as having been incurred pursuant to only one of such clauses or pursuant
to the first paragraph hereof.
 
                                       72
Liens
 
     The Indenture will provide that the Company will not, and will not permit

any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or suffer to exist any Lien on any asset now owned or hereafter acquired,
or any income or profits therefrom or assign or convey any right to receive
income therefrom, except Permitted Liens.
 
  Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
 
     The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to (i)(A) pay dividends
or make any other distributions to the Company or any of its Restricted
Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest
or participation in, or measured by, its profits, or (B) pay any indebtedness
owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or
advances to the Company or any of its Restricted Subsidiaries or (iii) transfer
any of its properties or assets to the Company or any of its Restricted
Subsidiaries, except for such encumbrances or restrictions existing under or by
reason of (a) agreements relating to Indebtedness as in effect as of the Issue
Date, and any amendments, modifications, restatements, renewals, increases,
supplements, refundings, additions (including additional Warehouse Facilities),
replacements or refinancings thereof, provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
additions, replacements or refinancings are no more restrictive with respect to
such dividend and other payment restrictions than those contained in the
agreements relating to Indebtedness as in effect on the Issue Date, (b)
applicable law, (c) any instrument governing Acquired Debt or Capital Stock of a
Person acquired by the Company or any of its Restricted Subsidiaries as in
effect at the time of such acquisition (except to the extent such Acquired Debt
was incurred or such Capital Stock was issued or its terms amended in connection
with or in contemplation of such acquisition), which encumbrance or restriction
is not applicable to any Person, or the property or assets of any Person, other
than the Person or the property or assets of the Person, so acquired, provided
that such Person is not taken into account in determining on a pro forma basis
whether such acquisition subject to such Acquired Debt was permitted by the
terms of the Indenture, (d) customary non-assignment provisions in leases
entered into in the ordinary course of business and consistent with past
practices, (e) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature described in clause
(iii) above on the property so acquired, and (f) Permitted Refinancing
Indebtedness; provided that the restrictions contained in the agreements
governing such Permitted Refinancing Indebtedness are no more restrictive than
those contained in the agreements governing the Indebtedness being refinanced.
 
  Merger, Consolidation or Sale of Assets
 
     The Indenture will provide that the Company may not consolidate or merge
with or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions to, another
Person unless (i) the Company is the surviving corporation or the Person formed
by or surviving any such consolidation or merger (if other than the Company) or
to which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of

the United States, any state thereof or the District of Columbia; (ii) the
Person formed by or surviving any such consolidation or merger (if other than
the Company) or the Person to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made assumes all the obligations
of the Company under the Notes and the Indenture pursuant to a supplemental
indenture in a form reasonably satisfactory to the Trustee; (iii) immediately
after such transaction no Default or Event of Default exists; and (iv) the
Company or the Person formed by or surviving any such consolidation or merger
(if other than the Company), or to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made (A) will have Consolidated
Net Worth immediately after the transaction equal to or greater than the
Consolidated Net Worth of the Company immediately preceding the transaction and
(B) will, at the time of such transaction and after giving pro forma effect
thereto, be permitted to incur at least $1.00 of additional Indebtedness
pursuant to the first paragraph of the covenant described above under
'--Incurrence of Indebtedness and Issuance of Preferred Stock.'
 
                                       73
Transactions with Affiliates
 
     The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into or make or amend any transaction, contract,
agreement, understanding, loan, advance or guarantee with, or for the benefit
of, any Affiliate (each of the foregoing actions, considered separately, an
'Affiliate Transaction'), unless (i) such Affiliate Transaction is on terms that
are no less favorable to the Company or the relevant Restricted Subsidiary than
those that would have been obtained in a comparable transaction by the Company
or such Restricted Subsidiary with an unrelated Person and (ii) the Company
delivers to the Trustee (a) with respect to any Affiliate Transaction or series
of related Affiliate Transactions involving aggregate consideration in excess of
$1.0 million, a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause (i)
above and that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $5.0 million, an opinion as to the fairness
to the Company or such Restricted Subsidiary of such Affiliate Transaction from
a financial point of view issued by an accounting, appraisal or investment
banking firm of national standing; provided that Affiliate Transactions shall
not include (A) any employment agreement, stock option, employee benefit,
indemnification, compensation (including the payment of reasonable fees to
Directors of the Company or its Restricted Subsidiaries who are not employees of
the Company or its Restricted Subsidiaries), business expense reimbursement or
other employment-related agreement, arrangement or plan entered into by the
Company or any of its Restricted Subsidiaries in the ordinary course of business
of the Company or such Restricted Subsidiary, (B) transactions between or among
the Company and/or its Restricted Subsidiaries not otherwise prohibited by the
Indenture, (C) loans or advances to employees in the ordinary course of business
of the Company or its Restricted Subsidiaries, but in any event not to exceed

$500,000 in aggregate principal amount outstanding at any one time, and (D)
Restricted Payments other than Restricted Investments that are permitted by the
provisions of the Indenture described above under the caption '--Restricted
Payments'.
 
  Business Activities
 
     The Company will not, and will not permit any Restricted Subsidiary to,
engage in any business other than Permitted Businesses.
 
  Payments for Consent
 
     The Indenture will provide that neither the Company nor any of its
Subsidiaries will, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder of
any of the Notes for or as an inducement to any consent, waiver or amendment of
any of the terms or provisions of the Indenture or the Notes unless such
consideration is offered to be paid or is paid to all Holders of Notes that
consent, waive or agree to amend in the time frame set forth in the solicitation
documents relating to such consent, waiver or agreement.
 
  Reports
 
     The Indenture will provide that, whether or not required by the rules and
regulations of the Commission, so long as any of the Notes are outstanding, the
Company will furnish to the Holders of the Notes (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including a 'Management's Discussion and Analysis of Financial Condition
and Results of Operations' that describes the financial condition and results of
operations of the Company and its consolidated Subsidiaries (showing in
reasonable detail, either on the face of the financial statements or in the
notes thereto and in Management's Discussion and Analysis of Financial Condition
and Results of Operations, the financial condition and results of operations of
the Company and its Restricted Subsidiaries separately from the financial
condition and results of operations of the Unrestricted Subsidiaries of the
Company) and, with respect to the annual information only, a report thereon by
the Company's certified independent accountants and (ii) all current reports
that would be required to be filed with the Commission on Form 8-K if the
Company were required to file such reports. In addition, whether or not
 
                                       74
required by the rules and regulations of the Commission, the Company will file a
copy of all such information and reports with the Commission for public
availability (unless the Commission will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request.
 
EVENTS OF DEFAULT AND REMEDIES
 
     The Indenture will provide that each of the following constitutes an Event

of Default: (i) default for 30 days in the payment when due of interest on the
Notes; (ii) default in payment when due of the principal of or premium, if any,
on the Notes; (iii) failure by the Company to comply with the provisions
described above under 'Change of Control,' 'Asset Sales,' 'Restricted Payments,'
'Incurrence of Indebtedness and Issuance of Preferred Stock,' 'Merger,
Consolidation or Sale of Assets' or 'Liens'; (iv) failure by the Company for 30
days after notice to comply with any of its other agreements in the Indenture or
the Notes; (v) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Subsidiaries (or
the payment of which is guaranteed by the Company or any of its Subsidiaries)
whether such Indebtedness or guarantee now exists, or is created after the date
of the Indenture, which default (a) is caused by a failure to pay principal of
or premium, if any, or interest on such Indebtedness prior to the expiration of
the grace period provided in such Indebtedness on the date of such default (a
'Payment Default') or (b) results in the acceleration of such Indebtedness prior
to its express maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such Indebtedness
under which there has been a Payment Default or the maturity of which has been
so accelerated, aggregates $5.0 million or more; (vi) failure by the Company or
any of its Subsidiaries to pay final judgments aggregating in excess of $5.0
million, which judgments are not paid, discharged or stayed for a period of 60
days; (vii) certain events of bankruptcy or insolvency with respect to the
Company or any of its Subsidiaries; and (viii) except as permitted by the
Indenture, any Guarantee shall be held in any judicial proceeding to be invalid
or unenforceable or shall cease for any reason to be in full force and effect or
any Subsidiary Guarantor or any Person acting on behalf of any Subsidiary
Guarantor shall deny or disaffirm its obligations under its Guarantee.
 
     If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company or any Subsidiary, all
outstanding Notes will become due and payable without further action or notice.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. Subject to certain limitations, Holders of a majority
in principal amount of the then outstanding Notes may direct the Trustee in its
exercise of any trust or power. The Trustee may withhold from Holders of the
Notes notice of any continuing Default or Event of Default (except a Default or
Event of Default relating to the payment of principal or interest) if it
determines that withholding notice is in their interest.
 
     In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to
            , 2001 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to             , 2001, then the
premium specified in the Indenture shall also become immediately due and payable

to the extent permitted by law upon the acceleration of the Notes.
 
     The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
premium, if any, or interest on, or the principal of, the Notes.
 
     The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required, upon
becoming aware of any Default or Event of Default, to deliver to
 
                                       75
the Trustee a statement specifying such Default or Event of Default. The 'Events
of Default and Remedies' provisions described above shall apply to the Notes in
lieu of those described in the accompanying Prospectus.
 
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
 
     No director, officer, employee, incorporator or stockholder of the Company
or a Subsidiary Guarantor, as such, shall have any liability for any obligations
of the Company or the Subsidiary Guarantors under the Notes, the Indenture, the
Guarantees or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder of the Notes by accepting a Note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
 
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
 
     The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ('Legal
Defeasance') except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
on such Notes when such payments are due from the trust referred to below, (ii)
the Company's obligations with respect to the Notes concerning issuing temporary
Notes, registration of the Notes, mutilated, destroyed, lost or stolen Notes and
the maintenance of an office or agency for payment and money for security
payments held in trust, (iii) the rights, powers, trusts, duties and immunities
of the Trustee, and the Company's obligations in connection therewith and (iv)
the Legal Defeasance provisions of the Indenture. In addition, the Company may,
at its option and at any time, elect to have the obligations of the Company
released with respect to certain covenants that are described in the Indenture
('Covenant Defeasance') and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under 'Events of Default' will no longer constitute an Event
of Default with respect to the Notes.
 

     In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest on the outstanding Notes
on the stated maturity or on the applicable redemption date, as the case may be,
and the Company must specify whether the Notes are being defeased to maturity or
to a particular redemption date; (ii) in the case of Legal Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and based
thereon such opinion of counsel shall confirm that, the Holders of the
outstanding Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance had not occurred; (iii) in the
case of the Covenant Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders of the outstanding Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit (other than a Default or
Event of Default resulting from the borrowing of funds to be applied to such
deposit) or insofar as Events of Default from bankruptcy or insolvency events
are concerned, at any time in the period ending on the 91st day after the date
of deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in
a breach or violation of, or constitute a default under any material agreement
or instrument (other than the Indenture) to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound; (vi) the Company must have delivered to the Trustee an opinion of counsel
to the effect that after the 91st day following the deposit, the trust funds
will not be subject to the effect of any applicable bankruptcy,
 
                                       76
insolvency, reorganization or similar laws affecting creditors' rights
generally; (vii) the Company must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the intent
of preferring the Holders of the Notes over the other creditors of the Company
or the Subsidiary Guarantors with the intent of defeating, hindering, delaying
or defrauding creditors of the Company, the Subsidiary Guarantors or others; and
(viii) the Company must deliver to the Trustee an Officers' Certificate and an
opinion of counsel, each stating that all conditions precedent provided for
relating to the Legal Defeasance or the Covenant Defeasance have been complied
with.
 
TRANSFER AND EXCHANGE

 
     A Holder may transfer or exchange the Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company is not required to transfer or exchange any Note selected for
redemption. Also, the Company is not required to transfer or exchange any Note
for a period of 15 days before a selection of the Notes to be redeemed.
 
     The registered Holder of a Note will be treated as the owner of it for all
purposes.
 
AMENDMENT, SUPPLEMENT AND WAIVER
 
     Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, the Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender offer
or exchange offer for the Notes).
 
     Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of the Notes whose Holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed maturity
of any Note or alter the provisions with respect to the redemption of the Notes
(other than provisions relating to the covenants described above under
'Repurchase at the Option of Holders'), (iii) reduce the rate of or change the
time for payment of interest on any Note, (iv) waive a Default or Event of
Default in the payment of principal of or premium, if any, or interest on the
Notes (except a rescission of acceleration of the Notes by the Holders of at
least a majority in aggregate principal amount of the Notes and a waiver of the
payment default that resulted from such acceleration), (v) make any Note payable
in money other than that stated in the Notes, (vi) make any change in the
provisions of the Indenture relating to waivers of past Defaults or the rights
of Holders of the Notes to receive payments of principal of or premium, if any,
or interest on the Notes, (vii) waive a redemption payment with respect to any
Note (other than a payment required by one of the covenants described above
under '--Repurchase at the Option of Holders'), (viii) make any change in the
foregoing amendment and waiver provisions or (ix) release any Subsidiary
Guarantor from its obligations under the Indenture or its Guarantee of the Notes
(other than in accordance with the Indenture).
 
     Notwithstanding the foregoing, without the consent of any Holder of the
Notes, the Company and the Trustee may amend or supplement the Indenture or the
Notes to cure any ambiguity, defect or inconsistency, to provide for
uncertificated Notes in addition to or in place of certificated Notes (provided
that the uncertificated Notes are issued in registered form for purposes of
Section 163(f) of the Code, or in a manner such that the uncertificated Notes
are described in Section 163(f)(2)(B) of the Code), to provide for the
assumption of the Company's obligations to Holders of the Notes in the case of a
merger or consolidation, to make any change that would provide any additional

rights or benefits to the Holders of the Notes or that does not adversely affect
the legal rights under the Indenture of any such Holder, or to comply with
requirements of the Commission in order to effect or maintain the qualification
of the Indenture under the Trust Indenture Act.
 
                                       77
CERTAIN DEFINITIONS
 
     Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
 
     'Acquired Debt' means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
 
     'Affiliate' of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, 'control'
(including, with correlative meanings, the terms 'controlling,' 'controlled by'
and 'under common control with'), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided, that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
 
     'Asset Sale' means (i) the sale, lease, conveyance or other disposition of
any assets (including, without limitation, by way of a sale and leaseback and
the sale or other disposition of any Residual Receivables) other than sales of
Receivables in connection with Securitizations or Warehouse Facilities and sales
of foreclosed assets, in each case in the ordinary course of business (provided
that the sale, lease, conveyance or other disposition of all or substantially
all of the assets of the Company and its Restricted Subsidiaries taken as a
whole will be governed by the provisions of the Indenture described above under
the caption 'Change of Control' and/or the provisions described above under
'Merger, Consolidation or Sale of Assets' and not by the provisions of the Asset
Sale covenant), and (ii) the issuance by the Company or any of its Restricted
Subsidiaries of Equity Interests, or the sale by the Company or any Restricted
Subsidiary of any Equity Interests, in each case, of their Subsidiaries (other
than directors qualifying shares), in the case of either clause (i) or (ii),
whether in a single transaction or a series of related transactions (a) that
have a fair market value in excess of $1.0 million or (b) for net proceeds in
excess of $1.0 million. Notwithstanding the foregoing, the following will not be
deemed to be Asset Sales: (i) an issuance of Equity Interests by a Wholly-Owned
Restricted Subsidiary to the Company or to another Wholly-Owned Restricted
Subsidiary; (ii) a Restricted Payment that is permitted by the covenant

described above under 'Restricted Payments'; and (iii) a disposition by a
Restricted Subsidiary to the Company or a Wholly-Owned Restricted Subsidiary or
by the Company to a Wholly-Owned Restricted Subsidiary of the Company.
 
     'Capital Lease Obligation' means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
 
     'Capital Stock' means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership (whether general or limited) or membership interests and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
 
     'Cash Equivalents' means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than one
year from the date of acquisition, (iii) certificates of deposit and Eurodollar
time deposits with maturities of one year or less from the date of acquisition,
bankers' acceptances with maturities not exceeding one year and overnight bank
deposits, in each case with any domestic commercial bank having capital and
surplus in excess of $500.0 million and a Keefe Bank Watch Rating of 'B' or
better, (iv) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (ii) and (iii) above
entered into with any financial institution meeting the qualifications specified
in clause (iii) above, (v) commercial paper having one of the two highest
ratings obtainable from Moody's or Standard & Poor's and
 
                                       78
in each case maturing within nine months after the date of acquisition, and (vi)
money market funds, the portfolios of which are limited to investments described
in clauses (i) through (v) above.
 
     'Change of Control' means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation and excluding sales, leases, transfers, conveyances or
other dispositions pursuant to Securitizations, Warehouse Facilities or Residual
Receivables financing arrangements otherwise permitted by the Indenture entered
into in the ordinary course of business), in one or a series of related
transactions, of all or substantially all of the assets of the Company and its
Restricted Subsidiaries taken as a whole to any 'person' (as such term is used
in Section 13(d)(3) of the Exchange Act) other than a Permitted Holder, (ii) the
adoption of a plan relating to the liquidation or dissolution of the Company,
(iii) the consummation of any transaction (including, without limitation, any
merger or consolidation) the result of which is that any 'person' (as defined
above) other than a Permitted Holder becomes the 'beneficial owner' (as such
term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly

or indirectly, of more than 50% of the Voting Stock of the Company (measured by
general voting power rather than number of shares), (iv) the first day on which
a majority of the members of the Board of Directors of the Company are not
Continuing Directors or (v) the Company consolidates with, or merges with or
into, any Person, or any Person consolidates with, or merges with or into, the
Company, in any such event pursuant to a transaction in which any of the
outstanding Voting Stock of the Company is converted into or exchanged for cash,
securities or other property, other than any such transaction where the Voting
Stock of the Company outstanding immediately prior to such transaction is
converted into or exchanged for Voting Stock (other than Disqualified Stock) of
the surviving or transferee Person constituting a majority of the outstanding
shares of such Voting Stock of such surviving or transferee Person (immediately
after giving effect to such issuance). For purposes of this definition, any
transfer of an equity interest of an entity that was formed for the purpose of
acquiring Voting Stock of the Company will be deemed to be a transfer of such
portion of such Voting Stock as corresponds to the portion of the equity of such
entity that has been so transferred.
 
     'Code' means the Internal Revenue Code of 1986, as amended.
 
     'Consolidated Leverage Ratio' as of any date of determination means the
ratio of (i) the aggregate amount of all consolidated Indebtedness of the
Company and its Restricted Subsidiaries excluding (A) Permitted Warehouse Debt,
and (B) Hedging Obligations permitted to be incurred pursuant to clause (7) of
the covenant described under '--Incurrence of Indebtedness and Issuance of
Preferred Stock' to (ii) the Consolidated Net Worth of the Company.
 
     'Consolidated Net Income' means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
(for such period, on a consolidated basis, determined in accordance with GAAP);
provided, that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly-Owned Restricted
Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (that
has not been obtained) or, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute, rule
or governmental regulation applicable to that Restricted Subsidiary or its
stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded, and (iv) the cumulative effect of a change in accounting principles
shall be excluded.
 
     'Consolidated Net Worth' means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Restricted Subsidiaries as of such date plus (ii) the
respective amounts reported on such Person's balance sheet as of such date with
respect to any series of preferred stock (other than Disqualified Stock) that by
its terms is not entitled to the payment of dividends unless such dividends may
be declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such

Person upon issuance of such preferred stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern made within 12 months after the acquisition of such
business) subsequent to the date of the Indenture in the book value of any asset
owned by such Person or a consolidated Restricted Subsidiary of
 
                                       79
such Person, (y) all Investments as of such date in unconsolidated Restricted
Subsidiaries and in Persons that are not Restricted Subsidiaries and (z) all
unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
 
     'Continuing Director' means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the Issue Date or (ii) was nominated for election or elected to
such Board of Directors with the approval of a majority of the Directors
constituting Continuing Directors who were members of such Board at the time of
such nomination or election.
 
     'Credit Enhancement Agreements' means, collectively, any documents,
instruments or agreements entered into by the Company or, any of its Restricted
Subsidiaries with any Person exclusively for the purpose of providing credit
support for asset-backed securities issued in connection with Securitizations.
 
     'Default' means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
 
     'Disqualified Stock' means any Capital Stock that either (A) by its terms
(or by the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, (i) matures or is mandatorily
redeemable, in whole or in part, pursuant to a sinking fund obligation or
otherwise or, (ii) is convertible into or exchangeable for Indebtedness or
Disqualified Stock, in whole or in part, or (iii) is redeemable, in whole or in
part, at the option of the Holder thereof at any time, in any such case, on or
prior to the date that is 91 days after the date on which the Notes mature, or
(B) is designated by the Company (in a resolution of the Board of Directors
delivered to the Trustee) as Disqualified Stock.
 
     'Eligible Receivables' means, at the time of determination, Receivables
meeting the sale or loan eligibility criteria set forth in one or more of the
Warehouse Facilities to which the Company or any of its Restricted Subsidiaries
is a party at such time and is eligible for sale in a Securitization.
 
     'Equity Interests' means Capital Stock and all warrants, options or other
rights to acquire such Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, such Capital Stock).
 
     'Excess Spread' means, over the life of a pool of Receivables that have
been sold by the Company or a Restricted Subsidiary in a Securitization, the
rights, other than servicing rights, retained by the Company or such Restricted
Subsidiary at or subsequent to the closing of such Securitization or sale with

respect to such pool, to receive cash flows attributable to such pool.
 
     'fair market value' means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between an informed and willing seller and an informed and willing and able
buyer, neither of whom is under undue pressure or compulsion to complete the
transaction.
 
     'GAAP' means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
 
     'Guarantee' means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness. Notwithstanding the foregoing, the term 'Guarantee' does not
include obligations pursuant to representations, warranties, covenants and
indemnities in connection with a Securitization or Warehouse Facility.
 
     'Hedging Obligations' means, with respect to any Person, the obligations of
such Person under (i) interest rate or currency swap agreements, cap agreements,
collar agreements and related agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in value of
assets owned, financed or sold, or of liabilities incurred or assumed, or of
pre-funding arrangements, in any case in the ordinary course of business of such
Person and not for speculative purposes.
 
     'Indebtedness' means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of (i) borrowed money or evidenced
by bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital
 
                                       80
Lease Obligations or the unpaid deferred balance of the purchase price of any
property or representing any Hedging Obligations, except any such balance that
constitutes an accrued expense or trade payable, if and to the extent any of the
foregoing indebtedness (other than letters of credit and Hedging Obligations)
would appear as a liability upon a balance sheet of such Person prepared in
accordance with GAAP, (ii) all indebtedness of others secured by a Lien on any
asset of such Person (whether or not such indebtedness is assumed by such
Person), (iii) without duplication, all Warehouse Debt, (iv) all obligations of
such Person with respect to the redemption, repayment or other repurchase of any
Disqualified Stock and, in the case of any Subsidiary Guarantor, preferred stock
(but excluding in each case any accrued dividends thereon), and (v) to the
extent not otherwise included, the Guarantee by such Person of any indebtedness
of any other Person to the extent of any Guarantee of such indebtedness provided

by such Person. Except in the case of Warehouse Debt (the amount of which shall
be determined in accordance with the definition thereof) and except in the case
of Hedging Obligations (the amount of which shall be determined on a net basis
after rights of set-off and related positions), the amount of Indebtedness of
any Person at any date shall be the outstanding balance at such date of all
unconditional obligations as described above and the maximum liability, upon the
occurrence of the contingency giving rise to the obligation, of any contingent
obligations at such date. Notwithstanding the foregoing, the term 'Indebtedness'
does not include obligations pursuant to representations, warranties, covenants
and indemnities in connection with a Securitization or Warehouse Facility.
 
     'Investments' means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including Guarantees of Indebtedness), advances or capital
contributions (excluding commission, travel and similar advances to officers and
employees made in the ordinary course of business), purchases or other
acquisitions for consideration of Indebtedness, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP; provided that
an acquisition of Equity Interests or other securities by the Company for
consideration consisting of common equity securities of the Company (other than
Disqualified Stock) shall not be deemed to be an Investment.
 
     'Issue Date' means             , 1997.
 
     'Lien' means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
 
     'Net Income' means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but
not loss), together with any related provision for taxes on such extraordinary
or nonrecurring gain (but not loss).
 
     'Net Proceeds' means the aggregate Cash Equivalent proceeds received by the
Company or any of its Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, any Cash Equivalent received upon the sale or
other disposition of any non-cash consideration received in any Asset Sale), net
of the direct costs relating to such Asset Sale (including, without limitation,
legal, accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied to

the repayment of Indebtedness secured by a Lien on the asset or assets that were
the subject of such Asset Sale and any reserve for adjustment in respect of the
sale price of such asset or assets established in accordance with GAAP.
 
     'Non-Recourse Debt' means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), or (b) is directly or indirectly liable (as a guarantor or
otherwise); and (ii) as to
 
                                       81
which the lenders have been notified in writing that they will not have any
recourse to the stock or assets of the Company or any of its Restricted
Subsidiaries.
 
     'Permitted Businesses' means any consumer or commercial finance business or
any financial service business.
 
     'Permitted Holder' means any of Messrs. Sidney A. Miller, Hugh Miller, Marc
Miller and Lee Miller, any spouse or lineal descendant thereof or any trust all
of the beneficiaries of which are any of the foregoing.
 
     'Permitted Investments' means (a) any Investment in the Company or in a
Restricted Subsidiary that is a Subsidiary Guarantor; (b) any Investment in Cash
Equivalents; (c) any Investment by the Company or any Restricted Subsidiary in a
Person if, as a result of such Investment, (i) such Person becomes a
Wholly-Owned Restricted Subsidiary and a Subsidiary Guarantor that is engaged in
a Permitted Business or (ii) such Person is merged, consolidated or amalgamated
with or into, or transfers or conveys substantially all of its assets to, or is
liquidated into, the Company or a Wholly-Owned Restricted Subsidiary that is a
Subsidiary Guarantor and that is engaged in a Permitted Business; (d) any
Restricted Investment made as a result of the receipt of non-cash consideration
from an Asset Sale that was made pursuant to and in compliance with the covenant
described above under 'Repurchase at the Option of Holders--Asset Sales;' (e)
any Investment in Receivables, Residual Receivables or Servicing Receivables
made in the ordinary course of business; and (f) other Investments in any Person
(other than an Affiliate of the Company that is not also a Subsidiary of the
Company) that do not exceed $10.0 million in the aggregate since the Issue Date.
 
     'Permitted Liens' means (i) Liens on Receivables or other assets (other
than Residual Receivables) securing Warehouse Debt or Hedging Obligations (or
Guarantees of Warehouse Debt or Hedging Obligations); (ii) Liens on Servicing
Receivables, Residual Receivables and on the Capital Stock of Restricted
Subsidiaries of the Company substantially all of the assets of which are
Residual Receivables; provided, however, that, (x) all Retained Residual
Receivables shall remain unencumbered by any Lien unless after giving effect to
such sale, conveyance or other disposition the aggregate amount of Senior
Residual Receivables of the Company and its Restricted Subsidiaries which are
unencumbered by any Lien (of which no more than 25% of the aggregate book value
thereof shall constitute Retained Residual Receivables) would be greater than or
equal to 250% of all Senior Indebtedness of the Company and its Restricted

Subsidiaries; and (y) after giving effect to the incurrence of such Lien the
aggregate amount of Senior Residual Receivables of the Company and its
Restricted Subsidiaries which are unencumbered by any Lien (of which not more
than 25% of the aggregate book value thereof shall constitute Retained Residual
Receivables) would be greater than or equal to 150% of all Senior Indebtedness
of the Company and its Restricted Subsidiaries; (iii) Liens in favor of the
Company or any Restricted Subsidiary; (iv) Liens on property of a Person
existing at the time such Person is merged into or consolidated with the Company
or any Restricted Subsidiary of the Company; provided that such Liens were in
existence prior to the contemplation of such merger or consolidation and do not
extend to any assets other than those of the Person merged into or consolidated
with the Company or such Restricted Subsidiary; (v) Liens on property existing
at the time of acquisition thereof by the Company or any Restricted Subsidiary
of the Company, provided that such Liens were in existence prior to the
contemplation of such acquisition; (vi) Liens to secure the performance of
statutory obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of business; (vii)
Liens to secure Indebtedness (including Capital Lease Obligations) permitted by
clause (1) of the second paragraph of the covenant entitled 'Incurrence of
Indebtedness and Issuance of Preferred Stock' covering only the assets acquired
with such Indebtedness; (viii) Liens existing on the Issue Date; (ix) Liens for
taxes, assessments or governmental charges or claims that are not yet delinquent
or that are being contested in good faith by appropriate proceedings, provided
that any reserve or other appropriate provision as shall be required in
conformity with GAAP shall have been made therefor; (x) Liens (including,
without limitation, Liens on Residual Receivables) in favor of a monoline
insurance company or other provider of credit enhancement pursuant to a Credit
Enhancement Agreement; (xi) Liens incurred in the ordinary course of business of
the Company or any Restricted Subsidiary of the Company with respect to
obligations that do not exceed $1.0 million at any one time outstanding and that
(a) are not incurred in connection with the borrowing of money or the obtaining
of advances or credit (other than trade credit in the ordinary course of
business) and (b) do not in the aggregate materially detract from the value of
the property or materially impair the use thereof in the operation of business
by the Company or such Restricted Subsidiary; (xii) Liens imposed by law,
including but not limited to carriers', warehousemen's and mechanics' Liens, in
each case for sums not yet due or being contested in good faith by appropriate
proceedings or, other
 
                                       82
Liens arising out of judgments or awards against the Company or any of its
Restricted Subsidiaries with respect to which the Company or such Restricted
Subsidiary shall then be proceeding with an appeal or other proceedings for
review; (xiii) survey exceptions, easements and other restrictions on the use of
property; (xiv) Liens securing Indebtedness the proceeds of which were utilized
by the Company or a Restricted Subsidiary solely to fund any advances to
Securitization Trusts permitted by clause (v) of the second full paragraph under
the caption '--Certain Covenants--Restricted Payments,' provided that such Liens
encumber no assets other than the contractual right of the Company or such
Restricted Subsidiary, as the case may be, to be reimbursed in respect of any
advances funded by such Indebtedness; (xv) Liens on assets of Unrestricted

Subsidiaries of the Company that secure Non-Recourse Debt of Unrestricted
Subsidiaries of the Company; and (xvi) Liens to secure any Refinancing (or
successive Refinancings), in whole or in part, of any Indebtedness (or
commitment for Indebtedness) existing on the Issue Date; provided, however, that
(x) any such new Lien shall be a Lien on the same asset class or interest
securing the original Lien and (y) the Indebtedness secured by such Lien is not,
solely by virtue of the Refinancing (unless otherwise permitted by the
Indenture), increased to an amount greater than the greater of (A) the
outstanding principal amount of the Indebtedness existing on the Issue Date
secured by such Lien, or (B) if such Lien secures Indebtedness under a line of
credit, the commitment amount of such line of credit existing on the Issue Date.
Any determination of Senior Residual Receivable shall be based on the
consolidated balance sheet of the Company and its Restricted Subsidiaries for
the most recently ended fiscal quarter for which financial statements are
available, after giving pro forma effect to the Lien for which such
determination is being made and to any other sale of or Lien on or reduction of
Residual Receivable since the date of such balance sheet.
 
     'Permitted Refinancing Indebtedness' means any Indebtedness or Disqualified
Stock of the Company or any of its Restricted Subsidiaries issued in exchange
for, or the net proceeds of which are used to extend, refinance, renew, replace,
defease or refund other Indebtedness or Disqualified Stock of the Company or any
of its Restricted Subsidiaries (other than Indebtedness incurred pursuant to
dates (2), (3), (7), (9), (10) and (11) of the second paragraph of the covenant
described under 'Limitation on Incurrence of Indebtedness and Issuance of
Preferred Stock'; provided that: (i) the principal amount (or accreted value, if
applicable) or mandatory redemption amount of such Permitted Refinancing
Indebtedness does not exceed the principal amount of (or accreted value, if
applicable) or mandatory redemption amount, plus accrued interest or dividends
on, the Indebtedness or Disqualified Stock so extended, refinanced, renewed,
replaced, defeased or refunded (plus the amount of contractual prepayment
charges and reasonable expenses incurred in connection therewith); (ii) such
Permitted Refinancing Indebtedness has a final maturity or final redemption date
later than the final maturity or final redemption date of, and has a Weighted
Average Life to Maturity equal to or greater than the Weighted Average Life to
Maturity of, the Indebtedness or Disqualified Stock being extended, refinanced,
renewed, replaced, defeased or refunded; (iii) if the Indebtedness or
Disqualified Stock being extended, refinanced, renewed, replaced, defeased or
refunded is subordinated in right of payment to the Notes, such Permitted
Refinancing Indebtedness is subordinated in right of payment to, the Notes on
terms at least as favorable to the Holders of the Notes as those contained in
the documentation governing the Indebtedness or Disqualified Stock being
extended, refinanced, renewed, replaced, defeased or refunded; and (iv) such
Indebtedness is incurred or such Disqualified Stock is issued either by the
Company or by the Restricted Subsidiary who is the obligor on the Indebtedness
or Disqualified Stock being extended, refinanced, renewed, replaced, defeased or
refunded.
 
     'Permitted Warehouse Debt' means Warehouse Debt of the Company or a
Restricted Subsidiary outstanding under one or more Warehouse Facilities
(excluding any Guarantees issued by the Company or a Restricted Subsidiary in
connection therewith); provided, however, that (i) the assets purchased with
proceeds of such Warehouse Debt are or, prior to any funding under the Warehouse
Facility with respect to such assets, were eligible to be recorded as held for

sale on the consolidated balance sheet of the Company and its Restricted
Subsidiaries in accordance with GAAP, (ii) such Warehouse Debt will be deemed
Permitted Warehouse Debt (a) in the case of a Purchase Facility, only to the
extent the holder of such Warehouse Debt has no contractual recourse to the
Company or any of its Restricted Subsidiaries to satisfy claims in respect of
such Warehouse Debt in excess of the realizable value of the Eligible
Receivables financed thereby, and (b) in the case of any other Warehouse
Facility, at the time such Warehouse Debt is incurred, only to the extent of the
lesser of (A) the amount advanced by the lender with respect to the Eligible
Receivables financed under such Warehouse Facility, and (B) 100% of the
aggregate principal amount of such Eligible Receivables and (iii) any such
Indebtedness incurred under such Warehouse Facility has not been outstanding in
excess of 364 days.
 
                                       83
'Person' means any individual, corporation, partnership, joint venture,
association, joint stock company, limited liability company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
 
     'Purchase Facility' means any Warehouse Facility in the form of a purchase
and sale facility pursuant to which the Company or a Restricted Subsidiary sells
Receivables to a financial institution, commercial paper facility or conduit and
retains a right of first refusal or other repurchase arrangement upon the
subsequent resale of such Receivables by such financial institution, commercial
paper facility or conduit.
 
     'Receivables' means consumer and commercial loans, leases and receivables
purchased or originated by the Company or any Restricted Subsidiary; provided,
however, that for purposes of determining the amount of a Receivable at any
time, such amount shall be determined in accordance with GAAP, consistently
applied, as of the most recent practicable date.
 
     'Refinance' means, in respect of any Indebtedness, to extend, refinance,
renew, replace, defease, refund, repay, prepay, redeem, or retire, or to issue
other Indebtedness in exchange or replacement for, such Indebtedness.
'Refinanced' and 'Refinancing' shall have correlative meanings.
 
     'Residual Receivables' of the Company means at any time, the capitalized
asset value of Excess Spread of the Company and its Restricted Subsidiaries
(including, without limitation, subordinated, interest-only and residual
certificates of a Securitization Trust), with respect to any Receivable pool of
any Securitization Trust, calculated in accordance with GAAP.
 
     'Restricted Investment' means an Investment other than a Permitted
Investment.
 
     'Restricted Subsidiary' means any Subsidiary other than an Unrestricted
Subsidiary.
 
     'Retained Residual Receivables' has the meaning specified under

'--Repurchase at Option of Holders-Asset Sales.'
 
     'Securitization Trust' means any Person that is not a Restricted Subsidiary
established exclusively for the purpose of issuing securities in connection with
any Securitization, the obligations of which are without recourse to the Company
or any of its Subsidiaries (other than obligations constituting Indebtedness
incurred in accordance with the first paragraph of the covenant described under
'Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock').
 
     'Securitization' means a public or private transfer of Receivables in the
ordinary course of business and by which the Company or a Restricted Subsidiary
directly or indirectly securitizes a pool of specialized Receivables, including
any such transaction involving the sale of specialized Receivables to a
Securitization Trust.
 
     'Senior Indebtedness' means all Indebtedness of any Person that is not
subordinated in right of payment to any other Indebtedness or other obligations
of such Person, excluding Permitted Warehouse Debt and Hedging Obligations
permitted to be incurred under the Indenture and, in the case of Indebtedness
secured by Senior Residual Receivables, the lesser of (x) the amount of such
Indebtedness and (y) the amount of the Senior Residual Receivables securing such
Indebtedness.
 
     'Senior Residual Receivables' means Residual Receivables which have not
been created as the result of or in connection with the sale, securitization or
other disposition of other Residual Receivables.
 
     'Servicing Receivables' means the servicing rights or any interest therein
with respect to any Receivables.
 
     'Subsidiary' means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership or limited liability company (a) the sole
general partner or the managing general partner or managing member of which is
such Person or a Subsidiary of such Person or (b) the only general partners or
managing members of which are such Person or one or more Subsidiaries of such
Person (or any combination thereof).
 
     'Subsidiary Guarantor' means any Subsidiary of the Company that executes a
Guarantee in accordance with the provisions of the Indenture.
 
     'Unrestricted Subsidiary' means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution;
but only to the extent that such Subsidiary: (a) is not
 
                                       84
party to any agreement, contract, arrangement or understanding with the Company
or any Restricted Subsidiary unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary that those that might be obtained at the time from Persons
who are not Affiliates of the Company; (b) is a Person with respect to which
neither the Company nor any of its Restricted Subsidiaries has any direct or
indirect obligation (other than obligations constituting Indebtedness incurred
in accordance with the first paragraph of the covenant described under 'Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock') (x) to
subscribe for additional Equity Interests or (y) to maintain or preserve such
Person's financial condition or to cause such Person to achieve any specified
levels of operating results; and (c) has not guaranteed or otherwise directly or
indirectly provided credit support for any Indebtedness of the Company or any of
its Restricted Subsidiaries. Any such designation by the Board of Directors
shall be evidenced to the Trustee by filing with the Trustee a certified copy of
the Board Resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
conditions and was permitted by the covenant described above under the caption
'Certain Covenants--Restricted Payments.' If, at any time, any Unrestricted
Subsidiary would fail to meet the foregoing requirements as an Unrestricted
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the Indenture and any Indebtedness of such Subsidiary shall be
deemed to be incurred by a Restricted Subsidiary of the Company as of such date
(and, if such Indebtedness is not permitted to be incurred as of such date under
the covenant described under the caption 'Incurrence of Indebtedness and
Issuance of Preferred Stock,' the Company shall be in default of such covenant).
The Board of Directors of the Company may at any time designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided that such designation shall
be deemed to be an incurrence of Indebtedness and issuance of preferred stock by
a Restricted Subsidiary of the Company of any outstanding Indebtedness of such
Unrestricted Subsidiary and such designation shall only be permitted if (i) such
Indebtedness and preferred stock is permitted under the covenant described under
the caption 'Certain Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock,' (ii) such Subsidiary becomes a Subsidiary Guarantor, and (iii)
no Default or Event of Default would exist following such designation.
 
     'Voting Stock' of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote generally in the election of the
Board of Directors of such Person.
 
     'Warehouse Debt' means Indebtedness of the Company or a Restricted
Subsidiary equal to the greater of (x) the consideration received by the Company
or its Restricted Subsidiaries under a Warehouse Facility and (y) in the case of
a Purchase Facility, the book value of the Eligible Receivables financed under
such Warehouse Facility, until such time as such Eligible Receivables are (i)
securitized, (ii) repurchased by the Company or its Restricted Subsidiaries or
(iii) sold by the counterparty under the Warehouse Facility to a Person who is
not an Affiliate of the Company, including any Guarantees issued by the Company
or a Restricted Subsidiary in connection therewith.
 
     'Warehouse Facility' means any funding arrangement, including Purchase
Facilities, with a financial institution or other lender or purchaser or any
conduit or special purpose vehicle used in connection with such funding
arrangement, to the extent (and only to the extent) that the Company or any of

its Restricted Subsidiaries incurs Warehouse Debt thereunder exclusively to
finance or refinance the purchase or origination of Receivables by the Company
or a Restricted Subsidiary prior to securitization.
 
     'Weighted Average Life to Maturity' means, when applied to any Indebtedness
or Disqualified Stock at any date, the number of years obtained by dividing (i)
the sum of the products obtained by multiplying (a) the amount of each then
remaining installment, sinking fund, serial maturity or other required payments
of principal, including payment at final maturity (or final redemption, in the
case of Disqualified Stock), in respect thereof, by (b) the number of years
(calculated to the nearest one-twelfth) that will elapse between such date and
the making of such payment, by (ii) the then outstanding principal amount of
such Indebtedness or mandatory redemption amount of Disqualified Stock.
 
     'Wholly-Owned Restricted Subsidiary' of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly-Owned Restricted
Subsidiaries of such Person.
 
                                       85
UNDERWRITING
 
     Subject to the terms and conditions of the Underwriting Agreement (the
'Underwriting Agreement'), each of the underwriters named below (the
'Underwriters') has agreed to purchase from the Company and the Company has
agreed to sell to the Underwriters, the aggregate principal amount of the Notes
set forth opposite its name below:
PRINCIPAL AMOUNT
UNDERWRITER                                                                                OF THE NOTES
--------------------------------------------------------------------------------------   ----------------
Donaldson, Lufkin & Jenrette Securities Corporation...................................     $
Lehman Brothers Inc...................................................................
Smith Barney Inc......................................................................
                                                                                         ----------------
 
     Total............................................................................     $150,000,000
                                                                                         ----------------
                                                                                         ----------------
The Underwriting Agreement provides that the obligations of the
Underwriters to purchase and accept delivery of the Notes offered hereby are
subject to certain conditions precedent. If any of the Notes are purchased by
the Underwriters pursuant to the Underwriting Agreement, all such Notes must be
purchased.
 

     The Underwriters propose initially to offer the Notes directly to the
public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not to exceed
      % of the principal amount of the Notes. The Underwriters may allow, and
such dealers may reallow, discounts not to exceed       % of the principal
amount of the Notes on sales to certain other dealers. After the initial public
offering of the Notes, the public offering price and concession and reallowance
and other selling terms may be changed by the Underwriters.
 
     The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments which the Underwriters may be required to make in respect thereof.
 
     The Notes are a new issue of securities with no existing market and the
Company does not intend to list the Notes on any national securities exchange.
The Underwriters have advised the Company that they currently intend to make a
market in the Notes, but are not obligated to do so and may discontinue any such
market making at any time without notice. Accordingly, no assurance can be given
as to the liquidity of the trading market for the Notes or that an active
trading market for the Notes will develop.
 
     In connection with the Offering, certain Underwriters and selling group
members (if any) and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the price of the Notes. Such
transactions may include stabilization transactions effected in accordance with
Rule 104 of Regulation M, pursuant to which such persons may bid for or purchase
the Notes for the purpose of stabilizing their market price. The Underwriters
also may create a short position for the account of the Underwriters by selling
more of the Notes in connection with this offering then they are committed to
purchase from the Company, and in such case may purchase Notes in the open
market following completion of the Offering to cover all or a portion of such
short position. In addition, Donaldson, Lufkin & Jenrette Securities
Corporation, Lehman Brothers Inc. or Smith Barney Inc., on behalf of the
Underwriters, may impose 'penalty bids' under contractual arrangements with the
Underwriters whereby it may reclaim from an Underwriter (or dealer participating
in the Offering) for the account of the other Underwriters, the selling
concession with respect to the Notes that is distributed in the Offering but
subsequently purchased for the account of the Underwriters in the open market.
Any of the transactions described in this paragraph may result in the
maintenance of the price of the Notes at a level above that which might
otherwise prevail in the open market. None of the transactions described in this
paragraph is required, and, if any is undertaken, it may be discontinued at any
time.
 
     Under the Rules of Fair Practice of the National Association of Securities
Dealers ('NASD'), if more than 10% of the net proceeds of a public offering of
debt securities, not including underwriting compensation, are intended to be
paid to members of the NASD or affiliated or associated persons that are
participating in the distribution of the offering, the yield at which the debt
securities are distributed to the public must be no lower than that recommended
by a 'qualified independent underwriter', as defined in Rule 2720 of the Conduct
Rules of the NASD. Donaldson, Lufkin & Jenrette Securities Corporation and
Lehman Brothers Inc. provide interest-
 

                                       86
only and residual loans and warehouse lines of credit which are being repaid in
connection with the Offering. See 'Use of Proceeds.' As a result, Donaldson,
Lufkin & Jenrette Securities Corporation and Lehman Brothers Inc. are expected
to receive in the aggregate more than 10% of the net proceeds of the Offering.
Accordingly, Smith Barney Inc. has agreed to act as the qualified independent
underwriter in connection with this Offering. The yield on the Notes, when sold
to the public at the public offering price set forth on the cover of this
Prospectus, will be no lower than that recommended by Smith Barney Inc. In
exchange for its services for acting as a qualified independent underwriter,
Smith Barney Inc. will receive $5,000 from the Company.
 
     The Underwriters have informed the Company that they do not expect
discretionary sales by the Underwriters to exceed 5% of the principal amount of
the Notes being offered hereby.
 
     Donaldson, Lufkin & Jenrette Securities Corporation and Lehman Brothers
Inc. have provided, and expect in the future to provide, investment banking
and/or other advisory services to the Company and its subsidiaries.
 
                                 LEGAL MATTERS
 
     The validity of the issuance of the Notes and the Guarantees offered hereby
will be passed upon for the Company by Stroock & Stroock & Lavan LLP, New York,
New York. Certain legal matters in connection with the Offering will be passed
upon for the Underwriters by Latham & Watkins, Los Angeles, California.
 
                                    EXPERTS
 
     The consolidated financial statements of the Company as of December 31,
1995 and 1996 and for each of the years in the three-year period ended December
31, 1996 appearing in this Prospectus and Registration Statement, have been
audited by KPMG Peat Marwick LLP, independent auditors, as set forth in their
report thereon appearing elsewhere in this Prospectus and Registration Statement
and are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
 
                             ADDITIONAL INFORMATION
 
     The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act, of which this Prospectus forms a part, with
respect to the Notes offered hereby. This Prospectus omits certain information
contained in the Registration Statement, and reference is made to the
Registration Statement for further information with respect to the Company and
the Notes offered hereby. Statements contained herein concerning the provisions
of documents are necessarily summaries of such documents and when any such
document is an exhibit to the Registration Statement, each such statement is
qualified in its entirety by reference to the copy of such document filed with
the Commission. Copies of the Registration Statement may be acquired upon
payment of the prescribed fees or examined without charge at the public
reference facilities of the Commission at 450 Fifth Street, N.W., Washington,

D.C. 20549. In addition, the Registration Statement may be accessed
electronically at the Commission's site on the World Wide Web located at
http://www.sec.gov.
 
     The Indenture pursuant to which the Notes will be issued will require the
Company to file with the Commission and, if requested, to distribute to Holders
of the Notes annual reports containing audited financial statements of the
Company and a report thereon audited by independent certified public accountants
and quarterly reports containing unaudited summary financial information for
each of the first three quarters of each fiscal year.
 
                                       87
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
                                                                                                              ----
Report of Independent Auditors..............................................................................  F-2
Consolidated Financial Statements of Delta Financial Corporation:
  Consolidated Balance Sheets as of December 31, 1995 and 1996 and March 31, 1997 (unaudited)...............  F-3
  Consolidated Statements of Income for the years ended December 31, 1994, 1995 and 1996 and the three
     months ended March 31, 1996 (unaudited) and 1997 (unaudited)...........................................  F-4
  Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1994, 1995 and
     1996 and the three months ended March 31, 1997 (unaudited).............................................  F-5
  Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and the three
     months ended March 31, 1996 (unaudited) and 1997 (unaudited)...........................................  F-6
Notes to Consolidated Financial Statements..................................................................  F-7
F-1
INDEPENDENT AUDITORS' REPORT
 
The Board of Directors
Delta Financial Corporation:
 
We have audited the accompanying consolidated balance sheets of Delta Financial
Corporation and subsidiary as of December 31, 1995 and 1996, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
 
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Delta Financial
Corporation and subsidiary as of December 31, 1995 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
 
                                          KPMG PEAT MARWICK LLP
 
New York, New York
February 19, 1997
 
                                      F-2
DELTA FINANCIAL CORPORATION AND SUBSIDIARY

                          CONSOLIDATED BALANCE SHEETS
DECEMBER 31,              MARCH 31,
                                                                   ----------------------------    ------------
                                                                       1995            1996            1997
                                                                   ------------    ------------    ------------ 
                                                                                                   (UNAUDITED)
ASSETS
Cash and interest bearing deposits..............................   $ 16,635,135    $ 18,741,182    $ 19,111,677
Accounts receivable.............................................      6,845,947       8,654,885       9,362,420
Loans held for sale.............................................     63,816,298      83,677,017      77,768,963
Accrued interest and late charges receivable....................     15,946,847      20,158,812      21,999,632
Capitalized mortgage servicing rights...........................      3,830,996      11,411,634      13,447,924
Equipment, net..................................................      1,550,099       2,836,360       3,400,910
Cash held for advance payments..................................      3,119,558       2,488,218       2,585,208
Real estate owned...............................................        250,908         134,750         134,750
Interest-only and residual certificates.........................     25,309,548      83,072,777     101,858,297
Prepaid and other assets........................................      1,316,702       1,560,578       1,576,970
Goodwill........................................................             --              --       6,109,446
Due from stockholders...........................................        990,000              --              --
                                                                   ------------    ------------    ------------
                                                                   $139,612,038    $232,736,213    $257,356,197
                                                                   ------------    ------------    ------------
                                                                   ------------    ------------    ------------
 
              LIABILITIES AND STOCKHOLDERS' EQUITY
Bank payable....................................................   $  5,100,087    $  2,294,742    $  1,695,533
Warehouse financing and other borrowings........................     82,756,232      95,481,627     112,507,300
Accounts payable and accrued expenses...........................      4,843,719       7,201,674       6,849,065
Investor payable................................................     14,271,967      22,568,730      20,769,591
Advance payments by borrowers for taxes and insurance...........      2,806,818       2,255,045       2,351,000
Income taxes payable............................................             --       9,416,784      10,159,467
                                                                   ------------    ------------    ------------
                                                                    109,778,823     139,218,602     154,331,956
                                                                   ------------    ------------    ------------

Stockholders' equity:
  Common stock, $.01 par value. Authorized 49,000,000 shares;
     issued and outstanding 10,653,000 shares at December 31,
     1995, 15,253,000 shares at December 31, 1996, and
     15,372,288 shares at March 31, 1997........................        106,530         152,530         153,723
Additional paid-in capital......................................      3,225,615      90,952,737      93,468,544
Retained earnings...............................................     26,501,070       2,412,344       9,401,974
                                                                   ------------    ------------    ------------
     Total stockholders' equity.................................     29,833,215      93,517,611     103,024,241
                                                                   ------------    ------------    ------------
                                                                   $139,612,038    $232,736,213    $257,356,197
                                                                   ------------    ------------    ------------
                                                                   ------------    ------------    ------------
See accompanying notes to consolidated financial statements.
 
                                      F-3
DELTA FINANCIAL CORPORATION AND SUBSIDIARY

                       CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED                     THREE MONTHS ENDED
                                                      DECEMBER 31,                         MARCH 31,
                                         ---------------------------------------   -------------------------
                                            1994          1995          1996          1996          1997
                                         -----------   -----------   -----------   -----------   -----------
                                                                                          (UNAUDITED)
Revenues:
  Net gain on sale of mortgage loans...  $ 6,661,163   $15,382,960   $46,525,042   $   103,391   $17,313,852
  Interest.............................    9,839,484    13,587,807    16,372,115     3,966,572     5,558,889
  Servicing fees.......................    2,182,568     2,855,642     5,368,488     1,015,295     1,391,633
  Other................................    3,113,692     4,308,985     5,266,109       219,090     3,040,487
                                         -----------   -----------   -----------   -----------   -----------
                                          21,796,907    36,135,394    73,531,754     5,304,348    27,304,861
                                         -----------   -----------   -----------   -----------   -----------
Expenses:
  Payroll and related costs............    8,815,355    12,875,714    16,508,756     1,373,085     7,495,992
  Interest expense.....................    3,734,877     7,963,613    11,298,224     2,400,922     3,170,226
  General and administrative...........    7,238,140    10,710,179    12,236,260     1,841,865     4,398,410
                                         -----------   -----------   -----------   -----------   -----------
                                          19,788,372    31,549,506    40,043,240     5,615,872    15,064,628
                                         -----------   -----------   -----------   -----------   -----------
Income (loss) before income taxes and
  extraordinary item...................    2,008,535     4,585,888    33,488,514      (311,524)   12,240,233
Provision for income taxes.............           --            --     9,466,381        44,332     5,250,603
                                         -----------   -----------   -----------   -----------   -----------
Income (loss) before extraordinary
  item.................................    2,008,535     4,585,888    24,022,133      (355,856)    6,989,630
Extraordinary item:
  Gain on extinguishment of debt.......           --            --     3,167,828            --            --
                                         -----------   -----------   -----------   -----------   -----------
  Net income (loss)....................  $ 2,008,535   $ 4,585,888   $27,189,961   $  (355,856)  $ 6,989,630
                                         -----------   -----------   -----------   -----------   -----------
                                         -----------   -----------   -----------   -----------   -----------

Unaudited pro forma information:
  Provision for pro forma income taxes
     (benefit) before extraordinary
     item..............................      863,670     1,971,932    14,400,061      (133,955)          n/a
                                         -----------   -----------   -----------   -----------
                                         -----------   -----------   -----------   -----------
  Pro forma income (loss) before
     extraordinary item................  $ 1,144,865   $ 2,613,956   $19,088,453   $  (177,569)          n/a
                                         -----------   -----------   -----------   -----------
                                         -----------   -----------   -----------   -----------
Per share data (1):
  Earnings (loss) per share............           --            --            --         (0.01)         0.45
  Weighted average number of shares
     outstanding.......................           --            --            --    12,629,182    15,420,883
------------------
(1) March 31, 1996 is presented on a pro forma basis.
 
          See accompanying notes to consolidated financial statements.
 
                                      F-4
DELTA FINANCIAL CORPORATION AND SUBSIDIARY

           CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995, 1996 AND THREE MONTHS ENDED MARCH 31, 1997
                                  (UNAUDITED)
ADDITIONAL
                                                                           PAID-IN       RETAINED
                                                     CAPITAL STOCK(1)    CAPITAL(1)      EARNINGS         TOTAL
                                                     ----------------    -----------    -----------    ------------
Balance at December 31, 1993......................       $106,530        $ 3,225,615    $25,018,190    $ 28,350,335
  Net income......................................             --                 --      2,008,535       2,008,535
  Distributions...................................             --                 --     (2,195,056)     (2,195,056)
                                                     ----------------    -----------    -----------    ------------
Balance at December 31, 1994......................        106,530          3,225,615     24,831,669      28,163,814
  Net income......................................             --                 --      4,585,888       4,585,888
  Distributions...................................             --                 --     (2,916,487)     (2,916,487)
                                                     ----------------    -----------    -----------    ------------
Balance at December 31, 1995......................        106,530          3,225,615     26,501,070      29,833,215
  Proceeds from initial public offering of common
     stock........................................         46,000         69,655,435             --      69,701,435
  Net income......................................             --                 --     27,189,961      27,189,961
  Distributions...................................             --                 --    (33,207,000)    (33,207,000)
  Reclassification of undistributed
     S corporation earnings.......................             --         18,071,687    (18,071,687)             --
                                                     ----------------    -----------    -----------    ------------
Balance at December 31, 1996......................        152,530         90,952,737      2,412,344      93,517,611
  Issuance of common stock for Fidelity Mortgage
     acquisition..................................          1,193          2,515,807             --       2,517,000
  Net income......................................             --                 --      6,989,630       6,989,630
                                                     ----------------    -----------    -----------    ------------
Balance at March 31, 1997 (Unaudited).............       $153,723        $93,468,544    $ 9,401,974    $103,024,241
                                                     ----------------    -----------    -----------    ------------
                                                     ----------------    -----------    -----------    ------------
------------------
 
(1) Restated to reflect share exchange in connection with the October 1996
    reorganization.
 
          See accompanying notes to consolidated financial statements.
 
                                      F-5
DELTA FINANCIAL CORPORATION AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED                      THREE MONTHS ENDED
                                                             DECEMBER 31,                         MARCH 31,
                                                ---------------------------------------   --------------------------
                                                   1994          1995          1996           1996          1997
                                                -----------   -----------   -----------   ------------   -----------
                                                                                                 (UNAUDITED)
Cash flows from operating activities:
Net income (loss).............................  $ 2,008,535   $ 4,585,888   $27,189,961   $   (355,856)  $ 6,989,630
  Adjustments to reconcile net income to net
    cash used in operating activities:
    Provision for loan losses.................      169,867        99,761       101,158         24,940        24,999
    Depreciation and amortization.............      277,956       564,310       996,875        148,097       444,068
    Capitalized mortgage servicing rights, net
       of amortization........................    1,069,652    (1,409,683)   (7,580,638)       296,927    (2,036,290)
    Deferred origination fees.................      147,522       (61,239)   (2,399,299)    (4,421,195)       24,814
    Interest-only and residual certificates
       received in securitization
       transactions, net......................   (5,309,550)  (17,795,998)  (57,763,229)        (7,458)  (18,785,520)
  Changes in operating assets and liabilities:
    Increase in accounts receivable, net......   (2,365,992)   (1,136,618)   (1,808,938)      (358,458)     (676,741)
    Decrease (increase) in loans held for
       sale, net..............................   (7,447,873)  (15,021,532)  (17,562,578)  (103,786,484)    5,858,241
    Increase in accrued interest and late
       charges receivable.....................   (1,783,978)   (3,225,276)   (4,211,965)      (155,685)   (1,840,820)
    Decrease (increase) in cash held for
       advance payments.......................      141,478       166,924       631,340        234,058       (96,990)
    Decrease (increase) in real estate
       owned..................................      650,121       448,839       116,158        (42,759)           --
    Decrease (increase) in prepaid and other
       assets.................................      183,781     1,753,633      (243,876)       (56,147)       17,447
    Decrease in due from stockholders.........      165,000     2,165,000       990,000             --            --
    Increase (decrease) in accounts payable
       and accrued expenses...................     (354,737)    1,901,895     2,357,955        418,137      (430,939)
    Increase (decrease) in investor payable...    2,403,676     3,181,005     8,296,763       (633,936)   (1,799,139)
    Increase (decrease) in advance payments by
       borrowers for taxes and insurance......     (115,629)     (119,683)     (551,773)      (184,037)       83,295
    Increase in income taxes payable..........           --            --     9,416,784             --       786,760
                                                -----------   -----------   -----------   ------------   -----------
Net cash used in operating activities.........  (10,160,171)  (23,902,774)  (42,025,302)  (108,879,856)  (11,437,185)
                                                -----------   -----------   -----------   ------------   -----------

Cash flows used in investing activities:
  Acquisition of Fidelity Mortgage............           --            --            --             --    (3,674,845)
  Purchase of equipment.......................     (917,512)   (1,207,560)   (2,283,136)      (227,829)     (660,369)
                                                -----------   -----------   -----------   ------------   -----------
Net cash used in investing activities.........     (917,512)   (1,207,560)   (2,283,136)      (227,829)   (4,335,214)
                                                -----------   -----------   -----------   ------------   -----------
Cash flows from financing activities:
  Net proceeds from initial public offering...           --            --    69,701,435             --            --
  Proceeds from warehouse financing and other
    borrowings, net...........................   15,710,632    30,265,588    12,725,395    102,208,160    16,793,785
  Increase (decrease) in bank payable, net....      (11,954)    4,125,325    (2,805,345)      (165,266)     (650,891)
  Distributions...............................   (2,195,056)   (2,916,487)  (33,207,000)      (180,000)           --
  Payments (made to) received from
    affiliates................................      (43,366)      913,870            --             --            --
                                                -----------   -----------   -----------   ------------   -----------
Net cash provided by financing activities.....   13,460,256    32,388,296    46,414,485    101,862,894    16,142,894
                                                -----------   -----------   -----------   ------------   -----------
Net increase (decrease) in cash...............    2,382,573     7,277,962     2,106,047     (7,244,791)      370,495
Cash at beginning of period...................    6,974,600     9,357,173    16,635,135     16,635,135    18,741,182
                                                -----------   -----------   -----------   ------------   -----------
Cash at end of period.........................  $ 9,357,173   $16,635,135   $18,741,182   $  9,390,344   $19,111,677
                                                -----------   -----------   -----------   ------------   -----------
                                                -----------   -----------   -----------   ------------   -----------
See accompanying notes to consolidated financial statements.
 
                                      F-6
DELTA FINANCIAL CORPORATION AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     DECEMBER 31, 1994, 1995, 1996 AND MARCH 31, 1996 AND 1997 (UNAUDITED)
 
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  (a) Organization
 
     Delta Financial Corporation (the 'Company') is a Delaware corporation which
was organized in August 1996. On October 31, 1996, the Company acquired all of
the outstanding common stock of Delta Funding Corporation ('Delta Funding'), a
New York corporation and the Company's subsidiary, which had been organized on
January 8, 1982 for the purpose of originating, selling, servicing and investing
in residential first and second mortgages, and completed an initial public
offering (see note 2).
 
  (b) Principles of Consolidation
 
     The consolidated financial statements include the accounts of Delta
Financial Corporation and its wholly-owned subsidiary. All significant
intercompany accounts and transactions have been eliminated.
 
  (c) Origination Fees
 
     The Company accounts for origination fee income on mortgages held for sale
in conformity with Statement of Financial Accounting Standards (SFAS) No. 91.
This Statement requires that origination fees be offset by their direct loan
costs and the net deferred fees be recognized over the life of the loan or upon
sale of the loan, if earlier.
 
  (d) Loans held for sale
 
     Loans held for sale are carried at the lower of cost or market, determined
on a net aggregate basis. Adjustments to market are made by charges or credits
to income.
 
  (e) Income Taxes
 
     Through October 30, 1996, the Company elected for both Federal and State
income tax purposes to be treated as an S corporation (effective July 1, 1985).
As an S corporation, the net earnings of the Company were taxed directly to the
stockholders rather than the Company.
 
     On October 31, 1996, the Company became a C corporation. All income earned
from that date is subject to corporate tax at statutory rates for both Federal
and State income tax purposes. The Company accounts for income taxes from that
date in conformity with SFAS No. 109, 'Accounting for Income Taxes,' which
requires an asset and liability approach for accounting and reporting of income
taxes.
 
  (f) Sale of Mortgage Loans

 
     The Company sells whole loans with servicing retained. Gains or losses on
such sales are recognized at the time of sale and are determined by the
differences between net sales proceeds and the unpaid principal balance of the
loans sold adjusted for the present value of any yield differential.
 
  (g) Securitization
 
     The Company sells pools of loans on a servicing retained basis. Gains or
losses are determined at the time of sale by the differences between the net
sales proceeds and the present value of the future stream of servicing fees,
adjusted for estimated losses and prepayments. The Company continues to service
these loans for a normal servicing fee.
 
     Included in the gain on sale of loans is gain on securitization
representing the fair value of the interest-only and residual certificates
received by the Company. Fair value of these certificates is determined based on
various
 
                                      F-7
DELTA FINANCIAL CORPORATION AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

economic factors, including loan types, sizes, interest rates, dates of
origination, terms and geographic locations. The Company also uses other
available information such as reports on prepayment rates, collateral value,
discount rates, economic forecasts and historical default and prepayment rates
of the portfolio under review. The Company reviews these factors and, if
necessary, adjusts the remaining assets to the fair value of the interest-only
and residual certificates.
 
  (h) Real Estate Acquired Through Foreclosure
 
     Properties acquired through foreclosure or a deed in lieu of foreclosure
are recorded at the lower of the unpaid loan balance, or fair value, at the date
of acquisition. The carrying value of the individual properties is subsequently
adjusted to the extent it exceeds estimated fair value less costs to sell, at
which time a provision for losses on such real estate is charged to operations.
 
  (i) Equipment
 
     Equipment, including leasehold improvements, is stated at cost, less
accumulated depreciation and amortization. Depreciation of equipment is computed
using the straight-line or accelerated method over the estimated useful lives of
three to five 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.
 
  (j) Interest-Only and Residual Certificates

 
     Interest-only and residual certificates are carried at fair value in
accordance with SFAS No. 115, 'Accounting for Certain Investments in Debt and
Equity Securities.' Unrealized gains and losses are included in the statement of
operations.
 
  (k) Capitalized Mortgage Servicing Rights
 
     Effective January 1, 1995 the Company adopted SFAS No. 122 'Accounting for
Mortgage Servicing Rights.' The Statement amends SFAS No. 65 to require that a
mortgage banking enterprise recognize as separate assets the rights to service
mortgage loans for others, however those servicing rights are acquired. The
Statement requires the assessment of capitalized Mortgage Servicing Rights for
impairment. Mortgage Servicing Rights are amortized in proportion to and over
the period of the estimated net servicing income.
 
     Effective January 1, 1997, the Company adopted SFAS No. 125, 'Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities,' which supersedes SFAS No. 122, 'Accounting for Mortgage Servicing
Rights' and amends SFAS No. 65, 'Accounting for Certain Mortgage Banking
Activities.' SFAS No. 125 requires that a mortgage banking enterprise
distinguish between the transfer of financial assets that are sale transactions
from the transfer of financial assets that are secured borrowings. Because
Delta's transfers of loans made in connection with its securitizations qualify
as sales under SFAS No. 125, the required accounting is an allocation of basis
approach.
 
     SFAS No. 125 also requires impairment evaluations of all amounts
capitalized as servicing rights, including those purchased before the adoption
of SFAS No. 125, based upon the fair value of the underlying servicing rights.
The Company periodically performs these evaluations on a disaggregated basis.
The continuing effects of SFAS No. 125 on the Company's financial position and
results of operations will depend on several factors, including, among other
things, the amount of acquired or originated loans sold or securitized, the
type, term and credit quality of loans and estimates of future prepayment rates.
 
                                      F-8
DELTA FINANCIAL CORPORATION AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  (l) Fair Value of Financial Instruments
 
     SFAS No. 107, 'Disclosure About Fair Value of Financial Instruments'
requires the Company to disclose the fair value of financial instruments for
which is practicable to estimate fair value. Fair value is defined as the amount
at which a financial instrument could be exchanged in a current transaction
between willing parties, other than in a forced sale or liquidation and is best
evidenced by a quoted market price. Other than interest-only and residual
certificates, substantially all the Company's assets and liabilities deemed to
be financial instruments are carried at cost, which approximates their fair

value.
 
  (m) Use of Estimates
 
     Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
 
  (n) Servicing Income
 
     Servicing income includes servicing fees, prepayment penalties and late
payment charges earned for servicing mortgage loans owned by investors. All fees
and charges are recognized into income when earned.
 
  (o) Earnings Per Share
 
     Earnings per share data for periods prior to October 31, 1996 have not been
presented in the accompanying consolidated financial statements because the
Company was not a public company.
 
     Earnings per share data for the period November 1, 1996 to December 31,
1996 have not been presented in the accompanying consolidated financial
statements because management believes that such data would not be meaningful
given the relatively short period and the impact of the recognition of a
deferred tax liability in connection with the change in tax status.
 
  (p) Stock Option Plan
 
     During 1996, the Company adopted SFAS No. 123, 'Accounting for Stock-Based
Compensation,' which permits entities to continue to apply the provisions of APB
Opinion No. 25, 'Accounting for Stock Issued to Employees,' and provide pro
forma net income and pro forma earnings per share disclosures for employee stock
option grants as if the fair-value based method defined in SFAS No. 123 had been
applied. The Company elected to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123 (see Note 15).
 
  (q) Unaudited Pro Forma Information
 
     The pro forma financial information has been presented to show what the
significant effects on the historical results of operations before extraordinary
item might have been had the Company been treated as a C corporation for income
tax purposes as of the beginning of the earliest period presented and assumes an
effective tax rate of 43%.
 
  (r) Unaudited Interim Financial Information
 
     The accompanying unaudited consolidated financial statements for the three
months ended March 31, 1997 and 1996 have been prepared in accordance with
generally accepted accounting principles for interim financial information and
the instructions to Form 10-Q and do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments consisting

of normal recurring accruals, considered necessary for a fair presentation of
the results for the interim period have been included.
 
                                      F-9
DELTA FINANCIAL CORPORATION AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
(2) REORGANIZATION AND INITIAL PUBLIC OFFERING
 
     On October 31, 1996, the Company acquired all of the outstanding stock of
Delta Funding in exchange for 10,653,000 shares of common stock of the Company.
Prior to the exchange, Delta Funding was treated for Federal income tax purposes
as an S corporation under Subchapter S of the Internal Revenue Code, and as
such, the historical earnings of Delta Funding through October 31, 1996 were
taxed directly to the stockholders of Delta Funding. As a result of the
exchange, the Company and Delta Funding, which became a wholly-owned subsidiary
of the Company, became subject to Federal and State income taxes and the Company
recorded a deferred tax liability on its balance sheet relating to the tax
effect of temporary differences between book and tax accounting, principally
relating to recognition of gain on sale of mortgage loans.
 
     On November 1, 1996, the Company completed an initial public offering (IPO)
of 4,600,000 shares of common stock at an offering price of $16.50 per share.
The net proceeds of the offering to the Company, exclusive of underwriting
discounts and commissions and other expenses, was $69,701,435. In November 1996,
$32,607,000 of the proceeds raised in the offering was distributed to the former
S corporation shareholders with respect to declared distributions of
undistributed S corporation earnings. Remaining undistributed S corporation
earnings of $18,071,687 were reclassified to additional paid-in capital.
 
(3) LOANS HELD FOR SALE
 
     The Company owns first and second mortgages which had a weighted average
interest rate of 11.2% at December 31, 1996. These mortgages are being held as
inventory for future sale at the lower of cost or market. Certain of these
mortgages are pledged as collateral for a portion of the warehouse financing and
other borrowings.
 
     Included in loans held for sale are deferred origination fees and purchase
premiums in the amount of $1,013,658, $3,412,957 and $3,388,143 and an allowance
for loan losses of $750,000, $850,000 and $874,999 at December 31, 1995, 1996
and March 31, 1997 (unaudited), respectively.
 
     Mortgages are payable in monthly installments of principal and interest and
have due dates varying from five to thirty years.
 
     The changes in the allowance for loan losses are as follows:
YEAR ENDED DECEMBER 31,
                                                          ---------------------------------    THREE MONTHS ENDED
                                                            1994         1995        1996        MARCH 31, 1997
                                                          ---------    --------    --------    ------------------
                                                                                                  (UNAUDITED)
Balance at beginning of period.........................   $ 650,000    $700,000    $750,000         $850,000
Provisions.............................................     169,867      99,761     101,158           24,999
Charge-offs............................................    (119,867)    (49,761)     (1,158)              --
                                                          ---------    --------    --------    ------------------
Balance at end of period...............................   $ 700,000    $750,000    $850,000         $874,999
                                                          ---------    --------    --------    ------------------
                                                          ---------    --------    --------    ------------------
(4) ACCOUNTS RECEIVABLE
 
     Accounts receivable consist of the following:
DECEMBER 31,          MARCH 31, 1997
                                                                        ------------------------    --------------
                                                                           1995          1996        (UNAUDITED)
                                                                        ----------    ----------
Securitization.......................................................   $3,168,100    $4,390,694      $4,374,025
Escrow receivable....................................................      662,572       764,381         988,631
Insurance premiums...................................................    1,003,285     1,244,130       1,304,578
Other................................................................    2,011,990     2,255,680       2,695,186
                                                                        ----------    ----------    --------------
                                                                        $6,845,947    $8,654,885      $9,362,420
                                                                        ----------    ----------    --------------
                                                                        ----------    ----------    --------------
F-10
DELTA FINANCIAL CORPORATION AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
(5) WAREHOUSE FINANCING AND OTHER BORROWINGS
 
     The Company has two warehouse credit facilities for a combined amount of
$350,000,000. These lines are collateralized by specific mortgage receivables,
which are equal or greater than the outstanding balances under the line at any
point in time. Both of these lines expire in February 1998.
 
     The first warehouse line of credit is in the aggregate amount of
$250,000,000. At December 31, 1996 and March 31, 1997 (unaudited), the interest
rate was 0.80% and 0.75% above LIBOR, respectively. At December 31, 1995 and

1996, the Company had $0 and $45,813,382 outstanding under this agreement,
respectively. At March 31, 1997 (unaudited), the Company had $51,762,974
outstanding under this agreement.
 
     The second warehouse line of credit is in the aggregate amount of
$100,000,000. At December 31, 1996 the interest rate was 1% above LIBOR. On
February 14, 1997, this warehouse line of credit was increased to $200,000,000
and the interest rate was changed to 0.75% above LIBOR. At December 31, 1995 and
1996, the Company had $30,132,844 and $0 outstanding under this agreement,
respectively. At March 31, 1997 (unaudited), the Company had $0 outstanding
under this agreement.
 
     The Company had a warehouse line of credit in the aggregate amount of
$45,000,000. The line was collateralized by specific mortgage receivables, which
were equal to or greater than the outstanding balances under the line at any
point in time. The interest rate was 2% above LIBOR. At December 31, 1995, the
Company had $30,498,168 outstanding. In May 1996 the Company extinguished this
line of credit at a discount. An extraordinary gain of $3,167,828 was recorded
in connection with this extinguishment of debt.
 
     At December 31, 1995, the Company had lines of credit in the aggregate
amount of $3,500,000 with separate banks. The individual lines available, and
their interest rates, were as follows: $2,500,000 at 1/2% above prime and
$1,000,000 at 2.9% above the 30-day dealer commercial paper rate. At December
31, 1995, the Company had $2,500,000 and $981,843, drawn down from these
sources. During 1996, the $2,500,000 line of credit expired and, at the
Company's option, was not renewed. At December 31, 1996, the Company had $5,367
outstanding on the $1,000,000 line of credit. At March 31, 1997 (unaudited), the
Company had $0 outstanding on this line. Subsequent to March 31, 1997, the
Company obtained an additional credit line in the amount of $7.5 million with a
variable interest rate.
 
     At December 31, 1995 and 1996, the Company had a term loan with $879,710
and $486,710 outstanding, respectively. The interest rate is 1% above New York
Prime (as defined in the loan agreement) and the loan matures in April 1998. At
March 31, 1997 (unaudited), the Company had $388,460 outstanding.
 
     At December 31, 1995 and 1996, the Company had $1,586,935 and $2,160,990
outstanding, respectively, from two leasing companies for financing of capital
assets. At March 31, 1997 (unaudited), the Company had $2,023,753 outstanding.
These capital leases are amortized at fixed rates ranging from 7.11% to 10.41%
and mature between September 1998 and August 2001.
 
     The Company has obtained financing facilities for its interest-only and
residual certificates. As of December 31, 1995 and 1996, the aggregate
outstanding balance on these facilities was $16,176,732 and $47,015,178,
respectively. At March 31, 1997 (unaudited), the aggregate balance was
$57,454,193. These facilities have variable interest rates which ranged from
6.44% to 7.75% at December 31, 1996 and mature between October 1997 and December
1999, and ranged from 6.44% to 7.94% at March 31, 1997 (unaudited) and mature
between October 1997 and March 2000.
 
(6) BANK PAYABLE
 

     In order to maximize its cash management practices, the Company has
instituted a procedure whereby checks written against its operating account are
covered as they are presented to the bank for payment, either by drawing down
its lines of credit or from subsequent deposits of operating cash.
 
                                      F-11
DELTA FINANCIAL CORPORATION AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
(7) INVESTOR PAYABLE
 
     Investor payable represent the collection of mortgage payments by the
Company, from mortgagors, which were remitted to investors subsequent to the
period end.
 
(8) CAPITALIZED MORTGAGE SERVICING RIGHTS
 
     The Company sells mortgage loans to generate servicing income and provide
funds for additional investment and lending activities. Prior to January 1,
1995, the Company accounted for the sale of mortgage loans in conformity with
SFAS No. 65, 'Accounting for Certain Mortgage Banking Activities.' Effective
January 1, 1995, the Company adopted SFAS No. 122, 'Accounting for Mortgage
Servicing Rights' which prospectively changed the methodology for capitalized
Mortgage Servicing Rights and the methodology used to measure impairment of its
capitalized Mortgage Servicing Rights asset. These Statements require that the
gain on sale be recognized at the time of sale, using the present value of the
future servicing cash flows. The cash flow has been computed over the average
estimated life of the mortgages, adjusted for prepayments and recorded as
capitalized Mortgage Servicing Rights.
 
     The Company measures impairment of its servicing rights on a disaggregate
basis based on the predominate risk characteristics of the portfolio and
discounts the asset's estimated future cash flow using a current market rate.
The Company has determined the predominant risk characteristics to be prepayment
risk and interest rate risk. The fair value of the existing Mortgage Servicing
Rights as of December 31, 1995 and 1996 and March 31, 1997 (unaudited)
approximated its book value and did not require a valuation allowance to be
established. To determine the fair value of Mortgage Servicing Rights, the
Company estimates the expected future net servicing revenue based on common
industry assumptions, as well as on the Company's historical experience.
 
     SFAS No. 122 was superseded on January 1, 1997 by SFAS No. 125, 'Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities'. The Company adopted SFAS No. 125 on January 1, 1997.
 
     SFAS No. 125 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996, and is to
be applied prospectively. SFAS No. 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial-components approach

that focuses on control. SFAS No. 125 distinguishes transfers of financial
assets that are sales from transfers that are secured borrowings.
 
     SFAS No. 125 requires mortgage banking entities that acquire or originate
loans and subsequently sell or securitize those loans and retain the Mortgage
Servicing Rights to allocate the total cost of the loans to the Mortgage
Servicing Rights and the mortgage loans without the Mortgage Servicing Rights.
The Company determines fair value based upon the present value of estimated net
future servicing revenues less the estimated cost that would fairly compensate a
substitute servicer to service the loans. The servicing asset is then recorded
on the balance sheet and accounted for under SFAS No. 125 using the allocation
of cost relative to fair value approach. The assumptions used to calculate fair
value are the same assumptions used to determine the fair value of the
interest-only certificates. The cost allocated to the servicing rights is
amortized in proportion to and over the period of estimated net future cash
flows related to servicing income.
 
(9) INTEREST-ONLY AND RESIDUAL CERTIFICATES
 
     The interests that the Company receives upon the sales through
securitizations are in the form of interest-only and residual mortgage
securities which are classified as interest-only and residual certificates.
 
     In accordance with SFAS No. 115, the Company classifies the interest-only
and residual certificates as 'trading securities' and, as such, they are
recorded at their fair value. Fair value of these certificates has been
determined by the Company based on various economic factors, including loan
type, sizes, interest rates, dates of origination, terms and geographic
locations. The Company also uses other available information such as reports
 
                                      F-12
DELTA FINANCIAL CORPORATION AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

on prepayment rates, interest rates, collateral value, economic forecasts and
historical default and prepayment rates of the portfolio under review. If the
fair value of the interest-only and residual certificates is different from the
recorded value, the unrealized gain or loss will be reflected on the statement
of operations.
 
     In connection with loans sold through these securitization vehicles, the
Company has recorded interest-only and residual certificates totaling $25.3
million, $83.1 million and 101.9 million which represents their fair market
value at December 31, 1995 and 1996 and March 31, 1997 (unaudited),
respectively.
 
     Although the Company believes it has made reasonable estimates of the fair
value of the interest-only and residual certificates likely to be realized, the
rate of prepayments and the amount of defaults utilized by the Company are
estimates and actual experience may vary from its estimate. The gain on

securitization recognized by the Company upon the sale of loans through
securitizations will have been overstated if prepayments or losses are greater
than anticipated. Higher than anticipated rates of loan prepayments or losses
would require the Company to write down the fair value of the interest-only and
residual certificates, adversely impacting earnings. Similarly, if
delinquencies, liquidations or interest rates were to be greater than was
initially assumed, the fair value of the interest-only and residual certificates
would be negatively impacted which would have an adverse effect on income for
the period in which such events occurred. Should the estimated loan life assumed
for this purpose be shorter than the actual life, the amount of cash actually
received over the lives of the loans would exceed the gain previously recognized
at the time the loans were sold through securitizations and would result in
additional income.
 
     The activity in the interest-only and residual certificates is summarized
as follows:
THREE MONTHS ENDED
                                                YEAR ENDED DECEMBER 31,                   MARCH 31, 1997
                                        ----------------------------------------    ---------------------------
                                           1994          1995           1996           1996            1997
                                        ----------    -----------    -----------    -----------    ------------
                                                                                            (UNAUDITED)
Balance, beginning of period.........   $2,204,000    $ 7,513,550    $25,309,548    $25,309,548    $ 83,072,777
Additions............................    4,159,550     16,750,157     57,456,342             --      21,902,393
Cash remittances, accretion of
  discount and fair value
  adjustments, net...................    1,150,000      1,045,841        306,887          7,458      (3,116,873)
                                        ----------    -----------    -----------    -----------    ------------
Balance, end of period...............   $7,513,550    $25,309,548    $83,072,777    $25,317,006    $101,858,297
                                        ----------    -----------    -----------    -----------    ------------
                                        ----------    -----------    -----------    -----------    ------------
(10) HEDGING TRANSACTIONS
 
     The Company regularly securitizes and sells fixed rate mortgage loans. To
offset the effects of interest rate fluctuations on the value of its fixed-rate
loans held for sale, the Company in certain cases will hedge its interest rate
risk related to loans held for sale through the use of treasury rate lock
contracts, which function similar to a short sale of U.S. Treasury securities.
The Company accounts for these contracts as hedges of specific loans held for
sale. The gains or losses derived from these contracts are deferred and
recognized as an adjustment to gains on sales of loans when the loans are sold
or securitized.
 
     As of December 31, 1994, 1995 and 1996, the Company had no open hedge
positions. The Company included gains (losses) of $137,871, ($1,721,860) and
($519,192) on the short sale of U.S. Treasury securities as part of gains on
sale of loans in 1994, 1995 and 1996, respectively.
 

     As of March 31, 1996 (unaudited) and 1997 (unaudited), the Company had open
hedge positions of $105 million and $30 million, respectively. The Company
included gains (losses) of $0 and $931,082 on the short sale of U.S. Treasury
securities as part of gains on sale of loans for the three months ended March
31, 1996 (unaudited) and 1997 (unaudited), respectively.
 
                                      F-13
DELTA FINANCIAL CORPORATION AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
(11) RELATED PARTY TRANSACTIONS
 
     The Company had notes due from stockholders in the amount of $990,000 at
December 31, 1995. These notes were repaid during 1996.
 
(12) EMPLOYEE BENEFIT PLANS
 
     The Company has an employee profit-sharing plan covering all eligible
employees, as defined, with at least 30 months of service. The Company
contributed $90,000, $120,000, and $220,000 to the plan for the years ended
December 31, 1994, 1995 and 1996, respectively.
 
     The Company sponsors a 401(k) Retirement Savings Plan. Substantially all
employees of the Company are eligible to participate in the plan after
completing one year of service and who are at least 21 years old. Contributions
are made from employees' elected salary deferrals. The Company may elect to make
a discretionary contribution to the Plan each year. There were no contributions
to the plan by the Company in 1994, 1995 or 1996.
 
(13) COMMITMENTS AND CONTINGENCIES
 
     The Company has repurchase agreements with certain institutions that have
purchased mortgages. Currently, some of the agreements provide for the
repurchase by the Company of any of the mortgage loans that go to actual
foreclosure sale. At the foreclosure sale, the Company will repurchase the
mortgage, if necessary, and make the institution whole. The dollar amount of the
Company's exposure is approximately $20.0 million at December 31, 1996 and $18.0
million at March 31, 1997 (unaudited).
 
     The Company previously subleased its Woodbury, New York offices from an
affiliated company. In August 1996, the lease was assigned to the Company. This
lease provides for rent to be paid on a month-to-month basis. Rental expense,
net of sublease income, for the years ended December 31, 1994, 1995 and 1996
amounted to $382,702, $476,674 and $967,258, respectively.
 
     Minimum future rentals under non-cancelable operating leases as of December
31, 1996 and March 31, 1997 are as follows:
AMOUNT (000'S)
                                                 ---------------------------
                                                 DECEMBER 31,     MARCH 31,
                                                 ------------    -----------
                                                                 (UNAUDITED)
                                                                 -----------
1997..........................................      $1,138         $ 1,071
1998..........................................       1,151           1,405
1999..........................................       1,179           1,331
2000..........................................       1,219           1,240
2001..........................................       1,224           1,224
Thereafter....................................       2,695           2,695
                                                 ------------    -----------
  Total.......................................      $8,606         $ 8,966
                                                 ------------    -----------
                                                 ------------    -----------
In the normal course of business, the Company is subject to various legal
proceedings and claims, the resolution of which, in management's opinion, will
not have a material adverse effect on the financial position or the results of
operations of the Company.
 
     Several class-action lawsuits have been filed recently against a number of
consumer finance companies alleging that the compensation of mortgage brokers
through the payment of yield spread premiums violates various federal and state
consumer protection laws. On March 18, 1997 (unaudited), the Company received
notice that it had been named in a lawsuit filed in Federal District Court,
E.D.N.Y., alleging that the Company's compensation of mortgage brokers by means
of yield spread premiums violates, among other things, the Federal Real Estate
Settlement Procedures Act. The complaint seeks (i) certification of a class of
plaintiffs, (ii) an
 
                                      F-14
DELTA FINANCIAL CORPORATION AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

injunction against payment of yield spread premiums by the Company and (iii)
unspecified compensatory and punitive damages (including attorney's fees).
Management believes the Company has meritorious defenses and intends to defend
this suit, but the Company has not yet answered the complaint and cannot
estimate with any certainty its ultimate legal or financial liability, if any,
with respect to the alleged claims. On May 2, 1997, the Company filed a motion
to dismiss for failure to join a necessary party.
 
(14) SUPPLEMENTAL CASH FLOW INFORMATION
 
     The Company paid $3,796,047, $7,659,000 and $10,452,616 for interest during
the years ended December 31, 1994, 1995 and 1996, respectively. The Company paid

$1,855,922 and $3,901,246 for interest during the three months ended March 31,
1996 (unaudited) and 1997 (unaudited), respectively.
 
     The Company paid $4,463,843 for income taxes during the three
months ended March 31, 1997 (unaudited).
 
     During the three months ended March 31, 1997 (unaudited), in connection
with the acquisition of Fidelity Mortgage, the Company issued 119,288 shares of
common stock, valued at $2.5 million, to the former owners of Fidelity Mortgage.
 
(15) STOCK OPTION PLAN
 
     On October 4, 1996, the board of directors ratified the 1996 Stock Option
Plan and authorized the reserve of 2,200,000 shares of authorized but unissued
common stock for issuance pursuant to the plan. The majority of options issued
during 1996 in connection with the IPO vest over a five year period at 20% per
year and the expiration dates range from five to seven years from grant date.
 
     As of December 31, 1996, there were 466,850 options granted at an exercise
price of $16.50. Of the options granted, 6,000 were exercisable at the end of
the year. No options were exercised, forfeited or expired during the year.
 
     The Company applies APB Opinion No. 25, 'Accounting for Stock Issued to
Employees,' and related interpretations in accounting for its stock option plan.
There was no intrinsic value of the options granted as the exercise price was
equal to the quoted market price at grant date. Accordingly, no compensation
cost has been recognized for the year ended December 31, 1996.
 
     Had compensation cost for the stock option plan been determined based on
the fair value at the grant dates for awards under that plan consistent with the
method of SFAS No. 123, 'Accounting for Stock-Based Compensation,' the Company's
net income for 1996 would have been $25,481,126.
 
     The weighted-average fair value of options granted during 1996 was $6.31.
For purposes of the pro forma calculation under SFAS No. 123, the fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions used for
the 1996 grant:
1996
                                                                   -------
Dividend yield..................................................        0%
Expected volatility.............................................       51%
Risk-free interest rate.........................................        6%
Expected life...................................................   5 years
On March 4, 1997 (unaudited), the board of directors ratified the grant of
an additional 165,000 shares to various employees under the 1996 Stock Option
Plan. The options granted vest over a five year period at 20% per year and have
an expiration date of seven years from grant date. There was no intrinsic value

of the options granted as the exercise price was equal to the quoted market
price at grant date. Accordingly, no compensation cost has been recognized for
the quarter ending March 31, 1997.
 
                                      F-15
DELTA FINANCIAL CORPORATION AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
(16) INCOME TAXES
 
     The income tax provision for the year ended December 31, 1996 is comprised
of the following components:
CURRENT       DEFERRED       TOTAL
                                                                           ----------    ----------    ----------
Ordinary tax provision
  Federal...............................................................   $3,305,242    $  825,832    $4,131,074
  State.................................................................    1,150,463       284,348     1,434,811
                                                                           ----------    ----------    ----------
                                                                            4,455,705     1,110,180     5,565,885
                                                                           ----------    ----------    ----------
Change in tax status
  Federal...............................................................           --     2,901,470     2,901,470
  State.................................................................           --       999,026       999,026
                                                                           ----------    ----------    ----------
                                                                                   --     3,900,496     3,900,496
                                                                           ----------    ----------    ----------
     Total tax provision................................................   $4,455,705    $5,010,676    $9,466,381
                                                                           ----------    ----------    ----------
                                                                           ----------    ----------    ----------
As discussed in Note 1, the Company was an S corporation through October
30, 1996 pursuant to the Internal Revenue Code of 1986, as amended, and as such
did not incur any federal income tax expense. The Company was liable for New
York State minimum tax and that provision is included above under current state
provision.
 
     On October 31, 1996, the Company became a C corporation for federal and
state income tax purposes and as such is subject to federal and state income tax
on its taxable income for the months of November and December 1996. In
connection with the change in tax status from an S corporation to a C
corporation, the Company incurred deferred income tax expense of $3,900,496 as
of October 31, 1996.
 
     The liability for income taxes at December 31, 1996 reflected on the
consolidated balance sheet includes a deferred tax liability of $5,010,676. This

represents the tax effect of differences between the tax basis and financial
statement carrying amounts of assets and liabilities. The major sources of
temporary differences and their deferred tax effect at December 31, 1996 are as
follows:
Deferred tax liabilities:
  Capitalized cost of future servicing income...............   $4,814,213
  Book/tax difference in interest-only residual certificate
     valuation..............................................      966,481
                                                               ----------
Total deferred tax liabilities..............................    5,780,694
                                                               ----------
                                                               ----------
Deferred tax assets:
  Book over tax depreciation................................       86,291
  Book over tax basis in mortgage servicing asset...........      326,906
  Loss reserves.............................................      356,821
                                                               ----------
Total deferred tax assets...................................      770,018
                                                               ----------
Net deferred tax liability..................................   $5,010,676
                                                               ----------
                                                               ----------
F-16
DELTA FINANCIAL CORPORATION AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
A reconciliation of the statutory income tax provision to the effective income
tax provision, as applied to income for the period November 1, 1996 to December
31, 1996, is as follows:
AMOUNT
                                                               ----------
Tax at statutory rate.......................................   $4,161,394
Change in tax status........................................    3,900,000
State and local taxes.......................................      835,127
S corporation state and local tax...........................      150,000
Non-deductible expenses and other...........................      419,860
                                                               ----------
  Total provision...........................................   $9,466,381
                                                               ----------
                                                               ----------
(17) ACQUISITIONS (UNAUDITED)
 
     In February 1997, the Company acquired Fidelity Mortgage, Inc. and Fidelity
Mortgage (Florida), Inc. (together referred to herein as 'Fidelity Mortgage')
for a combination of cash and stock. These transactions were accounted for under
the purchase method of accounting. Accordingly, the results of operations of
Fidelity Mortgage starting from the date of purchase have been included in the
Company's consolidated financial statements. In connection with these
acquisitions the Company recorded goodwill of approximately $6.3 million, which
is being amortized on a straight-line basis over seven years. The acquired
operations will continue to operate as separate legal entities under the names
Fidelity Mortgage, Inc. and Fidelity Mortgage (Florida), Inc.
 
                                      F-17
------------------------------------------------------
            ------------------------------------------------------
 
     NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY
PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
 
                          ---------------------------
 
                               TABLE OF CONTENTS

                          ---------------------------
PAGE
                                                  ----
Prospectus Summary.............................     3
Summary Consolidated Financial Information.....     9
Risk Factors...................................    11
Use of Proceeds................................    21
Capitalization.................................    22
Selected Consolidated Financial Data...........    23
Management's Discussion and Analysis of
  Financial Condition and Results of
  Operations...................................    26
Business.......................................    39
Management.....................................    56
Certain Relationships and Related Party
  Transactions.................................    62
Principal Stockholders.........................    64
Description of the Notes.......................    65
Underwriting...................................    86
Legal Matters..................................    87
Experts........................................    87
Additional Information.........................    87
Index to Consolidated Financial Statements.....   F-1
------------------------------------------------------
            ------------------------------------------------------

            ------------------------------------------------------
            ------------------------------------------------------
 
                                  $150,000,000
 
                                DELTA FINANCIAL
                                  CORPORATION
                                 % SENIOR NOTES
                                    DUE 2004

                            ------------------------

                                   PROSPECTUS

                            ------------------------

                         DONALDSON, LUFKIN & JENRETTE
                            SECURITIES CORPORATION

                               LEHMAN BROTHERS

                              SMITH BARNEY INC.

                                             , 1997
 
            ------------------------------------------------------
            ------------------------------------------------------
PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 13.  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
 
     The Registrants estimates that expenses payable by them in connection with
the offering described in this registration statement (other than the
underwriting discount and commissions) will be as follows:
SEC registration fee..........................................   $ 45,455
Legal fees and expenses.......................................      *
Accounting fees and expenses..................................      *
Printing and engraving........................................      *
Blue sky qualification fees and expenses......................     11,000
Rating Agency fees and expenses...............................      *
Trustee's fees................................................      *
NASD fees and expenses........................................     15,500
Miscellaneous.................................................      *
                                                                 --------
  Total.......................................................   $      *
                                                                 --------
                                                                 --------
------------------
* To be completed by amendment.
 
ITEM 14.  INDEMNIFICATION OF DIRECTORS AND OFFICERS.
 
     The Certificates of Incorporation of each of Delta Financial Corporation,
DF Special Holdings Corporation, Fidelity Mortgage, Inc. and Fidelity Mortgage
(Florida), Inc. eliminates, to the fullest extent permitted by the law of the
State of Delaware, personal liability of directors to those companies and their
stockholders for monetary damages for breach of fiduciary duty as directors.
 
     Section 145(a) of the Delaware General Corporation Law ('DGCL') provides in
relevant part that 'a corporation may indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.'

With respect to derivative actions, Section 145(b) of the DGCL provides in
relevant part that '[a] corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor. . . [by reason of his service in one of the capacities
specified in the preceding sentence] against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the defense or
settlement or such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.'
 
     Article EIGHTH of the Certificates of Incorporation of each of Delta
Financial Corporation, Fidelity Mortgage, Inc. and Fidelity Mortgage (Florida),
Inc. provides:
 
          'To the fullest extent that the General Corporation Law of the State
     of Delaware, as it exists on the date hereof or as it may hereafter be
     amended, permits the limitation or elimination of the liability of
 
                                      II-1
directors, no director of this Corporation shall be personally liable to
     this Corporation or its stockholders for monetary damages for breach of
     fiduciary duty as a director. Notwithstanding the foregoing, a director
     shall be liable to the extent provided by applicable law (1) for any breach
     of the directors' duty of loyalty to the Corporation or its stockholders,
     (2) for acts or omissions not in good faith or which involve intentional
     misconduct or a knowing violation of law, (3) under Section 174 of the
     General Corporation Law of the State of Delaware, or (4) for any
     transaction from which the director derived any improper personal benefit.
     Neither the amendment or repeal of this Article, nor the adoption of any
     provision of this Certificate of Incorporation inconsistent with this
     Article shall adversely affect any right or protection of a director of the
     Corporation existing at the time of such amendment, repeal or adoption.'
 
     Article 12 of the Certificate of Incorporation of DF Special Holdings
     Corporation provides:
 
          'No director shall have any personal liability to the Corporation or
     its stockholders for any monetary damages for breach of fiduciary duty as a
     director, except that this Article 12 shall not eliminate or limit the
     liability of each director (i) for any breach of such director's duty of
     loyalty to the Corporation or its stockholders, (ii) for acts or omissions
     not in good faith or which involve intentional misconduct or a knowing
     violation of law, (iii) under Section 174 of the Delaware General

     Corporation Law, or (iv) for any transaction from which such director
     derived an improper personal benefit. If the Delaware General Corporation
     Law is amended to authorize corporate action further eliminating or
     limiting the personal liability of directors, then the liability of a
     director of the corporation shall be eliminated or limited to the fullest
     extent permitted by the Delaware General Corporation Law, as so amended.
     Any repeal or modification of this provision shall not adversely affect any
     right or protection of a director of the Corporation existing at the time
     of such repeal or modification.'
 
     With respect to Delta Funding Corporation, the New York Business
Corporation Law ('NYBCL') authorizes a New York corporation to indemnify any
person who is, or is threatened to be made, a party in any civil or criminal
proceeding (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another entity, against judgments,
fines, amounts paid in settlement and reasonable expenses (including attorneys'
fees), actually and reasonably incurred by such person as a result of such
action or proceeding or any appeal therein. With respect to actions by or in the
rights of the corporation, the NYBCL authorizes indemnification of such person
against reasonable expenses, including attorneys' fee and amounts paid in
settlement. To be entitled to indemnification, a person must have acted in good
faith and in a manner he reasonably believed to be in, or not opposed to, the
best interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. Court
approval is required as a prerequisite to indemnification of expenses in respect
of any claim as to which a person has been adjudged liable to the corporation.
The NYBCL requires indemnification against expenses actually and reasonably
incurred by any director, officer, employee or agent in connection with a
proceeding against such person for action in such capacity to the extent that
the person has been successful on the merits or otherwise. Advancement of
expenses (i.e., payment prior to a determination on the merits) is permitted,
but not required, by the NYBCL, which further requires that any director or
officer must undertake to repay such expenses if it is ultimately determined
that he is not entitled to indemnification. The disinterested members of the
board of directors (or independent legal counsel or the shareholders) must
determine, in each instance where indemnification is not required by the NYBCL,
that such director, officer, employee or agent is entitled to indemnification.
The NYBCL provides that the indemnification provided by statute is not
exclusive.
 
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
 
None.
 
                                      II-2
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
 
     (a) Exhibits:
EXHIBIT
      NUMBER          DESCRIPTION
-------------------   -----------------------------------------------------------------------------------------------------------
*1.      --   Form of Underwriting Agreement
              +3.1     --   Certificate of Incorporation of Delta Financial Corporation
              +3.2     --   Bylaws of Delta Financial Corporation
            ***3.3     --   Certificate of Incorporation of Delta Funding Corporation
            ***3.4     --   Bylaws of Delta Funding Corporation
              *3.5     --   Certificate of Incorporation of Fidelity Mortgage, Inc.
              *3.6     --   Bylaws of Fidelity Mortgage, Inc.
              *3.7     --   Certificate of Incorporation of Fidelity Mortgage (Florida), Inc.
              *3.8     --   Bylaws of Fidelity Mortgage (Florida), Inc.
              *3.9     --   Certificate of Incorporation of DF Special Holdings Corporation
              *3.10    --   Bylaws of DF Special Holdings Corporation
             **5.      --   Opinion of Stroock & Stroock & Lavan LLP
             +10.1     --   Employment Agreement dated October 1, 1996 between the Registrant and Sidney A. Miller
             +10.2     --   Employment Agreement dated October 1, 1996 between the Registrant and Hugh Miller
             +10.3     --   Employment Agreement dated October 1, 1996 between the Registrant and Christopher Donnelly
             +10.4     --   Employment Agreement dated October 1, 1996 between the Registrant and Randall F. Michaels
            ++10.5     --   Employment Agreement dated March 4, 1997 between the Registrant and Richard Blass
             +10.6     --   Lease Agreement between Delta Funding Corporation and the Tilles Investment Company
             +10.7     --   1996 Stock Option Plan of Delta Financial Corporation
            **10.8     --   Indenture dated as of             , 1997 between Delta Financial Corporation and
            **10.9     --   Form of Guarantee by Delta Funding Corporation
            **10.10    --   Form of Guarantee by Fidelity Mortgage, Inc.
            **10.11    --   Form of Guarantee by Fidelity Mortgage (Florida), Inc.
            **10.12    --   Form of Guarantee by DF Special Holdings Corporation
             *23.1     --   Consent of KPMG Peat Marwick LLP
            **23.2     --   Consent of Stroock & Stroock & Lavan LLP (contained in 5.1)
             *24.      --   Power of Attorney (included in the signature page)
            **25.      --   Statement of Eligibility and Qualification of Trustee (Form T-1)
------------------
  * Filed herewith
 
 ** To be filed by amendment
 
*** Incorporated by reference from Delta Funding Corporation's Registration
    Statement on Form S-3 (File No. 333-3418) filed with the Commission on
    August 5, 1996.
 
  + Incorporated by reference from the Company's Registration Statement on Form
    S-1 (No. 333-11289) filed with the Commission on October 9, 1996.
 
 ++ Incorporated by reference from the Company's Quarterly Report on Form 10-Q
    for the quarter ended March 31, 1997 (File No. 1-12109) filed with the
    Commission on May 15, 1997.
 
                                      II-3
ITEM 17. UNDERTAKINGS.
 
     (a)  Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrants pursuant to the foregoing provisions, or otherwise,
the Registrants have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrants of expenses incurred or paid by a director, officer
or controlling person of the Registrants in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, each of the
Registrants will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
 
     (b)  Each of the undersigned Registrants hereby undertakes that:
 
          (1) For purposes of determining any liability under the Securities Act
              of 1933, the information omitted from the form of prospectus filed
              as part of this Registration Statement in reliance upon Rule 430A
              and contained in a form of prospectus filed by the Registrants
              pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities
              Act of 1933 shall be deemed to be part of this Registration
              Statement as of the time it was declared effective.
 
          (2) For the purpose of determining any liability under the Securities
              Act of 1933, each post-effective amendment that contains a form of
              prospectus shall be deemed to be a new registration statement
              relating to the securities offered therein, and the offering of
              such securities at that time shall be deemed to be the initial
              bona fide offering thereof.
 
                                      II-4
SIGNATURES
 
     PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANTS HAVE DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON THEIR
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE STATE OF NEW YORK
ON THE 6TH DAY OF JUNE, 1997.
 
                                          DELTA FINANCIAL CORPORATION ('DFC')
                                          and the Guarantors listed on Annex A
                                          (the 'Guarantors')
 
                                          By:           /s/ HUGH MILLER
                                              ----------------------------------
                                                         Hugh Miller
                                               President and Chief Executive
                                                      Officer of DFC
                                                 and each of the Guarantors
 
                               POWER OF ATTORNEY
 
     KNOW ALL MEN BY THESE PRESENTS, THAT EACH INDIVIDUAL WHOSE SIGNATURE
APPEARS BELOW CONSTITUTES AND APPOINTS HUGH MILLER AND RICHARD BLASS, OR ANY OF
THEM, HIS TRUE AND LAWFUL ATTORNEY-IN-FACT AND AGENT WITH FULL POWER OF
SUBSTITUTION AND RESUBSTITUTION, FOR HIM OR HER AND IN HIS NAME, PLACE AND
STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS (INCLUDING
POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT, AND TO FILE THE SAME
WITH ALL EXHIBITS THERETO, AND ALL DOCUMENTS IN CONNECTION THEREWITH, WITH THE
SECURITIES AND EXCHANGE COMMISSION, GRANTING SAID ATTORNEY-IN-FACT AND AGENT AND
EACH OF THEM, FULL POWER AND AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND
THING REQUISITE AND NECESSARY TO BE DONE IN AND ABOUT THE PREMISES, AS FULLY TO
ALL INTENTS AND PURPOSES AS HE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND
CONFIRMING ALL THAT SAID ATTORNEY-IN-FACT AND AGENT OR ANY OF THEM, OR THEIR OR
HIS SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE
HEREOF.
 
     PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSON IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE                               CAPACITY IN WHICH SIGNED                     DATE
------------------------------------------  -------------------------------------------------   --------------
/s/ SIDNEY A. MILLER             Chairman of the Board of Directors of DFC             June 6, 1997
------------------------------------------
             Sidney A. Miller
 

             /s/ HUGH MILLER                Director, Chief Executive Officer and President       June 6, 1997
------------------------------------------  of DFC and each of the Guarantors (Principal
               Hugh Miller                  Executive Officer)

 

            /s/ RICHARD BLASS               Director, Chief Financial Officer, Senior Vice        June 6, 1997
------------------------------------------  President and Treasurer (Principal Accounting
              Richard Blass                 Officer) of DFC, Treasurer (Principal Accounting
                                            Officer) of DF Special Holdings Corporation and
                                            Director of each of the Guarantors
 

           /s/ MARTIN D. PAYSON             Director of DFC                                       June 6, 1997
------------------------------------------
             Martin D. Payson
II-5
/s/ ARNOLD B. POLLARD             Director of DFC                                       June 3, 1997
------------------------------------------
            Arnold B. Pollard
 

            /s/ MARC E. MILLER              Director of all Guarantors and Vice President,        June 6, 1997
------------------------------------------  Secretary and Treasurer (Principal Accounting
              Marc E. Miller                Officer) of Fidelity Mortgage, Inc. and Fidelity
                                            Mortgage (Florida), Inc.
 

             /s/ JONATHAN NEW               Director of Fidelity Mortgage, Inc. and Fidelity      June 6, 1997
------------------------------------------  Mortgage (Florida), Inc.
               Jonathan New
 

              /s/ LEE MILLER                Director of DF Special Holdings Corporation           June 6, 1997
------------------------------------------
                Lee Miller
 

           /s/ WILLIAM J. HORAN             Director of DF Special Holdings Corporation           June 6, 1997
------------------------------------------
             William J. Horan
II-6
ANNEX A
 
Delta Funding Corporation
DF Special Holdings Corporation
Fidelity Mortgage, Inc.
Fidelity Mortgage (Florida), Inc.
 
                                      A-1
REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                            ------------------------
 
                                    EXHIBITS
                                   FILED WITH
                                    FORM S-1

                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
 
                            ------------------------
 
                          DELTA FINANCIAL CORPORATION
                           DELTA FUNDING CORPORATION
                        DF SPECIAL HOLDINGS CORPORATION
                            FIDELITY MORTGAGE, INC.
                       FIDELITY MORTGAGE (FLORIDA), INC.
           (EXACT NAME OF REGISTRANTS AS SPECIFIED IN THEIR CHARTER)
 
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
EXHIBIT INDEX
EXHIBIT                                                                                                     SEQUENTIAL
NUMBER    DESCRIPTION                                                                                        PAGE NO.
-------   -----------------------------------------------------------------------------------------------   -----------
*1.      --   Form of Underwriting Agreement
  +3.1     --   Certificate of Incorporation of Delta Financial Corporation
  +3.2     --   Bylaws of Delta Financial Corporation
***3.3     --   Certificate of Incorporation of Delta Funding Corporation
***3.4     --   Bylaws of Delta Funding Corporation
  *3.5     --   Certificate of Incorporation of Fidelity Mortgage, Inc.
  *3.6     --   Bylaws of Fidelity Mortgage, Inc.
  *3.7     --   Certificate of Incorporation of Fidelity Mortgage (Florida), Inc.
  *3.8     --   Bylaws of Fidelity Mortgage (Florida), Inc.
  *3.9     --   Certificate of Incorporation of DF Special Holdings Corporation
  *3.10    --   Bylaws of DF Special Holdings Corporation
 **5.      --   Opinion of Stroock & Stroock & Lavan LLP
 +10.1     --   Employment Agreement dated October 1, 1996 between the Registrant and Sidney A. Miller
 +10.2     --   Employment Agreement dated October 1, 1996 between the Registrant and Hugh Miller
 +10.3     --   Employment Agreement dated October 1, 1996 between the Registrant and Christopher
                Donnelly
 +10.4     --   Employment Agreement dated October 1, 1996 between the Registrant and Randall F. Michaels
++10.5     --   Employment Agreement dated March 4, 1997 between the Registrant and Richard Blass
 +10.6     --   Lease Agreement between Delta Funding Corporation and the Tilles Investment Company
 +10.7     --   1996 Stock Option Plan of Delta Financial Corporation
**10.8     --   Indenture dated as of             , 1997 between Delta Financial Corporation and
**10.9     --   Form of Guarantee by Delta Funding Corporation
**10.10    --   Form of Guarantee by Fidelity Mortgage, Inc.
**10.11    --   Form of Guarantee by Fidelity Mortgage (Florida), Inc.
**10.12    --   Form of Guarantee by DF Special Holdings Corporation
 *23.1     --   Consent of KPMG Peat Marwick LLP
**23.2     --   Consent of Stroock & Stroock & Lavan LLP (contained in 5.1)
 *24.      --   Power of Attorney (included in the signature page).
**25.      --   Statement of Eligibility and Qualification of Trustee (Form T-1)
------------------
  * Filed herewith
 
 ** To be filed by amendment
 
*** Incorporated by reference from Delta Funding Corporation's Registration
    Statement on Form S-3 (File No. 333-3418) filed with the Commission on
    August 5, 1996.
 
  + Incorporated by reference from the Company's Registration Statement on Form
    S-1 (No. 333-11289) filed with the Commission on October 9, 1996.
 
 ++ Incorporated by reference from the Company's Quarterly Report on Form 10-Q
    for the quarter ended March 31, 1997 (File No. 1-12109) filed with the
    Commission on May 15, 1997.