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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Kx ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2002

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From  to .

Commission File Number: 1-09589

PMC CAPITAL, INC.




(Exact name of registrant as specified in its charter)


|                                                |  |                                
|----------------------------------------------- |  | -------------------------------
|Florida                                         |  | 59-2338539                     
|                                                |  |                                
|(State or other jurisdiction of                 |  | (I.R.S. Employer               
|incorporation or organization)                  |  | Identification No.)            
|                                                |  |                                
|18111 Preston Road, Suite 600, Dallas, TX 75252 |  | (972) 349-3200                 
|                                                |  |                                
|(Address of principal executive offices)        |  | (Registrants telephone number)

Securities registered pursuant to Section 12(b) of the Act:Common stock, $.01 par value

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES x NO o

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

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES o NO x

The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on June
28, 2002 as reported on the American Stock Exchange, was approximately $63
million. Common Stock held by each officer and director and by each person
who owns 10% or more of the outstanding Common Stock has been excluded
because such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.

As of March 21, 2003, the Registrant had 11,853,516 shares of Common Stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Registrants Proxy Statement to be filed with the Securities
and Exchange Commission within 120 days after the year covered by this Form
10-K with respect to the Annual Meeting of Shareholders are incorporated by
reference into Part III.





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TABLE OF CONTENTS



|                                                   |                                                                                                         |  |  |  |  |  |  | 
|-------------------------------------------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                            
|                                                   | Item 1. BUSINESS                                                                                       
|                                                   | Item 2. PROPERTIES                                                                                     
|                                                   | Item 3. LEGAL PROCEEDINGS                                                                              
|                                                   | Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                            
|PART II                                           
|                                                   | Item 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANTS COMMON STOCK AND RELATED SHAREHOLDER MATTERS 
|                                                   | Item 6. SELECTED CONSOLIDATED FINANCIAL DATA                                                           
|                                                   | Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS          
|                                                   | Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                    
|                                                   | Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                       
|                                                   | Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE           
|PART III                                          
|                                                   | Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                            
|                                                   | Item 11. EXECUTIVE COMPENSATION                                                                        
|                                                   | Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
|                                                   | Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                
|                                                   | Item 14. CONTROLS AND PROCEDURES                                                                       
|PART IV                                           
|                                                   | Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                               
|SIGNATURES                                        
|CERTIFICATION                                     
|EXHIBITS                                          
|EX-2.1 Agreement and Plan of Merger               
|EX-2.2 Form of Voting Agreement-PMC Capital       
|EX-2.3 Form of Voting Agreement-PMC Commercial    
|EX-10.1 Employment Contract - Lance B. Rosemore   
|EX-10.2 Employment Contract - Andrew S. Rosemore  
|EX-10.4 Employment Contract - Jan F. Salit        
|EX-10.5 Employment Contract - Barry N. Berlin     
|EX-10.26 Eighth Amendment to Credit Agreement     
|EX-10.27 Investment Management Agreement          
|EX-10.28 Form of Distribution/Indemnification Agmt
|EX-21.1 Subsidiaries of the Registrant            
|EX-23.1 Consent of PricewaterhouseCoopers LLP     
|EX-99.1 Certification of Chief Executive Officer  
|EX-99.2 Certification of Chief Financial Officer  



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PMC CAPITAL, INC.

Form 10-K
For the Year Ended December 31, 2002



TABLE OF CONTENTS

|                                  |     |  |     |                                                                                                |  |  |    | 
|--------------------------------- | --- |  | --- | ---------------------------------------------------------------------------------------------- |  |  | -- | 
|ITEM                              |     |  |     | PAGE                                                                                          
|                                  |     |  |     |                                                                                               
|PART I                           
|                                  | 1.  |  |     | Business                                                                                       |  |  | 2  | 
|                                  | 2.  |  |     | Properties                                                                                     |  |  | 22 | 
|                                  | 3.  |  |     | Legal Proceedings                                                                              |  |  | 22 | 
|                                  | 4.  |  |     | Submission of Matters to a Vote of Security Holders                                            |  |  | 22 | 
|PART II                          
|                                  | 5.  |  |     | Market Price of and Dividends on the Registrants Common
Stock and Related Shareholder Matters |  |  | 23 | 
|                                  | 6.  |  |     | Selected Consolidated Financial Data                                                           |  |  | 24 | 
|                                  | 7.  |  |     | Managements Discussion and Analysis of Financial Condition
and Results of Operations          |  |  | 25 | 
|                                  | 7A. |  |     | Quantitative and Qualitative Disclosures about Market Risk                                     |  |  | 50 | 
|                                  | 8.  |  |     | Consolidated Financial Statements and Supplementary Data                                       |  |  | 52 | 
|                                  | 9.  |  |     | Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure           |  |  | 52 | 
|PART III                         
|                                  | 10. |  |     | Directors and Executive Officers of the Registrant                                             |  |  | 53 | 
|                                  | 11. |  |     | Executive Compensation                                                                         |  |  | 53 | 
|                                  | 12. |  |     | Security Ownership of Certain Beneficial Owners and
Management and Related Shareholder Matters |  |  | 53 | 
|                                  | 13. |  |     | Certain Relationships and Related Transactions                                                 |  |  | 53 | 
|                                  | 14. |  |     | Controls and Procedures                                                                        |  |  | 53 | 
|PART IV                          
|                                  | 15. |  |     | Exhibits, Financial Statements, Schedules and Reports on
Form 8-K                              |  |  | 55 | 
|Signatures                        |     |  | 56  |                                                                                               
|Certifications                    |     |  | 57  |                                                                                               
|Consolidated Financial Statements |     |  | F-1 |                                                                                               
|Exhibits                          |     |  | E-1 |                                                                                               

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PART I




Item 1. BUSINESS

INTRODUCTION

PMC Capital, Inc., a Florida corporation, is a diversified, closed-end
management investment company that has elected to operate as a business
development company (BDC) under the Investment Company Act of 1940, as
amended (the 1940 Act). PMC Capital, Inc. (PMC Capital or PMC, and
together with its consolidated subsidiaries, the Company, we or our)
is a national lender to small businesses either directly or through our
three 1940 Act subsidiaries. These subsidiaries are First Western SBLC,
Inc. (First Western), PMC Investment Corporation (PMCIC) and Western
Financial Capital Corporation (Western Financial). First Western, PMCIC
and Western Financial are registered under the 1940 Act as diversified,
closed-end management investment companies. PMC Capitals common stock (the
Common Stock) is traded on the American Stock Exchange under the symbol
PMC. Our investment objective is to achieve current income that is
available to pay out to shareholders in the form of quarterly dividends.
PMC Capital has elected to be taxed as a regulated investment company under
the Internal Revenue Code of 1986, as amended (the Code) and thus
distributes substantially all of its taxable income as dividends to its
shareholders, thereby incurring no Federal income tax liability on such
income.

Our operations are centralized in Dallas, Texas and include
originating, servicing and selling commercial loans. We also have business
development offices in Georgia, Arizona and Missouri. We operate under
several licenses from the Small Business Administration (the SBA). First
Western is licensed as a small business lending company (SBLC) that
originates loans through the SBAs 7(a) Guaranteed Loan Program. PMCIC is a
licensed specialized small business investment company (SSBIC) under the
Small Business Investment Act of 1958, as amended (SBIA). PMCIC uses
long-term funds provided by the SBA, together with its own capital, to
provide long-term collateralized loans to eligible small businesses owned by
disadvantaged persons, as defined under SBA regulations. Western
Financial is a licensed small business investment company (SBIC) under the
SBIA that provides loans to borrowers whether or not they qualify as
disadvantaged.

PMC Capital is either directly or indirectly the sole shareholder or a
partner of several non-investment company subsidiaries: PMC Advisers, Ltd.
and its subsidiary (PMC Advisers); PMC Funding Corp. and its subsidiary
(PMC Funding); and several special purpose entities (the SPEs)
established to facilitate structured loan transactions. Our consolidated
financial statements include the accounts of PMC Capital and its
wholly-owned regulated investment company subsidiaries. The accounts of PMC
Advisers and PMC Funding are accounted for using the equity method of
accounting in conformity with the requirements of Federal securities laws.
Our interests in the SPEs are accounted for as retained interests in
transferred assets.

In addition to our lending operations, we earn income through PMC
Advisers which evaluates and services loans receivable and other investments
pursuant to fee arrangements (the Investment Management Agreements) with
PMC Commercial Trust (PMC Commercial), a real estate investment trust
(REIT) affiliated with us through common management.

PMC Commercial provides loans to entities whose borrowing needs and/or
strength and stability exceed the limitations set by the SBA for our SBA
approved loan programs. As a result, we generally pursue different
prospective borrowers than PMC Commercial. In order to further mitigate the
potential for conflicts of interest, PMC Capital, PMC Commercial and PMC
Advisers have entered into a loan origination agreement (the Loan
Origination Agreement). Pursuant to the Loan Origination Agreement, loans
that are greater than $1.3 million that meet PMC Commercials underwriting
criteria are first presented to PMC Commercial for funding. If PMC
Commercial does not have available funds, we may originate those lending
opportunities as long as they meet our lending criteria.

As of December 31, 2002 and 2001, our total assets were approximately
$140.3 million and $162.7 million, respectively. During the years ended
December 31, 2002 and 2001, our total investment income was approximately
$16.7 million and $20.8 million, respectively and our net increase in net
assets resulting from operations (hereinafter referred to as net income)
was approximately $6.0 million and $10.6 million, respectively.

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LENDING ACTIVITIES

 Overview

The fair value of our loans receivable was $87.2 million and $107.4
million at December 31, 2002 and 2001, respectively. As of December 31,
2002, we have $71.3 million (82%) of variable-rate loans receivable and
$15.9 million (18%) of fixed-rate loans receivable and the weighted average
interest rate on our loans receivable was 7.1%.

We primarily originate loans to small business concerns in the limited
service sector of the hospitality industry. We have a fundamental policy
with respect to loan concentration that requires us to have at least 25% of
our total assets invested in the hospitality industry, and at December 31,
2002 our concentration was approximately 81%. We also emphasize lending to
the convenience store and gas station, restaurant, service, retail and
commercial real estate industries. We are a national lender that primarily
lends to businesses in the southeast and southwest regions of the United
States.

 Limited Service Hospitality Industry

Our loans in the hospitality industry are generally collateralized by
first liens on limited service hospitality properties and are generally made
to owner-operated facilities operating under national franchises. We
believe that franchise operations offer attractive lending opportunities
because such businesses generally employ proven business concepts, have
national reservation systems, have consistent product quality, are screened
and monitored by franchisors and generally have a higher rate of success
when compared to other independently operated hospitality businesses.

Reductions in business and discretionary travel have caused a
moderation in demand for hotel rooms and a slowdown in construction of
hospitality properties (including limited service hospitality properties).
However, the limited service segment of the hospitality industry has been
less impacted and has continued to outperform the luxury and upscale sectors
which experienced the weakest performance. Another factor which affects the
limited service sector of the hospitality industry is a significant rise in
gasoline prices within a short period of time. Most of the limited service
hospitality properties collateralizing our loans receivable are located on
interstate highways. As seen in the past, when gas prices sharply increase,
occupancy rates for properties located on interstate highways decrease.

 Loan Originations and Underwriting

We originate mortgage loans to small businesses primarily
collateralized by commercial real estate. We believe that we successfully
compete in the commercial real estate finance market due to our
understanding of our borrowers businesses, the flexible loan terms that we
offer and our responsive customer service. Our approach to assessing new
commercial mortgage loans requires an analysis of the replacement cost of
the collateral, its liquidation value and an analysis of local market
conditions. We also consider the underlying cash flow of the tenant or
owner-occupant as well as more traditional real estate loan underwriting
criteria.

Our variable-rate loans receivable require payments of principal and
interest, reset on a quarterly basis, to amortize the principal over ten to
20 years. Our fixed interest rate loans receivable primarily require level
payments of principal and interest calculated to amortize the principal over
ten to 25 years.

We have business development offices in Texas, Georgia, Arizona and
Missouri and we solicit loan applications from potential borrowers through
personal contacts and public appearances, direct mailings, advertisements in
trade publications and other marketing vehicles. In addition, a significant
percentage of new loans is generated through referrals from existing
borrowers, lawyers, accountants, real estate brokers and loan brokers. In
certain cases, we make referral payments to persons who assist in generating
loan applications. Such referral payments generally are in amounts not
exceeding 1% of the principal amount of the related loan. Our loan
committee, comprised primarily of senior management, makes the final
determination on whether or not to approve each loan application.

Upon receipt of a completed loan application, our credit department
conducts: (i) a detailed analysis of the loan, which typically includes an
appraisal and a valuation by the credit department of the property that will

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collateralize the loan to assure compliance with loan-to-value percentages,
(ii) a site inspection for real estate collateralized loans, (iii) a review
of the borrowers business experience, (iv) a review of the borrowers
credit history, and (v) an analysis of the borrowers debt-service-coverage
and debt-to-equity ratios. All appraisals must be performed by an approved
licensed third party appraiser and based on the market value, replacement
cost and cash flow value approaches. We generally utilize nationwide
independent appraisal firms and seek local market economic information to
the extent available.

Our typical loan is distinguished from those of some of our competitors by
the following characteristics:



| |  |  | Substantial down payments are required. We usually require
an initial down payment of not less than 20% of the value of the
property which is collateral for the loan at the time of such loan.
Our experience has shown that the likelihood of full repayment of
a loan increases if the owner/operator is required to make an
initial and substantial financial commitment to the property which
is collateral for the loan.                                                                                                                                                                                                                                                                                                                               
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | Cash outs are typically not permitted. Generally, we
will not make a loan in an amount greater than either the cost or
the current appraised value of the property which is collateral for
the loan. For example, a hotel property may have been originally
constructed for a cost of $2,000,000, with the owner/operator
borrowing $1,600,000 of that amount. At the time of the borrowers
loan refinancing request, the property which is collateral for the
loan is appraised at $4,000,000. Some of our competitors might
loan from 70% to 90% or more of the new appraised value of the
property and permit the owner/operator to receive a cash
distribution from the proceeds. Generally, we would not permit
this type of cash-out distribution.
| |  |  | The obligor is personally liable for the loan. We
generally require the principals of the borrower to guarantee the
loan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

 Loan Activity

The following table details our loan activity for the years indicated:

|                                     |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|------------------------------------ |  | ------------------------ | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                     |  | Years Ended December 31,
|                                     |  |                         
|                                     |  | 2002                     |         | 2001 |  | 2000 |         | 1999 |  | 1998
|                                     |  |                          |         |      |  |      |         |      |  |     
|                                     |  | (In thousands)          
|Loans receivable  beginning of year |  | $                        | 107,392 |      |  | $    | 100,353 |      |  | $    | 106,325 |   |  | $ | 116,711 |   |  | $ | 127,240 |  
|Loans originated                     |  |                          | 46,138  |      |  |      | 65,977  |      |  |      | 44,158  |   |  |   | 84,264  |   |  |   | 66,450  |  
|Principal collections (1)            |  |                          | (13,891 | )    |  |      | (10,063 | )    |  |      | (11,233 | ) |  |   | (15,431 | ) |  |   | (23,538 | )
|Structured loan sales (2)            |  |                          | (43,218 | )    |  |      | (49,194 | )    |  |      | (28,046 | ) |  |   | (60,481 | ) |  |   | (43,144 | )
|Loans sold (3)                       |  |                          | (6,146  | )    |  |      | (7,778  | )    |  |      | (9,584  | ) |  |   | (19,152 | ) |  |   | (9,978  | )
|Loans transferred to AAL (4)         |  |                          | (2,629  | )    |  |      | (314    | )    |  |      |        |   |  |   |        |   |  |   |        |  
|Loans assumed by affiliate (5)       |  |                          | (885    | )    |  |      |        |      |  |      |        |   |  |   |        |   |  |   |        |  
|Loans purchased (6)                  |  |                          | 1,176   |      |  |      | 8,634   |      |  |      |        |   |  |   |        |   |  |   |        |  
|Other adjustments (7)                |  |                          | (692    | )    |  |      | (223    | )    |  |      | (1,267  | ) |  |   | 414     |   |  |   | (319    | )
|                                     |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Loans receivable  end of year       |  | $                        | 87,245  |      |  | $    | 107,392 |      |  | $    | 100,353 |   |  | $ | 106,325 |   |  | $ | 116,711 |  
|                                     |  |                          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  



---

|(1) |  | Includes scheduled payments and prepayments.                                                                                                                              
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | We sold loans receivable as part of structured loan sale transactions.                                                                                                    
|   
|(3) |  | First Western sells the guaranteed portion of its loans receivable
through private placements to either dealers in government guaranteed
loans or institutional investors.
|   
|(4) |  | During 2001 and 2002, we transferred loans to assets acquired in
liquidation (AAL).                                                                                     
|   
|(5) |  | During 2002, PMC Funding acquired assets and assumed notes payable
to PMC Capital and First Western.                                                                      
|   
|(6) |  | Represents the value of loans purchased through our exercise of
optional redemption provisions from affiliated special purpose
entities.                                  
|   
|(7) |  | Includes the change in unrealized appreciation (depreciation) in
loans receivable, loans written-off and discounts.                                                       

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 Quarterly Loan Originations

The following table is a breakdown of loans originated on a quarterly
basis during the years indicated:

|               |       |   |                          |        |      |   |        |        |      |   |        |        |  |   |        |        |  |   |        |        | 
|-------------- | ----- | - | ------------------------ | ------ | ---- | - | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ | 
|               |       |   | Years Ended December 31,
|               |       |   |                         
|               |       |   | 2002                     |        | 2001 |   | 2000   |        | 1999 |   | 1998  
|               |       |   |                          |        |      |   |        |        |      |   |       
|               |       |   | (In thousands)          
|First Quarter  |       | $ | 11,772                   |        |      | $ | 15,628 |        |      | $ | 13,190 |        |  | $ | 17,231 |        |  | $ | 10,937 |       
|Second Quarter |       |   | 7,696                    |        |      |   | 32,850 |        |      |   | 10,943 |        |  |   | 16,534 |        |  |   | 11,739 |       
|Third Quarter  |       |   | 8,226                    |        |      |   | 9,903  |        |      |   | 10,453 |        |  |   | 27,687 |        |  |   | 16,887 |       
|Fourth Quarter |       |   | 18,444                   |        |      |   | 7,596  |        |      |   | 9,572  |        |  |   | 22,812 |        |  |   | 26,887 |       
|               |       |   |                          |        |      |   |        |        |      |   |        |        |  |   |        |        |  |   |        |       
|               | Total |   | $                        | 46,138 |      |   | $      | 65,977 |      |   | $      | 44,158 |  |   | $      | 84,264 |  |   | $      | 66,450 | 
|               |       |   |                          |        |      |   |        |        |      |   |        |        |  |   |        |        |  |   |        |       

 Loan Portfolio Statistics

Information on our loans receivable, and combined with loans receivable
which have been sold and which we service and have retained interests (the
Serviced Loan Portfolio) was as follows, broken down by division:

|                                |                                |  |                                          |         |          |  |       |        |       |  |            |         |       |  |   |         |   |  |   |        |            |  |   |         |  
|------------------------------- | ------------------------------ |  | ---------------------------------------- | ------- | -------- |  | ----- | ------ | ----- |  | ---------- | ------- | ----- |  | - | ------- | - |  | - | ------ | ---------- |  | - | ------- | -
|                                |                                |  | December 31,                            
|                                |                                |  |                                         
|                                |                                |  | 2002                                     |         | 2001    
|                                |                                |  |                                          |         |         
|                                |                                |  |                                          |         |          |  |       |        |       |  | Commercial |         |       |  |   |         |   |  |   |        | Commercial
|                                |                                |  | Total                                    |         | SBA 7(a) |  | Loans |        | Total |  | SBA 7(a)   |         | Loans
|                                |                                |  |                                          |         |          |  |       |        |       |  |            |         |      
|                                |                                |  | (Dollars in thousands, except footnotes)
|Principal balance:              |                                |  |                                          |         |          |  |       |        |       |  |            |         |       |  |   |         |   |  |   |        |            |  |   |        
|                                | Loans receivable (1)           |  | $                                        | 88,476  |          |  | $     | 15,220 |       |  | $          | 73,256  |       |  | $ | 108,357 |   |  | $ | 17,510 |            |  | $ | 90,847  |  
|                                | Sold loans of SPEs             |  |                                          | 176,296 |          |  |       | 3,590  |       |  |            | 172,706 |       |  |   | 158,002 |   |  |   | 4,907  |            |  |   | 153,095 |  
|                                | Sold SBA 7(a)
guaranteed loans |  |                                          | 48,181  |          |  |       | 48,181 |       |  |            |        |       |  |   | 55,409  |   |  |   | 55,409 |            |  |   |        |  
|                                |                                |  |                                          |         |          |  |       |        |       |  |            |         |       |  |   |         |   |  |   |        |            |  |   |        
|                                | Serviced Loan Portfolio        |  | $                                        | 312,953 |          |  | $     | 66,991 |       |  | $          | 245,962 |       |  | $ | 321,768 |   |  | $ | 77,826 |            |  | $ | 243,942 |  
|                                |                                |  |                                          |         |          |  |       |        |       |  |            |         |       |  |   |         |   |  |   |        |            |  |   |        
|Weighted average interest
rate: |                                |  |                                          |         |          |  |       |        |       |  |            |         |       |  |   |         |   |  |   |        |            |  |   |        
|                                | Loans receivable               |  |                                          | 7.1     | %        |  |       | 6.6    | %     |  |            | 7.2     | %     |  |   | 9.0     | % |  |   | 7.9    | %          |  |   | 9.2     | %
|                                | Sold loans of SPEs             |  |                                          | 9.0     | %        |  |       | 7.1    | %     |  |            | 9.1     | %     |  |   | 9.1     | % |  |   | 8.4    | %          |  |   | 9.1     | %
|                                | Sold SBA 7(a)
guaranteed loans |  |                                          | 6.8     | %        |  |       | 6.8    | %     |  |            |        |       |  |   | 8.0     | % |  |   | 8.0    | %          |  |   |        |  
|                                | Serviced Loan Portfolio        |  |                                          | 8.2     | %        |  |       | 6.7    | %     |  |            | 8.6     | %     |  |   | 8.9     | % |  |   | 8.1    | %          |  |   | 9.2     | %



---

|(1) |  | Balances represent the principal outstanding on our loans receivable
before discounts aggregating $520,000 and $552,000 and unrealized
depreciation of $711,000 and $443,000 at December 31, 2002 and 2001,
respectively.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 Problem Loans

Our policy with respect to loans receivable which are in arrears as to
interest payments for a period in excess of 60 days is generally to
discontinue the accrual of interest income and reverse previously recorded
interest income which is deemed uncollectible. We will deliver a default
notice and begin foreclosure and liquidation proceedings when we determine
that pursuit of these remedies is the most appropriate course of action.

Senior management closely monitors our problem loans which are classified
into two categories: Impaired Loans and Special Mention Loans (together,
Problem Loans). Our Impaired Loans are loans which are not complying with
their contractual terms, the collection of the balance of the principal is
considered impaired and on which its fair value is less than the remaining
unamortized principal balance. Our Special Mention Loans are those loans
receivable that are not complying with their contractual terms but we expect a
full recovery of the principal balance through either collection efforts or
liquidation of collateral.

Information on our Problem Loans was as follows, broken down by
division:

|                                      |                      |                                         |       |                                          |     |          |     |       |     |       |       |            |     |       |       |       |     |   |       |       |     |            |       |        |     |  
|------------------------------------- | -------------------- | --------------------------------------- | ----- | ---------------------------------------- | --- | -------- | --- | ----- | --- | ----- | ----- | ---------- | --- | ----- | ----- | ----- | --- | - | ----- | ----- | --- | ---------- | ----- | ------ | --- | -
|                                      |                      |                                         |       | December 31,                            
|                                      |                      |                                         |       |                                         
|                                      |                      |                                         |       | 2002                                     |     | 2001    
|                                      |                      |                                         |       |                                          |     |         
|                                      |                      |                                         |       |                                          |     |          |     |       |     |       |       | Commercial |     |       |       |       |     |   |       |       |     | Commercial
|                                      |                      |                                         |       | Total                                    |     | SBA 7(a) |     | Loans |     | Total |       | SBA 7(a)   |     | Loans
|                                      |                      |                                         |       |                                          |     |          |     |       |     |       |       |            |     |      
|                                      |                      |                                         |       | (Dollars in thousands, except footnotes)
|Impaired Loans (1):                   |                      |                                         |       |                                          |     |          |     |       |     |       |       |            |     |       |       |       |     |   |       |       |     |            |       |       
|                                      | Loans receivable (2) |                                         | $     | 5,728                                    |     |          | $   | 772   |     |       | $     | 4,956      |     |       | $     | 6,152 |     |   | $     | 1,308 |     |            | $     | 4,844  |    
|                                      | Sold loans of SPEs   |                                         |       | 2,343                                    |     |          |     |      |     |       |       | 2,343      |     |       |       | 1,799 |     |   |       | 125   |     |            |       | 1,674  |    
|                                      |                      |                                         |       |                                          |     |          |     |       |     |       |       |            |     |       |       |       |     |   |       |       |     |            |       |       
|                                      |                      | $                                       | 8,071 |                                          |     | $        | 772 |       |     | $     | 7,299 |            |     | $     | 7,951 |       |     | $ | 1,433 |       |     | $          | 6,518 |       
|                                      |                      |                                         |       |                                          |     |          |     |       |     |       |       |            |     |       |       |       |     |   |       |       |     |            |       |       
|Special Mention Loans (1):            |                      |                                         |       |                                          |     |          |     |       |     |       |       |            |     |       |       |       |     |   |       |       |     |            |       |       
|                                      | Loans receivable     |                                         | $     | 3,248                                    |     |          | $   | 553   |     |       | $     | 2,695      |     |       | $     | 1,549 |     |   | $     | 60    |     |            | $     | 1,4890 |    
|                                      | Sold loans of SPEs   |                                         |       | 5,226                                    |     |          |     | 1     |     |       |       | 5,225      |     |       |       | 6,456 |     |   |       | 202   |     |            |       | 6,254  |    
|                                      |                      |                                         |       |                                          |     |          |     |       |     |       |       |            |     |       |       |       |     |   |       |       |     |            |       |       
|                                      |                      | $                                       | 8,474 |                                          |     | $        | 554 |       |     | $     | 7,920 |            |     | $     | 8,005 |       |     | $ | 262   |       |     | $          | 7,743 |       
|                                      |                      |                                         |       |                                          |     |          |     |       |     |       |       |            |     |       |       |       |     |   |       |       |     |            |       |       
|Percentage Impaired Loans (3):        |                      |                                         |       |                                          |     |          |     |       |     |       |       |            |     |       |       |       |     |   |       |       |     |            |       |       
|                                      |                      | Loans receivable                        |       |                                          | 6.5 | %        |     |       | 5.1 | %     |       |            | 6.8 | %     |       |       | 5.7 | % |       |       | 7.5 | %          |       |        | 5.3 | %
|                                      |                      | Sold loans of SPEs                      |       |                                          | 1.3 | %        |     |       |    |       |       |            | 1.4 | %     |       |       | 1.1 | % |       |       | 2.5 | %          |       |        | 1.1 | %
|                                      |                      | Loans receivable and sold
loans of SPEs |       |                                          | 3.0 | %        |     |       | 4.1 | %     |       |            | 3.0 | %     |       |       | 3.0 | % |       |       | 6.4 | %          |       |        | 2.7 | %
|Percentage Special Mention
Loans (3): |                      |                                         |       |                                          |     |          |     |       |     |       |       |            |     |       |       |       |     |   |       |       |     |            |       |       
|                                      |                      | Loans receivable                        |       |                                          | 3.7 | %        |     |       | 3.6 | %     |       |            | 3.7 | %     |       |       | 1.4 | % |       |       | 0.3 | %          |       |        | 1.6 | %
|                                      |                      | Sold loans of SPEs                      |       |                                          | 3.0 | %        |     |       |    |       |       |            | 3.0 | %     |       |       | 4.1 | % |       |       | 4.1 | %          |       |        | 4.1 | %
|                                      |                      | Loans receivable and sold
loans of SPEs |       |                                          | 3.2 | %        |     |       | 2.9 | %     |       |            | 3.2 | %     |       |       | 3.0 | % |       |       | 1.2 | %          |       |        | 3.2 | %



---

|(1) |  | Since the sold SBA 7(a) guaranteed loans are secured by a
government guarantee, we do not have exposure to loss. Accordingly,
impaired and special mention loan statistics for our SBA 7(a)
guaranteed loans have not been presented.                                                                                                                                                                                                                                                                                                                                         
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | As of December 31, 2002 the balance included a loan collateralized
by a golf facility that we repurchased from an SPE during December 2002
and was acquired through foreclosure during the first quarter of 2003 by
one of our non-investment company subsidiaries. The fair value of the
loan receivable was estimated to be $1.2 million. As of December 31,
2001 the balance included two limited service hospitality properties we
acquired through foreclosure during the first quarter of 2002. The fair
value of the loans receivable was estimated to be $2.1 million.
|   
|(3) |  | The denominator does not include our SBA 7(a) guaranteed loans that
have been sold.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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 Industry Information on our Loan Portfolio

The distribution of our loans receivable and our serviced loan
portfolio by industry were as follows at December 31, 2002:

|                          |  |                        |     |       |  |   |        |      |  |   |       |   |  |   |        |  |  |  |       |  
|------------------------- |  | ---------------------- | --- | ----- |  | - | ------ | ---- |  | - | ----- | - |  | - | ------ |  |  |  | ----- | -
|                          |  | Loans Receivable      
|                          |  |                       
|                          |  | Number                 |     |       |  |   |        |      |  |   |       |   |  |   |        |  |  | 
|                          |  | of                     |     |       |  |   |        |      |  |   |       |   |  |   |        |  |  | 
|                          |  | Loans                  |     | Value |  | % |        | Cost |  | %
|                          |  |                        |     |       |  |   |        |      |  |  
|                          |  | (Dollars in thousands)
|Hotels and motels         |  |                        | 104 |       |  | $ | 74,098 |      |  |   | 84.9  | % |  | $ | 74,603 |  |  |  | 84.8  | %
|Services                  |  |                        | 28  |       |  |   | 2,732  |      |  |   | 3.1   | % |  |   | 2,773  |  |  |  | 3.2   | %
|Restaurants               |  |                        | 21  |       |  |   | 1,259  |      |  |   | 1.4   | % |  |   | 1,274  |  |  |  | 1.5   | %
|Retail, other             |  |                        | 21  |       |  |   | 4,147  |      |  |   | 4.8   | % |  |   | 4,176  |  |  |  | 4.7   | %
|Gasoline/service stations |  |                        | 15  |       |  |   | 2,407  |      |  |   | 2.8   | % |  |   | 2,440  |  |  |  | 2.8   | %
|Other                     |  |                        | 31  |       |  |   | 2,602  |      |  |   | 3.0   | % |  |   | 2,690  |  |  |  | 3.0   | %
|                          |  |                        |     |       |  |   |        |      |  |   |       |   |  |   |        |  |  |  |       |  
|                          |  |                        | 220 |       |  | $ | 87,245 |      |  |   | 100.0 | % |  | $ | 87,956 |  |  |  | 100.0 | %
|                          |  |                        |     |       |  |   |        |      |  |   |       |   |  |   |        |  |  |  |       |  

|                          |  |                         |     |      |  |   |         |  |  |  |       |  
|------------------------- |  | ----------------------- | --- | ---- |  | - | ------- |  |  |  | ----- | -
|                          |  | Serviced Loan Portfolio
|                          |  |                        
|                          |  | Number                  |     |      |  |   |         |  |  | 
|                          |  | of                      |     |      |  |   |         |  |  | 
|                          |  | Loans                   |     | Cost |  | %
|                          |  |                         |     |      |  |  
|                          |  | (Dollars in
thousands) 
|Hotels and motels         |  |                         | 264 |      |  | $ | 263,624 |  |  |  | 84.2  | %
|Services                  |  |                         | 46  |      |  |   | 10,179  |  |  |  | 3.2   | %
|Restaurants               |  |                         | 29  |      |  |   | 8,763   |  |  |  | 2.8   | %
|Retail, other             |  |                         | 24  |      |  |   | 6,904   |  |  |  | 2.2   | %
|Gasoline/service stations |  |                         | 28  |      |  |   | 12,452  |  |  |  | 4.0   | %
|Other                     |  |                         | 47  |      |  |   | 11,031  |  |  |  | 3.6   | %
|                          |  |                         |     |      |  |   |         |  |  |  |       |  
|                          |  |                         | 438 |      |  | $ | 312,953 |  |  |  | 100.0 | %
|                          |  |                         |     |      |  |   |         |  |  |  |       |  

STRUCTURED LOAN TRANSACTIONS

 General

Structured loan sale transactions are our primary method of obtaining
funds for new loan originations. In a structured loan sale transaction, we
contribute loans receivable to an SPE in exchange for an ownership interest
in that entity. The SPE issues notes payable (usually through a private
placement) to third parties and then distributes a portion of the notes
payable proceeds to us. The notes payable are collateralized solely by the
assets of the SPE which means that, should the SPE fail to make payments on
the debt, the noteholders have no recourse to us. We have no obligation to
pay the notes, nor do the holders of the notes have any recourse against our
assets.

We account for structured loan sale transactions as sales of our loans
receivable and the SPE meets the definition of a qualifying SPE; as a
result, neither the loans receivable contributed to the SPE nor the notes
payable issued by the SPE are included in our consolidated financial
statements. When a structured loan sale transaction is completed: (1) our
ownership interests in the SPEs are accounted for as retained interests in
transferred assets (the Retained Interests) and are recorded at the
present value of our estimated future cash flows to be received from the SPE
and (2) the difference between (i) the carrying value of the loans
receivable sold and (ii) the sum of (a) cash received and (b) the initial
value of the estimated future cash flows from the Retained Interests
constitutes the gain or loss on sale. Gains or losses on these sales may
represent a material portion of our net income in the period in which the
transactions occur. These gains or losses also cause timing differences
between our net income determined in accordance with generally accepted
accounting principles and our investment company taxable income. See Risk
Factors  There May Be Significant Fluctuations in

7



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##### Table of Contents



our Quarterly Results and Managements Discussion and Analysis of
Financial Condition and Results of Operations  Liquidity and Capital
Resources-Dividends.

Since we rely on structured loan sale transactions as our primary
source of operating capital to fund new loan originations, any adverse
changes in our ability to complete this type of transaction, including any
negative impact on the asset-backed securities market for the type of
product we generate, could have a detrimental effect on our ability to
generate funds to originate loans.

Problems in the asset-backed securities market that could affect our
ability to complete a structured loan transaction on a timely basis or cause
us to sell our loans receivable on less favorable terms include, but are not
limited to, the following:



| |  |  | As a result of certain economic conditions, investors in the
type of asset-backed securities that we place may widen the
spreads they require in order to purchase asset-backed securities;                                                              
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | Deterioration in the performance of either our loans
receivable or the loans receivable of PMC Commercial may deter
potential investors from purchasing our asset-backed securities;                                                                       
| |  |  | Deterioration in the operations of the limited service sector
of the hospitality industry which may deter potential investors from
purchasing our asset-backed securities or lower the available rating
from the rating agencies;                          
| |  |  | A reduction in the performance of the loans receivable of our
prior transactions or of similar transactions (for example, higher
than expected loan losses or delinquencies) may deter potential
investors from purchasing our asset-backed securities; and
| |  |  | A change in the underlying criteria utilized by the rating agencies
may cause transactions to receive lower ratings than previously issued
thereby increasing the cost of capital and decreasing the spread on our
transaction.                          

Significant changes in any of these criteria may result in us
temporarily suspending our structured loan sale program and we may seek
other sources of financing. See Risk Factors  The Market for Structured
Loan Sale Transactions May Change.

Our Retained Interests consist of (i) the retention of a portion of
each of the sold loans (the required overcollateralization), (ii) required
cash balances owned by the SPE (the reserve fund) and (iii) future excess
funds to be generated by the SPE after payment of all obligations of the SPE
(the interest-only strip receivable). The value of our Retained Interests
is determined based on the present value of estimated future cash flows that
we will receive from the SPEs. The estimated future cash flows are
calculated based on assumptions concerning, among other things, loan losses
and prepayment speeds. On a quarterly basis, we measure the fair value of,
and record income relating to, the Retained Interests based upon the future
anticipated cash flows discounted based on an estimate of market interest
rates for investments of this type. Any appreciation (depreciation) of our
Retained Interests is included in the accompanying statement of operations
as either a realized loss (if there is a reduction in expected future cash
flows) or unrealized gain (loss) on investments.

We retain a portion of the default and prepayment risk associated with
the underlying transferred loans receivable of our Retained Interests.
Actual defaults and prepayments with respect to estimating future cash flows
for purposes of valuing the Retained Interests will vary from assumptions,
possibly to a material degree, and slower (faster) than anticipated
prepayments of principal or lower (higher) than anticipated loan losses will
increase (decrease) the fair value of our Retained Interests and the related
cash flows. See Risk Factors  There is Volatility in the Valuation of
Our Retained Interests. We regularly measure our loan loss, prepayment and
other assumptions against the actual performance of the loans receivable
sold. Although we believe that reasonable assumptions as to the future cash
flows have been made, actual rates of loss or prepayments will vary from
those assumed and these assumptions may be revised based upon changes in
facts or circumstances.

8



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##### Table of Contents



In connection with our structured loan sale transactions, limited partnerships and joint ventures have been formed as
SPEs to hold the loans receivable sold and issue certificates or notes payable collateralized by the loans
receivable. As of December 31, 2002, our SPEs consisted of:



| |  |  | FW 97 L.L.C. (First Western 1997);                                                                                                                                                 
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | PMC Capital, L.P. 1998-1 (the 1998 Partnership) and its related general partner;                                                                                                   
| |  |  | PMC Capital, L.P. 1999-1 (the 1999 Partnership) and its related general partner;                                                                                                   
| |  |  | PMC Joint Venture, L.P. 2000 (the 2000 Joint Venture) and its related general partner;                                                                                             
| |  |  | PMC Joint Venture, L.P. 2001 (the 2001 Joint Venture) and its related general partner; and                                                                                         
| |  |  | PMC Joint Venture, L.P. 2002-1 (the 2002 Joint
Venture, and together with the 2000 Joint Venture and the 2001
Joint Venture, the Joint Ventures) and its related general
partner.

PMC Capital owns 100% of First Western 1997, the 1998 Partnership and
the 1999 Partnership. In addition, PMC Capital owned approximately 34% of
the 2000 Joint Venture, 61% of the 2001 Joint Venture and 61% of the 2002
Joint Venture as of December 31, 2002. The balance of the Joint Ventures
is owned by PMC Commercial. Our share of the cash flows from the Joint
Ventures is allocated based on the cash flows from the underlying loans
receivable contributed by us to the respective Joint Venture less allocated
costs based on the remaining principal on the underlying loans receivable
contributed by us divided by all loans receivable held by the respective
Joint Venture.

Information relating to our structured loan sale transactions is as
follows:

|                                                |                      |            |                         |        |             |       |             |        |            |       |            |        |            |  |      |        |   |  |      |        |   |  |      |        |  
|----------------------------------------------- | -------------------- | ---------- | ----------------------- | ------ | ----------- | ----- | ----------- | ------ | ---------- | ----- | ---------- | ------ | ---------- |  | ---- | ------ | - |  | ---- | ------ | - |  | ---- | ------ | -
|                                                |                      |            | As of December 31, 2002
|                                                |                      |            |                        
|                                                |                      |            | First Western           |        | 1998        |       | 1999        |        | 2000 Joint |       | 2001 Joint |        | 2002 Joint
|                                                |                      |            | 1997 (1)                |        | Partnership |       | Partnership |        | Venture    |       | Venture    |        | Venture   
|                                                |                      |            |                         |        |             |       |             |        |            |       |            |        |           
|                                                |                      |            | (Dollars in thousands) 
|Principal amount of loans sold:                 |                      |            |                         |        |             |       |             |        |            |       |            |        |            |  |      |        |   |  |      |        |   |  |      |       
|                                                | At time of sale      |            | $                       | 22,810 |             |       | $           | 43,144 |            |       | $          | 60,481 |            |  | $    | 28,046 |   |  | $    | 49,194 |   |  | $    | 43,218 |  
|                                                | At December 31, 2002 |            | $                       | 3,590  |             |       | $           | 26,099 |            |       | $          | 39,216 |            |  | $    | 20,783 |   |  | $    | 44,409 |   |  | $    | 42,199 |  
|Structured notes/certificates:                  |                      |            |                         |        |             |       |             |        |            |       |            |        |            |  |      |        |   |  |      |        |   |  |      |       
|                                                | At time of sale      |            | $                       | 22,810 |             |       | $           | 39,646 |            |       | $          | 55,648 |            |  | $    | 24,955 |   |  | $    | 45,233 |   |  | $    | 38,897 |  
|                                                | At December 31, 2002 |            | $                       | 3,590  |             |       | $           | 24,806 |            |       | $          | 35,907 |            |  | $    | 18,086 |   |  | $    | 42,762 |   |  | $    | 38,017 |  
|Weighted average interest rate on loans (2):    |                      |            |                         |        |             |       |             |        |            |       |            |        |            |  |      |        |   |  |      |        |   |  |      |       
|                                                | At time of sale      |            |                         | P+2.48 | %           |       |             | P+1.26 | %          |       |            | 9.59   | %          |  |      | 9.54   | % |  |      | 9.78   | % |  |      | 9.53   | %
|                                                | At December 31, 2002 |            |                         | P+2.38 | %           |       |             | P+1.22 | %          |       |            | 9.44   | %          |  |      | 9.21   | % |  |      | 9.73   | % |  |      | 9.54   | %
|Interest rate on the SPE notes/certificates (2) |                      |            | P-1.90                  | %      |             |       | P-1.00      | %      |            |       | 6.60       | %      |            |  | 7.28 | %      |   |  | 6.36 | %      |   |  | 6.67 | %     
|Subordinated interest owned (3)                 |                      |            |                        |        |             |       | 5.0         | %      |            |       |           |        |            |  |     |        |   |  |     |        |   |  |     |       
|Required initial overcollateralization (4)      |                      |            |                        |        |             |       | 5.5         | %      |            |       | 8.0        | %      |            |  | 11.0 | %      |   |  | 8.0  | %      |   |  | 10.0 | %     
|Required overcollateralization (5)              |                      |            |                        |        |             |       | 5.5         | %      |            |       | 9.1        | %      |            |  | 13.2 | %      |   |  | 8.9  | %      |   |  | 10.2 | %     
|Rating of certificates/notes (2) (6)            |                      | Aaa/ A |                         | Aaa  |             | Aaa |             | Aaa  |            | Aaa |            | Aaa 
|Cash reserve requirement/minimum (7)            |                      | $          | 912                     |        |             |       | 8.0         | %      |            |       | 6.0        | %      |            |  | 6.0  | %      |   |  | 6.0  | %      |   |  | 6.0  | %     



---

|(1) |  | The transaction had both the primary and a subordinated portion
of the transaction rated and sold.                                                                                                                      
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Variable interest rates are denoted by the spread over (under) the
prime rate (P). The interest rate for the A rated subordinated
certificates of First Western 1997 is P-1.55%.                                    
|   
|(3) |  | The subordinated interest owned represents our mortgage-backed
security of affiliate owned by PMC Capital.                                                                                                              
|   
|(4) |  | The required initial overcollateralization percentage represents
the portion of our sold loans receivable retained by the SPEs whose
value is included in Retained Interests.                                           
|   
|(5) |  | The required overcollateralization percentage is larger than the
initial required overcollateralization percentage since all principal
payments received on the underlying loans receivable are paid to the
noteholders.
|   
|(6) |  | Structured notes issued by the SPEs were rated by Moodys Investors
Service, Inc.                                                                                                                                       
|   
|(7) |  | Transactions all have minimum reserve requirements of 2% of the
principal balance sold at the time of the sale. First Western 1997 is
currently at its minimum requirement.                                             

9



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##### Table of Contents



In addition to the transactions described above, the SBA guaranteed
portion of First Westerns loans receivable are sold to either dealers in
government guaranteed loans receivable or institutional investors
(Secondary Market) as the loans are funded. On all Secondary Market
transactions, we retain an excess spread between the interest rate paid to
us from our borrowers and the rate we pay to the purchaser of the guaranteed
portion of the note.

 Structured Loan Sale Transaction Completed During 2002

On April 12, 2002, we completed a structured loan sale transaction of a
pool of primarily fixed-rate loans receivable. PMC Capital and PMC
Commercial contributed loans receivable of $43.2 million and $27.3 million,
respectively, to the 2002 Joint Venture. The 2002 Joint Venture issued,
through a private placement, approximately $63.5 million of its 2002
Loan-Backed Fixed Rate Notes (the 2002 L.P. Notes) of which approximately
$38.9 million (the 2002 PMC L.P. Notes) was allocated to us based on our
ownership percentage in the 2002 Joint Venture. The 2002 L.P. Notes, issued
at par, have a stated maturity in 2023, bear interest at 6.67% and are
collateralized by the loans receivable contributed by us and PMC Commercial
to the 2002 Joint Venture. We accounted for this transaction as a sale,
recorded a gain of $1,463,000 and recorded our Retained Interests at an
initial amount of $8,772,000 during 2002.

The net proceeds from the issuance of the 2002 PMC L.P. Notes
(approximately $37.9 million) were distributed to us. These proceeds were
net of our issuance costs and prior to funding the required reserve balance.
At inception of the 2002 Joint Venture and at December 31, 2002, we owned a
61% limited partnership interest based on our share of the capital.

 Structured Loan Sale Transaction Completed During 2001

On June 27, 2001, we completed a structured loan sale transaction of a
pool of fixed-rate loans receivable. PMC Capital and PMC Commercial
contributed loans receivable of $49.2 million and $32.7 million,
respectively, to the 2001 Joint Venture. The 2001 Joint Venture issued,
through a private placement, approximately $75.4 million of its 2001
Loan-Backed Fixed Rate Notes (the 2001 L.P. Notes) of which approximately
$45.2 million (the 2001 PMC L.P. Notes) was allocated to us based on our
ownership percentage in the 2001 Joint Venture. The 2001 L.P. Notes, issued
at par, have a stated maturity in 2021, bear interest at 6.36% and are
collateralized by the loans receivable contributed by us and PMC Commercial
to the 2001 Joint Venture. We accounted for this transaction as a sale,
recorded a gain of $2,732,000 and recorded our Retained Interests at an
initial amount of $9,186,000 during 2001.

The net proceeds from the issuance of the 2001 PMC L.P. Notes
(approximately $44.5 million) were distributed to us. These proceeds are
net of our issuance costs and prior to funding the required reserve balance.
At inception of the 2001 Joint Venture, we owned a 60% limited partnership
interest based on our share of the capital. At December 31, 2002, we owned
a 61% limited partnership interest in the 2001 Joint Venture.

 Structured Loan Sale Transaction Completed During 2000

On December 18, 2000, we completed a structured loan sale transaction
of a pool of fixed-rate loans receivable. PMC Capital and PMC Commercial
contributed loans receivable of $28.0 million and $55.7 million,
respectively, to the 2000 Joint Venture. The 2000 Joint Venture issued,
through a private placement, approximately $74.5 million of its 2000
Loan-Backed Fixed Rate Notes (the 2000 L.P. Notes) of which approximately
$25.0 million (the 2000 PMC L.P. Notes) was allocated to us based on our
ownership percentage in the 2000 Joint Venture. The 2000 L.P. Notes, issued
at par, have a stated maturity in 2024, bear interest at 7.28% and are
collateralized by the loans receivable contributed by us and PMC Commercial
to the 2000 Joint Venture. We accounted for this transaction as a sale,
recorded a gain of $564,000 and recorded our Retained Interests at an
initial amount of $5,573,000 during 2000.

The net proceeds from the issuance of the 2000 PMC L.P. Notes
(approximately $24.7 million) were distributed to us. These proceeds are
net of our issuance costs and prior to funding the required reserve balance.
At inception of the 2000 Joint Venture and at December 31, 2002, we owned a
34% limited partnership interest based on our share of the capital.

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 Joint Structured Loan Sale Transactions  General

The terms of the 2002 L.P. Notes, the 2001 L.P. Notes and the 2000 L.P.
Notes (the JV Notes) provide that each of the partners of the respective
Joint Ventures is not liable for any payments on the JV Notes. Accordingly,
if the Joint Ventures fail to pay the JV Notes, the sole recourse of the
holders of the JV Notes is against the assets of the respective Joint
Venture. Accordingly, we have no obligation to pay the JV Notes, nor do the
holders of the JV Notes have any recourse against our assets.

PMC Capital and PMC Commercial have entered into cross indemnification
agreements regarding the performance of their respective loans receivable
sold to the Joint Ventures. To the extent that poor performance by either
PMC Commercials or PMC Capitals sold loans receivable (the
Underperforming Company) is pervasive enough to cause the other company
(the Performing Company) to not receive cash flow that it otherwise would
have received, then the Underperforming Company must make the Performing
Company whole. If the cash flow reduction is considered to be temporary,
then interest will be paid as compensation to the Performing Company. In
general, when a loan is liquidated, it may cause a deferral of cash flow to
the Performing Company and, as a result, interest would be charged to the
Underperforming Company until the cash flow from the Joint Venture repays
the Performing Company. If the reduction of cash flows is deemed permanent
(i.e.,to the extent that the Underperforming Company will not be able to
satisfy the shortfall with the assets they have contributed to the related
structured loan sale transaction), the balance of reduction to cash flows
must be paid to the Performing Company by the Underperforming Company. At
December 31, 2002, the maximum potential amount of future payments to PMC
Commercial (undiscounted and without consideration of any recoveries from
the underlying loans receivable) we could be required to make under these
cross indemnification agreements was approximately $34.3 million and the
discounted amount was $23.5 million which represents the estimated fair
value of the Retained Interests reflected on PMC Commercials consolidated
balance sheet for the Joint Ventures. All of our loans are collateralized;
however, the maximum potential amount of future payments we could be
required to make under these cross indemnification agreements has not
considered any proceeds from the liquidation of collateral underlying these
loans. Upon completion of a joint securitization and on each subsequent
quarterly reporting date, management evaluates the need to recognize a
liability associated with the indemnification agreements. Based on present
cash flow assumptions, including stress test analyses of increasing the
anticipated losses on each of the loan pools, it does not appear that the
loans receivable sold by us will cause any permanent cash flow reductions to
PMC Commercial nor does it appear that the loans receivable sold by PMC
Commercial will cause any permanent cash flow reduction to us. Accordingly,
we believe that the fair value of these cross indemnification agreements at
inception of the Joint Ventures and as of December 31, 2002 and 2001 was
zero; thus, no liability was recorded. If the performance of our sold loans
receivable significantly deteriorates, it could be necessary for us to
perform under these cross indemnification agreements.

When our structured loan sale transactions were completed, the
transaction documents that the SPE entered into contained provisions (the
Credit Enhancement Provisions) that govern the assets and the flow of
funds in and out of the SPE formed as part of the structured loan sale
transactions. The Credit Enhancement Provisions include specified limits on
the delinquency, default and loss rates on loans receivable included in each
SPE. If, at any measurement date, the delinquency, default or loss rate
with respect to any SPE were to exceed the specified limits, the Credit
Enhancement Provisions would automatically increase the level of credit
enhancement requirements for that SPE. During the period in which the
specified delinquency, default or loss rate was exceeded, excess cash flow
from the SPE, if any, would be used to fund the increased credit enhancement
levels instead of being distributed, which would delay or reduce our
distribution.

ADVISORY SERVICES

As the investment advisor for PMC Commercial, PMC Advisers has earned
$2.3 million, $2.3 million and $2.2 million in advisory fees during the
years ended December 31, 2002, 2001 and 2000, respectively. The fees of PMC
Advisers (pursuant to the Investment Management Agreements) are primarily
based on the value of PMC Commercials assets. As a result, any increases
in the dollar amount of PMC Commercials assets will benefit PMC Advisers,
and PMC Advisers may have a potential conflict in determining whether to
advise PMC Commercial to acquire assets or write-down the value of any
assets. In order to mitigate the risk to PMC Commercial from increasing its
asset base through leveraged transactions, the Investment Management
Agreements provide PMC Advisers with a reduced fee for any loans originated
with capital obtained through borrowings. The Investment Management
Agreements are renewable on an annual basis.

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Pursuant to the Investment Management Agreements entered into between
PMC Commercial and PMC Advisers, fees of between 0.40% and 1.55%, annually,
are charged by PMC Advisers based upon the average principal outstanding of
PMC Commercials loans. In addition, the Investment Management Agreements
include compensation to PMC Advisers for its assistance in the issuance of
PMC Commercials debt and equity securities and the acquisition by PMC
Commercial of limited service hospitality properties. The Investment
Management Agreements also provide for (i) an annual fee of 0.70% of the
original cost of the hospitality properties to be paid to PMC Advisers
relating to leases entered into by PMC Commercial, (ii) a fee of $10,000
upon the sale of each limited service hospitality property and (iii) an
annual loan origination fee equal to five basis points of loans funded for
the first $20 million in loans and 2.5 basis points thereafter.

REGULATORY OVERVIEW

 Investment Company Act Regulations

PMC Capital is in compliance with the requirement to maintain a minimum
of 200% asset coverage of debt as defined in sections 18 and 61 of the 1940
Act as modified by exemptive orders obtained by us from the Securities and
Exchange Commission (the SEC).

We may not sell shares of common stock below net asset value unless we
obtain approval from a majority of the outstanding voting securities as
defined in the 1940 Act. We may sell shares of common stock in a rights
offering at a price below our net asset value without shareholder approval
under the 1940 Act.

We may be prohibited under the 1940 Act from knowingly participating in
certain transactions with our affiliates without the prior approval of our
Board of Directors (Board) who are not interested persons and, in some
cases, prior approval by the SEC. We have been granted an exemptive order
by the SEC permitting us to engage in certain transactions that would be
permitted if we and our subsidiaries were one company and permitting certain
transactions among our subsidiaries, subject to certain conditions and
limitations. One of our exemptive orders permits PMC Capital to establish
SPEs owned by PMC Capital and PMC Commercial to engage in joint
securitizations.

As with other companies regulated by the 1940 Act, a BDC must adhere to
certain substantive regulatory requirements. A majority of our directors
must be persons who are not interested persons, as that term is defined in
the 1940 Act. Additionally, we are required to provide and maintain a bond
issued by a reputable fidelity insurance company to protect the BDC.
Furthermore, as a BDC, we are prohibited from protecting any director or
officer against any liability to the Company or our shareholders arising
from willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of such persons office.

We maintain a code of ethics that establishes procedures for personal
investment and restricts certain transactions by our personnel. Our code of
ethics does not permit investment by our employees in securities that may be
purchased or held by us.

 Business Development Company (BDC) Regulations

PMC Capital has elected to be regulated as a BDC. BDCs must have a
class of securities registered under Section 12 of the Securities Exchange
Act of 1934, as amended (the Exchange Act), and are subject to the
Exchange Acts periodic reporting requirements rather than the 1940 Acts
reporting requirements. BDCs have greater operating flexibility than other
investment companies relating to capital structure, portfolio
diversification, transactions with downstream affiliates, executive stock
options and the frequency which they may make distributions from capital
gains. A BDCs focus is on investing in or lending to small private
companies and making managerial assistance available to them. A BDC may use
capital provided by public shareholders and from other sources to invest in
long-term, private investments in growing small businesses. A BDC provides
shareholders the ability to retain the liquidity of a publicly traded stock,
while sharing in the benefits, if any, of investing in privately owned
companies. As a BDC, we may not acquire any asset other than Qualifying
Assets unless, at the time we make the acquisition, our Qualifying Assets
represent at least 70% of the value of our total assets (the 70% test).
The principal categories of Qualifying Assets relevant to our business are:

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(1)  Securities purchased in transactions not involving any public
offering, the issuer of which is an eligible portfolio company. An
eligible portfolio company is defined to include any issuer that:



| | a. |  | is organized and has its principal place of business in the United
States,                                                                       
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | is not an investment company other than an SBIC
wholly-owned by a BDC (our investments in PMCIC and Western
Financial are Qualifying Assets), and
|
| | c. |  | does not have any class of publicly traded securities with
respect to which a broker may extend margin credit;                                   

(2)  Securities received in exchange for or distributed with respect to
securities described in (1) above or pursuant to the exercise of options,
warrants, or rights relating to such securities; and

(3)  Cash, cash items, government securities, or high quality debt securities
(within the meaning of the 1940 Act), maturing in one year or less from the
time of investment.

To include certain securities described above as Qualifying Assets for
the purpose of the 70% test, a BDC must make available to the issuer of
those securities significant managerial assistance such as providing
guidance and counsel concerning the management, operations, or business
objectives and policies of a portfolio company, or making loans to a
portfolio company. We will provide managerial assistance on a continuing
basis to any portfolio company upon request.

As a BDC, we are entitled to issue senior securities in the form of
stock or senior securities representing indebtedness, as long as each class
of senior security has an asset coverage of at least 200% immediately after
each such issuance. This limitation is not applicable to borrowings by our
SBIC or SBLC subsidiaries, and therefore any borrowings by these
subsidiaries are not included in this asset coverage test. We may not
change the nature of our business so as to cease to be, or withdraw our
election as, a BDC unless authorized by vote of a majority of the
outstanding voting securities, as defined in the 1940 Act. A majority of
the outstanding voting securities of a company is defined under the 1940 Act
as the lesser of (i) 67% or more of such companys shares present at a
meeting if more than 50% of the outstanding shares of such company are
present and represented by proxy, or (ii) more than 50% of the outstanding shares of such company.

 Regulated Investment Company (RIC) Regulations

Our status as a RIC enables us to avoid the cost of Federal and state
income taxation and, as a result, achieve pre-tax investment returns. We
believe that this tax advantage enables us to achieve strong equity returns
without having to aggressively leverage our balance sheet. In order to
qualify as a RIC, we must, among other things:

(1)  Derive at least 90% of our gross income from dividends,
interest, payments with respect to securities loans, gains from the
sale of stock or other securities or other income derived with
respect to our business of investing in such stock or securities;

(2)  Diversify our holdings so that:



| | a. |  | at least 50% of the value of our assets consists of cash,
cash items, government securities, securities of other RICs and other
securities if such other securities of any one issuer do not represent
more than 5% of our assets and 10% of the outstanding voting securities
of the issuer; and
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | no more than 25% of the value of our assets are invested in
securities of one issuer (other than U.S. government securities or
securities of other RICs), or of two or more issuers that are controlled
by the Company; and                                                                      

(3)  Distribute at least 90% of our investment company taxable income
each tax year to the shareholders. In addition, if a RIC distributes in a
timely manner (or treats as deemed distributed) 98% of its capital gain
net income for each one-year period ending on October 31 and distributes 98%
of its ordinary income for each calendar year, it will not be subject to the
4% nondeductible Federal excise tax on certain undistributed income of RICs.

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 Fundamental and Other Policies of PMC and its Subsidiaries

We have established a core set of fundamental policies. PMC Capital
and each of its investment company subsidiaries have designated certain
investment policies as fundamental policies.

The following investment policies of PMC Capital and its investment
company subsidiaries are fundamental policies and may not be changed without
the approval of the lesser of (i) more than 50% of PMC Capitals outstanding
voting securities, or (ii) 67% or more of PMC Capitals voting securities
present at a meeting of security holders at which a quorum is present. Our
Board may change any other investment policies of PMC Capital at any time.



|1) |  | The Company will not purchase or sell commodities or commodity contracts.                                                                                                                                                                                                                                                                                                                                                                                                             
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2) |  | The Company will not engage in short sales, purchase securities on
margin or trade in contracts commonly called puts or calls or in
combinations thereof, except that it may acquire warrants, options or
other rights to subscribe to or sell securities in furtherance of its
investment objectives.                                                                                                                                                                                
|  
|3) |  | The Company will not underwrite securities of other issuers, except
that it may acquire portfolio securities under circumstances where, if
sold, the Company might be deemed an underwriter for purposes of the
Securities Act of 1933. The Company may purchase restricted
securities as to which there are substantial restrictions on resale
under the Securities Act of 1933.                                                                                                   
|  
|4) |  | The Company will not purchase any securities of a company if any of
the directors or officers of the Company owns more than 0.5% of such
company and such persons owning more than 0.5% together own 5% or more
of the shares of such company.                                                                                                                                                                                                                                        
|  
|5) |  | The Company may issue senior securities in the form of debentures,
reverse repurchase agreements and preferred stock and may borrow monies
from banks and other lenders, all on an unsecured basis. The 1940 Act
limits the Company to the issuance of one class of senior debt
securities and one class of senior equity securities (as such terms are
defined in the 1940 Act).                                                                                                     
|  
|6) |  | The Company will not invest more than 25% of its total assets in
any one industry except in the lodging industry which may constitute
100% of the Companys portfolio. The Company will invest at least 25%
of its total assets in the lodging industry.                                                                                                                                                                                                                              
|  
|7) |  | The Company may invest in real estate development companies, may
make real estate acquisition loans and real estate improvement loans
and may further make other loans secured by real estate.                                                                                                                                                                                                                                                                                        
|  
|8) |  | The Company may make loans and purchase debt securities in
furtherance of its investment objectives. The Company will not make
loans to its officers, directors or other affiliated persons.                                                                                                                                                                                                                                                                                          
|  
|9) |  | PMCIC will perform the functions and conduct the activities
contemplated under the SBIA, and will provide assistance solely to
small business concerns which will contribute to a well-balanced
national economy by facilitating ownership of such concerns by persons
whose participation in the free enterprise system is hampered because
of social or economic disadvantages. These fundamental policies of
PMCIC may not be changed without the prior written consent of the SBA.

 SBA Regulations

The lending operations of First Western, PMCIC and Western Financial
are regulated by the SBA, which establishes, among other things, maximum
interest rates that borrowers may be charged and minimum and maximum
maturities for our loans receivable (which generally range from seven to 25
years). The maximum interest rates which PMCIC and Western Financial can
charge may not exceed the greater of 19% per annum or 11% above our cost of
funds from the SBA and was 19% at December 31, 2002. Borrowers must satisfy
certain criteria established by the SBA to qualify for loans originated by
us under SBA sponsored programs, including limitations on the net worth and
net income of potential borrowers or alternative criteria that focus upon
the number of employees of the borrower and its gross revenues. In
addition, the SBA generally limits the aggregate amount of guaranties that
can be provided to any single borrower and restricts the use to which the

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loan proceeds can be employed by the borrower. Effective October 1,
2002, the SBA temporarily changed its policy on origination of loans under
the SBA 7(a) Guaranteed Loan Program to limit the maximum amount of a loan
to $500,000 (the Loan Cap). As a result of legislation that Congress
passed, in February 2003 the SBA discontinued the Loan Cap.

SBICs are intended to stimulate the flow of private equity capital to
eligible small businesses. Under present SBA regulations, eligible small
businesses include businesses that have a net worth not exceeding $18
million and have average annual fully taxed net income not exceeding $6
million for the most recent two fiscal years. In addition, an SBIC must
devote 20% of its investment activity to smaller concerns as defined by
the SBA. A smaller concern is one that has a net worth not exceeding $6
million and has average annual fully taxed net income not exceeding $2
million for the most recent two fiscal years. SBA regulations also provide
alternative size standard criteria to determine eligibility, which depend on
the industry in which the business is engaged and are based on such factors
as the number of employees and gross sales. According to SBA regulations,
SBICs may make long-term loans to small businesses, invest in the equity
securities of such businesses, and provide them with consulting and advisory
services.

Both Western Financial and PMCIC provide long-term loans to qualifying
small businesses. Western Financial and PMCIC have the opportunity to
borrow up to an additional aggregate principal amount of $37.2 million of
SBA debentures, based on their regulatory capital. Under SBA regulations,
an SBIC may borrow up to $111.7 million from the SBA as governed by SBA
regulations. This limit generally applies to all financial assistance
provided by the SBA to an SBIC licensee and its associates, as the term is
defined by SBA regulations. Western Financial and PMCIC had outstanding
$14.3 million of SBA debentures and PMCIC had $7.0 million of preferred
stock investments from the SBA at December 31, 2002. At December 31, 2002,
we had an outstanding commitment from the SBA to purchase up to $5.2 million
($4.2 million expiring September 2003 and $1.0 million expiring September
2004) in additional SBA debentures. As leveraged SBICs, PMCIC and Western
Financial are subject to certain regulatory restrictions such as change in
control provisions.

First Western is licensed to operate as an SBLC. The SBA guarantees
75% of qualified loans over $150,000 with such individual guarantees not
exceeding $1.0 million. While the eligibility requirements of the SBA 7(a)
Program vary by the industry of the borrower and other factors, the general
eligibility requirements are that: (i) gross sales of the borrower cannot
presently exceed $6 million, (ii) liquid assets or real estate equity of the
borrower and affiliates cannot exceed specified limits, and (iii) the
maximum aggregate SBA loan guarantees to a borrower cannot exceed $1.0
million. Maximum maturities for SBA 7(a) loans are 25 years for real estate
and 15 years for the purchase of machinery and equipment. In order to
operate as an SBLC, a licensee is required to maintain a minimum net worth
(as defined by SBA regulations) of the greater of (i) 10% of the outstanding
loans receivable of First Western or (ii) $1.0 million, as well as certain
other regulatory restrictions such as change in control provisions.

First Western, PMCIC and Western Financial are periodically examined
and audited by the SBA to determine compliance with SBA regulations.

RISK FACTORS

Management has identified the following important factors that could
cause actual results to differ materially from those reflected in
forward-looking statements or from our historical results. These factors,
while not all-inclusive, could have a material impact on our asset
valuations, results of operations or financial condition. In addition,
these factors could impair our ability to maintain dividend distributions at
current levels.

 Our Investments Are Valued at Fair Value

Pursuant to the requirements of the 1940 Act, we value our investments
at fair value on a quarterly basis as determined in good faith by our Board.
Since there is typically no readily ascertainable market value for the
investments in our portfolio, our Board determines the fair value of these
investments pursuant to a valuation policy and a consistently applied
valuation process.

There is no single standard for determining fair value. As a result,
determining fair value requires that judgment be applied to the specific
facts and circumstances of each portfolio investment while employing a

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consistently applied valuation process for the types of investments we make.
Unlike banks, we are not permitted to provide a general reserve for
anticipated losses. We are instead required by the 1940 Act to specifically
value each individual investment and record unrealized depreciation for an
investment that we believe has become impaired or where collection of a loan
is in doubt. Conversely, we will record unrealized appreciation if we have
an indication that the underlying assets in the portfolio have appreciated
in value and therefore, our security has also appreciated in value, as
appropriate. Due to the inherent uncertainty of valuation, fair value of
our investments determined in good faith by the Board may differ from the
values that would have been used had a ready market existed for the
investments and the differences could be material.

 There is Volatility in the Valuation of Our Retained Interests

Due to the limited number of entities that conduct transactions with
similar assets, the relatively small size of our Retained Interests and the
limited number of buyers for such assets, no readily ascertainable market
exists for our Retained Interests. Therefore, the Boards determination of
the fair value may vary significantly from the value had a readily
ascertainable market existed. If we were forced to immediately liquidate
some or all of our Retained Interests, the proceeds of such liquidation may
be significantly less than the current value of such Retained Interests.

The value of our Retained Interests is determined based on assumptions
concerning, among other things, anticipated defaults, discount rates and
prepayment speeds. We retain a portion of the default and prepayment risk
associated with the underlying loans receivable of our Retained Interests.
As more fully described below, actual defaults and prepayments with respect
to estimating future cash flows for purposes of valuing the Retained
Interests may vary from assumptions, possibly to a material degree, and
slower (faster) than anticipated prepayments of principal or lower (higher)
than anticipated loan losses will increase (decrease) the fair value of our
Retained Interests and the related estimated cash flows. The discount rates
that we utilize are determined for each of the assets comprising the
Retained Interests based upon an estimate of the inherent risks associated
with each asset.

The following is a sensitivity analysis of our Retained Interests as of
December 31, 2002 to highlight the volatility that results when prepayments,
loan losses and discount rates are different than our assumptions:

|                                                   |  |                 |        |               |  |               |        |  
|-------------------------------------------------- |  | --------------- | ------ | ------------- |  | ------------- | ------ | -
|                                                   |  |                 |        |               |  | Asset and Net
|Changed Assumption                                 |  | Pro-Forma Value |        | Income Change
|                                                   |  |                 |        |              
|                                                   |  | (In thousands) 
|Losses increase by 50 basis points per annum (1)   |  | $               | 37,297 |               |  | $             | (2,706 | )
|Losses increase by 100 basis points per annum (1)  |  | $               | 34,714 |               |  | $             | (5,289 | )
|Rate of prepayments increases by 5% per annum (2)  |  | $               | 38,642 |               |  | $             | (1,361 | )
|Rate of prepayments increases by 10% per annum (2) |  | $               | 37,688 |               |  | $             | (2,315 | )
|Discount rates increase by 100 basis points        |  | $               | 38,408 |               |  | $             | (1,595 | )
|Discount rates increase by 200 basis points        |  | $               | 37,002 |               |  | $             | (3,001 | )



---

|(1) |  | If we experience significant losses (i.e., in excess of anticipated
losses), the effect on our Retained Interests would first reduce the
value of the interest-only strip receivables. To the extent the
interest-only strip receivables could not fully absorb the losses, the
effect would then be to reduce the value of our reserve funds and then
the value of our required overcollateralization.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | For example, an 8% assumed rate of prepayment would be increased to
13% or 18% based on increases of 5% or 10% per annum, respectively.                                                                                                                                                                                                                                                                

These sensitivities are hypothetical and should be used with caution.
Pro-forma values based on changes in these assumptions generally cannot be
extrapolated since the relationship of the change in assumption to the
change in fair value may not be linear. The effect of a variation in a
particular assumption on the fair value of our Retained Interests is
calculated without changing any other assumption. In reality, changes in
one factor are not isolated from changes in another which might magnify or
counteract the sensitivities.

Changes in any of these assumptions, or actual results which deviate
from the assumptions, affect the value of our Retained Interests, possibly
to a material degree. There can be no assurance as to the accuracy of these
estimates.

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 We Have a Concentration of Investments in the Hospitality Industry and Texas

We have a fundamental policy regarding investment in the hospitality
industry. At December 31, 2002, our investment in loans to businesses in
the hospitality industry comprised approximately 81% and 85% of our total
assets and loans receivable, respectively. Any economic factors that
negatively impact this industry could have a material adverse effect on our
financial condition and results of operations.

At December 31, 2002, loans receivable to businesses located in Texas
comprised approximately 29% of our loans receivable. No other state had a
concentration of 10% or greater of our loans receivable at December 31,
2002. In addition, approximately 27% of the loans receivable underlying our
Retained Interests are also concentrated in Texas. A decline in economic
conditions in Texas could have a material adverse effect on our financial
condition and results of operations.

 The Market for Structured Loan Sale Transactions May Change

We will continue to need capital to fund loans. Our ability to
continue to grow depends, to a large extent, on our ability to complete
structured loan sale transactions. In certain economic markets, the
availability of funds may be diminished or the spread charged for funds
may increase causing us to delay a structured loan sale transaction.
Terrorist attacks, bankruptcies or other political events, including
the impact of war, could impact the availability and cost of our capital.

It is anticipated that our working capital needs for 2003 will require
us to complete a variable-rate structured loan sale transaction with PMC
Commercial during the first half of 2003. Due to the current economic and
interest rate environments, we may experience difficulties in selling our
variable-rate loans receivable at an acceptable spread. Certain economic
conditions may cause investors in the type of asset-backed securities that
we place to widen the spreads they require in order to purchase
asset-backed securities.

A reduction in the availability of this source of funds could have a
material adverse effect on our financial condition and results of operations
since working capital may not be available to fund our current commitments
or future loan originations.

 We Are Subject to Prepayment Risk

Prepayments generally increase during times of declining interest
rates. The proceeds from the prepayments we receive are invested initially
in temporary investments and have generally been re-loaned or committed to
be re-loaned at lower interest rates than the prepaid loans receivable. The
lower interest rates we receive on these new loans receivable have had an
adverse effect on our results of operations and depending upon the rate of
future prepayments may further impact our results of operations. The impact
of the lower lending rates on our net investment income may be partially
offset by the reduced cost of our variable-rate borrowings in a lower
interest rate environment. In addition, when loans receivable (other than
SBA 7(a) Program loans originated prior to January 1, 2001) are repaid prior
to their maturity, we generally receive prepayment fees which result in
one-time increases in our other income.

Prepayments may also affect our spread on the pool of loans sold in
our structured loan sale transactions. Prepayments of loans receivable with
higher interest rates negatively impact the value of our Retained Interests
to a greater extent than prepayments of loans receivable with lower interest
rates. Prepayments in excess of assumptions will cause a decline in the
value of our Retained Interests primarily relating to the excess funds (our
interest-only strip receivable) expected from our structured loan sale
transactions. For example, if a $1.0 million loan with an interest rate of
10% prepays and the all-in cost of that Joint Ventures structured notes
was 7%, we would lose the 3% spread we had expected to receive on that loan
in future periods. Our all-in costs include interest, servicing, trustee
and other ongoing costs. The spread that is lost may be offset in part or
in whole by the prepayment fee that we collect.

First Western sells the guaranteed portion of most of its originated
loans through private placements. These sales are included in our Retained
Interests and are especially sensitive to prepayments. Our Retained
Interest in these loan sales consists only of the spread between the
interest we collect from the borrower and the interest we pay the purchaser
of the guaranteed portion of the loan. Therefore, to the extent the
prepayments of these

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loans exceed estimates, there is a significant impact on the value of the
associated Retained Interests. See  There is Volatility in the Valuation
of our Retained Interests.

 We Are Subject to Interest Rate Risk

Our net interest margin is affected by changes in the spread between
the rate at which we borrow funds and the rate at which we loan these funds.
PMC Capital, Western Financial and PMCIC currently originate primarily
variable interest rate loans and the borrowed funds of these companies are
typically long-term and at fixed interest rates. First Western originates
variable interest rate loans and has utilized both advances from PMC Capital
and the sale of its loans receivable to obtain funds necessary to originate
loans. If the yield on loans originated by us with funds obtained from
borrowings or preferred stock fails to cover the cost of such funds, our
cash flow will be reduced. During periods of changing interest rates,
interest rate mismatches on our loans receivable could negatively impact our
net investment income, dividend yield and the market price of our common
stock.

As a result of our dependence on variable-rate loans (we are currently
originating primarily variable-rate loans and all of our current commitments
are for variable-rate loans), our interest income has been, and will
continue to be, reduced. In addition, to the extent that rates remain at
these historically low levels, or LIBOR or the prime rate decreases from
current levels, interest income on our currently outstanding loans
receivable will decline.

Changes in interest rates do not have an immediate impact on interest
income with regard to fixed-rate loans receivable. Our interest rate risk
on our fixed-rate loans receivable is primarily due to loan prepayments and
pay-offs. The average maturity of our loans receivable is less than their
average contractual terms because of prepayments. The average life of
mortgage loans tends to increase when the current mortgage loan rates are
substantially higher than rates on existing mortgage loans and, conversely,
decrease when the current mortgage loan rates are substantially lower than
rates on existing mortgage loans (due to refinancings of fixed-rate loans).

 There is Volatility in the Valuation of our Loans Receivable and Assets
Acquired in Liquidation

The valuation of our loans receivable and assets acquired in
liquidation are determined in good faith by our Board. There is typically
no public market or established trading market for the loans we originate.
The illiquid nature of our loans receivable and assets acquired in
liquidation may adversely affect our ability to dispose of these investments
at times when it may be advantageous for us to liquidate them. The
valuation of our loans receivable and assets acquired in liquidation is
adjusted on a quarterly basis to reflect the good faith determination of our
Board as to their current fair value. The determination of fair value
requires judgment and consideration of the facts and circumstances existing
at the evaluation date. Adverse changes to the facts and circumstances of
the collateral, borrower, industry and/or the economy will impact the
Boards determination of value and may require valuation losses which may be
material to our results of operations. In the absence of a readily
ascertainable market, the value of the loans receivable may differ from the
values that would be placed if a ready market existed. If we were forced
to immediately liquidate some or all of our loans receivable, the proceeds
of such liquidation may be significantly less than the current value of such
loans receivable.

Losses on our loans (realized and unrealized) were 0.56% (56 basis
points) of our weighted average outstanding loans receivable during the year
ended December 31, 2002. To the extent we are forced to liquidate one or
several of our loans, future losses may be substantial. The change in
assets and net income if the valuation of our loan portfolio were to decline
is as follows:

|                                        |  |                                 |        |  
|--------------------------------------- |  | ------------------------------- | ------ | -
|                                        |  | Change in Assets and Net Income
|                                        |  |                                
|                                        |  | (In thousands)                 
|Loan portfolio valuation declines by 1% |  | $                               | (885   | )
|Loan portfolio valuation declines by 2% |  | $                               | (1,770 | )

 We Are Subject to Government Regulations Affecting our Assets Acquired
in Liquidation

In conjunction with our assets acquired in liquidation, we are subject
to numerous Federal, state and local laws and government regulations
including environmental, occupational health and safety, state and local
taxes and laws relating to access for disabled persons.

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Under various Federal, state and local laws, ordinances and
regulations, a current or former owner or operator of real estate may be
considered liable for the costs of remediating or removing hazardous
substances found on its property, regardless of whether or not the property
owner or operator was responsible for its presence. Such liability may be
imposed regardless of fault and may be joint and several. We have not been
informed by the Environmental Protection Agency or any state or local
government authority of any non-compliance likely to be material to our
financial condition or results of operations.

We are also subject to the Americans with Disabilities Act of 1990
(ADA), which requires all public accommodations and commercial facilities
to meet federal requirements related to access and use by disabled persons.
Compliance with ADA requirements could require removal of access barriers,
and noncompliance could result in imposition of fines by the United States
government or an award of damages to private litigants. Although we believe
that the properties we own are substantially in compliance with these
requirements, a determination that the properties are not in compliance with
the ADA could result in the imposition of fines or an award of damages to
private litigants.

 We Are Leveraged

We have borrowed funds and issued shares of preferred stock and intend
to borrow additional funds through advances on our revolving credit facility
and discretionary guidance line and through the issuance of notes payable or
SBA debentures, if available. As a result, we use leverage to fund our
capital needs. The SBA and private lenders have fixed dollar claims on our
assets superior to the claims of the holders of our common stock. Leverage
magnifies the effect that rising or falling interest rates have on our
earnings. Any increase in the interest rate earned by us on investments in
excess of the interest rate or dividend payable on the funds obtained from
either borrowings or the issuance of preferred stock would cause our net
income and earnings per share to increase more than it would without
leverage, while any decrease in the interest rate earned by us on
investments would cause net income and earnings per share to decline by a
greater amount than it would without leverage. Leverage is thus generally
considered a speculative investment technique. In order for us to repay
indebtedness or meet our obligations in respect of any outstanding preferred
stock on a timely basis, we may be required to dispose of assets when we
would not otherwise do so and at prices which may be below the net book
value of such assets. Dispositions of assets could have a material adverse
effect on our financial condition and results of operations.

 The Economic and Competitive Environments May Change

Our primary competition has come from banks, financial institutions and
other finance companies. Many of these competitors have greater financial
and larger managerial resources than us and are able to provide services
that we are not able to provide (i.e.,depository services). In general, we
believe we compete effectively with such entities on the basis of the
variety of our lending programs offered, interest rates, our long-term
maturities and payment schedules, the quality of our service, our reputation
as a lender, timely credit analysis and decision-making processes, and the
renewal and refinancing options available to borrowers. In addition, the
variety and flexibility of our lending programs enhances our ability to
react to current market conditions.

Several factors may impact the ability of our borrowers to meet their
contractual payment obligations. During economic downturns, there may be
reductions in business travel and consumers generally take fewer vacations.
Another factor which affects the limited service sector of the hospitality
industry is a significant rise in gasoline prices within a short period of
time. Most of the limited service hospitality properties collateralizing
our loans receivable are located on interstate highways. As seen in the
past, when gas prices sharply increase, occupancy rates for properties
located on interstate highways decrease. These factors may cause a
reduction in revenue per available room (RevPar). If RevPar for the
limited service sector of the hospitality industry were to experience
significant sustained reductions, the ability of our borrowers to meet their
obligations could be impaired and losses could increase.

Economic recessions or downturns could impair our borrowers and harm
our operating results. Many of the companies in which we have made or will
make loans may be susceptible to economic slowdowns or recessions.
Terrorism, bankruptcies or other political events, including the impact of
war, could affect our borrowers. Our substandard assets are likely to
increase and the value of our portfolio is likely to decrease

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during these periods. These conditions could lead to losses in our
portfolio and a decrease in our net investment income, net income and
assets.

 There Are Significant Risks in Lending to Small Businesses

Our loans receivable consist primarily of loans to small,
privately-owned companies. There is no publicly available information about
these companies; therefore, we rely on the due diligence of our employees to
obtain information in connection with our investment decisions. Our
borrowers may not meet net income, cash flow and other coverage tests
typically imposed by bank lenders. A borrowers ability to repay its loan
may be adversely impacted by numerous factors, including a downturn in its
industry or negative economic conditions. Deterioration in a borrowers
financial condition and prospects may be accompanied by a deterioration in
the collateral for the loan receivable. In addition, small businesses
depend on the management talents and efforts of one person or a small group
of people for their success. The loss of services of one or more of these
persons could have a material adverse impact on the operations of the small
business. Small companies are typically more vulnerable to customer
preferences, market conditions and economic downturns and often need
substantial additional capital to expand or compete. These factors may have
an impact on the ultimate recovery of our loans to such businesses. Loans
to small businesses, therefore, involve a high degree of business and
financial risk, which can result in substantial losses and accordingly
should be considered speculative.

 We Have an Ongoing Need for Additional Capital Since Earnings Are
Required to be Paid as Dividends

We will continue to need working capital to fund loans. Historically,
we have sold loans receivable, borrowed from financial institutions and
issued equity securities. A reduction in the availability of funds from
financial institutions, the equity market or the asset-backed securities
market could have a material adverse effect on us. We must distribute at
least 90% of our investment company taxable income to our shareholders to
maintain our RIC status under the Code. As a result, such earnings are not
available to fund loan originations. We expect to be able to borrow from
financial institutions and sell loans receivable in the asset-backed
securities market. We do not anticipate selling additional equity
securities at our current market price. If we fail to obtain funds from
such sources or from other sources to fund our loans and pay dividends, it
could have a material adverse effect on our financial condition and our
results of operations. In addition, as a BDC, we are generally required to
maintain a ratio of at least 200% of total assets to total borrowings, which
restricts our ability to borrow in certain circumstances.

 There May be Significant Fluctuations in Our Quarterly Results

Our quarterly operating results will fluctuate based on a number of factors, including, among others:



| |  |  | The completion of a structured loan sale transaction in a particular period;                    
| | - |  | ------------------------------------------------------------------------------------------------
| |  |  | Interest rate changes;                                                                          
| |  |  | The volume and timing of loan originations and prepayments of our loans receivable;             
| |  |  | Changes in the cash flows and/or assumptions underlying the valuation of our Retained Interests;
| |  |  | The recognition of gains or losses on investments;                                              
| |  |  | The level of competition in our markets; and                                                    
| |  |  | General economic conditions, especially those which affect the hospitality industry.            

As a result of these factors, results for any quarter should not be
relied upon as being indicative of performance in future quarters.

In addition, to the extent a structured loan sale transaction is
completed, (i) our interest income in future periods will be reduced until
the proceeds received are reinvested in new loan originations, (ii) interest
expense will be reduced if we repay outstanding debt with the proceeds and
(iii) we will earn income from our ownership of a retained interest in the
loans sold. Until the proceeds are fully reinvested, the net impact of a
structured loan sale transaction on future operating periods should be a
reduction in interest income, net of interest expense.

 The Loss of Pass-Through Tax Treatment Would Subject Us to Income Taxes

We intend to continue to qualify as a RIC under the Code. If a company
meets certain diversification and distribution requirements under the Code,
it qualifies for pass-through tax treatment. We would cease to qualify

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for pass-through tax treatment if we were unable to comply with these
requirements or if we ceased to qualify as an investment company under the
1940 Act. We are also subject to a 4% excise tax (and, in certain cases,
corporate level income tax) if we fail to make certain distributions.
Failure to qualify as a RIC would subject us to Federal income tax as if we
were an ordinary corporation, resulting in a substantial reduction in both
our net assets and the amount of income available for distribution to our
shareholders.

 We Operate in a Highly Regulated Environment

We are regulated by the SBA and the SEC. In addition, changes in the
laws or regulations that govern BDCs, RICs, SBICs and SBLCs may
significantly affect our business. Laws and regulations may be changed from
time to time, and the interpretations of the relevant laws and regulations
are also subject to change. Any change in the laws or regulations governing
our business could have a material impact on our financial condition or our
results of operations.

EMPLOYEES

At December 31, 2002, we employed 47 individuals including marketing
professionals, investment professionals, operations professionals and
administrative staff. Our loan processing is centralized in our Dallas,
Texas office. In addition, we have loan production offices in Georgia,
Arizona and Missouri. Our management believes the relationship with our
employees is good.

All of our operating assets acquired in liquidation are managed for us
by third party management companies. All persons employed in the day-to-day
operations of our assets acquired in liquidation are employees of the
management companies engaged by us and are not our employees.

At December 31, 2002, our non-consolidated subsidiary, PMC Funding,
employed 14 individuals in relation to the operation of its assisted care
living facility. During January 2003, PMC Funding sold the assisted care
living facility.

CUSTOMERS

We are not dependent upon a single borrower, or a few borrowers, whose
loss would have a material adverse effect on us. In addition, we have not
loaned more than 10% of our assets to any single borrower.

AVAILABLE INFORMATION

We file annual, quarterly and special reports and other information
with the Securities and Exchange Commission (the SEC). All documents may
be located at the SECs Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549 or you may obtain information on the operation of the
Public Reference Room by calling 1-800-SEC-0330. Our SEC filings are also
available to the public, free of charge, at our internet site
www.pmccapital.comas soon as reasonably practicable after the reports are
filed with, or furnished to, the SEC or at the SECs internet site
www.sec.gov.

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Item 2. PROPERTIES

Our headquarters are located at 18111 Preston Road, Suite 600, Dallas,
Texas 75252. We lease approximately 13,000 square feet in an office
building pursuant to a five-year lease which commenced in December 1998. In
addition, at December 31, 2002, we leased office space in Missouri. The
aggregate annual lease payments for the year ended December 31, 2002 were
approximately $328,000.




Item 3. LEGAL PROCEEDINGS

We are a party to certain lawsuits in the normal course of our
business, including the operation of our assets acquired in liquidation.
While the outcome of these legal proceedings cannot at this time be
predicted with complete certainty, we do not expect that any of these
actions either individually or in the aggregate will have a material effect
upon our financial condition or results of operations.




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

No matters were submitted to a vote of shareholders during the last
quarter of 2002.

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PART II




Item 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANTS COMMON STOCK AND RELATED SHAREHOLDER MATTERS

Our Common Stock is traded on the American Stock Exchange (AMEX)
under the symbol PMC. The following table sets forth, for the periods
indicated, the high and low sales prices as reported on the AMEX and the
regular dividends per share declared by us for each such period.

|                   |  |      |       |     |  |       |      |  |  |           |       | 
|------------------ |  | ---- | ----- | --- |  | ----- | ---- |  |  | --------- | ----- | 
|                   |  |      |       |     |  |       |      |  |  | Regular  
|                   |  |      |       |     |  |       |      |  |  | Dividends
|                   |  |      |       |     |  |       |      |  |  | Per      
|Quarter Ended      |  | High |       | Low |  | Share
|                   |  |      |       |     |  |      
|December 31, 2002  |  | $    | 4.80  |     |  | $     | 3.20 |  |  | $         | 0.120 | 
|September 30, 2002 |  | $    | 6.74  |     |  | $     | 5.40 |  |  | $         | 0.120 | 
|June 30, 2002      |  | $    | 7.28  |     |  | $     | 6.50 |  |  | $         | 0.160 | 
|March 31, 2002     |  | $    | 8.00  |     |  | $     | 7.06 |  |  | $         | 0.160 | 
|December 31, 2001  |  | $    | 8.03  |     |  | $     | 6.79 |  |  | $         | 0.200 | 
|September 30, 2001 |  | $    | 8.18  |     |  | $     | 7.75 |  |  | $         | 0.200 | 
|June 30, 2001      |  | $    | 8.50  |     |  | $     | 6.75 |  |  | $         | 0.200 | 
|March 31, 2001     |  | $    | 9.50  |     |  | $     | 8.00 |  |  | $         | 0.250 | 
|December 31, 2000  |  | $    | 9.81  |     |  | $     | 7.75 |  |  | $         | 0.250 | 
|September 30, 2000 |  | $    | 10.38 |     |  | $     | 9.13 |  |  | $         | 0.250 | 
|June 30, 2000      |  | $    | 10.13 |     |  | $     | 7.75 |  |  | $         | 0.250 | 
|March 31, 2000     |  | $    | 8.31  |     |  | $     | 7.75 |  |  | $         | 0.250 | 

On March 21, 2003, there were approximately 800 shareholders of record
of our Common Stock and the last reported sales price of our Common Stock
was $4.25 per share.

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Item 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following is a summary of our Selected Consolidated Financial Data
as of and for the five years in the period ended December 31, 2002. The
following data should be read in conjunction with our consolidated financial
statements and the notes thereto and Managements Discussion and Analysis
of the Financial Condition and Results of Operations appearing elsewhere in
this Form 10-K. The selected consolidated financial data presented below
has been derived from our consolidated financial statements.

|                    |                                                  |                       |   |                                                      |      |      |   |         |      |      |   |         |      |  |   |         |      |  |   |         |      | 
|------------------- | ------------------------------------------------ | --------------------- | - | ---------------------------------------------------- | ---- | ---- | - | ------- | ---- | ---- | - | ------- | ---- |  | - | ------- | ---- |  | - | ------- | ---- | 
|                    |                                                  |                       |   | As of and for the Years Ended December 31,          
|                    |                                                  |                       |   |                                                     
|                    |                                                  |                       |   | 2002                                                 |      | 2001 |   | 2000    |      | 1999 |   | 1998   
|                    |                                                  |                       |   |                                                      |      |      |   |         |      |      |   |        
|                    |                                                  |                       |   | (Dollars in thousands, except per share information)
|Operating Data:     |                                                  |                       |   |                                                      |      |      |   |         |      |      |   |         |      |  |   |         |      |  |   |        
|                    | Total investment income                          |                       | $ | 16,662                                               |      |      | $ | 20,752  |      |      | $ | 21,584  |      |  | $ | 22,627  |      |  | $ | 24,314  |     
|                    | Net investment income                            |                       | $ | 5,956                                                |      |      | $ | 9,344   |      |      | $ | 10,304  |      |  | $ | 11,487  |      |  | $ | 13,223  |     
|                    | Sale of assets                                   |                       | $ | 1,446                                                |      |      | $ | 2,732   |      |      | $ | 564     |      |  | $ | 2,564   |      |  | $ | 925     |     
|                    | Net income                                       |                       | $ | 5,983                                                |      |      | $ | 10,567  |      |      | $ | 11,253  |      |  | $ | 13,420  |      |  | $ | 13,949  |     
|                    | Dividends declared, common                       |                       | $ | 6,638                                                |      |      | $ | 10,076  |      |      | $ | 11,846  |      |  | $ | 12,007  |      |  | $ | 14,473  |     
|                    | Basic and diluted earnings per common share:     |                       |   |                                                      |      |      |   |         |      |      |   |         |      |  |   |         |      |  |   |         |     
|                    |                                                  | Net investment income |   | $                                                    | 0.48 |      |   | $       | 0.77 |      |   | $       | 0.85 |  |   | $       | 0.95 |  |   | $       | 1.10 | 
|                    |                                                  | Net income            |   | $                                                    | 0.48 |      |   | $       | 0.87 |      |   | $       | 0.93 |  |   | $       | 1.11 |  |   | $       | 1.16 | 
|                    | Dividends per common share                       |                       | $ | 0.56                                                 |      |      | $ | 0.85    |      |      | $ | 1.00    |      |  | $ | 1.02    |      |  | $ | 1.23    |     
|                    | Basic weighted average common shares
outstanding |                       |   | 11,854                                               |      |      |   | 11,854  |      |      |   | 11,841  |      |  |   | 11,829  |      |  |   | 11,800  |     
|Balance Sheet Data: |                                                  |                       |   |                                                      |      |      |   |         |      |      |   |         |      |  |   |         |      |  |   |        
|                    | Loans receivable                                 |                       | $ | 87,245                                               |      |      | $ | 107,392 |      |      | $ | 100,353 |      |  | $ | 106,325 |      |  | $ | 116,711 |     
|                    | Retained interests in transferred assets         |                       | $ | 40,003                                               |      |      | $ | 33,537  |      |      | $ | 32,341  |      |  | $ | 28,423  |      |  | $ | 20,151  |     
|                    | Total assets                                     |                       | $ | 140,266                                              |      |      | $ | 162,698 |      |      | $ | 161,478 |      |  | $ | 165,191 |      |  | $ | 163,349 |     
|                    | Notes and debentures payable                     |                       | $ | 54,310                                               |      |      | $ | 76,310  |      |      | $ | 72,977  |      |  | $ | 73,973  |      |  | $ | 74,790  |     
|                    | Cumulative preferred stock of
subsidiary         |                       | $ | 7,000                                                |      |      | $ | 7,000   |      |      | $ | 7,000   |      |  | $ | 7,000   |      |  | $ | 7,000   |     
|                    | Common shareholders equity                      |                       | $ | 72,003                                               |      |      | $ | 72,908  |      |      | $ | 72,667  |      |  | $ | 73,314  |      |  | $ | 72,151  |     
|                    | Number of common shares outstanding              |                       | $ | 11,854                                               |      |      | $ | 11,854  |      |      | $ | 11,854  |      |  | $ | 11,829  |      |  | $ | 11,829  |     
|Other Data:         |                                                  |                       |   |                                                      |      |      |   |         |      |      |   |         |      |  |   |         |      |  |   |        
|                    | Loans funded                                     |                       | $ | 46,138                                               |      |      | $ | 65,977  |      |      | $ | 44,158  |      |  | $ | 84,264  |      |  | $ | 66,450  |     

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Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Form 10-K contains certain forward-looking statements. These
statements include the plans and objectives of management for future
operations, including plans and objectives relating to future growth of the
loan portfolio and availability of funds. Such forward-looking statements
can be identified by the use of forward-looking terminology such as may,
will, expect, intend, believe, anticipate, estimate, or
continue, or the negative thereof or other variations or similar words or
phrases. The forward-looking statements included herein are based on
current expectations that involve numerous risks and uncertainties
identified in this Form 10-K, including, without limitation, the risk
identified under the caption, Item 1. Business  Risk Factors.
Assumptions relating to the foregoing involve judgments with respect to,
among other things, future economic, competitive and market conditions and
future business decisions, all of which are difficult or impossible to
predict accurately and many of which are beyond our control. Although we
believe that the assumptions underlying the forward-looking statements are
reasonable, any of the assumptions could be inaccurate and, therefore, there
can be no assurance that the forward-looking statements included in this
Form 10-K will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included herein,
the inclusion of such information should not be regarded as a representation
by us or any other person that our objectives and plans will be achieved.

RECENT DEVELOPMENTS

On March 27, 2003, we entered into an Agreement and Plan of Merger with PMC Commercial.
Under the terms of the merger agreement, PMC Capital will be merged into PMC Commercial, with PMC Commercial continuing
as the surviving entity. Each issued and outstanding share of PMC Capital common stock will be converted into 0.37 of a common share of
PMC Commercial. The merger has been recommended by each companys special committee and approved by the Board of Directors of PMC Capital and the Board of Trust Managers
of PMC Commercial. In addition, the boards and management of each company have entered into voting agreements pursuant to which they have agreed to vote their shares in favor
of the merger and related transactions. Completion of the merger, which is expected to occur in the fourth quarter of 2003, is subject to approval by the shareholders
of PMC Capital and PMC Commercial, certain governmental consents and customary closing conditions.

CURRENT OPERATING OVERVIEW

We are a national small business lender. Our operations include
originating, servicing and selling commercial loans. We primarily originate
loans to small business concerns in the limited service sector of the
hospitality industry. We sell certain of our loans receivable through
privately-placed structured loan transactions and sell the government
guaranteed portion of our loans originated under the SBA 7(a) Program.
Historically, we have retained servicing rights and residual interests in
all loans sold. Servicing rights include the right to collect payments on
behalf of the loan purchaser, monitor the loan receivable for any defaults
and address any problems in collecting the required principal and interest
payments. We retain a residual interest in the sold loans receivable either
directly or through our ownership in the related SPEs. In addition, we
operate as an investment manager to evaluate properties and loans receivable
and to service loans receivable and lease contracts pursuant to fee
arrangements with PMC Commercial.

Our investment income and realized gains include the following:



| |  |  | Interest earned on loans receivable which includes
commitment fees collected at the inception of the loan;                 
| | - |  | ---------------------------------------------------------------------------------------------------------------------------
| |  |  | Gains relating to structured loan transactions;                                                                            
| |  |  | Earnings on our Retained Interests;                                                                                        
| |  |  | Fee income from the management of PMC Commercials property and loans receivable;                                          
| |  |  | Equity interests in the income of our non-investment company unconsolidated subsidiaries;                                  
| |  |  | Premiums recognized from the sale of the government
guaranteed portion of SBA 7(a) Program loans into the secondary
market;
| |  |  | Interest earned on temporary (short-term) investments; and                                                                 
| |  |  | Other fees, including late fees, prepayment fees, construction monitoring fees and site visit fees.                        

Our ability to generate investment income is dependent on (i) economic,
regulatory and competitive factors that influence interest rates and loan
originations and (ii) our ability to secure financing for our investment
activities. The amount of investment income earned will vary based on
volume of loans funded, the timing and amount of financings, the volume of
loans receivable which prepay, the mix of loans receivable (construction
versus non-construction), the rate and type of loans originated (whether
fixed or variable) as well as the general level of interest rates. For a
more detailed description of the risks affecting our financial condition and
results of operations, see Risk Factors in Item 1 of this Form 10-K.

Expenses primarily consist of interest expense, salaries and related
benefits and overhead. Our overhead expenditures consist primarily of
insurance, advertising and promotional expense, telephone services,
corporate printing costs, directors and shareholders costs and general
office expenses. In addition, we have other administrative costs which
consist of profit sharing plan, rent and professional fees. Our operations
are

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centralized in Dallas, Texas where our headquarters are located. We also
have additional business development offices located in Georgia, Arizona and
Missouri.

Our results of operations during 2002 were negatively impacted by a
combination of factors including: the low interest rate environment,
investment losses, diminished loan origination volume, general economic
conditions, lower earnings on our variable-rate loans compared to fixed-rate
loans, the costs of operating foreclosed properties and reduced income on
the cash and cash equivalents invested from our April 2002 structured loan
sale transaction.

Prior to 2001, other than loans originated under the SBA 7(a) Program,
we primarily originated fixed-rate loans. Commencing in the latter half of
2001, our ability to compete for fixed-rate lending opportunities declined.
Interest rates have remained at historically low levels for a prolonged
period of time providing the banking industry with the ability to offer
fixed-rate mini-perm loans (i.e.,five-year maturity, 20-year
amortization) based on these low short-term rates. In contrast, the
interest rates on our fixed-rate loan products are based on a longer term
(10-year U.S. Treasuries) which remained at disproportionately higher levels
than shorter term financial indices. As a result, our fixed interest rates
offered were higher than the banks and our lending opportunities decreased.
Accordingly, we began marketing variable-rate loan products with interest
rates based on LIBOR. We have been able to compete more effectively by
offering this LIBOR-based variable-rate loan product.

At December 31, 2002, our variable-rate loans receivable were $71.3
million (82%) of our loans receivable. At December 31, 2002, all of our
outstanding commitments were for variable-rate loans, and given the current
interest rate market, we expect to continue to originate primarily
variable-rate loans. At December 31, 2002, our commitments to fund loans of
approximately $29.4 million were greater than commitments of $19.5 million
at December 31, 2001. Commitments have fixed expiration dates and require
payment of a fee to us. Based upon current economic conditions, we
anticipate that the loan origination volume for 2003 will range from $45
million to $60 million. However, there can be no assurance of the accuracy
of this estimate.

The weighted average interest rate on our loans receivable declined to
7.1% at December 31, 2002 from 9.0% at December 31, 2001 primarily as a
result of a decrease in the average quarterly LIBOR (244 basis points) and
prime rate (281 basis points) during 2002 which are utilized in the
determination of our quarterly variable rates and an increase in
variable-rate lending.

We primarily fund our commitments through structured loan sale
transactions. The proceeds that we receive from the completion of
structured loan sale transactions are invested initially in temporary
investments which generate less interest income and, as a result of the
declining interest rate environment, have generally been re-loaned or
committed to be re-loaned initially at lower interest rates. To the extent
LIBOR or the prime rate increases (decreases), we would receive the benefit
(reduction) from this increase (decrease) in variable interest rates. In
addition, due to the decreased loan originations during the first nine
months of 2002, the funds from our most recent transaction were invested for
a longer period of time than the proceeds from our prior structured loan
sale transactions and our interest income, cash flows and financial
condition were negatively impacted. However, during the fourth quarter of
2002, our loan originations increased. During the first three quarters of
2002 we funded $27.7 million in loans while in the fourth quarter of 2002 we
funded $18.4 million in loans. See Liquidity and Capital Resources  Uses
of Funds  Loan Originations.

Our investment losses during 2002 consist primarily of realized losses
on our Retained Interests due primarily to our loans in the 2000 Joint
Venture which were in default and unrealized losses on our assets acquired
in liquidation due to devaluation of collateral, additional capital
expenditures and expected holding costs. See Results of Operations for a
detailed discussion of our operations.

ECONOMIC FACTORS

The following provides a summary of the more significant economic
factors that may have an impact on our financial condition and results of
operations. The factors described below could impact the volume of our loan
originations, the income we earn on our investments, our ability to complete
a securitization, the performance of our loan portfolio and/or the
performance of our SPEs.

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Interest Income and Rates:As a result of our increasing dependence on
variable-rate loans, the continued prolonged low interest rate environment
has caused our interest income to be reduced. To the extent that rates
remain at these historically low levels, or LIBOR or the prime rate
decreases from current levels, we will earn less interest income.
Alternatively, when rates rise in the future, the interest we earn on our
performing variable-rate loans will increase. In addition, the decreased
loan origination volume during the first nine months of 2002 affected our
interest income. Interest income can continue to be reduced if (i)
principal payments on outstanding loans receivable exceed our loan
originations, (ii) interest rates continue to decrease, or (iii) Problem
Loans increase.

Interest Rate Spreads: Our net interest margin is dependent upon the
difference between the cost of our borrowed funds and the rate at which we
invest these funds (the spread differential). A significant reduction in
spread differential may have a material adverse effect on our results of
operations. Over the past few years the spread differential has been reduced
causing decreased net investment income. There can be no assurance that the
spread differential will not continue to decrease. We believe that our
LIBOR-based loan program will provide us with a spread differential
(resulting from our structured loan sale transactions) that approximates the
spread differential we have historically received on our fixed-rate
transactions due to managements belief that there is a more favorable
market for LIBOR-based structured loan sale transactions compared to
fixed-rate structured loan sale transactions.

Loan Origination Trend:During the latter part of 2001, we commenced
marketing and selling a variable-rate loan product based on LIBOR which
presently provides a lower cost variable interest rate alternative to our
borrowers as a result of market conditions. During the first half of 2002,
we experienced decreases in lending opportunities, loans funded and loan
commitments compared to the prior year. This decrease was due to
competition resulting from the interest rate environment and the economic
uncertainty which specifically had an impact on the hospitality sector. As
a result of the continuation of low short-term interest rates, banks
continue to offer their mini-perm short-term loans at rates considerably
lower than our long-term fixed-rate loans and often with less down payment
requirements. In addition, as a result of the economic uncertainty
following the tragic events of September 11th, fewer hospitality properties
were marketed to be sold; therefore, fewer property sales required
financing. However, during the second half of 2002, we perceived a change
in the economic environment for limited service hospitality properties and
more property owners were willing to refinance into variable-rate loans and
more properties were being sold. As a result of our borrowers acceptance
of our LIBOR-based lending program and the change in the market, our loan
commitments and lending opportunities increased during the second half of
2002. We believe this trend will continue in 2003. Most of our current
commitments are based on LIBOR.

Hospitality Industry Factors:During 2001, there were reductions in
business and discretionary travel causing a moderation in demand for hotel
rooms and a slowdown in construction of hospitality properties (including
limited service hospitality properties). These reductions were primarily
caused by (i) traveler concerns about the safety and convenience of air
travel, (ii) a general reluctance to be away from home and (iii) a downturn
in corporate profits, investments and transactions which led to aggressive
business travel reductions. Although the Federal Reserve lowered interest
rates during 2001 to aid in stimulating the economy and to provide
liquidity, consumer and business confidence declined. This lack of
confidence, which continued into 2002 and 2003, caused a significant strain
on the travel and hotel industries as well as numerous other industries in
the United States. Political uncertainties, including the possibility of
war, have impeded a rebound in consumer and investor confidence and
spending. However, the limited service segment of the hospitality industry
has been less impacted and has continued to outperform the luxury and
upscale sectors which experienced the weakest performance.

Another factor which affects the limited service sector of the
hospitality industry is a significant rise in gasoline prices within a short
period of time. Most of the limited service hospitality properties
collateralizing our loans receivable are located on interstate highways. As
seen in the past, when gas prices sharply increase, occupancy rates for
properties located on interstate highways decrease.

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PORTFOLIO INFORMATION

Lending Activities

 General

The fair value of our loans receivable was $87.2 million and $107.4
million at December 31, 2002 and 2001, respectively. During 2002 and 2001,
we originated loans totaling $46.1 million and $66.0 million and received
repayments, including proceeds from the sale of our guaranteed SBA 7(a)
Program loans, of $20.0 million (of which approximately $9.9 million
represented prepayments) and $17.8 million (of which approximately $4.2
million represented prepayments), respectively. During 2002 and 2001,
principal collections (including prepayments), as an annualized percentage
of our loans receivable, were 16% and 9%, respectively. Our Serviced Loan
Portfolio decreased by $8.8 million (3%) to $313.0 million at December 31,
2002 from $321.8 million at December 31, 2001.

At December 31, 2002, approximately $71.3 million of our loans
receivable had a variable interest rate (reset on a quarterly basis) based
upon either LIBOR or the prime rate. First Western originates loans based
on the prime rate while PMC Capital, Western Financial and PMCIC primarily
originate loans based on LIBOR. As of December 31, 2002, 68% of our
variable-rate loans were based on LIBOR and 32% were based on the prime
rate. The spread that we charge over LIBOR generally ranges from 3.5% to
4.5%. The spread that we charge over the prime rate generally ranges from
1.0% to 2.5%. The LIBOR and prime rate used in determining interest rates
for the first quarter of 2003 (set on January 1, 2003) were 4.25% and 1.38%,
respectively. To the extent LIBOR or the prime rate changes, we will see
changes in interest income on our variable-rate loans receivable. In
addition, at December 31, 2002, approximately $15.9 million of our loans
receivable had a fixed interest rate with a weighted average interest rate
of 10.4%. See Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.

 Prepayment Activity

We have experienced increased prepayment activity as a result of the
current low interest rate environment (the prime rate, LIBOR and yield on
treasury notes decreased substantially during 2001 and 2002) and we believe
that we may continue to experience increased prepayment activity at high
levels (particularly in relation to our fixed-rate loans receivable) in
2003. Many of our prepayment fees for our fixed-rate loans receivable are
based upon a yield maintenance premium which provides for greater fees as
interest rates decrease. In addition, certain of our loans receivable have
prepayment prohibitions of up to five years. In accordance with SBA policy,
our SBA 7(a) loans receivable (all variable interest rate) did not have
prepayment fees for loans originated prior to January 2001. Effective for
loans originated after January 1, 2001, the SBA changed its policy on
prepayment fees to allow the SBA to collect a 5% fee for loans prepaid in
the first year, 3% in the second year and 1% in the third year. This change
in SBA policy may lessen the amount of prepayments received during the first
three years after the origination of an SBA guaranteed loan.

The timing and volume of our prepayment activity for both our variable
and fixed-rate loans receivable fluctuate and are impacted by numerous
factors including the following:



| |  |  | The competitive lending environment (i.e.,availability of alternative
financing);                           
| | - |  | ------------------------------------------------------------------------------------------------------------
| |  |  | The current and anticipated interest rate environment (i.e.,if
interest rates are expected to rise or fall);
| |  |  | The market for limited service hospitality property sales; and                                              
| |  |  | The amount of the prepayment fee and length of prepayment prohibition.                                      

When our loans receivable are paid-off prior to their maturity, we
generally receive prepayment fees. Prepayment fees result in one-time
increases in our income. The proceeds from the prepayments we receive are
invested initially in temporary investments and are generally re-loaned or
committed to be re-loaned at lower interest rates than the prepaid loans
receivable. These lower interest rates have had an adverse effect on our
interest income and depending upon the rate of future prepayments may
further impact our interest income. It is difficult for us to accurately
predict the volume or timing of prepayments since the factors listed above
are not all-inclusive and changes in one factor are not isolated from
changes in others which might magnify or counteract the rate or volume of
prepayment activity.

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 Problem Loans

Our policy with respect to loans receivable which are in arrears as to
interest payments for a period in excess of 60 days is generally to
discontinue the accrual of interest income and reverse previously recorded
interest income which is deemed uncollectible. We will deliver a default
notice and begin foreclosure and liquidation proceedings when we determine
that pursuit of these remedies is the most appropriate course of action.

Senior management closely monitors our Problem Loans which are
classified into two categories: Impaired Loans and Special Mention Loans.
Our Impaired Loans are loans which are not complying with their contractual
terms, the collection of the balance of the principal is considered impaired
and on which its fair value is less than the remaining unamortized principal
balance. Our Special Mention Loans are those loans receivable that are not
complying with their contractual terms but we expect a full recovery of the
principal balance through either collection efforts or liquidation of
collateral.

There can be no assurance that Special Mention Loans will not become
Impaired Loans in the future if there is deterioration of the value of the
collateral. The value of our loans receivable at December 31, 2002 has been
reduced by unrealized depreciation of $711,000. Each Impaired Loan is
valued by the Board based upon a determination of fair value of the
collateral and other collections since our Impaired Loans are all collateral
dependent.

Historically, we have not had a significant amount of Problem Loans nor
have we had a significant amount of charged-off loans. However, during 2001
and 2002 we experienced a trend of increasing Impaired Loans and, as a
result, an increase in unrealized and realized losses. This unfavorable
trend in Impaired Loans is primarily a result of current economic conditions
(see Economic Factors). In addition, our increased unrealized and
realized losses are partially a result of the reduced value of distressed
properties in the limited service hospitality industry. Due to the
increased number of properties being marketed, the value of the collateral
for our Impaired Loans has decreased.

Realized losses and the change in unrealized (appreciation)
depreciation of our loans was as follows:

|                       |  |                          |     |      |  |      |     |  |  |   |     | 
|---------------------- |  | ------------------------ | --- | ---- |  | ---- | --- |  |  | - | --- | 
|                       |  | Years ended December 31,
|                       |  |                         
|                       |  | 2002                     |     | 2001 |  | 2000
|                       |  |                          |     |      |  |     
|                       |  | (In thousands)          
|SBIC commercial loans  |  | $                        | 422 |      |  | $    | 344 |  |  | $ | 122 | 
|Other commercial loans |  |                          | (2  | )    |  |      | 2   |  |  |   | 14  | 
|SBA 7(a) loans         |  |                          | 63  |      |  |      | 463 |  |  |   | 350 | 
|                       |  |                          |     |      |  |      |     |  |  |   |     | 
|                       |  | $                        | 483 |      |  | $    | 809 |  |  | $ | 486 | 
|                       |  |                          |     |      |  |      |     |  |  |   |     | 

Retained Interests

At December 31, 2002 and 2001 the recorded value of our Retained
Interests was $40.0 million and $33.5 million, respectively. Retained
Interests represents our ownership interest in loans receivable that have
been contributed to SPEs and have been recorded as sold. Our Retained
Interests consist of (i) the retention of a portion of each of the sold
loans (the required overcollateralization), (ii) required cash balances
owned by the SPE (the reserve fund) and (iii) future excess funds to be
generated by the SPE after payment of all obligations of the SPE (the
interest-only strip receivable).

The fair value of our Retained Interests is determined based on the
present value of future cash flows we expect to receive from the SPEs.
Estimated future cash flows are based in part upon estimates of prepayment
speeds and loan losses. Prepayment speeds and loan losses were estimated
based on the current and anticipated interest rate and competitive
environments and our historical experience with these and similar loans
receivable. The discount rates utilized are determined for each of the
components of Retained Interests as estimates of market rates based on
interest rate levels considering the risks inherent in the transaction.
Changes in any assumptions, or actual results which deviate from these
assumptions, may materially affect the value of our Retained Interests.

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The net unrealized appreciation on our Retained Interests at December
31, 2002 and December 31, 2001 was $3.5 million and $2.0 million,
respectively. The net increase of $1.5 million resulted primarily from a
decrease in the discount rates used to value our Retained Interests
resulting from the lower interest rate environment at December 31, 2002
compared to December 31, 2001 partially offset by unrealized losses due to
anticipated increased losses and prepayments. Any appreciation
(depreciation) of our Retained Interests is included in the accompanying
statements of operations as either a realized loss (if there is a reduction
in expected future cash flows) or an unrealized gain (loss) on investments.

With the exception of the 2000 Joint Venture, our SPEs have experienced
positive results with no loan losses and minimal 60-day delinquencies.
There can be no assurance that we will continue to achieve these types of
results in future periods. The 2000 Joint Venture had two Impaired Loans
emerge during 2002. The first Impaired Loan resulted in the acquisition of
a limited service hospitality property by the 2000 Joint Venture. We are
currently marketing this asset and expect the sale to occur in 2003. The
second Impaired Loan, with a principal balance of $2.3 million, was deemed a
charged-off loan (in accordance with the transaction documents) during
December 2002. At that time, PMC Capital exercised its option to repurchase
the loan from the 2000 Joint Venture for $2.3 million plus accrued interest.
The aggregate value of this property (and our estimate of the underlying
loan receivable), as reduced for anticipated holding and selling costs, was
estimated to be $1.2 million. Primarily as a result of these two Impaired
Loans, we recorded realized losses on our Retained Interests of $2.0 million
during 2002.

Assets Acquired in Liquidation

Our assets acquired in liquidation include (i) assets repurchased by us
and recorded on our balance sheet as assets acquired in liquidation and (ii)
assets repurchased by one of our non-investment company subsidiaries or one
of our affiliates.

With regard to properties acquired through foreclosure: (i) deferred
maintenance issues must be addressed prior to operation of the property or
(ii) it may not be economically justifiable to operate the property prior to
its sale. To the extent keeping the property operating is deemed to assist
in attaining a higher value upon sale, we will take steps to do so. We
typically hire third party management companies with expertise in management
of the type of property for sale (i.e., limited service hospitality, golf
facility, etc.).

On an ongoing basis, we monitor revenue generation and growth, expense
controls, working capital projections, capital needs, marketing plans and
sales opportunities for our assets acquired in liquidation. We are
marketing these assets while implementing new operating plans to stimulate
revenue at the properties. Marketing efforts include the use of our
marketing personnel, advertising through use of our website, direct mail,
word of mouth with current borrowers and other contacts and the use of third
party brokers and dealers.

 Owned by PMC Capital and Subsidiaries

At December 31, 2002, the aggregate recorded value of our assets
acquired in liquidation on our consolidated balance sheet was approximately
$2.3 million and consisted primarily of two limited service hospitality
properties (one of which was operating at December 31, 2002).

We have incurred costs, primarily operating losses and capital
expenditures, on our assets acquired in liquidation. During 2002, we
incurred losses from the operations of our assets acquired in liquidation of
approximately $391,000. There can be no assurance that we will be able to
sell these properties in the near future; therefore, operating losses will
likely continue and may be substantial.

During December 2002, we sold one limited service hospitality property
for approximately $500,000 and recorded a gain of approximately $113,000.
We financed the sale through origination of a loan of $325,000 at an
interest rate of LIBOR plus 4.5%. The loan matures in 2022. In addition,
First Western sold four properties during 2002 for approximately $350,000
and recorded losses of approximately $130,000.

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 Owned by Non-Consolidated Subsidiaries and SPEs

Assets have been acquired by our non-consolidated subsidiaries or our
SPEs: (i) to reduce liability exposure, (ii) to reduce the risk of
non-compliance with revenue requirements of the Code or (iii) if the
acquisition was required by an SPEs transaction documents.

In October 2002, our affiliate, PMC Funding, acquired two assisted care
living facilities with an estimated fair value of approximately $1.2 million
for $101,000 in cash and the assumption of notes payable to PMC Capital and
First Western. PMC Funding operated one of the two assisted care living
facilities while the other facility is vacant. On January 15, 2003, PMC
Funding sold the operating assisted care living facility for $975,000. The
proceeds were used to repay in full the mortgage held by PMC Capital,
including additional costs incurred prior to liquidation and accrued
interest. The remaining funds were used to repay a portion of the
receivable due to First Western and no gain or loss was recorded on the
sale. As of December 31, 2002, the underlying loan receivable held by PMC
Capital related to these facilities was valued at approximately $788,000.
We have classified the receivables of PMC Capital and First Western as due
from affiliate on our consolidated balance sheet (i.e.,they are not
included as assets acquired in liquidation).

The 2000 Joint Venture owns a limited service hospitality property with
an aggregate estimated value of $1.4 million. We are currently marketing
this property and expect it to be sold in 2003.

Subsequent to year-end, our newly formed non-investment company
subsidiary, PMC Asset Holding, LLC, acquired a golf facility that was
collateral for a loan receivable held by PMC Capital. At the time of the
purchase, the asset was valued at $1.2 million which is the same as PMC
Capital valued its loan receivable at December 31, 2002. The value of this
property (and our estimate of the underlying loan receivable) was determined
based on our estimate of the net proceeds expected from the liquidation of
the collateral as reduced for taxes, anticipated holding costs and selling
costs. The golf facility is not currently operating. To the extent the
value of the golf facility was to become further impaired, we would reflect
a loss in our consolidated financial statements at the time the asset was
deemed to be impaired. The asset will be classified as due from affiliate
on our consolidated balance sheet (i.e., it will not be included in assets
acquired in liquidation). The operations, if any, of the golf facility will
be reflected as equity in income (loss) of unconsolidated subsidiaries, net,
in our statement of operations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and our results
of operations are based upon our consolidated financial statements, which
have been prepared in accordance with generally accepted accounting
principles. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, income and expenses and related disclosure of contingent assets
and liabilities. Our management has discussed the development and selection
of these critical accounting policies and estimates with the audit committee
of the Board and the audit committee has reviewed the disclosure relating to
these policies and estimates included in this annual report.

We believe the following critical accounting considerations and
significant accounting policies represent our more significant policies,
judgments and estimates used in the preparation of our consolidated
financial statements.

Principles of Consolidation

Our consolidated financial statements include the accounts of PMC
Capital and its wholly-owned regulated investment company subsidiaries,
First Western, PMCIC and Western Financial. PMC Advisers and PMC Funding
are accounted for using the equity method of accounting in conformity with
Federal securities laws. SPEs created in conjunction with our structured
loan sale transactions are accounted for in accordance with Statement of
Financial Accounting Standards No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities (SFAS No.
140). Under SFAS No. 140, interests in the SPEs are accounted for as
Retained Interests.

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Fair Value Accounting

Our Board determines, in good faith, the fair value of our investments,
with the resulting unrealized gains and losses being recorded through
earnings. Fair value in accordance with generally accepted accounting
principles for investment companies includes the current sale concept
meaning orderly disposition over a reasonable period of time between
willing parties other than in a forced or liquidation sale.

The determination of fair value requires judgment and consideration of
the facts and circumstances existing at the evaluation date. Adverse
changes to the facts and circumstances will impact the Boards determination
of value and may require valuation losses which may be material to our
results of operations.

Below we discuss the valuation of our loans receivable, Retained
Interests and assets acquired in liquidation.

Valuation of Loans Receivable

The valuation of our loans receivable is adjusted on a quarterly basis
to reflect the good faith determination of our Board as to the current fair
value of our loans. There is typically no public market or established
trading market for the loans we originate. The illiquid nature of our loans
receivable may adversely affect our ability to dispose of such loans at
times when it may be advantageous for us to liquidate such investments. In
the absence of a readily ascertainable market, the value of our loans
receivable may differ from the values that would be placed on the loans
receivable if a ready market existed. Therefore, if we were forced to
immediately liquidate some or all of our loans receivable, the proceeds of
such liquidation may be significantly less than the current value of such
loans receivable.

On an ongoing basis, the Board values our loans receivable through an
assessment of the recoverability of individual loans. The Board values an
individual loan based on the borrowers payment history, collateral value,
guarantor support and other factors. If significant doubt exists as to the
ultimate realization of a loan, the Board will reduce the fair value
accordingly. The determination of whether significant doubt exists
regarding the ultimate realization of a loan requires judgment and
consideration of the facts and circumstances existing at the evaluation
date. Changes to the facts and circumstances of the borrower, the
hospitality industry and the economy may cause a decline in the fair value
of the loan, and ultimately unrealized and realized losses which may be
material to our results of operations. The fair value of our loans
receivable generally approximates the remaining unamortized principal of the
loan, unless there is doubt as to the realization of the loan receivable.
When doubt exists, the fair value of the loan receivable is then based upon
the value of the collateral which may involve (i) cash flow/revenue
multiples, (ii) property tax assessments, (iii) historical information and
(iv) updated appraisals in certain circumstances. In addition, as part of
the evaluation of the collateral, we generally review all loan origination
underwriting documentation including the appraisal used during the loan
origination process.

Losses on our loans (realized and unrealized) were 0.56% (56 basis
points) and 0.76% (76 basis points) of our weighted average outstanding
loans receivable during 2002 and 2001, respectively. To the extent we are
forced to liquidate one or several of our loans, future losses may be
substantial. The change in assets and net income if the valuation of our
loan portfolio were to decline is as follows:

|                                        |  |                                 |        |  
|--------------------------------------- |  | ------------------------------- | ------ | -
|                                        |  | Change in Assets and Net Income
|                                        |  |                                
|                                        |  | (In thousands)                 
|Loan portfolio valuation declines by 1% |  | $                               | (885   | )
|Loan portfolio valuation declines by 2% |  | $                               | (1,770 | )

Valuation of Retained Interests

The valuation of our Retained Interests is adjusted on a quarterly
basis to reflect the good faith determination of our Board as to the current
fair value of our Retained Interests. Due to the limited number of entities
that conduct transactions with similar assets, the relatively small size of
our Retained Interests and the limited number of buyers for such assets, no
readily ascertainable market exists for our Retained Interests. Therefore,
the Boards determination of the fair value may vary significantly from
values that would be placed on our Retained Interests if a ready market
existed. If we were forced to immediately liquidate some or all of

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our Retained Interests, the proceeds of such liquidation may be
significantly less than the current value of such Retained Interests.

The valuation of our Retained Interests is our most volatile critical
accounting estimate because the valuation is dependent upon estimates of
future cash flows that are dependent upon the performance of the underlying
loans receivable. Prepayments or losses in excess of estimates will cause
us to incur losses. The fair value of our Retained Interests is determined
based on the present value of estimated future cash flows from the SPEs.
The estimated future cash flows are calculated based on assumptions
concerning, among other things, loan losses and prepayment speeds. We
regularly measure loan loss, prepayment and other assumptions against the
actual performance of the loans receivable sold and to the extent
adjustments to our assumptions are deemed necessary, they are made on a
quarterly basis. If the prepayment speeds occur at a faster rate than
anticipated or future loan losses occur quicker than expected or in amounts
greater than expected, the value of the Retained Interests will decline and
total income in future periods would be reduced. If prepayments occur
slower than anticipated or future loan losses are less than expected, cash
flows would exceed estimated amounts, the value of our Retained Interest
would increase and total income in future periods would be enhanced. Actual
prepayments and loan losses may vary significantly from our assumptions.
Although we believe that we have made reasonable assumptions as to the
future cash flows of the structured loan transactions, actual rates of loss
or prepayments may vary significantly from those assumed and other
assumptions may be revised based upon anticipated future events. These
assumptions are updated on a quarterly basis by the Board. Over the past
three years, there has been no significant change in the methodology
employed in valuing these investments. The discount rates utilized in
computing the net present value of future cash flows are based on an
estimate of the inherent risks associated with each cash flow stream.

Significant estimates related to our Retained Interests were as follows
at December 31, 2002:

|                     |  |            |      |             |  |          |      |   |  |               |      |  
|-------------------- |  | ---------- | ---- | ----------- |  | -------- | ---- | - |  | ------------- | ---- | -
|                     |  | Constant   |      | Aggregate   |  | Range of
|                     |  | Prepayment |      | Losses      |  | Discount
|                     |  | Rate (1)   |      | Assumed (2) |  | Rates   
|                     |  |            |      |             |  |         
|Secondary Market (3) |  |            | 20.0 | %           |  |          |     |   |  |               | 11.7 | %
|FW 97                |  |            | 30.0 | %           |  |          | 0.30 | % |  | 6.0% to 11.6%
|1998 Partnership     |  |            | 11.0 | %           |  |          | 2.87 | % |  | 4.3% to 11.5%
|1999 Partnership     |  |            | 10.0 | %           |  |          | 2.40 | % |  | 6.8% to 11.5%
|2000 Joint Venture   |  |            | 14.0 | %           |  |          | 3.02 | % |  | 7.3% to 12.0%
|2001 Joint Venture   |  |            | 9.5  | %           |  |          | 3.09 | % |  | 6.7% to 11.4%
|2002 Joint Venture   |  |            | 9.5  | %           |  |          | 3.13 | % |  | 6.8% to 11.5%



---

|(1) |  | Based on anticipated principal prepayments considering the loans
sold and similar loans.                                                                                  
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | As a percentage of the outstanding principal balance of the
underlying loans receivable as of December 31, 2002 based upon per
annum losses that ranged from 0.3% to 1.0%.
|   
|(3) |  | There are no losses on Secondary Market sales as the SBA has
guaranteed payment of principal on these loans.                                                              

Future annualized loan losses of between 35 to 100 basis points were
estimated on all of our structured loan transactions. At December 31, 2002,
we have identified two sold loans ($2.3 million) that we consider Impaired
Loans and five sold loans ($5.2 million) that we consider Special Mention
Loans. If we have to liquidate these loans, losses may exceed estimates and
the value of our Retained Interests will decline.

In addition, prepayments in excess of assumptions will cause a decline
in the value of our Retained Interests relating to the excess funds (our
interest-only strip receivable) expected from our structured loan sale
transactions. For example, if a $1.0 million loan with an interest rate of
10% prepays and the all-in cost of that joint ventures structured notes
was 7%, we would lose the 3% spread we had expected to receive on that loan
in future periods. The spread that is lost may be offset in part or in
whole by the prepayment fee that we collect.

The value of our Retained Interests includes an asset acquired in
liquidation with an estimated value of $1.4 million that is owned by
the 2000 Joint Venture. We are currently marketing this asset and
expect it to be sold in 2003. In addition, during December 2002,
PMC Capital exercised its option to repurchase a charged-off loan

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from the 2000 Joint Venture with a principal balance
of $2.3 million. We recorded realized losses of $2.0 million on our
Retained Interests during 2002 primarily related to these assets.

The following is a sensitivity analysis of our Retained Interests as of
December 31, 2002 to highlight the volatility that results when prepayments,
loan losses and discount rates are different than our assumptions:

|                                                   |  |                 |        |               |  |               |        |  
|-------------------------------------------------- |  | --------------- | ------ | ------------- |  | ------------- | ------ | -
|                                                   |  |                 |        |               |  | Asset and Net
|Changed Assumption                                 |  | Pro-Forma Value |        | Income Change
|                                                   |  |                 |        |              
|                                                   |  | (In thousands) 
|Losses increase by 50 basis points per annum (1)   |  | $               | 37,297 |               |  | $             | (2,706 | )
|Losses increase by 100 basis points per annum (1)  |  | $               | 34,714 |               |  | $             | (5,289 | )
|Rate of prepayments increases by 5% per annum (2)  |  | $               | 38,642 |               |  | $             | (1,361 | )
|Rate of prepayments increases by 10% per annum (2) |  | $               | 37,688 |               |  | $             | (2,315 | )
|Discount rates increase by 100 basis points        |  | $               | 38,408 |               |  | $             | (1,595 | )
|Discount rates increase by 200 basis points        |  | $               | 37,002 |               |  | $             | (3,001 | )



---

|(1) |  | If we experience significant losses (i.e., in excess of anticipated
losses), the effect on our Retained Interests would first reduce the
value of the interest-only strip receivables. To the extent the
interest-only strip receivables could not fully absorb the losses, the
effect would then be to reduce the value of our reserve funds and then
the value of our required overcollateralization.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | For example, an 8% assumed rate of prepayment would be increased to
13% or 18% based on increases of 5% or 10% per annum, respectively.                                                                                                                                                                                                                                                                

These sensitivities are hypothetical and should be used with caution.
Pro-forma values based on changes in these assumptions generally cannot be
extrapolated since the relationship of the change in assumption to the
change in fair value may not be linear. The effect of a variation in a
particular assumption on the fair value of our Retained Interests is
calculated without changing any other assumption. In reality, changes in
one factor are not isolated from changes in another which might magnify or
counteract the sensitivities.

Valuation of Assets Acquired in Liquidation

The valuation of our assets acquired in liquidation is adjusted on a
quarterly basis to reflect the good faith determination of our Board as to
the current fair value of our assets acquired in liquidation. Our Boards
valuation of assets acquired in liquidation is based upon the value of the
collateral, necessary capital improvements and expected holding costs. The
fair value of the collateral is determined on an individual asset basis and
may involve (i) discussions with brokers, (ii) cash flow/revenue multiples,
(iii) property tax assessments, (iv) historical information and (v) updated
appraisals in certain circumstances. In addition, we review all loan
origination underwriting documentation including the appraisal and generally
conduct a site visit. This value is then reduced by expected holding costs,
including, but not limited to, legal fees, appraisal costs, delinquent
property taxes and capital expenditures related to improvements or
replacements of capital assets.

Adverse changes to the facts and circumstances for our assets acquired
in liquidation will impact the Boards determination of value and may
require valuation losses which may be material to our results of operations.

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RESULTS OF OPERATIONS

Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001

 Overview

Net income decreased by $4,584,000 (43%), to $5,983,000 during 2002
from $10,567,000 during 2001. Earnings per share decreased $0.39 (45%), to
$0.48 per share during 2002 from $0.87 per share during 2001. The decrease
in net income is primarily due to:



| |  | decreased interest income of $4,061,000 due to the sale of loans
receivable and an increase in variable-rate lending with lower variable
interest rates than our fixed interest rate loans;                                                                        
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a reduction in the gain on sale of assets of $1,286,000 due to a
smaller volume of loans sold and decreased anticipated cash flows due
to reduced net interest spread;                                                                                             
| |  | realized and unrealized losses from our Retained Interests
(excluding the benefit from the change in discount rates described
below) increased by approximately $1.3 million from approximately $1.4
million during 2001 to approximately $2.7 million during 2002;
| |  | an increase of $421,000 in unrealized losses from our assets
acquired in liquidation due primarily to collateral devaluation,
greater than anticipated capital expenditures and increases in expected
holding costs related to these assets; and                   
| |  | a loss from operations of assets held for sale of $391,000 as a
result of operating losses associated with our two operating hotel
properties included in assets acquired in liquidation during 2002.                                                              

Partially offsetting these decreases in net income were:



| |  | a benefit from the change in discount rates utilized in the
valuation on our Retained Interests of approximately $1.5 million from
a valuation increase of approximately $700,000 during 2001 to a
valuation increase of approximately $2.2 million during 2002;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a decrease in interest expense of $901,000 due to decreasing
variable rates of interest on our LIBOR based notes payable and the
repayment in 2002 of debentures due the SBA and notes payable; and                                                             
| |  | a decrease in salaries and related benefits of $259,000.                                                                                                                                                                                                        

Significant changes in our income and expenses are further described
below.

 Income

Interest income decreased by $4,061,000 (35%), to $7,507,000 during
2002 from $11,568,000 during 2001. Interest income consisted of the
following:

|                                    |  |                         |       |                     |  |        |        |            |  |   |        |   |  |  |       |   
|----------------------------------- |  | ----------------------- | ----- | ------------------- |  | ------ | ------ | ---------- |  | - | ------ | - |  |  | ----- | --
|                                    |  | Year Ended December 31, |       | Increase (Decrease)
|                                    |  |                         |       |                    
|                                    |  | 2002                    |       | 2001                |  | Amount |        | Percentage
|                                    |  |                         |       |                     |  |        |        |           
|                                    |  | (Dollars in thousands) 
|Interest income  loans             |  | $                       | 6,629 |                     |  | $      | 10,515 |            |  | $ | (3,886 | ) |  |  | (37.0 | )%
|Commitment fees collected           |  |                         | 339   |                     |  |        | 523    |            |  |   | (184   | ) |  |  | (35.2 | )%
|Interest income  other investments |  |                         | 539   |                     |  |        | 530    |            |  |   | 9      |   |  |  | 1.7   | % 
|                                    |  |                         |       |                     |  |        |        |            |  |   |        |   |  |  |       |   
|                                    |  | $                       | 7,507 |                     |  | $      | 11,568 |            |  | $ | (4,061 | ) |  |  | (35.1 | )%
|                                    |  |                         |       |                     |  |        |        |            |  |   |        |   |  |  |       |   

The decrease in our interest income was primarily a result of the sale
of approximately $49.2 million and $43.2 million of our loans receivable in
structured loan sale transactions completed in June 2001 and April 2002,
respectively, which reduced our weighted average loans receivable
outstanding by $19.5 million (18%) to $86.8 million during 2002 from $106.3
million during 2001. In addition, the average quarterly prime rate and
LIBOR (utilized in the determination of our quarterly variable rates)
decreased by 281 basis points and 244 basis points, respectively, during
2002 causing our weighted average interest rate to decline to 7.1% at
December 31, 2002 from 9.0% at December 31, 2001. Approximately 82% and 36%
of our loans receivable had variable rates of interest as of December 31,
2002 and 2001, respectively. The sharp rise in the percentage of
variable-rate loans receivable at December 31, 2002 is a result of new
variable-rate loan originations and the sale of fixed-rate loans receivable
in the April 2002 structured loan sale transaction. In addition, commitment
fees collected decreased due to a decrease in loan originations.

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Income from Retained Interests decreased by $138,000 (3%), to
$5,202,000 during 2002 from $5,340,000 during 2001. Income from Retained
Interests is comprised of the yield on our Retained Interests. The
annualized yield on our Retained Interests decreased to 13.7% during 2002
from 14.9% during 2001; however, our weighted average Retained Interests
increased due primarily to the structured loan sale transaction completed in
April 2002.

Advisory fee income increased by $124,000 (7%), to $1,927,000 during
2002 from $1,803,000 during 2001. Advisory fees relate to our Investment
Management Agreements with PMC Commercial. The increase was primarily a
result of the increased loan portfolio of PMC Commercial.

 Interest expense

Interest expense decreased by $901,000 (16%), to $4,588,000 during 2002
from $5,489,000 during 2001. Interest expense results primarily from
interest on (i) our notes payable ($40.0 million outstanding as of December
31, 2002 and $45.0 million outstanding as of December 31, 2001) with a
weighted average interest rate of 4.9% and a weighted average remaining
maturity of 2.1 years as of December 31, 2002 and (ii) debentures due the
SBA ($14.3 million outstanding as of December 31, 2002 and $31.3 million
outstanding as of December 31, 2001), with a weighted average interest rate
of approximately 7.7% and a weighted average remaining maturity of 5.2 years
as of December 31, 2002. The primary reasons for the decrease in interest
expense were (i) a reduction in the average quarterly interest rates on our
LIBOR-based notes payable of 244 basis points ($25.0 million in variable
rate debt outstanding as of both December 31, 2002 and 2001) from the year
ended December 31, 2001 to the year ended December 31, 2002 and (ii) the
repayment during the last half of 2002 of $17.0 million in debentures due
the SBA with a weighted average interest rate of approximately 7.6% and the
repayment of $5.0 million in notes payable during December 2002 with an
interest rate of 7.0%.

 Other expenses

Other expenses increased by $199,000 (3%), to $6,118,000 during 2002
from $5,919,000 during 2001. Other operating expenses are comprised of
salaries and related benefits, general and administrative, loss from
operations of assets acquired in liquidation, profit sharing plan, rent, and
professional fees. The primary reason for the increase was the loss from
operations of assets acquired in liquidation of $391,000 during 2002. Our
assets acquired in liquidation held at December 31, 2002 were not operated
by us during 2001. The increase was partially offset by a reduction in
salaries and related benefits which decreased $259,000 (6%), to $3,940,000
during 2002 from $4,199,000 during 2001. The decrease was mainly a result
of a decrease in the number of our employees and a reduction in bonuses.

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Realized and unrealized gain (loss) on investments

Realized and unrealized gain (loss) on investments decreased $1,196,000
to a gain of $27,000 during 2002 compared to a gain of $1,223,000 during
2001. Our realized and unrealized gain (loss) on investments consisted of
the following:

|                                                                |  |                              |        |                |  |            |      |       |  |   |       |   |  |   |        |  
|--------------------------------------------------------------- |  | ---------------------------- | ------ | -------------- |  | ---------- | ---- | ----- |  | - | ----- | - |  | - | ------ | -
|                                                                |  | Year Ended December 31, 2002
|                                                                |  |                             
|                                                                |  | (In thousands)              
|                                                                |  |                              |        |                |  | Assets     |      |       |  |   |       |   |  |  
|                                                                |  | Retained                     |        | Acquired       |  | Loans      |      |       |  |  
|                                                                |  | Interests (1)                |        | in Liquidation |  | Receivable |      | Total
|                                                                |  |                              |        |                |  |            |      |      
|Realized losses                                                 |  | $                            | (1,981 | )              |  | $          |     |       |  | $ | (215  | ) |  | $ | (2,196 | )
|Sale of assets                                                  |  |                              |       |                |  |            | (17  | )     |  |   | 1,463 |   |  |   | 1,446  |  
|Change in unrealized appreciation
(depreciation) on investments |  |                              | 1,466  |                |  |            | (421 | )     |  |   | (268  | ) |  |   | 777    |  
|                                                                |  |                              |        |                |  |            |      |       |  |   |       |   |  |   |        |  
|Total realized and unrealized
gain (loss) on investments        |  | $                            | (515   | )              |  | $          | (438 | )     |  | $ | 980   |   |  | $ | 27     |  
|                                                                |  |                              |        |                |  |            |      |       |  |   |       |   |  |   |        |  

|                                                         |  |                              |        |                |  |            |   |       |  |   |        |   |  |   |        |  
|-------------------------------------------------------- |  | ---------------------------- | ------ | -------------- |  | ---------- | - | ----- |  | - | ------ | - |  | - | ------ | -
|                                                         |  | Year Ended December 31, 2001
|                                                         |  |                             
|                                                         |  | (In thousands)              
|                                                         |  |                              |        |                |  | Assets     |   |       |  |   |        |   |  |  
|                                                         |  | Retained                     |        | Acquired       |  | Loans      |   |       |  |  
|                                                         |  | Interests (1)                |        | in Liquidation |  | Receivable |   | Total
|                                                         |  |                              |        |                |  |            |   |      
|Realized losses                                          |  | $                            | (1,303 | )              |  | $          |  |       |  | $ | (1,025 | ) |  | $ | (2,328 | )
|Sale of assets                                           |  |                              |       |                |  |            |  |       |  |   | 2,732  |   |  |   | 2,732  |  
|Change in unrealized
appreciation on investments         |  |                              | 603    |                |  |            |  |       |  |   | 216    |   |  |   | 819    |  
|                                                         |  |                              |        |                |  |            |   |       |  |   |        |   |  |   |        |  
|Total realized and unrealized
gain (loss) on investments |  | $                            | (700   | )              |  | $          |  |       |  | $ | 1,923  |   |  | $ | 1,223  |  
|                                                         |  |                              |        |                |  |            |   |       |  |   |        |   |  |   |        |  



---

|(1) |  | Includes the mortgage-backed security of our affiliate.
|--- |  | -------------------------------------------------------

During April 2002, we sold $43.2 million of loans receivable and
recognized a gain of $1,463,000. During June 2001, we sold $49.2 million of
our loans receivable and recognized a gain of $2,732,000. The decrease in
gain recognized of $1,269,000 was primarily due to the smaller pool of sold
loans and a reduced net interest spread. The net interest spread is the
difference between the weighted average interest rate on the sold loans
receivable compared to the coupon rate on the debt issued by the SPE. At
the time the transactions were completed, our net interest rate spread was
2.86% related to our 2002 Joint Venture compared to our net interest rate
spread of 3.42% related to our 2001 Joint Venture as a result of the
interest rate market and the market for the purchase of asset-backed
securities.

The unrealized appreciation of $1,466,000 on our Retained Interests
during 2002 primarily relates to a decrease in the discount rates used to
value our Retained Interests. Unrealized gains of approximately $2,174,000
were recorded during 2002 as a result of a decrease in our discount rates.
The decrease in discount rates was a result of the lower interest rate
environment at December 31, 2002 compared to December 31, 2001. Offsetting
a portion of these unrealized gains from the reduction in discount rates
were unrealized losses of $708,000 and realized losses of $1,981,000
resulting primarily from (i) increased losses related primarily to the 2000
Joint Venture, (ii) lower than anticipated income on our underlying loans
receivable and reserve funds and (iii) increased anticipated prepayments.
Realized losses of approximately $1.9 million relate to reductions in actual
and anticipated future cash flows from the 2000 Joint Venture as a result of
its Impaired Loans.

The unrealized appreciation of $603,000 during 2001 primarily relates
to a decrease in the discount rates used to value our Retained Interests.
Unrealized appreciation of approximately $668,000 was recorded during 2001
as a result of the decrease in our discount rates. The decrease in discount
rates was a result of the lower interest rate environment at December 31,
2001 compared to December 31, 2000. Offsetting a portion of these

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unrealized gains from the reduction in discount rates were realized losses
of $1,303,000 resulting primarily from (i) a reduction in expected future
cash flows resulting from higher than anticipated prepayment activity and
(ii) lower than anticipated income on our reserve funds and underlying loans
receivable.

We recognized $483,000 of realized losses and unrealized depreciation
on our loans during 2002 compared to $809,000 in realized losses and
unrealized depreciation on our loans during 2001. Losses on our loans were
0.56% and 0.76% of our weighted average outstanding loans receivable during
2002 and 2001, respectively.

We recorded $421,000 in unrealized losses on our assets acquired in
liquidation during 2002. The loss is primarily related to devaluation of
collateral, additional capital expenditures and increased expected holding
costs related to our assets acquired in liquidation. There were no realized
or unrealized losses on our assets acquired in liquidation during 2001.

We generated a net loss on sale of assets of $17,000 from our assets
acquired in liquidation during 2002. During December 2002, we sold one of
our limited service hospitality properties for approximately $500,000
resulting in a net gain of approximately $113,000 and First Western sold
four retail establishments during 2002 for proceeds of approximately
$350,000 resulting in a loss of approximately $130,000.

Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000

 Overview

Net income decreased by $686,000 (6%), to $10,567,000 during 2001 from
$11,253,000 during 2000. Earnings per share decreased $0.06 (6%), to $0.87
per share during 2001 from $0.93 per share during 2000. The decrease in net
income is primarily due to:



| |  |  | decreased interest income of $1,972,000 due to the sale of
loans receivable and an increase in variable rate lending with lower
variable interest rates than our fixed interest rate loans;                                                                                                                          
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | realized and unrealized losses from our Retained Interests
(excluding the benefit from the change in discount rates described
below) increased by approximately $2.3 million from unrealized gains
of approximately $900,000 during 2000 to realized and unrealized
losses of approximately $1.4 million during 2001.

Partially offsetting these decreases in net income were:



| |  |  | a benefit from the change in discount rates utilized in the valuation on our Retained Interests of
approximately $700,000; and                                         
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | an increase in the gain on sale of assets of $2,168,000 due
to a larger volume of loans sold and increased anticipated cash
flows due to increased net interest spread.

Significant changes in our income and expenses are further described
below.

 Income

Interest income decreased by $1,972,000 (15%), to $11,568,000 during
2001 from $13,540,000 during 2000. Interest income consisted of the
following:

|                                    |  |                          |        |                     |  |        |        |            |  |   |        |   |  |  |       |   
|----------------------------------- |  | ------------------------ | ------ | ------------------- |  | ------ | ------ | ---------- |  | - | ------ | - |  |  | ----- | --
|                                    |  | Years Ended December 31, |        | Increase (Decrease)
|                                    |  |                          |        |                    
|                                    |  | 2001                     |        | 2000                |  | Amount |        | Percentage
|                                    |  |                          |        |                     |  |        |        |           
|                                    |  | (Dollars in thousands)  
|Interest income  loans             |  | $                        | 10,515 |                     |  | $      | 12,628 |            |  | $ | (2,113 | ) |  |  | (16.7 | )%
|Commitment fees collected           |  |                          | 523    |                     |  |        | 432    |            |  |   | 91     |   |  |  | 21.1  | % 
|Interest income  other investments |  |                          | 530    |                     |  |        | 480    |            |  |   | 50     |   |  |  | 10.4  | % 
|                                    |  |                          |        |                     |  |        |        |            |  |   |        |   |  |  |       |   
|                                    |  | $                        | 11,568 |                     |  | $      | 13,540 |            |  | $ | (1,972 | ) |  |  | (14.6 | )%
|                                    |  |                          |        |                     |  |        |        |            |  |   |        |   |  |  |       |   

The decrease in our interest income was primarily a result of the sale
of approximately $49.2 million and $28.0 million of our loans receivable in
structured loan sale transactions completed in June 2001 and December 2000,
respectively, which decreased our weighted average loans receivable
outstanding by $11.5 million (10%) to $106.3 million during 2001 from $117.8
million during 2000. In addition, the prime rate decreased by 350

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basis points during 2001 causing our weighted average interest rate to
decline to 9.0% at December 31, 2001 from 10.4% at December 31, 2000.
Approximately 36% and 30% of our loans receivable had variable rates of
interest based on the prime rate as of December 31, 2001 and 2000,
respectively.

Income from our Retained Interests increased by $1,320,000 (33%), to
$5,340,000 during 2001 from $4,020,000 during 2000. Income from Retained
Interests is comprised of the yield accreted on our Retained Interests. The
increase in income from our Retained Interests was the result of an increase
in our weighted average Retained Interests outstanding primarily due to the
structured loan sale transactions completed in June 2001 and December 2000.
In addition, the annualized yield on our Retained Interests increased to
14.9% during 2001 from 14.2% during 2000.

Advisory fee income increased by $104,000 (6%), to $1,803,000 during
2001 from $1,699,000 during 2000. Advisory fees relate to our Investment
Management Agreements with PMC Commercial. The increase was primarily a
result of the increased loan portfolio of PMC Commercial.

 Interest expense

Interest expense increased by $29,000 (1%), to $5,489,000 during 2001
from $5,460,000 during 2000. Interest expense remained relatively flat,
since the effect of our weighted average debt outstanding increasing to
$75.3 million in 2001 compared to $70.8 million in 2000, was offset by a
decline in our weighted average cost of funds to 7.2% for 2001 compared to
7.6% in 2000. Interest expense results primarily from interest on (i) our
notes payable ($45.0 million and $41.7 million outstanding as of December
31, 2001 and 2000, respectively) with a weighted average interest rate of
5.4% and a weighted average remaining maturity of 2.9 years as of December
31, 2001, (ii) debentures due the SBA (as of both December 31, 2001 and 2000
the outstanding balances were $31.3 million), with a weighted average
interest rate of approximately 7.6% and a weighted average remaining
maturity of 4.6 years as of December 31, 2001, and (iii) balances
outstanding on our revolving credit facility.

 Other expenses

Operating expenses increased by $99,000 (2%), to $5,919,000 during 2001
from $5,820,000 during 2000. Operating expenses are comprised of salaries
and related benefits, general and administrative, profit sharing plan, rent
and professional fees. The primary reason for the increase was general and
administrative expenses which increased $68,000 (8%), to $884,000 during
2001 from $816,000 during 2000. The increase was mainly due to increased
insurance expense, advertising and bank fees.

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 Realized and unrealized gain (loss) on investments

Realized and unrealized gain (loss) on investments increased $274,000
to a gain of $1,223,000 during 2001 compared to a gain of $949,000 during
2000. Our realized and unrealized gain (loss) on investments consisted of
the following:

|                                                         |  |                              |        |            |  |       |        |   |  |   |        |  
|-------------------------------------------------------- |  | ---------------------------- | ------ | ---------- |  | ----- | ------ | - |  | - | ------ | -
|                                                         |  | Year Ended December 31, 2001
|                                                         |  |                             
|                                                         |  | (In thousands)              
|                                                         |  | Retained                     |        | Loans      |  |       |        |  
|                                                         |  | Interests (1)                |        | Receivable |  | Total
|                                                         |  |                              |        |            |  |      
|Realized losses                                          |  | $                            | (1,303 | )          |  | $     | (1,025 | ) |  | $ | (2,328 | )
|Sale of assets                                           |  |                              |       |            |  |       | 2,732  |   |  |   | 2,732  |  
|Change in unrealized
appreciation on
investments         |  |                              | 603    |            |  |       | 216    |   |  |   | 819    |  
|                                                         |  |                              |        |            |  |       |        |   |  |   |        |  
|Total realized and unrealized
gain (loss) on investments |  | $                            | (700   | )          |  | $     | 1,923  |   |  | $ | 1,223  |  
|                                                         |  |                              |        |            |  |       |        |   |  |   |        |  

|                                                                |  |                              |     |            |  |       |      |   |  |   |     |  
|--------------------------------------------------------------- |  | ---------------------------- | --- | ---------- |  | ----- | ---- | - |  | - | --- | -
|                                                                |  | Year Ended December 31, 2000
|                                                                |  |                             
|                                                                |  | (In thousands)              
|                                                                |  | Retained                     |     | Loans      |  |       |      |  
|                                                                |  | Interests (1)                |     | Receivable |  | Total
|                                                                |  |                              |     |            |  |      
|Realized losses                                                 |  | $                            |    |            |  | $     | (17  | ) |  | $ | (17 | )
|Sale of assets                                                  |  |                              |    |            |  |       | 564  |   |  |   | 564 |  
|Change in unrealized
appreciation (depreciation)
on investments |  |                              | 871 |            |  |       | (469 | ) |  |   | 402 |  
|                                                                |  |                              |     |            |  |       |      |   |  |   |     |  
|Total realized and unrealized
gain (loss) on investments        |  | $                            | 871 |            |  | $     | 78   |   |  | $ | 949 |  
|                                                                |  |                              |     |            |  |       |      |   |  |   |     |  



---

|(1) |  | Includes the mortgage-backed security of our affiliate.
|--- |  | -------------------------------------------------------

During 2001 we recognized a gain of approximately $2,732,000 relating
to the sale of $49.2 million of loans receivable during June 2001 compared
to a gain of $564,000 recognized from the structured loan sale of $28.0
million of loans receivable during December 2000. The increase was due to
an increase in the principal sold of approximately $21.2 million and the
increased net interest spread. The net interest spread is the difference
between the weighted average interest rate on the sold loans receivable
compared to the coupon rate on the debt issued by the SPE. We generated a
net interest spread of 3.42% related to our 2001 Joint Venture compared to a
net interest spread of 2.26% related to our 2000 Joint Venture as a result
of the interest rate market and the market for purchases of asset-backed
securities.

The unrealized appreciation of $603,000 on our Retained Interests
during 2001 primarily relates to a decrease in the discount rates used to
value our Retained Interests. Unrealized appreciation of approximately
$668,000 was recorded during 2001 as a result of the decrease in our
discount rates. The decrease in discount rates was a result of the lower
interest rate environment at December 31, 2001 compared to December 31,
2000. Offsetting these unrealized gains from the reduction in discount
rates were realized losses of $1,303,000 resulting primarily from a
reduction in expected future cash flows resulting from higher than
anticipated prepayment activity and lower than anticipated income on our
reserve funds. During 2000 we recognized $871,000 in valuation gains
relating to our Retained Interests. The primary reason for the unrealized
appreciation of $871,000 during 2000 was the lower than anticipated rate of
prepayment activity and less than anticipated loan losses.

We recognized $809,000 of realized losses and unrealized appreciation
on our loans during 2001 compared to $486,000 in realized losses and
unrealized depreciation on our loans during 2000. The change was primarily
a result of unrealized depreciation on impaired loans recorded during the
third and fourth quarter of 2001 including $460,000 related to two limited
service hospitality properties we acquired through foreclosure in

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January and February 2002. Losses on our loans were 0.76% (76 basis points)
and 0.41% (41 basis points) of our weighted average outstanding loans
receivable during 2001 and 2000, respectively.

CASH FLOW ANALYSIS

We generated cash flow from operating activities of $7,503,000 and
$9,959,000 during 2002 and 2001, respectively. The decrease in cash flows
from operating activities of $2,456,000 primarily relates to (i) a decrease
in our net income of $4,584,000 and (ii) decreased funds available from our
SBA 7(a) loan activity of $2,030,000. This decrease was partially offset by
a $2,812,000 increase in cash flows from our other operating assets and
liabilities due primarily to increased other liabilities due to the SBA and
borrower advances. We pay dividends from the cash flows generated by our
operating activities. See Dividends.

We generated cash of $10,493,000 and used cash of $6,965,000 from
investing activities during 2002 and 2001, respectively. This $17,458,000
increase in cash from investing activities relates primarily to (i) a net
decrease in loans funded less principal collected of $25,486,000 and (ii) a
decrease of $6,610,000 in net proceeds from the debt issued by the 2002
Joint Venture of $37,901,000 compared to $44,511,000 in net proceeds from
the debt issued by the 2001 Joint Venture.

We used cash of $29,836,000 from financing activities during 2002
compared to $7,585,000 from financing activities during 2001. This
$22,251,000 increase in cash flows used in financing activities relates
primarily to (i) $22,000,000 in debt repayments in 2002 compared to
$3,333,000 in net proceeds from borrowings during 2001 and (ii) a reduction
in dividends paid of $3,082,000.

LIQUIDITY AND CAPITAL RESOURCES

Sources and Uses of Funds

 Overview

Historically, our cash flows provided by operating activities have been paid to our shareholders as
dividends. In 2003, we anticipate that our cash flows from operating activities will be sufficient
to pay 2003 dividend distributions. As a result, our cash flows from operating activities are
generally not available to fund loan originations or debt service. During 2002 our investment in
loans ($47.0 million) and debt repayments ($22.0 million) were primarily funded by:



| |  |  | Principal collections on our loans receivable of $13.9 million;             
| | - |  | ----------------------------------------------------------------------------
| |  |  | Net proceeds from our structured loan sale transaction of $37.9 million; and
| |  |  | Use of cash on hand.                                                        

During 2003, we anticipate loan originations will range from $45
million to $60 million, which we expect to be funded primarily through (i) a
structured loan sale transaction(s), (ii) issuance of notes payable or SBA
debentures and (iii) advances under our revolving credit facility and
guidance line facility. We are currently in the process of marketing a
co-securitization transaction with PMC Commercial and expect the transaction
to be completed in the second quarter of 2003.

We have $5.0 million in notes payable with an interest rate of 8.6%
that mature in April 2003. We anticipate that these notes payable will
either be repaid from the proceeds from our structured loan sale transaction
which is expected to be completed in the second quarter of 2003 or
refinanced into new notes payable. To the extent necessary, there can be no
assurance that we will be able to refinance the $5.0 million in notes
payable.

At December 31, 2002, we had approximately $5.5 million of cash and
cash equivalents, availability of $10 million under our revolving credit
facility and $5 million under our discretionary guidance line facility
compared to approximately $29.4 million of total loan commitments and
approvals outstanding. Commitments have fixed expiration dates and require
payment of a fee to us. Since some commitments expire without the proposed
loan closing, the total committed amounts do not necessarily represent
future cash requirements.

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 Sources of Funds

General

Our ability to continue to originate loans will depend on our ability
to borrow funds, sell assets, complete structured loan sale transactions
and/or issue equity on acceptable terms. A reduction in the availability of
these sources of funds could have a material adverse effect on our financial
condition and results of operations.

We expect that the sources of funds described below should be adequate
to meet our existing obligations and generate funds sufficient to meet both
our short-term and long-term capital needs. However, there can be no
assurance that we will be able to raise funds through these financing
sources. If these sources are not available, we may have to originate loans
at reduced levels and we may have to refer commitments to PMC Commercial.

To meet our liquidity requirements, including origination of new loans,
we primarily generate funds from the following sources:



| |  |  | Structured loan sales;                                                                    
| | - |  | ------------------------------------------------------------------------------------------
| |  |  | Issuance of SBA debentures;                                                               
| |  |  | Borrowings under our short-term, unsecured revolving credit facility and/or guidance line;
| |  |  | Issuance of senior unsecured medium-term notes; and                                       
| |  |  | Private and public issuances of common stock.                                             

As a BDC, we are generally required to maintain a ratio of at least
200% of total assets to total borrowings, which may restrict our ability to
borrow in certain circumstances. We expect to be able to borrow from
financial institutions and sell loans receivable in the asset-backed
securities market. We do not anticipate selling additional equity
securities during the year ending December 31, 2003.

Additional sources of capital include principal and interest collected
on our existing loans receivable, the cash flows from our Retained Interests
and proceeds from the sale of SBA 7(a) loans receivable in the secondary
market. However, to the extent these sources represent taxable income
(i.e.,interest income, etc.), such amounts have historically been
distributed to our shareholders as dividends. As a result, those earnings
are generally not available to fund future investments.

We believe that as a result of the current interest rate environment
(the prime rate, LIBOR and the yield on treasury notes decreased
substantially during 2001 and 2002) we may continue to experience prepayment
activity in 2003 which may also provide us with an additional source of
funds. The majority of our fixed-rate loan receivables prepayment fees are
based on a yield maintenance premium which provides for greater fees as
interest rates decrease. In addition, certain loans receivable have
prepayment prohibitions of up to five years.

The proceeds from the prepayments and principal collections we receive
and from the completion of structured loan sale transactions are initially
invested in temporary investments which generate less interest income and
have generally been re-loaned or committed to be re-loaned at lower interest
rates than the prepaid loans receivable. These lower interest rates have
had an adverse effect on interest income and depending upon the rate of
future prepayments may further impact our interest income.

Structured Loan Sale Transactions

Our primary source of funds has been structured loan sale transactions.
We generated net proceeds of $37.9 million, $44.5 million and $24.7 million
from the completion of our 2002, 2001 and 2000 structured loan sale
transactions, respectively. It is anticipated that our primary source of
working capital during 2003 will be structured loan transaction(s).

In certain economic markets the availability of funds may be diminished
or the spread charged for funds may increase causing us to delay a
structured loan transaction. A reduction or delay in the availability of
this source of funds could have a material adverse effect on our financial
condition and results of operations since working capital may not be
available to fund loan originations. To the extent our commitments to fund
loans fully utilize our availability under our revolving credit facilities,
we will attempt to complete a structured loan sale transaction.

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The timing of a securitization also has significant impact on our
financial condition and results of operations. Since we rely on structured
loan sale transactions as our primary source of operating capital to fund
new loan originations, any adverse changes in our ability to complete this
type of transaction, including any negative impact on the asset-backed
securities market for the type of product we generate, could have a
detrimental effect on our ability to sell loans receivable thereby reducing
our ability to originate loans.

We are presently in the process of marketing a structured loan sale
transaction with PMC Commercial of approximately $62 million of our
variable-rate loans receivable. Completion of this structured loan sale
transaction is expected in the second quarter of 2003. Changes in market
conditions may have an impact on the completion of this transaction. While
we have been successful in completing our past structured loan transactions
in a timely manner, due to the risky nature of these transactions and the
many factors which could cause us to delay or postpone a transaction, there
can be no assurance of a successful outcome.

In the event a securitization is delayed or unable to be completed, we
will either have to increase our capacity under our revolving credit
facility, enter into new debt agreements or cease originating new loans
until a securitization is complete. In addition, to the extent there are
problems in the asset-backed securities market, we may choose to sell the
loans receivable on unfavorable terms including:



| |  |  | Increased interest rate spreads required by investors that reduce our future cash flows;
| | - |  | ----------------------------------------------------------------------------------------
| |  |  | Increased cash reserve requirements; or                                                 
| |  |  | Increased subordinated portions of loans receivable.                                    

Each of the items described above would have a negative impact on our
net income. In addition, there are other occurrences that could impair our
ability, or alter our decision, to complete a structured loan transaction.
These events include, but are not limited to, the following:



| |  |  | As a result of certain economic conditions, investors in the
type of asset-backed securities that we place may widen the
spreads they require in order to purchase asset-backed securities;                                                              
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | Deterioration in the performance of either our loans
receivable or the loans receivable of PMC Commercial may deter
potential investors from purchasing our asset-backed securities;                                                                       
| |  |  | Deterioration in the operations of the limited service sector
of the hospitality industry which may deter potential investors from
purchasing our asset-backed securities or lower the available rating
from the rating agencies;                          
| |  |  | A reduction in the performance of the loans receivable of our
prior transactions or of similar transactions (for example, higher
than expected loan losses or delinquencies) may deter potential
investors from purchasing our asset-backed securities; and
| |  |  | A change in the underlying criteria utilized by the rating
agencies may cause transactions to receive lower ratings than
previously issued thereby increasing the cost of capital and
decreasing the spread on our transaction.                          

Debt

At December 31, 2002, we did not have any borrowings outstanding under
our $10 million revolving credit facility or our $5 million discretionary
guidance line, thus providing credit availability on our revolving credit
facility of $15 million. Advances pursuant to the credit facility bear
interest at our option at either the lenders prime rate less 50 basis
points or LIBOR plus 175 basis points. The credit facility requires that we
meet certain covenants (terms as defined in the agreements), the most
restrictive of which provides that the ratio of net charge-offs to net loans
receivable may not exceed 2%, and the ratio of assets to debt may not fall
below 110% for PMC Capital and 135% including our consolidated subsidiaries.
At December 31, 2002, we were in compliance with all covenants of this
facility. Subsequent to year-end we commenced borrowing under our revolving
credit facility and have approximately $3.0 million outstanding as of
February 28, 2003. The credit facility expires in May 2004.

We repaid $5.0 million of notes payable at maturity in December 2002.
We have $40.0 million of notes payable outstanding which require us to meet
certain covenants (terms as defined in the agreements), the most restrictive
of which require that (i) net loans receivable exceed 150% of funded debt,
(ii) loan losses for any 12-month period must not exceed 3% of net loans
receivable and (iii) our consolidated earnings plus interest expense must
exceed 150% of interest expense. At December 31, 2002, we were in
compliance with all of the covenants of these notes.

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We repaid $17.0 million in debentures due to the SBA during September
and December 2002. At December 31, 2002, we had an outstanding commitment
from the SBA to purchase up to $5.2 million ($4.2 million expiring September
2003 and $1.0 million expiring September 2004) in additional SBA debentures.

Uses of Funds

General

Our primary use of funds is to originate loans to small businesses in
the limited service hospitality industry. We also use funds primarily for
payment of dividends to shareholders, principal payments on borrowings,
interest and salaries and other general and administrative expenses.

As a regulated investment company, pursuant to the Code, we are
required to pay out substantially all of our net investment company taxable
income to our common shareholders. See Dividends.

Loan Originations

At December 31, 2002, commitments to originate loans of approximately
$29.4 million were greater than commitments of $19.5 million at December 31,
2001. The increase in outstanding commitments is primarily the result of
borrower acceptance of our LIBOR-based lending program (see Economic
Factors). We anticipate that the loan origination volume for 2003 (which
averaged approximately $11.5 million per quarter during 2002) will range
from $45 million to $60 million. As discussed above, these commitments will
be funded primarily through (i) structured loan transactions, (ii) advances
under our revolving credit facility and guidance line facility or (iii)
issuance of SBA debentures.

We expect that the sources of funds described above should be adequate
to meet existing obligations and generate funds sufficient to meet both
short-term and long-term capital needs. However, there can be no assurance
that we will be able to raise additional funds through these financing
sources. If these sources are not available, we will have to originate
loans at reduced levels and we may have to refer commitments to PMC
Commercial.

 Impact of Inflation

To the extent we originate fixed-rate loans while we borrow funds at
variable rates, we would have an interest rate mismatch. In an inflationary
environment, if variable-rates were to rise significantly and we were
originating fixed-rate loans, our net interest margin would be reduced.
Currently we are primarily originating variable-rate loans and $25.0 million
of our debt has variable rates of interest; therefore, we do not believe
inflation will have a significant impact on us in the near future. To the
extent costs of operations rise while the economy prevents a matching rise
in revenue rates (i.e.,room rates, menu prices, gasoline prices, etc.), our
borrowers would be negatively impacted and valuation losses could result.
Accordingly, our borrowers can be impacted by inflation. In addition, in an
inflationary environment we could experience pressure to increase our income
and our dividend yield to maintain our stock price.

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SUMMARIZED CONTRACTUAL OBLIGATIONS, COMMITMENTS AND CONTINGENCIES

The following summarizes our contractual obligations at December 31,
2002:

|                                   |  |                        |        |        |  |           |       |        |  |        |        |         |  |   |        |  |  |   |        | 
|---------------------------------- |  | ---------------------- | ------ | ------ |  | --------- | ----- | ------ |  | ------ | ------ | ------- |  | - | ------ |  |  | - | ------ | 
|                                   |  | Payments Due by Period
|                                   |  |                       
|Contractual                        |  |                        |        |        |  | Less than |       | 1 to 3 |  | 4 to 5 |        | After 5
|Obligations                        |  | Total                  |        | 1 year |  | years     |       | years  |  | years 
|                                   |  |                        |        |        |  |           |       |        |  |       
|                                   |  | (In thousands)        
|Long-term debt (1)                 |  | $                      | 54,310 |        |  | $         | 5,000 |        |  | $      | 32,000 |         |  | $ | 10,000 |  |  | $ | 7,310  | 
|Preferred stock (2)                |  |                        | 4,000  |        |  |           |      |        |  |        |       |         |  |   |       |  |  |   | 4,000  | 
|Operating leases (3)               |  |                        | 308    |        |  |           | 284   |        |  |        | 24     |         |  |   |       |  |  |   |       | 
|Employment agreements (4)          |  |                        | 2,707  |        |  |           | 1,182 |        |  |        | 1,525  |         |  |   |       |  |  |   |       | 
|                                   |  |                        |        |        |  |           |       |        |  |        |        |         |  |   |        |  |  |   |        | 
|Total contractual cash
obligations |  | $                      | 61,325 |        |  | $         | 6,466 |        |  | $      | 33,549 |         |  | $ | 10,000 |  |  | $ | 11,310 | 
|                                   |  |                        |        |        |  |           |       |        |  |        |        |         |  |   |        |  |  |   |        | 



---

|(1) |  | In addition, we have a $10 million revolving credit facility and a $5
million guidance line facility. No
amounts are outstanding under either of these facilities as of
December 31, 2002.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The 4% preferred stock of our subsidiary was issued in 1994
($2.0 million) and 1995 ($2.0 million) and must be redeemed at par
no later than 15 years from the date of issuance.          
|   
|(3) |  | Represents our future minimum lease payments under our leases for
office space.                                                                                                           
|   
|(4) |  | We have employment agreements with certain of our officers.                                                                                                                               

Our commitments at December 31, 2002 are summarized as follows:

|                      |                   |           |                |        |           |       |                                            |        |        |       |         |   |  |   |   |   |  |   |   |   | 
|--------------------- | ----------------- | --------- | -------------- | ------ | --------- | ----- | ------------------------------------------ | ------ | ------ | ----- | ------- | - |  | - | - | - |  | - | - | - | 
|                      |                   |           |                |        |           |       | Amount of Commitment Expiration Per Period
|                      |                   |           |                |        |           |       |                                           
|                      |                   |           | Total Amounts  |        | Less than |       | 1 to 3                                     |        | 4 to 5 |       | After 5
|Other Commitments     |                   | Committed |                | 1 year |           | years |                                            | years  |        | years
|                      |                   |           |                |        |           |       |                                            |        |        |      
|                      |                   |           | (In thousands)
|Indemnification (1)   |                   | $         |               |        |           | $     |                                           |        |        | $     |        |   |  | $ |  |   |  | $ |  |  
|Environmental (2)     |                   |           |               |        |           |       |                                           |        |        |       |        |   |  |   |  |   |  |   |  |  
|Other commitments (3) |                   |           | 29,427         |        |           |       | 29,427                                     |        |        |       |        |   |  |   |  |   |  |   |  |  
|                      |                   |           |                |        |           |       |                                            |        |        |       |         |   |  |   |   |   |  |   |   |  
|                      | Total commitments |           | $              | 29,427 |           |       | $                                          | 29,427 |        |       | $       |  |  |   | $ |  |  |   | $ |  | 
|                      |                   |           |                |        |           |       |                                            |        |        |       |         |   |  |   |   |   |  |   |   |  



---

|(1) |  | Represents our cross indemnification agreements with PMC Commercial
related to the Joint Ventures with a maximum exposure at December 31,
2002 of $34.3 million as discussed in detail below. We have valued
these indemnification agreements at zero.                                                                                                                                                                                                                                           
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Represents a liability of $0.3 million reflected on the
balance sheet of PMC Funding, our non-consolidated, non-investment
company subsidiary. The liability represents the estimated remaining
costs to remediate an environmental obligation relating to an asset
acquired through liquidation and subsequently sold during 1999 by
PMC Funding. We cannot currently estimate when or if the obligation
may be required to be paid. There can be no assurance of the
accuracy of this estimate.
|   
|(3) |  | Represents our loan commitments outstanding.                                                                                                                                                                                                                                                                                                                                                                                                                                                     

PMC Capital and PMC Commercial have entered into cross indemnification
agreements regarding the performance of their respective loans receivable
sold to the special purpose entities created in conjunction with our
structured loan sale transactions completed in 2002, 2001 and 2000. See
Related Party Transactions  Cross Indemnification Agreements.

When a structured loan sale transaction is completed, the transaction
documents that the special purpose entity enters into contain Credit
Enhancement Provisions that govern the assets and the flow of funds in and
out of the special purpose entity formed as part of the structured loan sale
transaction. See Related Party Transactions  Credit Enhancement
Provisions.

In the normal course of business, including the operation of our assets
acquired in liquidation, we are subject to various proceedings and claims,
the resolution of which will not, in managements opinion, have a material
adverse effect on our consolidated financial position or results of
operations.

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IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In April 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 145, Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. The statement, which is effective for financial
statements issued for fiscal years beginning after May 15, 2002 and
encourages early application, updates, clarifies and simplifies existing
accounting pronouncements. Specifically, the statement rescinds SFAS No. 4,
which required all gains and losses from extinguishment of debt to be
aggregated and, if material, classified as an extraordinary item, net of the
related income tax effect. As a result of this rescission, the criteria in
APB Opinion No. 30 will now be used to determine the classification of gains
and losses resulting from the extinguishment of debt. The statement also
amends SFAS No. 13 to require that when a capital lease is modified in such
a way that the change in the lease provisions establishes a new lease which
is classified as an operating lease, the asset and lease obligation under
the capital lease should be removed, a gain or loss for the difference
should be recorded and the new lease should be accounted for as an operating
lease. The implementation of SFAS No. 145 on January 1, 2003 will not have
a material impact on our consolidated financial statements.

In June 2002, SFAS No. 146, Accounting for Exit or Disposal
Activities was issued. SFAS No. 146 addresses significant issues regarding
the recognition, measurement and reporting of cost associated with exit and
disposal activities, including restructuring activities that are currently
accounted for pursuant to the guidance that the Emerging Issues Task Force
has set forth in Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). The scope of SFAS No. 146 also
includes (i) costs related to terminating a contract that is not a capital
lease and (ii) termination benefits that employees who are involuntarily
terminated receive under the terms of a one-time benefit arrangement that is
not an ongoing benefit arrangement or an individual deferred compensation
contract. SFAS No. 146 will be effective for financial statements issued
for fiscal years beginning after December 15, 2002. The implementation of
SFAS No. 146 on January 1, 2003 will not have a material impact on our
consolidated financial statements.

FASB issued FASB Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45) in November 2002. FIN 45 elaborates on
the disclosures to be made by a guarantor in its interim and annual
statements about its obligations under certain guarantees that it has
issued. It also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. FIN 45 does not prescribe a specific
approach for subsequently measuring the guarantors recognized liability
over the term of the related guarantee. FIN 45 also incorporates, without
change, the guidance in FASB Interpretation No. 34, Disclosure of Indirect
Guarantees of Indebtedness of Others, which is being superseded. We
adopted the disclosure requirements of FIN 45 at December 31, 2002.

In December 2002, SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure was issued. SFAS No. 148 amends
SFAS No. 123 to provide alternative methods of transition for voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements
of SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS
No. 148 improves the prominence and clarity of the pro-forma disclosures
required by SFAS No. 123 by prescribing a specific tabular format and by
requiring disclosure in the Summary of Significant Accounting Policies
footnote or its equivalent. In addition, SFAS No. 148 improves the
timeliness of these disclosures by requiring their inclusion in financial
reports for interim periods. SFAS No. 148 is effective for financial
statements for fiscal years ending after December 15, 2002. Adoption of the
provisions of SFAS No. 148 for 2002 resulted in the addition of our
Stock-Based Compensation Plans footnote to our Summary of Significant
Accounting Policies footnote in our consolidated financial statements. In
addition, effective January 1, 2003, we adopted the fair value recognition
provisions of SFAS No. 123 prospectively to all awards granted, modified or
settled after January 1, 2003.

FASB issued FASB Interpretation No. 46, Consolidation of Variable
Interest Entities, an interpretation of ARB 51 (FIN 46) in January 2003.
The primary objectives of FIN 46 are to provide guidance on the
identification of entities for which control is achieved through means other
than voting rights, Variable Interest

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Entities (VIEs), and how to determine when and which business enterprise
should consolidate the VIE (the primary beneficiary). This new model for
consolidation applies to an entity which either (i) the equity investors, if
any, do not have a controlling financial interest or (ii) the equity
investment at risk is insufficient to finance that entitys activities
without receiving additional subordinated financial support from other
parties. In addition, FIN 46 requires that both the primary beneficiary and
all other enterprises with a significant variable interest in a VIE make
additional disclosures. FIN 46 will not impact our consolidated financial
statements since it is not applicable to registered investment companies or
qualifying SPEs accounted for in accordance with SFAS No. 140.

RELATED PARTY TRANSACTIONS

Advisory Agreements

Our executive officers are also the executive officers of PMC
Commercial and three of our directors or officers are members of the Board
of Trust Managers of PMC Commercial. PMC Advisers provides investment
advisory services to PMC Commercial pursuant to the Investment Management
Agreements. As the investment advisor for PMC Commercial, PMC Advisers has
earned $2.3 million, $2.3 million and $2.2 million in advisory fees during
2002, 2001 and 2000, respectively. Pursuant to the Investment Management
Agreements entered into between PMC Commercial and PMC Advisers, fees of
between 0.40% and 1.55%, annually, are charged by PMC Advisers based upon
the average principal outstanding of PMC Commercials loans. In addition,
the Investment Management Agreements include compensation to PMC Advisers
for its assistance in the issuance of PMC Commercials debt and equity
securities and the acquisition by PMC Commercial of limited service
hospitality properties.

Pursuant to the Loan Origination Agreement, loans that are greater than
$1.3 million ($1.1 million prior to July 1, 2002) that meet PMC Commercials
underwriting criteria are first presented to PMC Commercial for funding. If
PMC Commercial does not have available funds, we may originate those lending
opportunities as long as they meet our lending criteria. In the event the
Loan Origination Agreement is terminated or not renewed by PMC Commercial
(other than as a result of a material breach by PMC Advisers) or terminated
by PMC Advisers (as a result of a material breach by PMC Commercial), PMC
Capital would enter into a non-compete agreement for a period of seven years
from the termination date. A fee would be paid to PMC Advisers each year by
PMC Commercial in consideration of the non-compete agreement until the
non-compete agreement is terminated. Upon termination, the fee would be
calculated as 1% (less loan losses as a percentage of average invested
assets) multiplied by the average invested assets at the date of
termination. The Loan Origination Agreement is renewable on an annual basis.

The Lease Supervision Agreement provides for (i) an annual fee of 0.70%
of the original cost of the hospitality properties to be paid to PMC
Advisers relating to leases entered into by PMC Commercial, (ii) a fee of
$10,000 upon the sale of each limited service hospitality property and (iii)
an annual loan origination fee equal to five basis points of loans funded
for the first $20 million in loans and 2.5 basis points thereafter. In the
event the Lease Supervision Agreement is terminated or not renewed by PMC
Commercial (other than as a result of a material breach by PMC Advisers) or
terminated by PMC Advisers (as a result of a material breach by PMC
Commercial), PMC Advisers would be entitled to receive the Lease Supervision
Fee for a period of five years from the termination date. The Lease
Supervision Agreement is renewable on an annual basis.

Cross Indemnification Agreements

PMC Capital and PMC Commercial have entered into cross indemnification
agreements regarding the performance of their respective loans receivable
sold to the Joint Ventures. To the extent that poor performance by PMC
Capital or PMC Commercials sold loans receivable (the Underperforming
Company) is pervasive enough to cause the other company (the Performing
Company) to not receive cash flow that it otherwise would have received,
then the Underperforming Company must make the Performing Company whole. If
the cash flow reduction is considered to be temporary, then interest will be
paid as compensation to the Performing Company. In general, when a loan is
liquidated, it may cause a deferral of cash flow to the Performing Company
and, as a result, interest would be charged to the Underperforming Company
until the cash flow from the Joint Venture repays the Performing Company.
As a result of the Credit Enhancement Provisions described below, PMC
Commercial had a cash flow deferral, and we paid compensation to PMC
Commercial of less than $1,000. If the reduction of cash flows is deemed
permanent, (i.e.,to the extent that the Underperforming

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Company will not be able to satisfy the shortfall with the assets they have
contributed to the related structured loan sale transaction), the reduction
in cash flows must be paid to the Performing Company by the Underperforming
Company. At December 31, 2002, the maximum potential amount of future
payments to PMC Commercial (undiscounted and without consideration of any
recoveries from the underlying loans receivable) we could be required to
make under these cross indemnification agreements was approximately $34.3
million and the discounted amount was $23.5 million which represents the
estimated fair value of the Retained Interests reflected on PMC Commercials
consolidated balance sheet for the Joint Ventures. All of our loans are
collateralized; however, the maximum potential amount of future payments we
could be required to make under these cross indemnification agreements has
not considered any proceeds from the liquidation of collateral underlying
these loans. Upon completion of a joint securitization and on each
subsequent quarterly reporting date, management evaluates the need to
recognize a liability associated with these cross indemnification
agreements. Based on our present cash flow assumptions, including stress
test analyses of increasing the anticipated losses on each of the loan
pools, it does not appear that the loans receivable sold by us will cause
any permanent cash flow reductions to PMC Commercial nor will the loans
receivable sold by PMC Commercial cause any permanent cash flow reductions
to us. Accordingly, we believe that the fair value of these cross
indemnification agreements at inception of the Joint Ventures and as of
December 31, 2002 and 2001 was zero; thus, no liability was recorded. If
the performance of our sold loans receivable deteriorates, it may be
necessary for us to perform under these cross indemnification agreements.

Credit Enhancement Provisions

When our structured loan sale transactions were completed, the
transaction documents that the SPE entered into contained Credit Enhancement
Provisions that govern the assets and the flow of funds in and out of the
SPE formed as part of the structured loan sale transactions. The Credit
Enhancement Provisions include specified limits on the delinquency, default
and loss rates on loans receivable included in each SPE. If, at any
measurement date, the delinquency, default or loss rate with respect to any
SPE were to exceed the specified limits, the Credit Enhancement Provisions
would automatically increase the level of credit enhancement requirements
for that SPE. During the period in which the specified delinquency, default
or loss rate was exceeded, excess cash flow from the SPE, if any, would be
used to fund the increased credit enhancement levels instead of being
distributed, which would delay or reduce our distribution. As a result of
our Impaired Loans in the 2000 Joint Venture, a Credit Enhancement Provision
was triggered in November 2002. As a consequence, cash flows relating to
this transaction were deferred and utilized to fund the increased reserve
requirements. Our cash flow deferral at December 31, 2002 and February 28,
2003 was approximately $192,000 and $282,000, respectively. Based on
current cash flow assumptions, management anticipates that these funds will
be received in future periods.

Other Transactions

In October 2002, our affiliate, PMC Funding, acquired two assisted care
living facilities with an estimated fair value of $1.2 million for $101,000
in cash and the assumption of notes payable to PMC Capital and First
Western. PMC Funding operated one of the two assisted care living
facilities while the other facility is vacant. On January 15, 2003, PMC
Funding sold the operating assisted care living facility for $975,000. The
proceeds were used to repay in full the mortgage held by PMC Capital,
including additional costs incurred prior to liquidation and accrued
interest. The remaining funds were used to repay a portion of the
receivable due to First Western. As of December 31, 2002, the underlying
loan receivable held by PMC Capital related to these facilities was valued
at approximately $788,000.

During December 2002, PMC Capital exercised its option to repurchase a
loan which was deemed to be a charged-off loan (in accordance with the
transaction documents) from the 2000 Joint Venture for its principal balance
of $2.3 million plus accrued interest.

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QUARTERLY RESULTS

Earnings per share on a quarterly basis for the last ten years were as
follows.

|     |  |       |      |       |  |         |      |       |  |        |      |     |  |   |      |  |  |   |      |    
|---- |  | ----- | ---- | ----- |  | ------- | ---- | ----- |  | ------ | ---- | --- |  | - | ---- |  |  | - | ---- | ---
|     |  |       |      |       |  | Quarter
|     |  |       |      |       |  |        
|     |  | Total |      | First |  | Second  |      | Third |  | Fourth
|     |  |       |      |       |  |         |      |       |  |       
|1993 |  | $     | 0.87 |       |  | $       | 0.18 |       |  | $      | 0.23 |     |  | $ | 0.25 |  |  | $ | 0.21 |    
|1994 |  | $     | 1.12 |       |  | $       | 0.19 |       |  | $      | 0.23 |     |  | $ | 0.26 |  |  | $ | 0.44 | (1)
|1995 |  | $     | 1.03 |       |  | $       | 0.23 |       |  | $      | 0.25 |     |  | $ | 0.27 |  |  | $ | 0.28 |    
|1996 |  | $     | 1.18 |       |  | $       | 0.27 |       |  | $      | 0.30 |     |  | $ | 0.30 |  |  | $ | 0.31 |    
|1997 |  | $     | 1.35 |       |  | $       | 0.29 |       |  | $      | 0.31 |     |  | $ | 0.30 |  |  | $ | 0.45 | (1)
|1998 |  | $     | 1.16 |       |  | $       | 0.28 |       |  | $      | 0.28 |     |  | $ | 0.29 |  |  | $ | 0.31 | (1)
|1999 |  | $     | 1.11 |       |  | $       | 0.23 |       |  | $      | 0.42 | (1) |  | $ | 0.24 |  |  | $ | 0.22 |    
|2000 |  | $     | 0.93 |       |  | $       | 0.22 |       |  | $      | 0.22 |     |  | $ | 0.20 |  |  | $ | 0.29 | (1)
|2001 |  | $     | 0.87 |       |  | $       | 0.20 |       |  | $      | 0.38 | (1) |  | $ | 0.15 |  |  | $ | 0.14 |    
|2002 |  | $     | 0.48 |       |  | $       | 0.14 |       |  | $      | 0.20 | (1) |  | $ | 0.04 |  |  | $ | 0.10 |    



---

|(1) |  | During these quarters we sold portions of our loans receivable
which generated gains and increased our earnings per share.
|--- |  | --------------------------------------------------------------------------------------------------------------------------

DIVIDENDS

PMC Capital has historically paid dividends equal to at least 100% of
its investment company taxable income. There are certain timing differences
between book and tax income, most notably the recognition of income relating
to our structured loan transactions. As a result of these timing
differences and the anticipation of cash flows from the SPEs, the payment
and amount of dividends does not necessarily coincide with our earnings, and
we may have a distribution of dividends in excess of our net income. In
addition, our dividends paid since we became an investment company exceeded
our earnings and profits for tax purposes. We did not recognize any return
of capital for dividend reporting purposes during 2002 and 2001. The
computation of return of capital provides for several timing differences,
most notably relating to the recognition of gain treatment on structured
loan transactions.

During April, July and October 2002, we paid quarterly dividends of
$0.16, $0.16 and $0.12 per share to common shareholders of record on March
28, 2002, June 28, 2002 and September 30, 2002, respectively. During
December 2002, we declared a $0.12 per share dividend to common shareholders
of record on December 31, 2002, which was paid during January 2003. Our
Board may amend our dividend policy as warranted by actual and/or
anticipated earnings. During March 2003, we declared a $0.12 per share
dividend to common shareholders of record on March 31, 2003, to be paid on
April 14, 2003.

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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Since our balance sheet consists of items subject to interest rate
risk, we are subject to market risk associated with changes in interest
rates as described below. Although management believes that the analysis
below is indicative of our sensitivity to interest rate changes, it does not
adjust for potential changes in credit quality, size and composition of our
consolidated balance sheet and other business developments that could affect
our financial position and net income. Accordingly, no assurances can be
given that actual results would not differ materially from the potential
outcome simulated by these estimates.

LOANS RECEIVABLE

Changes in interest rates do not have an immediate impact on interest
income with regard to fixed-rate loans receivable. Our interest rate risk
on our fixed-rate loans receivable is primarily related to loan prepayments
and maturities. The average maturity of our loans receivable is less than
their average contractual terms because of prepayments. The average life of
mortgage loans tends to increase when the current mortgage loan rates are
substantially higher than rates on existing mortgage loans and, conversely,
decrease when the current mortgage loan rates are substantially lower than
rates on existing mortgage loans (due to refinancings of fixed-rate loans).
See Item 1, Business-Risk Factors-We Are Subject to Interest Rate Risk.

At December 31, 2002 and 2001, we had $15.9 million and $68.9 million
of fixed-rate loans receivable, respectively. The fair value of our
fixed-rate loans receivable is dependent upon several factors including
changes in interest rates and the market for the types of loans that we have
originated. If we were required to sell our loans at a time we would not
otherwise do so, our losses may be substantial. Changes in market interest
rates are considered by the Board in its determination of fair value of our
loans receivable; however, to date, changes in market interest rates have
not had a significant effect on the Board determination. However, future
interest rate changes could have an impact. Significant reductions in
interest rates, however, can prompt increased prepayments of our loans
receivable, resulting in possible decreases in long-term revenues due to the
potential for re-lending of the prepayment proceeds at lower interest rates.
Our variable-rate loans receivable are generally at spreads over LIBOR
($48.7 million and $11.7 million at December 31, 2002 and 2001,
respectively) or the prime rate ($22.6 million and $26.8 million at December
31, 2002 and 2001, respectively) consistent with the market. Accordingly,
increases or decreases in interest rates will generally not have a material
impact on the valuation of our variable-rate loans receivable.

At December 31, 2002 and 2001, we had $71.3 million and $38.5 million
of variable-rate loans receivable, respectively and $25.0 million of
variable-rate debt based on LIBOR at both December 31, 2002 and 2001. On
the differential between our variable-rate loans receivable outstanding and
our variable-rate debt ($46.3 million and $13.5 million at December 31, 2002
and 2001, respectively) we have interest rate risk. To the extent variable
rates continue to decrease we would have a decrease in interest income.
Since our variable-rate loans receivable exceed our LIBOR-based debt,
reductions in variable interest rates will negatively impact our results of
operations. Since a portion of our loans receivable are based on the prime
rate while our variable-rate debt is based on LIBOR, decreases in the prime
rate in excess of decreases in LIBOR would further reduce our net investment
income.

The sensitivity of our variable-rate loans receivable and debt to
changes in interest rates is regularly monitored and analyzed by measuring
the characteristics of our assets and liabilities. We assess interest rate
risk in terms of the potential effect on interest income net of interest
expense and the value of net assets in an effort to ensure that we are
insulated from any significant adverse effects from changes in interest
rates. Based on our analysis of the sensitivity of interest income net of
interest expense at December 31, 2002, if the consolidated balance sheet
were to remain constant and no actions were taken to alter the existing
interest rate sensitivity, each hypothetical 100 basis point reduction in
interest rates would reduce net investment income by approximately $500,000.
In comparison, based on our analysis of the sensitivity of interest income
net of interest expense at December 31, 2001, if the consolidated balance
sheet were to remain constant and no actions were taken to alter the
existing interest rate sensitivity, each hypothetical 100 basis point
reduction in interest rates would reduce net investment income by
approximately $135,000. We are currently more sensitive to interest rate
risk because of our focus on variable-rate lending and the increased
differential between our variable-rate loans receivable and our
variable-rate debt.

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NOTES AND DEBENTURES PAYABLE

As of December 31, 2002 and 2001, approximately $29.3 million (54%) and
$51.3 million (67%) of our consolidated debt had fixed rates of interest and
are therefore not affected by changes in interest rates. Currently, market
rates of interest are below the rates we are obligated to pay on the
majority of our fixed-rate debt. Our variable-rate notes payable ($25
million at both December 31, 2002 and 2001) are based on LIBOR and thus
subject to adverse changes in market interest rates. Assuming there were no
increases or decreases in our variable-rate notes payable outstanding at
December 31, 2002 and 2001, each hypothetical 100 basis point increase in
interest rates would increase interest expense and reduce net investment
income by approximately $250,000.

The following table presents the principal amounts and weighted average
interest rates and fair values required by year of expected maturity to
evaluate the expected cash flows and sensitivity to interest rate changes on
our outstanding debt at December 31, 2002 and 2001.
The following market risk disclosures related to our outstanding debt
at December 31, 2002:

|                                     |  |                         |       |      |  |      |        |          |  |      |        |            |  |       |        |           |  |   |   |  |  |   |       |  |  |   |        |  |  |   |        | 
|------------------------------------ |  | ----------------------- | ----- | ---- |  | ---- | ------ | -------- |  | ---- | ------ | ---------- |  | ----- | ------ | --------- |  | - | - |  |  | - | ----- |  |  | - | ------ |  |  | - | ------ | 
|                                     |  | Year Ended December 31, |       |      |  |      |        |          |  |      |        |            |  |      
|                                     |  |                         |       |      |  |      |        | Carrying |  | Fair
|                                     |  | 2003                    |       | 2004 |  | 2005 |        | 2006     |  | 2007 |        | Thereafter |  | Value |        | Value (1)
|                                     |  |                         |       |      |  |      |        |          |  |      |        |            |  |       |        |          
|                                     |  | (Dollars in thousands) 
|Fixed rate debt (2)                  |  | $                       | 5,000 |      |  | $    |       |          |  | $    | 17,000 |            |  | $     |       |           |  | $ |  |  |  | $ | 7,310 |  |  | $ | 29,310 |  |  | $ | 29,915 | 
|Variable rate debt
(LIBOR-based) (3) |  |                         |      |      |  |      | 15,000 |          |  |      |       |            |  |       | 10,000 |           |  |   |  |  |  |   |      |  |  |   | 25,000 |  |  |   | 25,000 | 
|                                     |  |                         |       |      |  |      |        |          |  |      |        |            |  |       |        |           |  |   |   |  |  |   |       |  |  |   |        |  |  |   |        | 
|Totals                               |  | $                       | 5,000 |      |  | $    | 15,000 |          |  | $    | 17,000 |            |  | $     | 10,000 |           |  | $ |  |  |  | $ | 7,310 |  |  | $ | 54,310 |  |  | $ | 54,915 | 
|                                     |  |                         |       |      |  |      |        |          |  |      |        |            |  |       |        |           |  |   |   |  |  |   |       |  |  |   |        |  |  |   |        | 



---

|(1) |  | The estimated fair value is based on a present value calculation
based on prices of the same or similar instruments after considering
risk, current interest rates and remaining maturities.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The weighted average interest rate of our fixed-rate debt at December
31, 2002 was 7.8%.                                                                                                    
|   
|(3) |  | The weighted average interest rate of our variable-rate debt at
December 31, 2002 was 3.1%.                                                                                                 

The following market risk disclosures related to our outstanding debt
at December 31, 2001:

|                                     |  |                         |       |      |  |      |       |          |  |      |        |            |  |       |        |           |  |   |        |  |  |   |       |  |  |   |        |  |  |   |        | 
|------------------------------------ |  | ----------------------- | ----- | ---- |  | ---- | ----- | -------- |  | ---- | ------ | ---------- |  | ----- | ------ | --------- |  | - | ------ |  |  | - | ----- |  |  | - | ------ |  |  | - | ------ | 
|                                     |  | Year Ended December 31, |       |      |  |      |       |          |  |      |        |            |  |      
|                                     |  |                         |       |      |  |      |       | Carrying |  | Fair
|                                     |  | 2002                    |       | 2003 |  | 2004 |       | 2005     |  | 2006 |        | Thereafter |  | Value |        | Value (1)
|                                     |  |                         |       |      |  |      |       |          |  |      |        |            |  |       |        |          
|                                     |  | (Dollars in thousands) 
|Fixed rate debt (2)                  |  | $                       | 5,510 |      |  | $    | 5,000 |          |  | $    | 6,000  |            |  | $     | 25,000 |           |  | $ | 2,490  |  |  | $ | 7,310 |  |  | $ | 51,310 |  |  | $ | 50,999 | 
|Variable
rate debt
(LIBOR-based) (3) |  |                         |      |      |  |      |      |          |  |      | 15,000 |            |  |       |       |           |  |   | 10,000 |  |  |   |      |  |  |   | 25,000 |  |  |   | 25,000 | 
|                                     |  |                         |       |      |  |      |       |          |  |      |        |            |  |       |        |           |  |   |        |  |  |   |       |  |  |   |        |  |  |   |        | 
|Totals                               |  | $                       | 5,510 |      |  | $    | 5,000 |          |  | $    | 21,000 |            |  | $     | 25,000 |           |  | $ | 12,490 |  |  | $ | 7,310 |  |  | $ | 76,310 |  |  | $ | 75,999 | 
|                                     |  |                         |       |      |  |      |       |          |  |      |        |            |  |       |        |           |  |   |        |  |  |   |       |  |  |   |        |  |  |   |        | 



---

|(1) |  | The estimated fair value is based on a present value calculation
based on prices of the same or similar instruments after considering
risk, current interest rates and remaining maturities.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The weighted average interest rate of our fixed-rate debt at December
31, 2001 was 7.6%.                                                                                                    
|   
|(3) |  | The weighted average interest rate of our variable-rate debt at
December 31, 2001 was 3.6%.                                                                                                 

RETAINED INTERESTS

We have an investment in Retained Interests which is valued by our
Board based on various factors including estimates of appropriate market
discount rates. Changes in discount rates used in determining the fair value of
the Retained Interests will have an impact on the recorded value and future
earnings. Assuming all other factors (i.e.,prepayments, losses, etc.)
remain unchanged, if discount rates were 100 basis points or 200 basis
points higher than rates estimated at December 31, 2002, the value of our
Retained Interests and our net income would decrease by approximately $1.6
million and $3.0 million, respectively. Assuming all other factors (i.e.,
prepayments, losses, etc.) remain unchanged, if discount rates were 100
basis points or 200 basis

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points higher than rates estimated at December 31, 2001, the value of our
Retained Interests and our net income would decrease by approximately $1.2
million and $2.4 million, respectively.




Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary data are included in this
report beginning on page F-1.




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

None.

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PART III




Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Incorporated herein by reference to our definitive proxy statement to
be filed with the Securities and Exchange Commission within 120 days after
the year-end covered by this Form 10-K with respect to the Annual Meeting of
Shareholders.




Item 11. EXECUTIVE COMPENSATION

Incorporated herein by reference to our definitive proxy statement to
be filed with the Securities and Exchange Commission within 120 days after
the year-end covered by this Form 10-K with respect to the Annual Meeting of
Shareholders.




Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

We are authorized to grant stock options up to an aggregate of 6% of
the total number of Common Shares outstanding at any time as incentive stock
options (intended to qualify under Section 422 of the Code) or non-qualified
stock options to employees. All of our equity compensation plans have been
approved by security holders. Information regarding our equity compensation
plans was as follows at December 31, 2002:

|                                                       |  |                         |         |                     |  |                         |      |  |  |                         |         | 
|------------------------------------------------------ |  | ----------------------- | ------- | ------------------- |  | ----------------------- | ---- |  |  | ----------------------- | ------- | 
|                                                       |  | Column                 
|                                                       |  |                        
|                                                       |  | (a)                     |         | (b)                 |  | (c)                    
|                                                       |  |                         |         |                     |  |                        
|                                                       |  |                         |         |                     |  |                         |      |  |  | Number of securities   
|                                                       |  |                         |         |                     |  |                         |      |  |  | remaining available for
|                                                       |  |                         |         |                     |  |                         |      |  |  | future issuances under 
|                                                       |  |                         |         |                     |  |                         |      |  |  | equity compensation    
|                                                       |  | Number of securities to |         | Weighted average    |  | plans (excluding       
|Plan                                                   |  | be issued upon exercise |         | exercise price of   |  | securities reflected in
|Category                                               |  | of outstanding options  |         | outstanding options |  | column (a))            
|                                                       |  |                         |         |                     |  |                        
|Equity compensation
plans approved by
security holders |  |                         | 236,250 |                     |  | $                       | 8.92 |  |  |                         | 474,961 | 
|                                                       |  |                         |         |                     |  |                         |      |  |  |                         |         | 

Additional information regarding security ownership of certain
beneficial owners and management and related shareholder matters is
incorporated herein by reference to our definitive proxy statement to be
filed with the Securities and Exchange Commission within 120 days after the
year-end covered by this Form 10-K with respect to the Annual Meeting of
Shareholders.




Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated herein by reference to our definitive proxy statement to
be filed with the Securities and Exchange Commission within 120 days after
the year-end covered by this Form 10-K with respect to the Annual Meeting of
Shareholders.




Item 14. CONTROLS AND PROCEDURES

Our Chief Executive Officer and Chief Financial Officer have reviewed
and evaluated the effectiveness of our disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of a date
within 90 days before the filing date of the annual report on Form 10-K.
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that our current disclosure controls and procedures
are effective in timely notifying them of material information relating to
us (including our consolidated subsidiaries) required to be disclosed in the
reports we file or submit under the Exchange Act.

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There have not been any significant changes in our internal controls or
other factors that could significantly affect these internal controls
subsequent to the date of their evaluation. We are not aware of any
significant deficiencies or material weaknesses; therefore, no corrective
actions were taken.

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PART IV




Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K



|(a) |  | Documents filed as part of this report
|--- |  | --------------------------------------



| | (1) |  | Financial Statements
| | --- |  | --------------------

| |  |  | See index to Financial Statements set forth on page F-1 of this Form 10-K.
| |  |  | --------------------------------------------------------------------------



| | (2) |  | Financial Statement Schedules
| | --- |  | -----------------------------

| |  |  | All schedules are omitted because they are not required
under the related instructions or not applicable, or
because the required information is included in the
consolidated financial statements or notes thereto.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) |  | Exhibits
| | --- |  | --------

| |  |  | See Exhibit Index beginning on page E-1 of this Form 10-K.
| |  |  | ----------------------------------------------------------



|(b) |  | Reports on Form 8-K
|--- |  | -------------------



| |  |  | None.
| |  |  | -----

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SIGNATURES

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

| |     |  |                             
| | --- |  | ----------------------------
| |     |  | PMC Capital, Inc.           
| | By: |  | /s/ Lance B. Rosemore       
| |     |  |                             
| |     |  | Lance B. Rosemore, President

Dated March 31, 2003

Pursuant to the requirements of the Securities Act of 1934, this report
has been signed by the following persons in the capacities and on the dates
indicated.

|                                                   |  |                                                                                          |  |               
|-------------------------------------------------- |  | ---------------------------------------------------------------------------------------- |  | --------------
|Name                                               |  | Title                                                                                    |  | Date          
|                                                   |  |                                                                                          |  |               
|/s/ DR. FREDRIC M. ROSEMOREDr. Fredric M. Rosemore |  | Chairman of the Board
and Treasurer                                                      |  | March 31, 2003
|                                                  
|/s/ LANCE B. ROSEMORELance B. Rosemore             |  | President, Chief Executive
Officer, Secretary and Director
(Principal Executive Officer) |  | March 31, 2003
|                                                  
|/s/ BARRY N. BERLINBarry N. Berlin                 |  | Chief Financial Officer
(Principal Financial and
Accounting Officer)                     |  | March 31, 2003
|                                                  
|/s/ DR. MARTHA GREENBERGDr. Martha Greenberg       |  | Director                                                                                 |  | March 31, 2003
|                                                  
|/s/ DR. IRVIN BORISHDr. Irvin Borish               |  | Director                                                                                 |  | March 31, 2003
|                                                  
|/s/ THOMAS HAMILLThomas Hamill                     |  | Director                                                                                 |  | March 31, 2003
|                                                  
|/s/ BARRY A. IMBERBarry A. Imber                   |  | Director                                                                                 |  | March 31, 2003
|                                                  
|/s/ THEODORE J. SAMUELTheodore J. Samuel           |  | Director                                                                                 |  | March 31, 2003

56



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CERTIFICATION

I, Lance B. Rosemore, Chief Executive Officer, certify that:

1.     I have reviewed this annual report on Form 10-K of PMC Capital, Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| | a) |  | designed such disclosure controls and
procedures to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this annual report is
being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90
days prior to the filing date of this annual report (the
Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this annual report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the
equivalent functions):



| | a) |  | all significant deficiencies in the design or
operation of internal controls which could adversely affect
the registrants ability to record, process, summarize and
report financial data and have identified for the
registrants auditors any material weaknesses in internal
controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that
involves management or other employees who have a significant
role in the registrants internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|      |  |                |  |                                          
|----- |  | -------------- |  | -----------------------------------------
|Date: |  | March 31, 2003 |  | /s/ Lance B. Rosemore                    
|      |  |                |  |                                          
|      |  |                |  | Lance B. Rosemore
Chief Executive Officer

57



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CERTIFICATION

I, Barry N. Berlin, Chief Financial Officer, certify that:

1.     I have reviewed this annual report on Form 10-K of PMC Capital,
Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the consolidated financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this annual
report;

4.     The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| | a) |  | designed such disclosure controls and
procedures to ensure that material information relating to
the registrant, including its subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this annual report is being prepared;
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90
days prior to the filing date of this annual report (the
Evaluation Date); and                                                                                     
|
| | c) |  | presented in this annual report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;                                                                                                           

5.     The registrants other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the
equivalent functions):



| | a) |  | all significant deficiencies in the design or
operation of internal controls which could adversely affect
the registrants ability to record, process, summarize and
report financial data and have identified for the
registrants auditors any material weaknesses in internal
controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that
involves management or other employees who have a significant
role in the registrants internal controls; and                                                                                                                                        

6.     The registrants other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

|      |  |                |  |                                        
|----- |  | -------------- |  | ---------------------------------------
|Date: |  | March 31, 2003 |  | /s/ Barry N. Berlin                    
|      |  |                |  |                                        
|      |  |                |  | Barry N. Berlin
Chief Financial Officer

58



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PMC CAPITAL, INC. AND SUBSIDIARIES
FORM 10-K
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                           |                                                                                                      |  |      |      | 
|------------------------------------------ | ---------------------------------------------------------------------------------------------------- |  | ---- | ---- | 
|Report of Independent Accountants          |                                                                                                      |  | F-2  |     
|Consolidated Financial Statements:         |                                                                                                      |  |      |     
|                                           | Consolidated Balance Sheets as of December 31, 2002 and 2001                                         |  |      | F-3  | 
|                                           | Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000           |  |      | F-4  | 
|                                           | Consolidated Statements of Shareholders Equity for the Years Ended December 31, 2002, 2001 and 2000 |  |      | F-5  | 
|                                           | Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000           |  |      | F-6  | 
|                                           | Consolidated Schedule of Investments as of December 31, 2002                                         |  |      | F-7  | 
|                                           | Financial Highlights                                                                                 |  |      | F-9  | 
|Notes to Consolidated Financial Statements |                                                                                                      |  | F-10 |     
|Consolidating Financial Statements:        |                                                                                                      |  |      |     
|                                           | Report of Independent Accountants on Consolidating Financial Statements                              |  |      | F-35 | 
|                                           | Consolidating Balance Sheet as of December 31, 2002                                                  |  |      | F-36 | 
|                                           | Consolidating Statement of Operations for the Year Ended December 31, 2002                           |  |      | F-37 | 
|                                           | Consolidating Statement of Shareholders Equity for the Year Ended December 31, 2002                 |  |      | F-38 | 
|                                           | Consolidating Statement of Cash Flows for the Year Ended December 31, 2002                           |  |      | F-39 | 

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Report of Independent Accountants

To the Shareholders and Board of Directors of
PMC Capital, Inc.:

In our opinion, the accompanying consolidated balance sheets as of December 31, 2002 and 2001, including the
schedule of investments as of December 31, 2002 and the related consolidated statements of operations,
shareholders equity and cash flows for each of the three years in the period ended December 31, 2002 and the
financial highlights for each of the five years in the period ended December 31, 2002, present fairly, in all
material respects, the financial position of PMC Capital, Inc. and its subsidiaries (the Company) at December
31, 2002 and 2001, and the results of their operations and their cash flows and the financial highlights for the
periods indicated, in conformity with accounting principles generally accepted in the United States of America.
These financial statements and financial highlights (hereafter referred to as financial statements) are the
responsibility of the Companys management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in accordance with auditing
standards generally accepted in the United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the 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,
assessing the accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included confirmation of securities as of
December 31, 2002 and 2001, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Dallas, Texas
March 11, 2003, except for Note 20,    as to which the date is March 27, 2003

F-2



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PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS(In thousands, except share and per share data)

|                                           |                                                                                                                                      |   |              |        |      |   |         |         |  
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------ | - | ------------ | ------ | ---- | - | ------- | ------- | -
|                                           |                                                                                                                                      |   | December 31,
|                                           |                                                                                                                                      |   |             
|                                           |                                                                                                                                      |   | 2002         |        | 2001
|                                           |                                                                                                                                      |   |              |        |     
|ASSETS                                     |                                                                                                                                      |   |              |        |      |   |         |        
|Investments at value:                      |                                                                                                                                      |   |              |        |      |   |         |        
|                                           | Loans receivable                                                                                                                     |   | $            | 87,245 |      |   | $       | 107,392 |  
|                                           | Retained interests in transferred assets                                                                                             |   |              | 40,003 |      |   |         | 33,537  |  
|                                           | Cash equivalents                                                                                                                     |   |              | 4,915  |      |   |         | 16,989  |  
|                                           | Assets acquired in liquidation                                                                                                       |   |              | 2,252  |      |   |         | 329     |  
|                                           | Mortgage-backed security of affiliate                                                                                                |   |              | 1,381  |      |   |         | 1,701   |  
|                                           | Restricted investments                                                                                                               |   |              | 299    |      |   |         | 95      |  
|                                           | Investment in unconsolidated subsidiaries                                                                                            |   |              | 81     |      |   |         | 67      |  
|                                           |                                                                                                                                      |   |              |        |      |   |         |        
|Total investments at value                 |                                                                                                                                      |   | 136,176      |        |      |   | 160,110 |        
|                                           |                                                                                                                                      |   |              |        |      |   |         |        
|Other assets:                              |                                                                                                                                      |   |              |        |      |   |         |        
|                                           | Due from affiliates                                                                                                                  |   |              | 1,839  |      |   |         | 607     |  
|                                           | Deferred charges, deposits and other assets                                                                                          |   |              | 728    |      |   |         | 873     |  
|                                           | Receivable for loans sold                                                                                                            |   |              | 637    |      |   |         | 184     |  
|                                           | Cash                                                                                                                                 |   |              | 563    |      |   |         | 329     |  
|                                           | Accrued interest receivable                                                                                                          |   |              | 225    |      |   |         | 462     |  
|                                           | Property and equipment, net                                                                                                          |   |              | 98     |      |   |         | 133     |  
|                                           |                                                                                                                                      |   |              |        |      |   |         |        
|Total other assets                         |                                                                                                                                      |   | 4,090        |        |      |   | 2,588   |        
|                                           |                                                                                                                                      |   |              |        |      |   |         |        
|Total assets                               |                                                                                                                                      | $ | 140,266      |        |      | $ | 162,698 |        
|                                           |                                                                                                                                      |   |              |        |      |   |         |        
|LIABILITIES AND SHAREHOLDERS EQUITY       |                                                                                                                                      |   |              |        |      |   |         |        
|Liabilities:                               |                                                                                                                                      |   |              |        |      |   |         |        
|                                           | Current portion of notes and debentures payable                                                                                      |   | $            | 5,000  |      |   | $       | 5,510   |  
|                                           | Borrower advances                                                                                                                    |   |              | 1,754  |      |   |         | 798     |  
|                                           | Accounts payable                                                                                                                     |   |              | 1,569  |      |   |         | 753     |  
|                                           | Dividends payable                                                                                                                    |   |              | 1,486  |      |   |         | 2,434   |  
|                                           | Accrued interest payable                                                                                                             |   |              | 748    |      |   |         | 1,193   |  
|                                           | Due to affiliates                                                                                                                    |   |              | 102    |      |   |         | 189     |  
|                                           | Other liabilities                                                                                                                    |   |              | 1,294  |      |   |         | 1,113   |  
|                                           |                                                                                                                                      |   |              |        |      |   |         |        
|Total current liabilities                  |                                                                                                                                      |   | 11,953       |        |      |   | 11,990  |        
|Notes and debentures payable               |                                                                                                                                      |   | 49,310       |        |      |   | 70,800  |        
|                                           |                                                                                                                                      |   |              |        |      |   |         |        
|Total liabilities                          |                                                                                                                                      |   | 61,263       |        |      |   | 82,790  |        
|                                           |                                                                                                                                      |   |              |        |      |   |         |        
|Commitments
and contingencies              |                                                                                                                                      |   |              |        |      |   |         |        
|Cumulative preferred stock of subsidiary   |                                                                                                                                      |   | 7,000        |        |      |   | 7,000   |        
|                                           |                                                                                                                                      |   |              |        |      |   |         |        
|Shareholders equity:                      |                                                                                                                                      |   |              |        |      |   |         |        
|                                           | Common stock, authorized 30,000,000 shares of $.01 par value,
11,853,516 shares issued and outstanding at December 31,
2002 and 2001 |   |              | 119    |      |   |         | 119     |  
|                                           | Additional paid-in capital                                                                                                           |   |              | 71,508 |      |   |         | 71,508  |  
|                                           | Dividends in excess of retained earnings                                                                                             |   |              | (2,022 | )    |   |         | (340    | )
|                                           | Net unrealized appreciation on investments                                                                                           |   |              | 2,398  |      |   |         | 1,621   |  
|                                           |                                                                                                                                      |   |              |        |      |   |         |        
|                                           |                                                                                                                                      |   | 72,003       |        |      |   | 72,908  |        
|                                           |                                                                                                                                      |   |              |        |      |   |         |        
|Total liabilities and shareholders equity |                                                                                                                                      | $ | 140,266      |        |      | $ | 162,698 |        
|                                           |                                                                                                                                      |   |              |        |      |   |         |        
|Net asset value per common share           |                                                                                                                                      | $ | 6.07         |        |      | $ | 6.15    |        
|                                           |                                                                                                                                      |   |              |        |      |   |         |        

The accompanying notes are an integral part of these consolidated financial statements.

F-3



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PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share data)

|                                                         |                                                        |                                                  |        |                          |        |      |        |        |        |   |        |        |     |  
|-------------------------------------------------------- | ------------------------------------------------------ | ------------------------------------------------ | ------ | ------------------------ | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | --- | -
|                                                         |                                                        |                                                  |        | Years Ended December 31,
|                                                         |                                                        |                                                  |        |                         
|                                                         |                                                        |                                                  |        | 2002                     |        | 2001 |        | 2000  
|                                                         |                                                        |                                                  |        |                          |        |      |        |       
|Investment income:                                       |                                                        |                                                  |        |                          |        |      |        |        |        |   |        |       
|                                                         | Interest                                               |                                                  | $      | 7,507                    |        |      | $      | 11,568 |        |   | $      | 13,540 |    
|                                                         | Income from retained interests in transferred assets   |                                                  |        | 5,202                    |        |      |        | 5,340  |        |   |        | 4,020  |    
|                                                         | Advisory fee income                                    |                                                  |        | 1,927                    |        |      |        | 1,803  |        |   |        | 1,699  |    
|                                                         | Premium income                                         |                                                  |        | 650                      |        |      |        | 501    |        |   |        | 573    |    
|                                                         | Equity in income of unconsolidated subsidiaries, net   |                                                  |        | 307                      |        |      |        | 382    |        |   |        | 480    |    
|                                                         | Other income, net                                      |                                                  |        | 1,069                    |        |      |        | 1,158  |        |   |        | 1,272  |    
|                                                         |                                                        |                                                  |        |                          |        |      |        |        |        |   |        |       
|Total investment income                                  |                                                        |                                                  | 16,662 |                          |        |      | 20,752 |        |        |   | 21,584 |       
|                                                         |                                                        |                                                  |        |                          |        |      |        |        |        |   |        |       
|Expenses:                                                |                                                        |                                                  |        |                          |        |      |        |        |        |   |        |       
|                                                         | Interest                                               |                                                  |        | 4,588                    |        |      |        | 5,489  |        |   |        | 5,460  |    
|                                                         | Salaries and related benefits                          |                                                  |        | 3,940                    |        |      |        | 4,199  |        |   |        | 4,182  |    
|                                                         | General and administrative                             |                                                  |        | 914                      |        |      |        | 884    |        |   |        | 816    |    
|                                                         | Loss from operations of assets acquired in liquidation |                                                  |        | 391                      |        |      |        |       |        |   |        |       |    
|                                                         | Rent                                                   |                                                  |        | 328                      |        |      |        | 321    |        |   |        | 315    |    
|                                                         | Professional fees                                      |                                                  |        | 325                      |        |      |        | 273    |        |   |        | 260    |    
|                                                         | Profit sharing plan                                    |                                                  |        | 220                      |        |      |        | 242    |        |   |        | 247    |    
|                                                         |                                                        |                                                  |        |                          |        |      |        |        |        |   |        |       
|Total expenses                                           |                                                        |                                                  | 10,706 |                          |        |      | 11,408 |        |        |   | 11,280 |       
|                                                         |                                                        |                                                  |        |                          |        |      |        |        |        |   |        |       
|Net investment income                                    |                                                        |                                                  | 5,956  |                          |        |      | 9,344  |        |        |   | 10,304 |       
|                                                         |                                                        |                                                  |        |                          |        |      |        |        |        |   |        |       
|Realized and unrealized gain (loss) on investments:      |                                                        |                                                  |        |                          |        |      |        |        |        |   |        |       
|                                                         |                                                        | Realized losses                                  |        |                          | (2,196 | )    |        |        | (2,328 | ) |        |        | (17 | )
|                                                         |                                                        | Sale of assets                                   |        |                          | 1,446  |      |        |        | 2,732  |   |        |        | 564 |  
|                                                         |                                                        | Change in unrealized appreciation on investments |        |                          | 777    |      |        |        | 819    |   |        |        | 402 |  
|                                                         |                                                        |                                                  |        |                          |        |      |        |        |        |   |        |       
|Total realized and unrealized gain (loss) on investments |                                                        |                                                  | 27     |                          |        |      | 1,223  |        |        |   | 949    |       
|                                                         |                                                        |                                                  |        |                          |        |      |        |        |        |   |        |       
|Net increase in net assets resulting from operations     |                                                        | $                                                | 5,983  |                          |        | $    | 10,567 |        |        | $ | 11,253 |       
|                                                         |                                                        |                                                  |        |                          |        |      |        |        |        |   |        |       
|Preferred dividends                                      |                                                        | $                                                | 250    |                          |        | $    | 250    |        |        | $ | 251    |       
|                                                         |                                                        |                                                  |        |                          |        |      |        |        |        |   |        |       
|Basic and diluted earnings per share                     |                                                        | $                                                | 0.48   |                          |        | $    | 0.87   |        |        | $ | 0.93   |       
|                                                         |                                                        |                                                  |        |                          |        |      |        |        |        |   |        |       

The accompanying notes are an integral part of these consolidated financial statements.

F-4



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000(In thousands, except share and per share data)

|                                                                       |                                 |   |        |   |         |   |            |   |             |   |               |         |            |   |       |   |  |   |        |         |  
|---------------------------------------------------------------------- | ------------------------------- | - | ------ | - | ------- | - | ---------- | - | ----------- | - | ------------- | ------- | ---------- | - | ----- | - |  | - | ------ | ------- | -
|                                                                       |                                 |   |        |   |         |   |            |   |             |   | Undistributed |         | Net        |   |       |   | 
|                                                                       |                                 |   |        |   |         |   |            |   |             |   | (Dividends in |         | Unrealized |   |       |   | 
|                                                                       |                                 |   |        |   |         |   | Additional |   | Excess of)  |   | Appreciation  |         |            |   |      
|                                                                       |                                 |   | Common |   | Paid-in |   | Retained   |   | on          |   |               |         |           
|                                                                       |                                 |   | Stock  |   | Capital |   | Earnings   |   | Investments |   | Total        
|                                                                       |                                 |   |        |   |         |   |            |   |             |   |              
|Balance, January 1, 2000                                               |                                 | $ | 118    |   |         | $ | 71,312     |   |             | $ | 1,484         |         |            | $ | 400   |   |  | $ | 73,314 |        
|Net increase in net assets resulting
from operations                   |                                 |   |       |   |         |   |           |   |             |   | 10,851        |         |            |   | 402   |   |  |   | 11,253 |        
|Issuances of common stock pursuant
to stock option plan, 24,400 shares |                                 |   | 1      |   |         |   | 196        |   |             |   |              |         |            |   |      |   |  |   | 197    |        
|Dividends:                                                             |                                 |   |        |   |         |   |            |   |             |   |               |         |            |   |       |   |  |   |        |        
|                                                                       | Preferred                       |   |        |  |         |   |            |  |             |   |               | (251    | )          |   |       |  |  |   |        | (251    | )
|                                                                       | Common ($1.00 per common share) |   |        |  |         |   |            |  |             |   |               | (11,846 | )          |   |       |  |  |   |        | (11,846 | )
|                                                                       |                                 |   |        |   |         |   |            |   |             |   |               |         |            |   |       |   |  |   |        |        
|Balance, December 31, 2000                                             |                                 |   | 119    |   |         |   | 71,508     |   |             |   | 238           |         |            |   | 802   |   |  |   | 72,667 |        
|Net increase in net assets resulting
from operations                   |                                 |   |       |   |         |   |           |   |             |   | 9,748         |         |            |   | 819   |   |  |   | 10,567 |        
|Dividends:                                                             |                                 |   |        |   |         |   |            |   |             |   |               |         |            |   |       |   |  |   |        |        
|                                                                       | Preferred                       |   |        |  |         |   |            |  |             |   |               | (250    | )          |   |       |  |  |   |        | (250    | )
|                                                                       | Common ($0.85 per common share) |   |        |  |         |   |            |  |             |   |               | (10,076 | )          |   |       |  |  |   |        | (10,076 | )
|                                                                       |                                 |   |        |   |         |   |            |   |             |   |               |         |            |   |       |   |  |   |        |        
|Balance, December 31, 2001                                             |                                 |   | 119    |   |         |   | 71,508     |   |             |   | (340          | )       |            |   | 1,621 |   |  |   | 72,908 |        
|Net increase in net assets resulting
from operations                   |                                 |   |       |   |         |   |           |   |             |   | 5,206         |         |            |   | 777   |   |  |   | 5,983  |        
|Dividends:                                                             |                                 |   |        |   |         |   |            |   |             |   |               |         |            |   |       |   |  |   |        |        
|                                                                       | Preferred                       |   |        |  |         |   |            |  |             |   |               | (250    | )          |   |       |  |  |   |        | (250    | )
|                                                                       | Common ($0.56 per common share) |   |        |  |         |   |            |  |             |   |               | (6,638  | )          |   |       |  |  |   |        | (6,638  | )
|                                                                       |                                 |   |        |   |         |   |            |   |             |   |               |         |            |   |       |   |  |   |        |        
|Balance, December 31, 2002                                             |                                 | $ | 119    |   |         | $ | 71,508     |   |             | $ | (2,022        | )       |            | $ | 2,398 |   |  | $ | 72,003 |        
|                                                                       |                                 |   |        |   |         |   |            |   |             |   |               |         |            |   |       |   |  |   |        |        

The accompanying notes are an integral part of these consolidated financial statements.

F-5



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)

|                                                    |                                                                                                                             |   |                                                      |         |   |                          |        |         |   |        |         |         |   |        |   | 
|--------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------- | - | ---------------------------------------------------- | ------- | - | ------------------------ | ------ | ------- | - | ------ | ------- | ------- | - | ------ | - | 
|                                                    |                                                                                                                             |   |                                                      |         |   | Years Ended December 31,
|                                                    |                                                                                                                             |   |                                                      |         |   |                         
|                                                    |                                                                                                                             |   |                                                      |         |   | 2002                     |        | 2001    |   | 2000  
|                                                    |                                                                                                                             |   |                                                      |         |   |                          |        |         |   |       
|Cash flows from operating activities:               |                                                                                                                             |   |                                                      |         |   |                          |        |         |   |        |         |        
|                                                    | Net increase in net assets resulting from operations                                                                        |   | $                                                    | 5,983   |   |                          | $      | 10,567  |   |        | $       | 11,253  |  
|                                                    | Adjustments to reconcile net increase in net assets resulting from
operations to net cash provided by operating activities: |   |                                                      |         |   |                          |        |         |   |        |         |         |  
|                                                    |                                                                                                                             |   | Loans funded, held for sale                          |         |   | (6,006                   | )      |         |   | (5,608 | )       |         |   | (8,606 | )
|                                                    |                                                                                                                             |   | Proceeds from sale of guaranteed loans               |         |   | 6,146                    |        |         |   | 7,778  |         |         |   | 9,584  |  
|                                                    |                                                                                                                             |   | Realized and unrealized gain on investments          |         |   | (27                      | )      |         |   | (1,223 | )       |         |   | (949   | )
|                                                    |                                                                                                                             |   | Unrealized premium income, net                       |         |   | (65                      | )      |         |   | (14    | )       |         |   | (255   | )
|                                                    |                                                                                                                             |   | Depreciation and amortization                        |         |   | 254                      |        |         |   | 159    |         |         |   | 177    |  
|                                                    |                                                                                                                             |   | Accretion of loan discount and deferred fees         |         |   | (136                     | )      |         |   | (167   | )       |         |   | (288   | )
|                                                    |                                                                                                                             |   | Equity in income of unconsolidated subsidiaries, net |         |   | (307                     | )      |         |   | (382   | )       |         |   | (480   | )
|                                                    |                                                                                                                             |   | Other operating assets and liabilities               |         |   | 1,661                    |        |         |   | (1,151 | )       |         |   | (1,800 | )
|                                                    |                                                                                                                             |   |                                                      |         |   |                          |        |         |   |        |         |        
|Net cash provided by operating activities           |                                                                                                                             |   | 7,503                                                |         |   |                          | 9,959  |         |   |        | 8,636   |        
|                                                    |                                                                                                                             |   |                                                      |         |   |                          |        |         |   |        |         |        
|Cash flows from investing activities:               |                                                                                                                             |   |                                                      |         |   |                          |        |         |   |        |         |        
|                                                    | Loans funded                                                                                                                |   |                                                      | (39,807 | ) |                          |        | (60,369 | ) |        |         | (35,552 | )
|                                                    | Purchase of loans through exercise of options                                                                               |   |                                                      | (1,176  | ) |                          |        | (2,272  | ) |        |         |        |  
|                                                    | Principal collected                                                                                                         |   |                                                      | 13,891  |   |                          |        | 10,063  |   |        |         | 11,233  |  
|                                                    | Proceeds from debt issued by SPEs, net                                                                                      |   |                                                      | 37,901  |   |                          |        | 44,511  |   |        |         | 24,713  |  
|                                                    | Proceeds from retained interests in transferred assets                                                                      |   |                                                      | 4,343   |   |                          |        | 3,181   |   |        |         | 3,000   |  
|                                                    | Proceeds from mortgage-backed security of affiliate                                                                         |   |                                                      | 313     |   |                          |        | 144     |   |        |         | 248     |  
|                                                    | Proceeds from sale of assets                                                                                                |   |                                                      | 498     |   |                          |        |        |   |        |         | 65      |  
|                                                    | Distributions from unconsolidated subsidiaries                                                                              |   |                                                      | 393     |   |                          |        | 462     |   |        |         | 494     |  
|                                                    | Investment in unconsolidated subsidiary                                                                                     |   |                                                      | (100    | ) |                          |        |        |   |        |         |        |  
|                                                    | Purchase of property and equipment and other assets                                                                         |   |                                                      | (594    | ) |                          |        | (33     | ) |        |         | (15     | )
|                                                    | Investment in retained interests in transferred assets                                                                      |   |                                                      | (4,425  | ) |                          |        | (2,508  | ) |        |         | (1,094  | )
|                                                    | Release of (investment in) restricted cash                                                                                  |   |                                                      | (203    | ) |                          |        | 82      |   |        |         | 792     |  
|                                                    | Advances to unconsolidated affiliates, net                                                                                  |   |                                                      | (541    | ) |                          |        | (226    | ) |        |         | (548    | )
|                                                    |                                                                                                                             |   |                                                      |         |   |                          |        |         |   |        |         |        
|Net cash provided by (used in) investing activities |                                                                                                                             |   | 10,493                                               |         |   |                          | (6,965 | )       |   |        | 3,336   |        
|                                                    |                                                                                                                             |   |                                                      |         |   |                          |        |         |   |        |         |        
|Cash flows from financing activities:               |                                                                                                                             |   |                                                      |         |   |                          |        |         |   |        |         |        
|                                                    | Proceeds from issuance of notes and debentures payable                                                                      |   |                                                      |        |   |                          |        | 10,000  |   |        |         | 17,310  |  
|                                                    | Proceeds from issuance of common stock                                                                                      |   |                                                      |        |   |                          |        |        |   |        |         | 197     |  
|                                                    | Payment of dividends on common stock                                                                                        |   |                                                      | (7,586  | ) |                          |        | (10,668 | ) |        |         | (12,018 | )
|                                                    | Payment of dividends on preferred stock                                                                                     |   |                                                      | (250    | ) |                          |        | (250    | ) |        |         | (251    | )
|                                                    | Payment of notes payable                                                                                                    |   |                                                      | (5,000  | ) |                          |        | (6,667  | ) |        |         | (6,666  | )
|                                                    | Payment of SBA debentures                                                                                                   |   |                                                      | (17,000 | ) |                          |        |        |   |        |         | (11,640 | )
|                                                    | Payment of issuance costs on notes and debentures                                                                           |   |                                                      |        |   |                          |        |        |   |        |         | (188    | )
|                                                    |                                                                                                                             |   |                                                      |         |   |                          |        |         |   |        |         |        
|Net cash used in financing activities               |                                                                                                                             |   | (29,836                                              | )       |   |                          | (7,585 | )       |   |        | (13,256 | )      
|                                                    |                                                                                                                             |   |                                                      |         |   |                          |        |         |   |        |         |        
|Net decrease in cash and cash equivalents           |                                                                                                                             |   | (11,840                                              | )       |   |                          | (4,591 | )       |   |        | (1,284  | )      
|Cash and cash equivalents, beginning of year        |                                                                                                                             |   | 17,318                                               |         |   |                          | 21,909 |         |   |        | 23,193  |        
|                                                    |                                                                                                                             |   |                                                      |         |   |                          |        |         |   |        |         |        
|Cash and cash equivalents, end of year              |                                                                                                                             | $ | 5,478                                                |         |   | $                        | 17,318 |         |   | $      | 21,909  |        
|                                                    |                                                                                                                             |   |                                                      |         |   |                          |        |         |   |        |         |        

The accompanying notes are an integral part of these consolidated financial statements.

F-6



---



##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
DECEMBER 31, 2002(Dollars in thousands)

|                                  |                                                                                 |                        |                           |       |                          |    |  |      |        |        |  |  |       |      |   |   |        |        |  |  |       |      |  
|--------------------------------- | ------------------------------------------------------------------------------- | ---------------------- | ------------------------- | ----- | ------------------------ | -- |  | ---- | ------ | ------ |  |  | ----- | ---- | - | - | ------ | ------ |  |  | ----- | ---- | -
|                                  |                                                                                 |                        |                           |       | Loans Receivable (1) (2)
|                                  |                                                                                 |                        |                           |       |                         
|                                  |                                                                                 |                        |                           |       | Number                   |    |  |      |        |        |  |  |       |      |   |   |        |        |  |  |      
|                                  |                                                                                 |                        |                           |       | of                       |    |  |      |        |        |  |  |       |      |   |   |        |        |  |  |      
|Category/Issuer                   |                                                                                 | Loans                  |                           | Value |                          | %  |  | Cost |        | %     
|                                  |                                                                                 |                        |                           |       |                          |    |  |      |        |       
|Loans to small business concerns: |                                                                                 |                        |                           |       |                          |    |  |      |        |        |  |  |       |      |   |   |        |        |  | 
|                                  | First Western SBLC, Inc. and Subsidiary(Small business lending company loans)   |                        |                           |       |                          |    |  |      |        |        |  |  |       |      |   |   |        |        |  |  |      
|                                  |                                                                                 |                        | Hotels and motels         |       |                          | 47 |  |      | $      | 8,420  |  |  |       | 9.7  | % |   | $      | 8,481  |  |  |       | 9.6  | %
|                                  |                                                                                 |                        | Restaurants               |       |                          | 20 |  |      |        | 1,060  |  |  |       | 1.2  | % |   |        | 1,075  |  |  |       | 1.2  | %
|                                  |                                                                                 |                        | Retail, other             |       |                          | 18 |  |      |        | 1,125  |  |  |       | 1.3  | % |   |        | 1,154  |  |  |       | 1.3  | %
|                                  |                                                                                 |                        | Gasoline/service stations |       |                          | 13 |  |      |        | 1,746  |  |  |       | 2.0  | % |   |        | 1,779  |  |  |       | 2.0  | %
|                                  |                                                                                 |                        | Services                  |       |                          | 25 |  |      |        | 914    |  |  |       | 1.0  | % |   |        | 955    |  |  |       | 1.1  | %
|                                  |                                                                                 |                        | Car washes                |       |                          | 2  |  |      |        | 359    |  |  |       | 0.4  | % |   |        | 366    |  |  |       | 0.4  | %
|                                  |                                                                                 |                        | Food and grocery stores   |       |                          | 1  |  |      |        | 136    |  |  |       | 0.2  | % |   |        | 136    |  |  |       | 0.2  | %
|                                  |                                                                                 |                        | Laundromats               |       |                          | 2  |  |      |        | 111    |  |  |       | 0.1  | % |   |        | 117    |  |  |       | 0.1  | %
|                                  |                                                                                 |                        | Wholesale                 |       |                          | 7  |  |      |        | 258    |  |  |       | 0.3  | % |   |        | 258    |  |  |       | 0.3  | %
|                                  |                                                                                 |                        | Manufacturing             |       |                          | 4  |  |      |        | 112    |  |  |       | 0.1  | % |   |        | 112    |  |  |       | 0.1  | %
|                                  |                                                                                 |                        | Health care               |       |                          | 4  |  |      |        | 142    |  |  |       | 0.2  | % |   |        | 142    |  |  |       | 0.2  | %
|                                  |                                                                                 |                        | Other                     |       |                          | 2  |  |      |        | 86     |  |  |       | 0.1  | % |   |        | 126    |  |  |       | 0.1  | %
|                                  |                                                                                 |                        |                           |       |                          |    |  |      |        |        |  |  |       |      |   |   |        |        |  | 
|                                  |                                                                                 | Total                  |                           |       | 145                      |    |  |      | 14,469 |        |  |  | 16.6  | %    |   |   | 14,701 |        |  |  | 16.6  | %   
|                                  |                                                                                 |                        |                           |       |                          |    |  |      |        |        |  |  |       |      |   |   |        |        |  | 
|                                  | Western Financial Capital Corporation(Small business investment company loans)  |                        |                           |       |                          |    |  |      |        |        |  |  |       |      |   |   |        |        |  |  |      
|                                  |                                                                                 |                        | Hotels and motels         |       |                          | 12 |  |      |        | 11,348 |  |  |       | 13.0 | % |   |        | 11,598 |  |  |       | 13.2 | %
|                                  |                                                                                 |                        | Retail, other             |       |                          | 1  |  |      |        | 1,466  |  |  |       | 1.7  | % |   |        | 1,466  |  |  |       | 1.7  | %
|                                  |                                                                                 |                        | Other                     |       |                          | 6  |  |      |        | 45     |  |  |       | 0.0  | % |   |        | 80     |  |  |       | 0.1  | %
|                                  |                                                                                 |                        |                           |       |                          |    |  |      |        |        |  |  |       |      |   |   |        |        |  | 
|                                  |                                                                                 | Total                  |                           |       | 19                       |    |  |      | 12,859 |        |  |  | 14.7  | %    |   |   | 13,144 |        |  |  | 15.0  | %   
|                                  |                                                                                 |                        |                           |       |                          |    |  |      |        |        |  |  |       |      |   |   |        |        |  | 
|                                  | PMC Investment Corporation(Specialized small business investment company loans) |                        |                           |       |                          |    |  |      |        |        |  |  |       |      |   |   |        |        |  |  |      
|                                  |                                                                                 |                        | Hotels and motels         |       |                          | 24 |  |      |        | 26,431 |  |  |       | 30.3 | % |   |        | 26,627 |  |  |       | 30.3 | %
|                                  |                                                                                 |                        | Health care               |       |                          | 2  |  |      |        | 106    |  |  |       | 0.1  | % |   |        | 106    |  |  |       | 0.1  | %
|                                  |                                                                                 |                        |                           |       |                          |    |  |      |        |        |  |  |       |      |   |   |        |        |  | 
|                                  |                                                                                 | Total                  |                           |       | 26                       |    |  |      | 26,537 |        |  |  | 30.4  | %    |   |   | 26,733 |        |  |  | 30.4  | %   
|                                  |                                                                                 |                        |                           |       |                          |    |  |      |        |        |  |  |       |      |   |   |        |        |  | 
|                                  | PMC Capital, Inc.(Commercial loans)                                             |                        |                           |       |                          |    |  |      |        |        |  |  |       |      |   |   |        |        |  |  |      
|                                  |                                                                                 |                        | Hotels and motels         |       |                          | 21 |  |      |        | 27,899 |  |  |       | 32.0 | % |   |        | 27,897 |  |  |       | 31.7 | %
|                                  |                                                                                 |                        | Apartment complex         |       |                          | 1  |  |      |        | 922    |  |  |       | 1.0  | % |   |        | 922    |  |  |       | 1.0  | %
|                                  |                                                                                 |                        | Services                  |       |                          | 2  |  |      |        | 1,806  |  |  |       | 2.1  | % |   |        | 1,806  |  |  |       | 2.1  | %
|                                  |                                                                                 |                        | Gasoline/service stations |       |                          | 2  |  |      |        | 661    |  |  |       | 0.8  | % |   |        | 661    |  |  |       | 0.8  | %
|                                  |                                                                                 |                        | Restaurants               |       |                          | 1  |  |      |        | 199    |  |  |       | 0.2  | % |   |        | 199    |  |  |       | 0.2  | %
|                                  |                                                                                 |                        | Commercial real estate    |       |                          | 1  |  |      |        | 337    |  |  |       | 0.4  | % |   |        | 337    |  |  |       | 0.4  | %
|                                  |                                                                                 |                        | Other                     |       |                          | 2  |  |      |        | 1,556  |  |  |       | 1.8  | % |   |        | 1,556  |  |  |       | 1.8  | %
|                                  |                                                                                 |                        |                           |       |                          |    |  |      |        |        |  |  |       |      |   |   |        |        |  | 
|                                  |                                                                                 | Total                  |                           |       | 30                       |    |  |      | 33,380 |        |  |  | 38.3  | %    |   |   | 33,378 |        |  |  | 38.0  | %   
|                                  |                                                                                 |                        |                           |       |                          |    |  |      |        |        |  |  |       |      |   |   |        |        |  | 
|                                  |                                                                                 | Total loans receivable |                           |       | 220                      |    |  | $    | 87,245 |        |  |  | 100.0 | %    |   | $ | 87,956 |        |  |  | 100.0 | %   
|                                  |                                                                                 |                        |                           |       |                          |    |  |      |        |        |  |  |       |      |   |   |        |        |  | 

(Continued on next page)

F-7



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
DECEMBER 31, 2002(Continued  dollars in thousands)

|                                                           |                                                              |                                                              |         |        |        |      |       |      |     |   |         |        |       |  |       |      |     |  
|---------------------------------------------------------- | ------------------------------------------------------------ | ------------------------------------------------------------ | ------- | ------ | ------ | ---- | ----- | ---- | --- | - | ------- | ------ | ----- |  | ----- | ---- | --- | -
|Category/Issuer                                            |                                                              | Value                                                        |         | %      |        | Cost |       | %   
|                                                           |                                                              |                                                              |         |        |        |      |       |     
|Total
loans receivable (from prior page):                  |                                                              | $                                                            | 87,245  |        |        |      | 64.1  | %    |     | $ | 87,956  |        |       |  | 65.7  | %   
|                                                           |                                                              |                                                              |         |        |        |      |       |      |     |   |         |        |       |  |       |     
|Investment in retained interests in transferred assets of: |                                                              |                                                              |         |        |        |      |       |      |     |   |         |        |       |  |       |     
|                                                           |                                                              | PMC Capital L.P. 1998-1 and affiliate                        |         |        | 4,014  |      |       |      | 3.0 | % |         |        | 3,553 |  |       |      | 2.6 | %
|                                                           |                                                              | PMC Capital L.P. 1999-1 and affiliate                        |         |        | 8,106  |      |       |      | 6.0 | % |         |        | 7,540 |  |       |      | 5.6 | %
|                                                           |                                                              | PMC Joint Venture, L.P. 2000 and affiliate                   |         |        | 4,801  |      |       |      | 3.5 | % |         |        | 4,492 |  |       |      | 3.4 | %
|                                                           |                                                              | PMC Joint Venture, L.P. 2001 and affiliate                   |         |        | 10,693 |      |       |      | 7.9 | % |         |        | 9,603 |  |       |      | 7.2 | %
|                                                           |                                                              | PMC Joint Venture, L.P. 2002-1 and affiliate                 |         |        | 9,657  |      |       |      | 7.1 | % |         |        | 8,965 |  |       |      | 6.7 | %
|                                                           |                                                              | First Western 1997                                           |         |        | 1,010  |      |       |      | 0.7 | % |         |        | 800   |  |       |      | 0.6 | %
|                                                           |                                                              | Secondary market loan sales                                  |         |        | 1,722  |      |       |      | 1.2 | % |         |        | 1,588 |  |       |      | 1.2 | %
|                                                           |                                                              |                                                              |         |        |        |      |       |      |     |   |         |        |       |  |       |     
|                                                           | Total investment in retained interests in transferred assets |                                                              |         | 40,003 |        |      |       | 29.4 | %   |   |         | 36,541 |       |  |       | 27.3 | %  
|                                                           |                                                              |                                                              |         |        |        |      |       |      |     |   |         |        |       |  |       |     
|Money market and fund deposit accounts (3):                |                                                              |                                                              |         |        |        |      |       |      |     |   |         |        |       |  |       |     
|                                                           |                                                              | Bank One money market saving accounts                        |         |        | 3,161  |      |       |      | 2.3 | % |         |        | 3,161 |  |       |      | 2.4 | %
|                                                           |                                                              | Merrill Lynch Premier Fund                                   |         |        | 1,652  |      |       |      | 1.2 | % |         |        | 1,652 |  |       |      | 1.2 | %
|                                                           |                                                              | Certificate of deposit                                       |         |        | 102    |      |       |      | 0.1 | % |         |        | 102   |  |       |      | 0.1 | %
|                                                           |                                                              |                                                              |         |        |        |      |       |      |     |   |         |        |       |  |       |     
|                                                           | Total money market and fund deposit accounts                 |                                                              |         | 4,915  |        |      |       | 3.6  | %   |   |         | 4,915  |       |  |       | 3.7  | %  
|                                                           |                                                              |                                                              |         |        |        |      |       |      |     |   |         |        |       |  |       |     
|Other investments:                                         |                                                              |                                                              |         |        |        |      |       |      |     |   |         |        |       |  |       |     
|                                                           |                                                              | Assets acquired in liquidation                               |         |        | 2,252  |      |       |      | 1.7 | % |         |        | 2,673 |  |       |      | 2.0 | %
|                                                           |                                                              | Investment in Class B certificate of PMC Capital L.P. 1998-1 |         |        | 1,381  |      |       |      | 1.0 | % |         |        | 1,313 |  |       |      | 1.1 | %
|                                                           |                                                              | Restricted investments                                       |         |        | 299    |      |       |      | 0.2 | % |         |        | 299   |  |       |      | 0.2 | %
|                                                           |                                                              | Investment in PMC Funding Corp. and subsidiary               |         |        | 54     |      |       |      | 0.0 | % |         |        | 54    |  |       |      | 0.0 | %
|                                                           |                                                              | Investment in PMC Advisers, Ltd. and subsidiary              |         |        | 27     |      |       |      | 0.0 | % |         |        | 27    |  |       |      | 0.0 | %
|                                                           |                                                              |                                                              |         |        |        |      |       |      |     |   |         |        |       |  |       |     
|                                                           | Total other investments                                      |                                                              |         | 4,013  |        |      |       | 2.9  | %   |   |         | 4,366  |       |  |       | 3.3  | %  
|                                                           |                                                              |                                                              |         |        |        |      |       |      |     |   |         |        |       |  |       |     
|Total investments (4)                                      |                                                              | $                                                            | 136,176 |        |        |      | 100.0 | %    |     | $ | 133,778 |        |       |  | 100.0 | %   
|                                                           |                                                              |                                                              |         |        |        |      |       |      |     |   |         |        |       |  |       |     



---

|(1) |  | Names have been omitted as disclosure to the public may be detrimental to the small business.                     
|--- |  | ------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Interest rates on loans receivable range from 6.0% to 15.0% at December 31, 2002.                                 
|   
|(3) |  | Interest or dividend rates on money market and fund deposit accounts range from 1.0% to 2.3% at December 31, 2002.
|   
|(4) |  | The aggregate cost of investments for Federal income tax purposes is approximately $132.7 million (unaudited).    

The accompanying notes are an integral part of these consolidated financial statements.

F-8



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS

|                                     |                                                                                     |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |      |      |        |      |      |      |        |      |      |      | 
|------------------------------------ | ----------------------------------------------------------------------------------- | ------------------------------------------------------------ | ------------------------------------------------ | -------------------------------- | ---- | ------------------------ | ---- | ------ | ---- | ---- | ---- | ------ | ---- | ---- | ---- | ------ | ---- | ---- | ---- | ------ | ---- | ---- | ---- | 
|                                     |                                                                                     |                                                              |                                                  |                                  |      | Years Ended December 31,
|                                     |                                                                                     |                                                              |                                                  |                                  |      |                         
|                                     |                                                                                     |                                                              |                                                  |                                  |      | 2002                     |      | 2001   |      | 2000 |      | 1999   |      | 1998
|                                     |                                                                                     |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |     
|Per share operating performance (1): |                                                                                     |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |      |      |        |      |      |      |       
|                                     | Net asset value, beginning of period                                                |                                                              | $                                                | 6.15                             |      |                          | $    | 6.13   |      |      | $    | 6.20   |      |      | $    | 6.10   |      |      | $    | 6.03   |     
|                                     |                                                                                     |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |      |      |        |      |      |      |       
|                                     |                                                                                     | Net investment income                                        |                                                  |                                  | 0.50 |                          |      |        | 0.79 |      |      |        | 0.87 |      |      |        | 0.98 |      |      |        | 1.12 |     
|                                     |                                                                                     | Total realized and unrealized
gain (loss) on investments (2) |                                                  |                                  |     |                          |      |        | 0.10 |      |      |        | 0.08 |      |      |        | 0.16 |      |      |        | 0.20 |     
|                                     |                                                                                     |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |      |      |        |      |      |      |       
|                                     |                                                                                     |                                                              |                                                  | Total from investment operations |      |                          | 0.50 |        |      |      | 0.89 |        |      |      | 0.95 |        |      |      | 1.14 |        |      |      | 1.32 | 
|                                     |                                                                                     |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |      |      |        |      |      |      |       
|                                     | Less distributions to:                                                              |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |      |      |        |      |      |      |        |     
|                                     |                                                                                     |                                                              | Preferred shareholder of consolidated subsidiary |                                  |      | 0.02                     |      |        |      | 0.02 |      |        |      | 0.02 |      |        |      | 0.02 |      |        |      | 0.02 |     
|                                     |                                                                                     |                                                              | Common shareholders                              |                                  |      | 0.56                     |      |        |      | 0.85 |      |        |      | 1.00 |      |        |      | 1.02 |      |        |      | 1.23 |     
|                                     |                                                                                     |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |      |      |        |      |      |      |       
|                                     |                                                                                     |                                                              |                                                  | Total distributions              |      |                          | 0.58 |        |      |      | 0.87 |        |      |      | 1.02 |        |      |      | 1.04 |        |      |      | 1.25 | 
|                                     |                                                                                     |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |      |      |        |      |      |      |       
|                                     | Net asset value, end of period                                                      |                                                              | $                                                | 6.07                             |      |                          | $    | 6.15   |      |      | $    | 6.13   |      |      | $    | 6.20   |      |      | $    | 6.10   |     
|                                     |                                                                                     |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |      |      |        |      |      |      |       
|                                     | Per share market value, end of period                                               |                                                              | $                                                | 4.21                             |      |                          | $    | 7.09   |      |      | $    | 8.00   |      |      | $    | 8.25   |      |      | $    | 8.56   |     
|                                     |                                                                                     |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |      |      |        |      |      |      |       
|                                     | Total investment return                                                             |                                                              |                                                  | (32                              | )%   |                          |      | (1     | )%   |      |      | 9      | %    |      |      | 9      | %    |      |      | (33    | )%  
|                                     |                                                                                     |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |      |      |        |      |      |      |       
|Ratios and supplemental data:        |                                                                                     |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |      |      |        |      |      |      |       
|                                     | Net assets, end of period (in thousands)                                            |                                                              | $                                                | 72,003                           |      |                          | $    | 72,908 |      |      | $    | 72,667 |      |      | $    | 73,314 |      |      | $    | 72,151 |     
|                                     |                                                                                     |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |      |      |        |      |      |      |       
|                                     | Ratio of expenses to average net assets                                             |                                                              |                                                  | 15                               | %    |                          |      | 16     | %    |      |      | 15     | %    |      |      | 15     | %    |      |      | 16     | %   
|                                     |                                                                                     |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |      |      |        |      |      |      |       
|                                     | Ratio of net investment income to average net assets                                |                                                              |                                                  | 8                                | %    |                          |      | 13     | %    |      |      | 14     | %    |      |      | 16     | %    |      |      | 19     | %   
|                                     |                                                                                     |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |      |      |        |      |      |      |       
|                                     | Ratio of net increase in net assets resulting from
operations to average net assets |                                                              |                                                  | 8                                | %    |                          |      | 15     | %    |      |      | 15     | %    |      |      | 18     | %    |      |      | 20     | %   
|                                     |                                                                                     |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |      |      |        |      |      |      |       
|                                     | Portfolio turnover (3)                                                              |                                                              |                                                  | 72                               | %    |                          |      | 56     | %    |      |      | 44     | %    |      |      | 87     | %    |      |      | 58     | %   
|                                     |                                                                                     |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |      |      |        |      |      |      |       
|                                     | Basic
weighted average common shares outstanding (in thousands)                     |                                                              |                                                  | 11,854                           |      |                          |      | 11,854 |      |      |      | 11,841 |      |      |      | 11,829 |      |      |      | 11,800 |     
|                                     |                                                                                     |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |      |      |        |      |      |      |       
|                                     | Average debt outstanding (in thousands)                                             |                                                              | $                                                | 69,612                           |      |                          | $    | 75,326 |      |      | $    | 70,800 |      |      | $    | 74,593 |      |      | $    | 75,090 |     
|                                     |                                                                                     |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |      |      |        |      |      |      |       
|                                     | Average debt per common share                                                       |                                                              | $                                                | 5.87                             |      |                          | $    | 6.35   |      |      | $    | 5.99   |      |      | $    | 6.31   |      |      | $    | 6.46   |     
|                                     |                                                                                     |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |      |      |        |      |      |      |       

Footnotes:



---

|(1) |  | The per share changes during the year are based on the basic weighted average number of shares outstanding during the year
presented and expresses the per share operating performance in terms of a single share outstanding throughout each fiscal period.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The per share net gains or losses on securities (realized and unrealized) includes the effect of stock issuances and other changes
in per share amounts during the year presented.                                                                          
|   
|(3) |  | Included in the computation of portfolio turnover are the sales of loans through the secondary market or private placement.                                                                                                                                 

The accompanying notes are an integral part of these consolidated financial statements.

F-9



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies:

Business

PMC Capital, Inc. (PMC Capital and, together with its subsidiaries,
we or our) is a diversified closed-end management investment company
that has elected to operate as a business development company (BDC)
under the Investment Company Act of 1940, as amended (the 1940 Act).
Our common stock (the Common Stock) is traded on the American Stock
Exchange under the symbol PMC.

We are engaged in the business of originating loans to small businesses
either directly or through our three principal subsidiaries: First
Western SBLC, Inc. (First Western), PMC Investment Corporation
(PMCIC) and Western Financial Capital Corporation (Western
Financial). We primarily originate loans to small businesses in the
hospitality industry. We are a national lender that primarily lends to
businesses in the southwest and southeast regions of the United States.
In addition to our lending operations, we earn revenue as an investment
advisor who evaluates and services loans and other investments pursuant
to fee arrangements with PMC Commercial Trust (PMC Commercial). PMC
Commercial is a real estate investment trust and our affiliate as a
result of common management.

First Western, PMCIC and Western Financial are registered under the 1940
Act as diversified closed-end management investment companies. In
addition, PMC Capital is either directly or indirectly the sole
shareholder or partner of several non-investment company subsidiaries.
These are: PMC Advisers, Ltd. and its subsidiary (PMC Advisers); PMC
Funding Corp. and its subsidiary (PMC Funding); PMC Capital, L.P.
1998-1 (the 1998 Partnership) and PMC Capital, L.P. 1999-1 (the 1999
Partnership).

In addition, at December 31, 2002, PMC Capital owns approximately 34% of
PMC Joint Venture, L.P. 2000 (the 2000 Joint Venture), 61% of PMC
Joint Venture, L.P. 2001 (the 2001 Joint Venture) and 61% of PMC Joint
Venture, L.P. 2002-1 (the 2002 Joint Venture, and together with the
2000 Joint Venture and the 2001 Joint Venture, the Joint Ventures).
PMC Commercial owns the remaining interests in the Joint Ventures. The
Joint Ventures, together with the 1998 Partnership and the 1999
Partnership, comprise our special purpose entities (SPEs).

Principles of Consolidation

The consolidated financial statements include the accounts of PMC
Capital and its wholly-owned regulated investment company subsidiaries,
First Western, PMCIC and Western Financial. All material intercompany
balances and transactions have been eliminated.

PMC Advisers, which acts as the investment advisor for PMC Commercial,
and PMC Funding, which holds assets on our behalf, are accounted for
using the equity method of accounting in conformity with Federal
securities laws. Our ownership interests in our SPEs created in
conjunction with structured loan transactions are accounted for as
retained interests in transferred assets (Retained Interests) in
accordance with Statement of Financial Accounting Standards (SFAS) No.
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities (SFAS No. 140).

Consolidated Subsidiaries

First Western is a small business lending company (SBLC) that
originates variable-rate loans which are partially guaranteed by the
Small Business Administration (SBA) pursuant to its Section SBA 7(a)
program (the SBA 7(a) Program).

PMCIC is a licensed specialized small business investment company
(SSBIC) under the Small Business Investment Act of 1958, as amended
(SBIA). PMCIC uses long-term funds provided by the SBA, together with
its own capital, to provide long-term collateralized loans to eligible
small businesses owned by disadvantaged persons, as defined under the
regulations of the SBA. As an SSBIC, PMCIC is eligible to obtain
long-term, fixed-rate, funding from the SBA through the issuance of
debentures.

Western Financial is a licensed small business investment company
(SBIC) under the SBIA that provides long-term loans to borrowers
whether or not they qualify as disadvantaged. As an SBIC, Western
Financial is eligible to obtain long-term, fixed-rate, funding from the
SBA through the issuance of debentures.

Special Purpose Entities

The 1998 Partnership and the 1999 Partnership were formed as Delaware
limited partnerships in connection with our structured loan sale
transactions to acquire loans from us and issue debt through private
placements.

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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Joint Ventures were formed as Delaware limited partnerships in
connection with structured loan sale transactions completed with PMC
Commercial. The Joint Ventures acquired loans from us and PMC
Commercial, and issued debt through private placements.

The transfers of assets to the SPEs have been accounted for as sales and
our ownership interests in the SPEs are accounted for as Retained
Interests.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with generally
accepted accounting principles requires us to make estimates and
assumptions that affect (i) the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and, (ii) the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from our estimates. Our most sensitive estimates involve the
valuation of our loans receivable, assets acquired in liquidation and
Retained Interests.

Valuation of Investments

All investments are valued by our Board of Directors in good faith with
the resulting unrealized gains and losses recorded in earnings.

Loans Receivable:The Board of Directors has determined that the fair
value of loans receivable approximates the remaining unamortized
principal of the loans, unless there is doubt as to the realization of
the loan. The determination of whether doubt exists regarding the
ultimate realization of a loan requires judgment and consideration of
the facts and circumstances existing at the valuation date. Changes to
the facts and circumstances of the borrower, the hospitality industry
and the economy may cause a decline in the fair value of the loan, and
ultimately realized and unrealized losses. When doubt exists, the fair
value of the loan receivable is then based upon the value of the
collateral. In the absence of a readily ascertainable market, the value
of our loans receivable may differ from the values that would be placed
on the loans receivable if a ready market existed. There can be no
assurance of the accuracy of these estimates. For loans originated
under the SBA 7(a) Program, when we sell the SBA guaranteed portion of
loans, a portion of the sale proceeds representing the difference in the
face amount of the unguaranteed portion of the loans and the value of
the loans (the Retained Loan Discount) is recorded as a reduction in
basis of the retained portion of the loan rather than premium income.

Retained Interests:Represents our interest in SPEs created in
conjunction with our structured loan sale transactions. The fair value
of our Retained Interests is based on estimates of the present value of
cash flows we expect to receive from the SPEs. The future cash flows
are based in part upon an estimate of prepayment speeds and loan losses.
Prepayment speeds and loan losses are estimated based on the current
and anticipated interest rate environment, the current and anticipated
competitive environment, the performance of the loan pool, and our
historical experience with these and similar loans receivable. The
discount rates utilized are determined for each of the components of the
Retained Interests as estimates of market rates based on interest rate
levels considering the risks inherent in the transaction. There can be
no assurance of the accuracy of these estimates. Any appreciation
(depreciation) of our Retained Interests is included in the accompanying
statement of operations as either a realized loss (if there is a
reduction in expected future cash flows) or an unrealized gain (loss) on
investments.

Cash Equivalents:We generally consider all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents. Cash equivalents are carried at value, which approximates
cost.

Assets Acquired in Liquidation:Assets acquired in liquidation are
carried at our Board of Directors determination of fair value, based
upon an expectation of the proceeds to be received from the sale of the
collateral after payment of selling costs, necessary capital
improvements and holding costs.

Mortgage-Backed Security of Affiliate:The mortgage-backed security
represents our ownership of the Class B notes of the 1998 Partnership
and is valued based on discounted cash flow techniques.

Restricted Investments:Our restricted investments consist of highly
liquid investments purchased with an original maturity of three months
or less. Restricted investments are carried at value, which
approximates cost.

Investment in Unconsolidated Subsidiaries:Our investments in
unconsolidated subsidiaries are carried at fair value, which
approximates the basis in our unconsolidated subsidiaries under the
equity method of accounting.

F-11



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Deferred Charges

Costs incurred in connection with the issuance of SBA debentures and
notes payable are included in deferred charges, deposits and other
assets. These costs are amortized to interest expense over the life of
the related obligation utilizing a method which approximates the
effective interest method.

Property and Equipment

Property, equipment and leasehold improvements are carried at their cost
less accumulated depreciation and amortization. Depreciation and
amortization are computed using accelerated and straight-line methods,
with estimated useful lives ranging from five to seven years.

Net Unrealized Appreciation (Depreciation) on Investments

Net unrealized appreciation (depreciation) on investments on the
accompanying consolidated balance sheet represents the difference
between the cost and fair value of our investments.

Interest Income

Interest income includes interest earned on loans and our short-term
investments. Interest income on loans is accrued as earned with the
accrual of interest generally suspended when the related loan becomes a
non-accrual loan. Loans receivable are generally classified as
non-accrual (a Non-Accrual Loan) if (i) they are past due as to
payment of principal or interest for a period of more than 60 days, (ii)
a loan or a portion of a loan is classified as impaired or charged-off
or (iii) loans receivable that are current or past due less than 60 days
if the repayment in full of principal and/or interest is in doubt.
Interest income on a Non-Accrual Loan is recognized on the cash basis
and we reverse previously recorded interest income which is deemed
uncollectible.

The Retained Loan Discount is amortized to interest income over the life
of the underlying loan based on an effective interest method unless the
underlying loans receivable are prepaid or sold.

Income from Retained Interests

The income from our Retained Interests is comprised of the yield earned
on our Retained Interests which is determined based on estimates of
future cash flows and includes any fees collected (i.e.,late fees,
prepayment fees, etc.) by the SPEs in excess of anticipated fees. We
update our cash flow assumptions on a quarterly basis and any changes to
cash flow assumptions impact the yield on our Retained Interests.

Premium Income

Premium income represents the differential between the value
attributable to the sale of the guaranteed portion of a loan originated
under the SBA 7(a) Program and the principal balance (cost) of the loan.
The sale price includes the value attributable to any excess servicing
spread retained by us plus any cash received.

Stock-Based Compensation Plan

At December 31, 2002, we have a stock-based compensation plan, which is
described more fully in Note 14. We have accounted for this plan under
the recognition and measurement provisions of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. Effective January 1, 2003, we adopted the fair
value recognition provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, (SFAS No. 123) prospectively to all awards
granted, modified or settled after January 1, 2003. Awards under the
plans generally vest immediately.

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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table illustrates the effect on our net increase in net
assets resulting from operations and earnings per share if the fair
value based method had been applied to all outstanding and unvested
awards in each period:

|                                                     |  |                                       |       |       |  |          |       |       |  |          |        |       |  |   |        |  |  |   |        |  |  |   |        | 
|---------------------------------------------------- |  | ------------------------------------- | ----- | ----- |  | -------- | ----- | ----- |  | -------- | ------ | ----- |  | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                                     |  | December 31,                         
|                                                     |  |                                      
|                                                     |  | 2002                                  |       | 2001  |  | 2000    
|                                                     |  |                                       |       |       |  |         
|                                                     |  | As                                    |       | Pro-  |  | As       |       | Pro-  |  | As       |        | Pro- 
|                                                     |  | Reported                              |       | Forma |  | Reported |       | Forma |  | Reported |        | Forma
|                                                     |  |                                       |       |       |  |          |       |       |  |          |        |      
|                                                     |  | (In thousands, except per share data)
|SFAS No. 123 charge                                  |  | $                                     |      |       |  | $        | 26    |       |  | $        |       |       |  | $ | 24     |  |  | $ |       |  |  | $ | 28     | 
|APB 25 charge                                        |  | $                                     |      |       |  | $        |      |       |  | $        |       |       |  | $ |       |  |  | $ |       |  |  | $ |       | 
|Net increase in net assets
resulting from operations |  | $                                     | 5,983 |       |  | $        | 5,957 |       |  | $        | 10,567 |       |  | $ | 10,543 |  |  | $ | 11,253 |  |  | $ | 11,225 | 
|Basic and diluted earnings
per common share          |  | $                                     | 0.48  |       |  | $        | 0.48  |       |  | $        | 0.87   |       |  | $ | 0.87   |  |  | $ | 0.93   |  |  | $ | 0.93   | 

The effects of applying SFAS No. 123 in this proforma disclosure are not
indicative of future amounts.

Realized and Unrealized Gain (Loss) on Investments

Realized and unrealized gain (loss) on investments consists of the
following:



| |  |  | Realized losses  represents the cost basis of
investments disposed of less proceeds received or investments
otherwise written-off.                                                                             
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | Sale of assets  represents the gain or loss on
disposition of investments measured by the difference between the
net proceeds from the sale and the cost basis of the investment.                              
| |  |  | Change in unrealized appreciation (depreciation) on
investments  represents the change in the cumulative difference
between the fair value and the cost of investments held on our
consolidated balance sheets.

Federal Income Taxes

We have elected to be treated as a regulated investment company by
meeting certain requirements of the Internal Revenue Code of 1986, as
amended (the Code) relating to the distribution of our net investment
income to shareholders. Therefore, we incur no Federal income tax
liability on such income. Based on our status as a regulated investment
company, we may elect to retain, deem to distribute or distribute, in
whole or in part, net long-term capital gains realized on the
disposition of our investments.

Distributions to Shareholders

Distributions to shareholders are recorded on the ex-dividend date.

Concentration of Credit Risk

At various times throughout the year, we maintain cash and cash
equivalents and restricted investments in accounts with various
financial institutions in excess of the amount insured by the Federal
Deposit Insurance Corporation. We regularly monitor the financial
stability of these financial institutions and do not believe there is a
significant credit risk associated with deposits in excess of federally
insured amounts.

Reclassifications

Certain prior period amounts have been reclassified to conform to the
current year presentation. These reclassifications had no effect on
previously reported net increase in net assets resulting from operations
(hereinafter referred to as net income) or shareholders equity.

Recently Issued Accounting Pronouncements

In April 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment
of FASB Statement No. 13, and Technical Corrections. The statement,
which is effective for financial statements issued for fiscal years
beginning after May 15, 2002 and encourages early application, updates,
clarifies and simplifies existing accounting pronouncements.
Specifically, the statement rescinds SFAS No. 4, which required all
gains and losses from extinguishment of debt to be aggregated and, if
material, classified as an extraordinary item, net of the related income
tax effect. As a result of this rescission, the criteria in APB Opinion
No. 30 will now be used to determine the classification of gains and
losses resulting from the extinguishment of debt. The statement also
amends SFAS No. 13 to require that when a capital lease is modified in
such a way that the change in the lease provisions establishes a new
lease which is classified as an operating lease, the asset and lease
obligation under the

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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

capital lease should be removed, a gain or loss for the difference
should be recorded and the new lease should be accounted for as an
operating lease. The implementation of SFAS No. 145 on January 1, 2003
will not have a material impact on our consolidated financial
statements.

In June 2002, SFAS No. 146, Accounting for Exit or Disposal Activities
(SFAS No. 146) was issued. SFAS No. 146 addresses significant issues
regarding the recognition, measurement and reporting of cost associated
with exit and disposal activities, including restructuring activities
that are currently accounted for pursuant to the guidance that the
Emerging Issues Task Force has set forth in Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring).
The scope of SFAS No. 146 also includes (i) costs related to
terminating a contract that is not a capital lease and (ii) termination
benefits that employees who are involuntarily terminated receive under
the terms of a one-time benefit arrangement that is not an ongoing
benefit arrangement or an individual deferred compensation contract.
SFAS No. 146 will be effective for financial statements issued for
fiscal years beginning after December 15, 2002. The implementation of
SFAS No. 146 on January 1, 2003 will not have a material impact on our
consolidated financial statements.

FASB issued FASB Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45) in November 2002. FIN 45 elaborates
on the disclosures to be made by a guarantor in its interim and annual
statements about its obligations under certain guarantees that it has
issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. FIN 45 does not
prescribe a specific approach for subsequently measuring the guarantors
recognized liability over the term of the related guarantee. FIN 45
also incorporates, without change, the guidance in FASB Interpretation
No. 34, Disclosure of Indirect Guarantees of Indebtedness of Others,
which is being superseded. We adopted the disclosure requirements of
FIN 45 at December 31, 2002.

In December 2002, SFAS No. 148, Accounting for Stock-Based Compensation
  Transition and Disclosure (SFAS No. 148) was issued. SFAS No. 148
amends SFAS No. 123 to provide alternative methods of transition for
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures
in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the
method used on reported results. SFAS No. 148 improves the prominence
and clarity of the pro-forma disclosures required by SFAS No. 123 by
prescribing a specific tabular format and by requiring disclosure in the
Summary of Significant Accounting Policies footnote or its equivalent.
In addition, SFAS No. 148 improves the timeliness of these disclosures
by requiring their inclusion in financial reports for interim periods.
SFAS No. 148 is effective for financial statements for fiscal years
ending after December 15, 2002. Effective January 1, 2003, we adopted
the fair value recognition provisions of SFAS No. 123 prospectively to
all awards granted, modified or settled after January 1, 2003.

FASB issued FASB Interpretation No. 46, Consolidation of Variable
Interest Entities, an interpretation of ARB 51 (FIN 46) in January
2003. The primary objectives of FIN 46 are to provide guidance on the
identification of entities for which control is achieved through means
other than voting rights, Variable Interest Entities (VIEs), and how
to determine when and which business enterprise should consolidate the
VIE (the primary beneficiary). This new model for consolidation
applies to an entity which either (i) the equity investors, if any, do
not have a controlling financial interest or (ii) the equity investment
at risk is insufficient to finance that entitys activities without
receiving additional subordinated financial support from other parties.
In addition, FIN 46 requires that both the primary beneficiary and all
other enterprises with a significant variable interest in a VIE make
additional disclosures. FIN 46 will not impact our consolidated
financial statements since it is not applicable to registered investment
companies or qualifying SPEs accounted for in accordance with SFAS No.
140.

F-14



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2. Loans Receivable:

Loans receivable consisted of the following:

|                       |  |                |        |      |  |   |         | 
|---------------------- |  | -------------- | ------ | ---- |  | - | ------- | 
|                       |  | December 31,  
|                       |  |               
|                       |  | 2002           |        | 2001
|                       |  |                |        |     
|                       |  | (In thousands)
|SBIC commercial loans  |  | $              | 39,396 |      |  | $ | 49,868  | 
|Other commercial loans |  |                | 33,380 |      |  |   | 40,901  | 
|SBA 7(a) loans         |  |                | 14,469 |      |  |   | 16,623  | 
|                       |  |                |        |      |  |   |         | 
|Balance, end of period |  | $              | 87,245 |      |  | $ | 107,392 | 
|                       |  |                |        |      |  |   |         | 

At December 31, 2002 and 2001, respectively, approximately $71.3 million
and $38.5 million of our loans receivable had a variable interest rate
(reset on a quarterly basis) based upon either LIBOR or the prime rate
and $15.9 million and $68.9 million had a fixed interest rate,
respectively. The weighted average interest rate of our variable-rate
loans receivable was 6.0% and 7.4% at December 31, 2002 and 2001,
respectively. The weighted average interest rate of our fixed-rate
loans receivable was 10.4% and 9.8% at December 31, 2002 and 2001,
respectively.

Our loans receivable are geographically concentrated as follows:

|               |  |                                |     |      |  |  |     |  
|-------------- |  | ------------------------------ | --- | ---- |  |  | --- | -
|               |  | Percentage of Loans Receivable
|               |  | December 31,                  
|               |  |                               
|               |  | 2002                           |     | 2001
|               |  |                                |     |     
|Texas          |  |                                | 29  | %    |  |  | 24  | %
|South Carolina |  |                                | 9   | %    |  |  | 5   | %
|North Carolina |  |                                | 8   | %    |  |  | 11  | %
|Georgia        |  |                                | 7   | %    |  |  | 12  | %
|California     |  |                                | 6   | %    |  |  | 1   | %
|Florida        |  |                                | 5   | %    |  |  | 6   | %
|Indiana        |  |                                | 4   | %    |  |  | 2   | %
|Ohio           |  |                                | 4   | %    |  |  | 5   | %
|Other          |  |                                | 28  | %    |  |  | 34  | %
|               |  |                                |     |      |  |  |     |  
|               |  |                                | 100 | %    |  |  | 100 | %
|               |  |                                |     |      |  |  |     |  

At December 31, 2002, loans receivable to businesses in the hospitality
industry comprised 85% of our loans receivable. Any economic factors
that negatively impact the hospitality industry could have a material
adverse effect on our financial condition or results of operations.

At December 31, 2002 and 2001, loans receivable of $5.7 million and $6.2
million, respectively, were either greater than 60 days past due,
litigation against the borrowers has commenced, the loan has been
identified as impaired or the loans are in the process of liquidation.
Impaired loans at December 31, 2002 included a loan collateralized by a
golf facility acquired through foreclosure during January 2003 by a
newly formed, wholly-owned, non-investment company subsidiary. The
aggregate value of this property (and our estimate of the value of the
underlying loan receivable), as reduced for costs of selling, was
estimated to be $1.2 million. Impaired loans at December 31, 2001
included two loans each collateralized by a property we acquired through
foreclosure during 2002. The aggregate value of these properties (and
our estimate of the value of the underlying loans receivable), as
reduced for costs of selling, was estimated to be $2.1 million at the
time of foreclosure.

F-15



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The activity in unrealized depreciation on loans receivable is as
follows:

|                                   |  |                          |      |      |  |   |        |  
|---------------------------------- |  | ------------------------ | ---- | ---- |  | - | ------ | -
|                                   |  | Years Ended December 31,
|                                   |  |                         
|                                   |  | 2002                     |      | 2001
|                                   |  |                          |      |     
|                                   |  | (In thousands)          
|Balance, beginning of period       |  | $                        | 443  |      |  | $ | 659    |  
|Unrealized losses                  |  |                          | 483  |      |  |   | 809    |  
|Principal balance written-off, net |  |                          | (215 | )    |  |   | (1,025 | )
|                                   |  |                          |      |      |  |   |        |  
|Balance, end of period             |  | $                        | 711  |      |  | $ | 443    |  
|                                   |  |                          |      |      |  |   |        |  

The investment in loans identified as impaired and the related
unrealized depreciation is as follows:

|                        |  |                |       |      |  |   |       |  
|----------------------- |  | -------------- | ----- | ---- |  | - | ----- | -
|                        |  | December 31,  
|                        |  |               
|                        |  | 2002           |       | 2001
|                        |  |                |       |     
|                        |  | (In thousands)
|Impaired loans          |  | $              | 5,728 |      |  | $ | 6,152 |  
|Unrealized depreciation |  |                | (711  | )    |  |   | (393  | )
|                        |  |                |       |      |  |   |       |  
|                        |  | $              | 5,017 |      |  | $ | 5,759 |  
|                        |  |                |       |      |  |   |       |  

We recorded interest income, primarily on the cash basis of accounting,
of approximately $525,000 and $560,000 on our impaired loans during 2002
and 2001, respectively. Had these impaired loans performed in
accordance with their original terms, additional interest income of
approximately $200,000 and $190,000 would have been recognized during
2002 and 2001, respectively.

Note 3. Retained Interests:

In our structured loan sale transactions, we contributed loans
receivable to an SPE in exchange for an ownership interest in that
entity. The SPE issued notes payable (the Structured Notes) (usually
through a private placement) to third parties (Structured
Noteholders). The SPE then distributed a portion of the proceeds from
the Structured Notes to us. The Structured Notes are collateralized
solely by the assets of the SPE which means that should the SPE fail to
make payments on the Structured Notes, the Structured Noteholders have
no recourse to us. Upon the completion of our structured loan sale
transactions, we recorded the transfer of loans receivable as a sale
since the SPE meets the definition of a qualifying SPE as outlined in
SFAS No. 140. As a result, the loans receivable contributed to the SPE,
the Structured Notes issued by the SPE, and the operating results of the
SPE are not included in our consolidated financial statements. The
difference between (i) the carrying value of the loans receivable sold
and (ii) the sum of (a) the cash received and (b) the present value of
the estimated future cash flows from the Retained Interests, constituted
the gain or loss on sale. Retained Interests are carried at fair value
(determined as described below), with realized and unrealized gains and
losses included in our consolidated statements of operations.

F-16



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Information pertaining to our SPEs is as follows. Balances represent
PMC Capitals share of the respective Joint Ventures.

|                      |                                         |  |                        |              |             |  |          |              |         |  |          |              |      |  |          |              |   |  |          |              |  
|--------------------- | --------------------------------------- |  | ---------------------- | ------------ | ----------- |  | -------- | ------------ | ------- |  | -------- | ------------ | ---- |  | -------- | ------------ | - |  | -------- | ------------ | -
|                      |                                         |  |                        |              |             |  |          |              |         |  | 2000     |              | 2001 |  | 2002    
|                      |                                         |  | 1998                   |              | 1999        |  | Joint    |              | Joint   |  | Joint   
|                      |                                         |  | Partnership            |              | Partnership |  | Venture  |              | Venture |  | Venture 
|                      |                                         |  |                        |              |             |  |          |              |         |  |         
|                      |                                         |  | (Dollars in thousands)
|Transaction date      |                                         |  | 11/24/98               |              |             |  | 06/03/99 |              |         |  | 12/18/00 |              |      |  | 06/27/01 |              |   |  | 04/12/02 |             
|At inception:         |                                         |  |                        |              |             |  |          |              |         |  |          |              |      |  |          |              |   |  |          |             
|                      | Principal amount of sold loans          |  | $                      | 43,144       |             |  | $        | 60,481       |         |  | $        | 28,046       |      |  | $        | 49,194       |   |  | $        | 43,218       |  
|                      | Structured Notes issued                 |  | $                      | 39,646       |             |  | $        | 55,648       |         |  | $        | 24,955       |      |  | $        | 45,233       |   |  | $        | 38,897       |  
|                      | Interest rate on the Structured Notes   |  |                        | Prime - 1    | %           |  |          | 6.60         | %       |  |          | 7.28         | %    |  |          | 6.36         | % |  |          | 6.67         | %
|                      | Structured Notes rating (1)             |  |                        | Aaa        |             |  |          | Aaa        |         |  |          | Aaa        |      |  |          | Aaa        |   |  |          | Aaa        |  
|                      | Weighted average interest rate of loans |  |                        | Prime + 1.26 | %           |  |          | 9.59         | %       |  |          | 9.54         | %    |  |          | 9.78         | % |  |          | 9.53         | %
|                      | Weighted average remaining life (2)     |  |                        | 5.05 years   |             |  |          | 4.49 years   |         |  |          | 5.24 years   |      |  |          | 5.26 years   |   |  |          | 5.05 years   |  
|                      | Aggregate losses assumed (3)            |  |                        | 3.25         | %           |  |          | 3.02         | %       |  |          | 2.41         | %    |  |          | 2.86         | % |  |          | 2.71         | %
|                      | Discount rate assumptions               |  |                        | 12.5         | %           |  |          | 13.8         | %       |  |          | 9.3% to 14.0 | %    |  |          | 8.5% to 13.3 | % |  |          | 8.2% to 12.9 | %
|                      | Constant prepayment rate assumption     |  |                        | 8.0          | %           |  |          | 12.0         | %       |  |          | 8.0          | %    |  |          | 9.0          | % |  |          | 9.0          | %
|                      | Net gain recorded                       |  | $                      | 925          |             |  | $        | 2,564        |         |  | $        | 564          |      |  | $        | 2,732        |   |  | $        | 1,463        |  
|                      | Value of Retained Interests             |  | $                      | 7,126        |             |  | $        | 9,731        |         |  | $        | 5,573        |      |  | $        | 9,186        |   |  | $        | 8,772        |  
|At December 31, 2002: |                                         |  |                        |              |             |  |          |              |         |  |          |              |      |  |          |              |   |  |          |             
|                      | Principal outstanding on sold loans (5) |  | $                      | 26,099       |             |  | $        | 39,216       |         |  | $        | 20,783       |      |  | $        | 44,409       |   |  | $        | 42,199       |  
|                      | Structured Notes balance outstanding    |  | $                      | 24,806       |             |  | $        | 35,907       |         |  | $        | 18,086       |      |  | $        | 42,762       |   |  | $        | 38,017       |  
|                      | Cash in the collection account          |  | $                      | 454          |             |  | $        | 681          |         |  | $        | 247          |      |  | $        | 2,940        |   |  | $        | 545          |  
|                      | Cash in the reserve account             |  | $                      | 2,103        |             |  | $        | 2,372        |         |  | $        | 192          |      |  | $        | 2,806        |   |  | $        | 2,543        |  
|                      | Asset acquired in liquidation, net      |  | $                      |             |             |  | $        |             |         |  | $        | 1,411        |      |  | $        |             |   |  | $        |             |  
|                      | Weighted average interest rate of loans |  |                        | Prime + 1.22 | %           |  |          | 9.44         | %       |  |          | 9.21         | %    |  |          | 9.73         | % |  |          | 9.54         | %
|                      | Discount rate assumptions (6)           |  |                        | 4.3% to 11.5 | %           |  |          | 6.8% to 11.5 | %       |  |          | 7.3% to 12.0 | %    |  |          | 6.7% to 11.4 | % |  |          | 6.8% to 11.5 | %
|                      | Constant prepayment rate assumption     |  |                        | 11.0         | %           |  |          | 10.0         | %       |  |          | 14.0         | %    |  |          | 9.5          | % |  |          | 9.5          | %
|                      | Weighted average remaining life (2)     |  |                        | 3.64 years   |             |  |          | 3.73 years   |         |  |          | 3.31 years   |      |  |          | 4.87 years   |   |  |          | 4.81 years   |  
|                      | Aggregate losses assumed (3)            |  |                        | 2.87         | %           |  |          | 2.40         | %       |  |          | 3.02         | %    |  |          | 3.09         | % |  |          | 3.13         | %
|                      | Aggregate principal losses to date      |  |                        |             | %           |  |          |             | %       |  |          | 4.27         | %    |  |          |             | % |  |          |             | %



---

|(1) |  | Structured Notes issued by the SPEs were rated by Moodys
Investors Service, Inc.                                                                                                                                                                                                                    
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The weighted average life is calculated by summing the
product of (i) the sum of the principal collections expected in
each future period multiplied by (ii) the number of periods until
collection, and then dividing that total by (iii) the remaining or
initial principal balance, as applicable.
|   
|(3) |  | Represents aggregate estimated losses as a percentage of
the principal outstanding based upon per annum losses that ranged
from 0.4% to 1.0%.                                                                                                                                                        
|   
|(4) |  | The prepayment rate was based on the actual performance of
the loan pools, adjusted for anticipated principal prepayments
considering other similar loans.                                                                                                                                           
|   
|(5) |  | Approximately 92% concentrated in the hospitality industry
and 27% to borrowers in Texas. No other state had a concentration
greater than 10%.                                                                                                                                                       
|   
|(6) |  | The discount rates utilized were (i) 4.3% to 7.3% for our
required overcollateralization, (ii) 8.4% to 9.0% for our reserve
funds and (iii) 11.4% to 12.0% for our interest-only strip
receivables.                                                                                                  

In addition to the transactions described above, First Western has
Retained Interests. First Western sold the unguaranteed portion of its
loans receivable through a private placement in 1997 and has retained
the right to service all of these loans receivable. Pursuant to the
sale, First Western maintains a reserve fund and receives cash flow from
the IO Receivable established in connection with the sold loans
receivable. At December 31, 2002, the principal balance outstanding on
its sold loans was $3.6 million and the reserve fund balance was
$912,000.

In addition, the SBA guaranteed portions of First Westerns loans
receivable are sold to either dealers in government guaranteed loans
receivable or institutional investors (Secondary Market Loan Sales) as
the loans are funded. On all Secondary Market Loan Sales, we retain an
excess spread between the interest rate paid to us from our borrowers
and the
F-17Table of Contents

PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

rate we pay to the purchaser of the guaranteed portion of the note. At
December 31, 2002 and 2001, the aggregate principal balance of serviced
loans receivable on which we have an excess spread was $47.6 million and
$52.6 million, respectively, and the weighted average excess spread
(before estimated servicing costs) was 1.8% and 1.9%, respectively.

In determining the fair value of our Retained Interests related to First
Western, assumptions at December 31, 2002 included prepayment speeds
that ranged from 20% to 30% per annum, loss rates that ranged from 0.2%
to 0.4% per annum and discount rates that ranged from 6.0% to 11.7%.

The value of our Retained Interests is based on an estimate of the
discounted future cash flows we will receive. In determining the
present value of expected future cash flows, estimates are made in
determining the amount and timing of those cash flows and the discount
rates. The amount and timing of cash flows is generally determined
based on estimates of loan losses and anticipated prepayment speeds
relating to the loans receivable contributed to the SPE. Actual loan
losses and prepayments may vary significantly from assumptions. The
discount rates utilized in computing the estimated fair value are based
upon estimates of the inherent risks associated with each cash flow
stream. Due to the limited number of entities that conduct transactions
with similar assets, the relatively small size of our Retained Interests
and the limited number of buyers for such assets, no readily
ascertainable market exists. Therefore, our estimate of the fair value
may or may not vary significantly from what a willing buyer would pay
for these assets.

The components of our Retained Interests are as follows:



|(1) |  | The required overcollateralization (the OC Piece). The
OC Piece represents the excess of the loans receivable contributed
to the SPE over the notes payable issued by the SPE and serves as
additional collateral for the Structured Noteholders.                                                                                                                                                      
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The Reserve Fund and the interest earned thereon. The
Reserve Fund represents cash that is required to be kept in a
liquid cash account by the SPE as collateral for the Structured
Noteholders, a portion of which was contributed by us to the SPE
upon formation and a portion of which is built up over time by the
SPE from the cash flows from the underlying loans receivable.                  
|   
|(3) |  | The interest-only strip receivable (the IO Receivable).
The IO Receivable is comprised of the cash flows that will be
received by us in the future after payment by the SPE of (a) all
interest and principal due to the Structured Noteholders, (b)
payment of all principal and interest due on the OC Piece, (c) any
required funding of the Reserve Fund and (d) on-going costs of the
transaction.

F-18



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Our Retained Interests consisted of the following:

|                         |  |                   |        |              |  |               |        |       |  |      |        |  |  |   |        |  |  |   |        | 
|------------------------ |  | ----------------- | ------ | ------------ |  | ------------- | ------ | ----- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                         |  | December 31, 2002
|                         |  |                  
|                         |  | Value             |        |              |  |              
|                         |  |                   |        |              |  |              
|                         |  | OC Piece          |        | Reserve Fund |  | IO Receivable |        | Total |  | Cost
|                         |  |                   |        |              |  |               |        |       |  |     
|                         |  | (In thousands)   
|First Western            |  | $                 |       |              |  | $             | 842    |       |  | $    | 1,890  |  |  | $ | 2,732  |  |  | $ | 2,388  | 
|1998 Limited Partnership |  |                   | 1,519  |              |  |               | 1,672  |       |  |      | 823    |  |  |   | 4,014  |  |  |   | 3,553  | 
|1999 Limited Partnership |  |                   | 4,216  |              |  |               | 1,923  |       |  |      | 1,967  |  |  |   | 8,106  |  |  |   | 7,540  | 
|2000 Joint Venture       |  |                   | 3,058  |              |  |               | 1,420  |       |  |      | 323    |  |  |   | 4,801  |  |  |   | 4,492  | 
|2001 Joint Venture       |  |                   | 4,798  |              |  |               | 2,282  |       |  |      | 3,613  |  |  |   | 10,693 |  |  |   | 9,603  | 
|2002 Joint Venture       |  |                   | 5,213  |              |  |               | 2,036  |       |  |      | 2,408  |  |  |   | 9,657  |  |  |   | 8,965  | 
|                         |  |                   |        |              |  |               |        |       |  |      |        |  |  |   |        |  |  |   |        | 
|                         |  | $                 | 18,804 |              |  | $             | 10,175 |       |  | $    | 11,024 |  |  | $ | 40,003 |  |  | $ | 36,541 | 
|                         |  |                   |        |              |  |               |        |       |  |      |        |  |  |   |        |  |  |   |        | 

|                         |  |                   |        |              |  |               |       |       |  |      |        |  |  |   |        |  |  |   |        | 
|------------------------ |  | ----------------- | ------ | ------------ |  | ------------- | ----- | ----- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                         |  | December 31, 2001
|                         |  |                  
|                         |  | Value             |        |              |  |              
|                         |  |                   |        |              |  |              
|                         |  | OC Piece          |        | Reserve Fund |  | IO Receivable |       | Total |  | Cost
|                         |  |                   |        |              |  |               |       |       |  |     
|                         |  | (In thousands)   
|First Western            |  | $                 |       |              |  | $             | 743   |       |  | $    | 2,238  |  |  | $ | 2,981  |  |  | $ | 2,587  | 
|1998 Limited Partnership |  |                   | 1,871  |              |  |               | 2,048 |       |  |      | 1,150  |  |  |   | 5,069  |  |  |   | 4,686  | 
|1999 Limited Partnership |  |                   | 4,428  |              |  |               | 2,441 |       |  |      | 3,149  |  |  |   | 10,018 |  |  |   | 9,532  | 
|2000 Joint Venture       |  |                   | 3,083  |              |  |               | 1,238 |       |  |      | 989    |  |  |   | 5,310  |  |  |   | 5,091  | 
|2001 Joint Venture       |  |                   | 4,397  |              |  |               | 1,825 |       |  |      | 3,937  |  |  |   | 10,159 |  |  |   | 9,656  | 
|                         |  |                   |        |              |  |               |       |       |  |      |        |  |  |   |        |  |  |   |        | 
|                         |  | $                 | 13,779 |              |  | $             | 8,295 |       |  | $    | 11,463 |  |  | $ | 33,537 |  |  | $ | 31,552 | 
|                         |  |                   |        |              |  |               |       |       |  |      |        |  |  |   |        |  |  |   |        | 

The 2000 Joint Venture acquired an asset through liquidation of an
impaired loan, with an estimated value of $1.4 million. In addition,
during December 2002, PMC Capital exercised its option to repurchase an
impaired loan from the 2000 Joint Venture with a principal balance of
$2.3 million. We recorded realized losses of $2.0 million on our
Retained Interests during 2002 primarily due to these impaired loans.

The following is a sensitivity analysis of our Retained Interests as of
December 31, 2002 to highlight the volatility that results when
prepayments, losses and discount rates are different than our
assumptions:

|                                                   |  |                 |        |               |  |               |        |  
|-------------------------------------------------- |  | --------------- | ------ | ------------- |  | ------------- | ------ | -
|                                                   |  |                 |        |               |  | Asset and Net
|Changed Assumption                                 |  | Pro-Forma Value |        | Income Change
|                                                   |  |                 |        |              
|                                                   |  | (In thousands) 
|Losses increase by 50 basis points per annum (1)   |  | $               | 37,297 |               |  | $             | (2,706 | )
|Losses increase by 100 basis points per annum (1)  |  | $               | 34,714 |               |  | $             | (5,289 | )
|Rate of prepayments increases by 5% per annum (2)  |  | $               | 38,642 |               |  | $             | (1,361 | )
|Rate of prepayments increases by 10% per annum (2) |  | $               | 37,688 |               |  | $             | (2,315 | )
|Discount rates increase by 100 basis points        |  | $               | 38,408 |               |  | $             | (1,595 | )
|Discount rates increase by 200 basis points        |  | $               | 37,002 |               |  | $             | (3,001 | )



---

|(1) |  | If we experience losses (i.e., in excess of anticipated
losses), the effect on our Retained Interests would first be to
reduce the value of the IO Receivables. To the extent the IO
Receivables could not fully absorb the losses, the effect would
then be to reduce the value of our Reserve Funds and then the value
of our OC Pieces.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | For example, an 8% assumed rate of prepayment would be
increased to 13% or 18% based on increases of 5% or 10% per annum,
respectively.                                                                                                                                                                                                   

These sensitivities are hypothetical and should be used with caution.
Pro-forma values based on changes in these assumptions generally cannot
be extrapolated since the relationship of the change in assumption to
the change in fair value may not be linear. The effect of a variation
in a particular assumption on the fair value of our Retained Interests
is calculated without changing any other assumption. In reality,
changes in one factor are not isolated from changes in another which
might magnify or counteract the sensitivities.

F-19



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following information summarizes the financial position of the SPEs
at December 31, 2002 and 2001. We own 100% of the 1998 Partnership and
the 1999 Partnership and 34% of the 2000 Joint Venture, 61% of the 2001
Joint Venture and 61% of the 2002 Joint Venture at December 31, 2002.
At December 31, 2001 we owned 33% of the 2000 Joint Venture and 60% of
the 2001 Joint Venture.

Summary of Financial Position (1):

|                      |  |                |        |             |  |      |        |      |  |   |        |  |  |   |        | 
|--------------------- |  | -------------- | ------ | ----------- |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|                      |  | 1998           |        | 1999       
|                      |  | Partnership    |        | Partnership
|                      |  |                |        |            
|                      |  | 2002           |        | 2001        |  | 2002 |        | 2001
|                      |  |                |        |             |  |      |        |     
|                      |  | (In thousands)
|Loans Receivable, Net |  | $              | 25,865 |             |  | $    | 29,817 |      |  | $ | 39,216 |  |  | $ | 47,909 | 
|                      |  |                |        |             |  |      |        |      |  |   |        |  |  |   |        | 
|Total Assets          |  | $              | 28,477 |             |  | $    | 35,438 |      |  | $ | 42,475 |  |  | $ | 55,761 | 
|                      |  |                |        |             |  |      |        |      |  |   |        |  |  |   |        | 
|Notes Payable         |  | $              | 24,806 |             |  | $    | 30,663 |      |  | $ | 35,907 |  |  | $ | 47,560 | 
|                      |  |                |        |             |  |      |        |      |  |   |        |  |  |   |        | 
|Total Liabilities     |  | $              | 24,885 |             |  | $    | 30,792 |      |  | $ | 36,106 |  |  | $ | 47,823 | 
|                      |  |                |        |             |  |      |        |      |  |   |        |  |  |   |        | 
|Partners Capital     |  | $              | 3,592  |             |  | $    | 4,646  |      |  | $ | 6,369  |  |  | $ | 7,938  | 
|                      |  |                |        |             |  |      |        |      |  |   |        |  |  |   |        | 

|                                   |  |                |        |               |  |               |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|---------------------------------- |  | -------------- | ------ | ------------- |  | ------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                   |  | 2000           |        | 2001          |  | 2002         
|                                   |  | Joint Venture  |        | Joint Venture |  | Joint Venture
|                                   |  |                |        |               |  |              
|                                   |  | 2002           |        | 2001          |  | 2002          |        | 2001 |  | 2002
|                                   |  |                |        |               |  |               |        |      |  |     
|                                   |  | (In thousands)
|Loans Receivable, Net              |  | $              | 70,627 |               |  | $             | 79,695 |      |  | $    | 73,220 |  |  | $ | 78,177 |  |  | $ | 69,025 | 
|                                   |  |                |        |               |  |               |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|Asset Acquired in Liquidation, Net |  | $              | 1,411  |               |  | $             |       |      |  | $    |       |  |  | $ |       |  |  | $ |       | 
|                                   |  |                |        |               |  |               |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|Total Assets                       |  | $              | 76,434 |               |  | $             | 85,716 |      |  | $    | 81,302 |  |  | $ | 83,600 |  |  | $ | 74,322 | 
|                                   |  |                |        |               |  |               |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|Notes Payable                      |  | $              | 62,658 |               |  | $             | 71,100 |      |  | $    | 69,146 |  |  | $ | 71,768 |  |  | $ | 62,152 | 
|                                   |  |                |        |               |  |               |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|Total Liabilities                  |  | $              | 62,848 |               |  | $             | 71,316 |      |  | $    | 69,329 |  |  | $ | 71,958 |  |  | $ | 62,325 | 
|                                   |  |                |        |               |  |               |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|Partners Capital                  |  | $              | 13,586 |               |  | $             | 14,400 |      |  | $    | 11,973 |  |  | $ | 11,642 |  |  | $ | 11,997 | 
|                                   |  |                |        |               |  |               |        |      |  |      |        |  |  |   |        |  |  |   |        | 



---

|(1) |  | Balances represent 100% of the limited partnership interests in the Joint Ventures.
|--- |  | -----------------------------------------------------------------------------------

F-20



---



##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following information summarizes the results of operations for the
periods ended December 31, 2002, 2001 and 2000.

Summary of Operations (1):

|                     |  |                  |       |                  |  |      |       |      |  |      |       |      |  |   |       |  |  |   |       |  |  |   |       | 
|-------------------- |  | ---------------- | ----- | ---------------- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | - | ----- |  |  | - | ----- |  |  | - | ----- | 
|                     |  | 1998 Partnership |       | 1999 Partnership
|                     |  |                  |       |                 
|                     |  | 2002             |       | 2001             |  | 2000 |       | 2002 |  | 2001 |       | 2000
|                     |  |                  |       |                  |  |      |       |      |  |      |       |     
|                     |  | (In thousands)  
|Interest Income      |  | $                | 1,797 |                  |  | $    | 3,087 |      |  | $    | 4,055 |      |  | $ | 4,187 |  |  | $ | 5,227 |  |  | $ | 5,689 | 
|                     |  |                  |       |                  |  |      |       |      |  |      |       |      |  |   |       |  |  |   |       |  |  |   |       | 
|Total Revenues       |  | $                | 1,845 |                  |  | $    | 3,210 |      |  | $    | 4,177 |      |  | $ | 4,559 |  |  | $ | 5,555 |  |  | $ | 5,728 | 
|                     |  |                  |       |                  |  |      |       |      |  |      |       |      |  |   |       |  |  |   |       |  |  |   |       | 
|Interest Expense     |  | $                | 1,002 |                  |  | $    | 2,089 |      |  | $    | 2,838 |      |  | $ | 2,689 |  |  | $ | 3,254 |  |  | $ | 3,447 | 
|                     |  |                  |       |                  |  |      |       |      |  |      |       |      |  |   |       |  |  |   |       |  |  |   |       | 
|Provision for Losses |  | $                | 103   |                  |  | $    | (29   | )    |  | $    | 37    |      |  | $ |      |  |  | $ |      |  |  | $ |      | 
|                     |  |                  |       |                  |  |      |       |      |  |      |       |      |  |   |       |  |  |   |       |  |  |   |       | 
|Total Expenses       |  | $                | 1,204 |                  |  | $    | 2,174 |      |  | $    | 3,002 |      |  | $ | 2,840 |  |  | $ | 3,432 |  |  | $ | 3,634 | 
|                     |  |                  |       |                  |  |      |       |      |  |      |       |      |  |   |       |  |  |   |       |  |  |   |       | 
|Net Income           |  | $                | 641   |                  |  | $    | 1,036 |      |  | $    | 1,175 |      |  | $ | 1,719 |  |  | $ | 2,123 |  |  | $ | 2,094 | 
|                     |  |                  |       |                  |  |      |       |      |  |      |       |      |  |   |       |  |  |   |       |  |  |   |       | 

|                     |  |                    |       |                    |  |          |       |      |  |          |     |          |  |   |       |  |  |   |       |  |  |       |       | 
|-------------------- |  | ------------------ | ----- | ------------------ |  | -------- | ----- | ---- |  | -------- | --- | -------- |  | - | ----- |  |  | - | ----- |  |  | ----- | ----- | 
|                     |  |                    |       |                    |  |          |       |      |  |          |     |          |  |   |       |  |  |   |       |  |  | 2002 
|                     |  |                    |       |                    |  |          |       |      |  |          |     |          |  |   |       |  |  |   |       |  |  | Joint
|                     |  | 2000 Joint Venture |       | 2001 Joint Venture |  | Venture 
|                     |  |                    |       |                    |  |         
|                     |  | 2002               |       | 2001               |  | 2000 (2) |       | 2002 |  | 2001 (3) |     | 2002 (4)
|                     |  |                    |       |                    |  |          |       |      |  |          |     |         
|                     |  | (In thousands)    
|Interest Income      |  | $                  | 7,092 |                    |  | $        | 7,936 |      |  | $        | 295 |          |  | $ | 7,507 |  |  | $ | 4,028 |  |  | $     | 4,850 | 
|                     |  |                    |       |                    |  |          |       |      |  |          |     |          |  |   |       |  |  |   |       |  |  |       |       | 
|Total Revenues       |  | $                  | 7,351 |                    |  | $        | 8,169 |      |  | $        | 298 |          |  | $ | 7,815 |  |  | $ | 4,222 |  |  | $     | 4,897 | 
|                     |  |                    |       |                    |  |          |       |      |  |          |     |          |  |   |       |  |  |   |       |  |  |       |       | 
|Interest Expense     |  | $                  | 4,988 |                    |  | $        | 5,277 |      |  | $        | 181 |          |  | $ | 4,463 |  |  | $ | 2,387 |  |  | $     | 2,999 | 
|                     |  |                    |       |                    |  |          |       |      |  |          |     |          |  |   |       |  |  |   |       |  |  |       |       | 
|Provision for Losses |  | $                  | 1,514 |                    |  | $        |      |      |  | $        |    |          |  | $ | 140   |  |  | $ |      |  |  | $     |      | 
|                     |  |                    |       |                    |  |          |       |      |  |          |     |          |  |   |       |  |  |   |       |  |  |       |       | 
|Total Expenses       |  | $                  | 6,752 |                    |  | $        | 5,526 |      |  | $        | 181 |          |  | $ | 4,849 |  |  | $ | 2,507 |  |  | $     | 3,153 | 
|                     |  |                    |       |                    |  |          |       |      |  |          |     |          |  |   |       |  |  |   |       |  |  |       |       | 
|Net Income           |  | $                  | 599   |                    |  | $        | 2,643 |      |  | $        | 117 |          |  | $ | 2,966 |  |  | $ | 1,715 |  |  | $     | 1,744 | 
|                     |  |                    |       |                    |  |          |       |      |  |          |     |          |  |   |       |  |  |   |       |  |  |       |       | 



---

|(1) |  | Amounts represent 100% of the
limited partnership interests in the Joint Ventures.
|--- |  | ----------------------------------------------------------------------------------
|   
|(2) |  | From December 18, 2000 (inception) to December 31, 2000                           
|   
|(3) |  | From June 27, 2001 (inception) to December 31, 2001                               
|   
|(4) |  | From April 12, 2002 (inception) to December 31, 2002                              

Our ownership of the Joint Ventures is based on our share of the capital
of the respective Joint Ventures. Our share of the cash flows from the
Joint Ventures is allocated based on the cash flows from the underlying
loans receivable contributed by us to the respective Joint Venture less
allocated costs based on the remaining principal on the underlying loans
receivable contributed by us divided by all loans receivable held by the
respective Joint Venture.

F-21



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Our limited partnership allocation of the assets, liabilities and
partners capital of the Joint Ventures was as follows:

|                                   |  |                   |        |                   |  |            |        |            |  |            |        |  |  |   |        |  |  |   |        | 
|---------------------------------- |  | ----------------- | ------ | ----------------- |  | ---------- | ------ | ---------- |  | ---------- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                   |  | December 31, 2002 |        | December 31, 2001
|                                   |  |                   |        |                  
|                                   |  | 2000 Joint        |        | 2001 Joint        |  | 2002 Joint |        | 2000 Joint |  | 2001 Joint
|                                   |  | Venture           |        | Venture           |  | Venture    |        | Venture    |  | Venture   
|                                   |  |                   |        |                   |  |            |        |            |  |           
|                                   |  | (In thousands)   
|Loans Receivable, Net              |  | $                 | 20,783 |                   |  | $          | 44,269 |            |  | $          | 42,199 |  |  | $ | 26,612 |  |  | $ | 48,648 | 
|Asset Acquired in Liquidation, Net |  | $                 | 1,411  |                   |  |            |       |            |  |            |       |  |  |   |       |  |  |   |       | 
|Total Assets                       |  | $                 | 22,727 |                   |  | $          | 50,232 |            |  | $          | 45,484 |  |  | $ | 28,589 |  |  | $ | 51,922 | 
|Total Liabilities                  |  | $                 | 18,141 |                   |  | $          | 42,875 |            |  | $          | 38,123 |  |  | $ | 23,810 |  |  | $ | 44,933 | 
|Partners Capital                  |  | $                 | 4,586  |                   |  | $          | 7,357  |            |  | $          | 7,361  |  |  | $ | 4,779  |  |  | $ | 6,989  | 

Our limited partnership allocation of the net income (loss) of the Joint
Ventures was as follows:

|                  |  |                    |      |                    |  |          |     |      |  |          |    |          |  |   |       |  |  |   |     |  |  |       |       | 
|----------------- |  | ------------------ | ---- | ------------------ |  | -------- | --- | ---- |  | -------- | -- | -------- |  | - | ----- |  |  | - | --- |  |  | ----- | ----- | 
|                  |  |                    |      |                    |  |          |     |      |  |          |    |          |  |   |       |  |  |   |     |  |  | 2002 
|                  |  |                    |      |                    |  |          |     |      |  |          |    |          |  |   |       |  |  |   |     |  |  | Joint
|                  |  | 2000 Joint Venture |      | 2001 Joint Venture |  | Venture 
|                  |  |                    |      |                    |  |         
|                  |  | 2002               |      | 2001               |  | 2000 (1) |     | 2002 |  | 2001 (2) |    | 2002 (3)
|                  |  |                    |      |                    |  |          |     |      |  |          |    |         
|                  |  | (In thousands)    
|Net Income (Loss) |  | $                  | (902 | )                  |  | $        | 756 |      |  | $        | 46 |          |  | $ | 1,894 |  |  | $ | 972 |  |  | $     | 1,069 | 
|                  |  |                    |      |                    |  |          |     |      |  |          |    |         



---

|(1) |  | From December 18, 2000 (inception) to December 31, 2000
|--- |  | -------------------------------------------------------
|   
|(2) |  | From June 27, 2001 (inception) to December 31, 2001    
|   
|(3) |  | From April 12, 2002 (inception) to December 31, 2002   

In accordance with SFAS No. 140, our consolidated financial statements
do not include these SPE assets, liabilities, capital, revenues or
expenses. As a result, at December 31, 2002 and 2001, our consolidated
balance sheets do not include the $189.4 million and $171.7 million of
assets, respectively, and $160.1 million and $147.4 million of
liabilities, respectively, related to our structured loan sale
transactions recorded by the SPEs. Our Retained Interests related to
these structured loan sale transactions was $37.3 million and $30.6
million at December 31, 2002 and 2001, respectively.

The net unrealized appreciation on our Retained Interests at December
31, 2002 and 2001 was $3.5 million and $2.0 million, respectively. The
net increase of $1.5 million primarily resulted from a decrease in the
discount rates used to value our Retained Interests resulting from the
lower interest rate environment at December 31, 2002 compared to
December 31, 2001. Any appreciation (depreciation) of our Retained
Interests is included in the accompanying statements of operations as
either a realized loss (if there is a reduction in expected future cash
flows) or an unrealized gain (loss) on investments.

The income from our Retained Interests is comprised of the yield earned
on our Retained Interests which is determined based on estimates of
future cash flows and includes any fees collected (i.e.,late fees,
prepayment fees, etc.) by the SPEs in excess of anticipated fees. We
update our cash flow assumptions on a quarterly basis and any changes to
cash flow assumptions impact the yield on our Retained Interests. The
annualized yield on our Retained Interests was 13.7%, 14.9% and 14.2%
during 2002, 2001 and 2000, respectively.

We are the servicer for all loans held by the SPEs. Servicing fee
income during 2002, 2001 and 2000 for the SPEs was approximately
$529,000, $410,000 and $283,000, respectively. Servicing fee income is
included in other income, net, in our consolidated statements of
operations. We have not established a servicing asset or liability as
our servicing fees are considered adequate compensation.

Pursuant to the trust indentures related to the Structured Notes, we
received approximately $9.5 million and $8.5 million in cash
distributions from our SPEs during 2002 and 2001, respectively.

F-22



---



##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Investment in Unconsolidated Subsidiaries:

The following are condensed financial statements of our non-investment
company subsidiaries (PMC Advisers and PMC Funding) as of December 31,
2002 and 2001 and for the three years in the period ended December 31,
2002:

CONDENSED COMBINED BALANCE SHEETS

|                            |                                             |   |                |       |      |   |     |      |  
|--------------------------- | ------------------------------------------- | - | -------------- | ----- | ---- | - | --- | ---- | -
|                            |                                             |   | December 31,  
|                            |                                             |   |               
|                            |                                             |   | 2002           |       | 2001
|                            |                                             |   |                |       |     
|                            |                                             |   | (In thousands)
|Assets                      |                                             |   |                |       |      |   |     |     
|Real estate investments     |                                             | $ | 1,213          |       |      | $ |    |     
|Due from affiliate          |                                             |   | 585            |       |      |   | 574 |     
|Property and equipment, net |                                             |   | 262            |       |      |   | 294 |     
|Cash and cash equivalents   |                                             |   | 96             |       |      |   | 40  |     
|Other assets                |                                             |   | 33             |       |      |   | 33  |     
|                            |                                             |   |                |       |      |   |     |     
|                            | Total assets                                |   | $              | 2,189 |      |   | $   | 941  |  
|                            |                                             |   |                |       |      |   |     |     
|Liabilities and Equity      |                                             |   |                |       |      |   |     |     
|Liabilities:                |                                             |   |                |       |      |   |     |     
|                            | Notes payable and advances to affiliates    |   | $              | 1,789 |      |   | $   | 574  |  
|                            | Other liabilities                           |   |                | 319   |      |   |     | 300  |  
|                            |                                             |   |                |       |      |   |     |     
|                            |                                             |   | 2,108          |       |      |   | 874 |     
|                            |                                             |   |                |       |      |   |     |     
|Equity:                     |                                             |   |                |       |      |   |     |     
|                            | Common stock and additional paid-in capital |   |                | 627   |      |   |     | 527  |  
|                            | Accumulated deficit                         |   |                | (546  | )    |   |     | (460 | )
|                            |                                             |   |                |       |      |   |     |     
|                            |                                             |   | 81             |       |      |   | 67  |     
|                            |                                             |   |                |       |      |   |     |     
|                            | Total liabilities and equity                |   | $              | 2,189 |      |   | $   | 941  |  
|                            |                                             |   |                |       |      |   |     |     

CONDENSED COMBINED STATEMENTS OF INCOME

|           |                     |                |     |                          |       |      |     |       |       |   |     |       |       | 
|---------- | ------------------- | -------------- | --- | ------------------------ | ----- | ---- | --- | ----- | ----- | - | --- | ----- | ----- | 
|           |                     |                |     | Years Ended December 31,
|           |                     |                |     |                         
|           |                     |                |     | 2002                     |       | 2001 |     | 2000 
|           |                     |                |     |                          |       |      |     |      
|           |                     |                |     | (In thousands)          
|Income:    |                     |                |     |                          |       |      |     |       |       |   |     |      
|           | Management fees     |                | $   | 2,328                    |       |      | $   | 2,264 |       |   | $   | 2,199 |      
|           | Other income, net   |                |     | 35                       |       |      |     | 10    |       |   |     | 40    |      
|           |                     |                |     |                          |       |      |     |       |       |   |     |      
|           |                     | Total income   |     |                          | 2,363 |      |     |       | 2,274 |   |     |       | 2,239 | 
|           |                     |                |     |                          |       |      |     |       |       |   |     |      
|Expenses:  |                     |                |     |                          |       |      |     |       |       |   |     |      
|           | Overhead allocation |                |     | 1,927                    |       |      |     | 1,803 |       |   |     | 1,699 |      
|           | Interest            |                |     | 11                       |       |      |     |      |       |   |     |      |      
|           | Other expense       |                |     | 118                      |       |      |     | 89    |       |   |     | 60    |      
|           |                     |                |     |                          |       |      |     |       |       |   |     |      
|           |                     | Total expenses |     |                          | 2,056 |      |     |       | 1,892 |   |     |       | 1,759 | 
|           |                     |                |     |                          |       |      |     |       |       |   |     |      
|Net income |                     | $              | 307 |                          |       | $    | 382 |       |       | $ | 480 |      
|           |                     |                |     |                          |       |      |     |       |       |   |     |      

In October 2002, PMC Funding acquired two assisted care living
facilities with a fair value of approximately $1.2 million for $101,000
in cash and the assumption of notes payable to PMC Capital and First
Western. PMC Funding operated one of the two assisted care living
facilities while the other facility is vacant. On January 15, 2003, PMC
Funding sold the operating assisted care living facility for $975,000.
The proceeds were used to repay in full the mortgage held by PMC
Capital, including additional costs incurred prior to liquidation and
accrued interest. The remaining funds were used to repay a portion of
the receivable due to First Western; thus, no gain or loss was recorded
on the sale.

During 2002, PMC Capital made a $100,000 capital contribution to PMC
Advisers.

F-23



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Other liabilities represent the estimated remaining costs to monitor and
remediate an environmental obligation relating to an asset acquired
through liquidation and subsequently sold during 1999.

Earnings and distributions of PMC Advisers and PMC Funding were as
follows:

|                        |              |                     |   |                          |     |      |   |      |     |  |   |     |     | 
|----------------------- | ------------ | ------------------- | - | ------------------------ | --- | ---- | - | ---- | --- |  | - | --- | --- | 
|                        |              |                     |   | Years Ended December 31,
|                        |              |                     |   |                         
|                        |              |                     |   | 2002                     |     | 2001 |   | 2000
|                        |              |                     |   |                          |     |      |   |     
|                        |              |                     |   | (In thousands)          
|Net income (loss):      |              |                     |   |                          |     |      |   |      |     |  |   |    
|                        | PMC Advisers |                     | $ | 401                      |     |      | $ | 456  |     |  | $ | 496 |    
|                        | PMC Funding  |                     |   | (94                      | )   |      |   | (74  | )   |  |   | (16 | )  
|                        |              |                     |   |                          |     |      |   |      |     |  |   |    
|                        |              | Net income          |   | $                        | 307 |      |   | $    | 382 |  |   | $   | 480 | 
|                        |              |                     |   |                          |     |      |   |      |     |  |   |    
|Dividend distributions: |              |                     |   |                          |     |      |   |      |     |  |   |    
|                        | PMC Advisers |                     | $ | 393                      |     |      | $ | 462  |     |  | $ | 494 |    
|                        | PMC Funding  |                     |   |                         |     |      |   |     |     |  |   |    |    
|                        |              |                     |   |                          |     |      |   |      |     |  |   |    
|                        |              | Total distributions |   | $                        | 393 |      |   | $    | 462 |  |   | $   | 494 | 
|                        |              |                     |   |                          |     |      |   |      |     |  |   |    

Note 5. Assets Acquired in Liquidation

At December 31, 2002 and 2001, the aggregate value of our assets
acquired in liquidation, as reduced for anticipated selling and holding
costs, was estimated to be approximately $2,252,000 and $329,000,
respectively. Our assets acquired in liquidation at December 31, 2002
consist primarily of two hotel properties. We are currently marketing
these assets.

During December 2002, we sold a property for approximately $500,000 and
recorded a gain of approximately $113,000. We financed the sale through
the origination of a loan of $325,000 at an interest rate of LIBOR plus
4.5%. The loan matures in 2022. In addition, First Western sold four
properties during 2002 for approximately $350,000 and recorded losses of
approximately $130,000.

The loss from operations of our assets acquired in liquidation consisted
of the following:

|                         |  |                          |      |      |  |      |   |  |  |   |   | 
|------------------------ |  | ------------------------ | ---- | ---- |  | ---- | - |  |  | - | - | 
|                         |  | Years Ended December 31,
|                         |  |                         
|                         |  | 2002                     |      | 2001 |  | 2000
|                         |  |                          |      |      |  |     
|                         |  | (In thousands)          
|Room revenue             |  | $                        | 128  |      |  | $    |  |  |  | $ |  | 
|Salaries and wages       |  |                          | (155 | )    |  |      |  |  |  |   |  | 
|Other operating expenses |  |                          | (364 | )    |  |      |  |  |  |   |  | 
|                         |  |                          |      |      |  |      |   |  |  |   |   | 
|                         |  | $                        | (391 | )    |  | $    |  |  |  | $ |  | 
|                         |  |                          |      |      |  |      |   |  |  |   |   | 

None of our assets acquired in liquidation held at December 31, 2002
were operated or owned by us during 2001 or 2000.

F-24



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6. Notes and Debentures Payable:

Outstanding notes and debentures payable were as follows:

|                    |  |               |        |               |  |                   |  |      |        |                |        |   |        |   |        | 
|------------------- |  | ------------- | ------ | ------------- |  | ----------------- |  | ---- | ------ | -------------- | ------ | - | ------ | - | ------ | 
|                    |  |               |        |               |  |                   |  |      |        | December 31,  
|                    |  |               |        |               |  |                   |  |      |        |               
|                    |  | Interest Rate |        | Maturity Date |  | 2002              |  | 2001
|                    |  |               |        |               |  |                   |  |     
|                    |  |               |        |               |  |                   |  |      |        | (In thousands)
|Notes payable:      |  |               | 8.600  | %             |  | April 19, 2003    |  | $    | 5,000  |                |        | $ | 5,000  |  
|                    |  |               | 3.570  | %(1)          |  | April 19, 2004    |  |      | 5,000  |                |        |   | 5,000  |  
|                    |  |               | 3.670  | %(2)          |  | July 19, 2004     |  |      | 10,000 |                |        |   | 10,000 |  
|                    |  |               | 7.440  | %             |  | July 19, 2005     |  |      | 10,000 |                |        |   | 10,000 |  
|                    |  |               | 3.570  | %(1)          |  | July 19, 2006     |  |      | 10,000 |                |        |   | 10,000 |  
|                    |  |               | 6.970  | %             |  | December 15, 2002 |  |      |       |                |        |   | 5,000  |  
|Debentures payable: |  |               | 6.8750 | %             |  | September 1, 2005 |  |      | 7,000  |                |        |   | 7,000  |  
|                    |  |               | 7.452  | %(3)          |  | September 1, 2010 |  |      | 3,000  |                |        |   | 3,000  |  
|                    |  |               | 7.452  | %(3)          |  | September 1, 2010 |  |      | 4,310  |                |        |   | 4,310  |  
|                    |  |               | 7.510  | %             |  | December 1, 2002  |  |      |       |                |        |   | 510    |  
|                    |  |               | 8.200  | %             |  | September 1, 2004 |  |      |       |                |        |   | 3,000  |  
|                    |  |               | 8.200  | %             |  | September 1, 2004 |  |      |       |                |        |   | 3,000  |  
|                    |  |               | 7.840  | %             |  | March 1, 2005     |  |      |       |                |        |   | 3,000  |  
|                    |  |               | 6.690  | %             |  | June 1, 2005      |  |      |       |                |        |   | 5,000  |  
|                    |  |               | 7.590  | %             |  | September 1, 2006 |  |      |       |                |        |   | 2,490  |  
|                    |  |               |        |               |  |                   |  |      |        |                |        |   |        |   |        | 
|                    |  |               |        |               |  |                   |  |      |        | $              | 54,310 |   |        | $ | 76,310 | 
|                    |  |               |        |               |  |                   |  |      |        |                |        |   |        |   |        | 



---

|(1) |  | Reset quarterly at 1.3% over the three month LIBOR.                                             
|--- |  | ------------------------------------------------------------------------------------------------
|   
|(2) |  | Reset quarterly at 1.4% over the three month LIBOR.                                             
|   
|(3) |  | Does not include the 1% annual fee that the SBA charges on all SBA
debentures issued after 1996.

We repaid $5.0 million in notes payable at maturity during December
2002. Our notes payable are uncollateralized and require us to meet
certain covenants (terms as defined in the agreements), the most
restrictive of which require (i) that net loans receivable exceed 150%
of funded debt, (ii) loan losses for any 12-month period must not exceed
3% of net loans receivable and (iii) our consolidated earnings plus
interest expense must exceed 150% of interest expense. At December 31,
2002, we were in compliance with all of the covenants of these notes.

Debentures payable represent amounts due to the SBA as a result of
borrowings made pursuant to the SBIA. We repaid $17.0 million in
debentures due to the SBA during September and December 2002. At
December 31, 2002, the SBA had committed to us for the issuance of $5.2
million ($4.2 million expiring September 2003 and $1.0 million expiring
September 2004) in new SBA debentures.

We have a $10 million uncollateralized revolving credit facility and a
$5 million guidance line facility which expire in May 2004. Advances
pursuant to the credit facility bear interest at our option of the
banks prime rate less 50 basis points or LIBOR plus 175 basis points.
The credit facility requires us to meet certain covenants (terms as
defined in the agreement), the most restrictive of which requires that
(i) the ratio of net charge-offs to net loans receivable not exceed 2%,
(ii) the ratio of assets to debt may not fall below 110% for PMC Capital
and 135% including our consolidated subsidiaries and (iii) the problem
loans percentage cannot exceed 10% of our serviced loan portfolio. As
of December 31, 2002 and 2001, we had no borrowings outstanding under
this facility. At December 31, 2002 and 2001, we were in compliance
with all covenants of this facility. Subsequent to year-end we
commenced borrowing under our revolving credit facility and have
approximately $3 million outstanding as of February 28, 2003.

F-25



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Principal payments required on the notes payable and debentures payable
at December 31, 2002, are as follows:

|             |      |       |                |            |  |               |        |       |  |   |        |        | 
|------------ | ---- | ----- | -------------- | ---------- |  | ------------- | ------ | ----- |  | - | ------ | ------ | 
|Year Ending  |      |       |                |            |  | SBA           |        |       |  |  
|December 31, |      | Total |                | Debentures |  | Notes Payable
|             |      |       |                |            |  |              
|             |      |       | (In thousands)
|             | 2003 |       | $              | 5,000      |  |               | $      |      |  |   | $      | 5,000  | 
|             | 2004 |       |                | 15,000     |  |               |        |      |  |   |        | 15,000 | 
|             | 2005 |       |                | 17,000     |  |               |        | 7,000 |  |   |        | 10,000 | 
|             | 2006 |       |                | 10,000     |  |               |        |      |  |   |        | 10,000 | 
|             | 2007 |       |                |           |  |               |        |      |  |   |        |       | 
|Thereafter   |      |       | 7,310          |            |  |               | 7,310  |       |  |   |       |       
|             |      |       |                |            |  |               |        |       |  |   |        |       
|             |      | $     | 54,310         |            |  | $             | 14,310 |       |  | $ | 40,000 |       
|             |      |       |                |            |  |               |        |       |  |   |        |       

Note 7. Cumulative Preferred Stock of Subsidiary:

PMCIC has outstanding 30,000 shares of $100 par value, 3% cumulative
preferred stock (the 3% Preferred Stock) and 40,000 shares of $100 par
value, 4% cumulative preferred stock (the 4% Preferred Stock). The 3%
Preferred Stock and the 4% Preferred Stock (collectively, the Preferred
Stock) are held by the SBA pursuant to the SBIA.

PMCIC is entitled to redeem, in whole or in part, the 3% Preferred Stock
by paying the par value of these securities plus dividends accumulated
and unpaid on the date of redemption. While the 3% Preferred Stock may
be redeemed, redemption is not mandatory. Dividends of $90,000 were
recognized on the 3% Preferred Stock during each of the years ended
December 31, 2002, 2001 and 2000.

The 4% Preferred Stock was issued during 1994 ($2,000,000) and 1995
($2,000,000), and must be redeemed at par no later than 15 years from
the date of issuance. Dividends of $160,000, $160,000 and $161,000 were
recognized on the 4% Preferred Stock during 2002, 2001 and 2000,
respectively.

Neither series of Preferred Stock has preemptive or conversion rights.
The Preferred Stock provides for a liquidation preference in the amount
of $100 per share plus accrued and unpaid dividends.

Note 8. Net Unrealized Appreciation (Depreciation) on Investments and
Realized and Unrealized Gain (Loss) on Investments:

Net unrealized appreciation (depreciation) on investments consisted of
the following:

|                                      |  |                |       |      |  |   |       |  
|------------------------------------- |  | -------------- | ----- | ---- |  | - | ----- | -
|                                      |  | December 31,  
|                                      |  |               
|                                      |  | 2002           |       | 2001
|                                      |  |                |       |     
|                                      |  | (In thousands)
|Loans receivable                      |  | $              | (711  | )    |  | $ | (443  | )
|Retained Interests                    |  |                | 3,462 |      |  |   | 1,985 |  
|Mortgage-backed security of affiliate |  |                | 68    |      |  |   | 79    |  
|Assets acquired in liquidation        |  |                | (421  | )    |  |   |      |  
|                                      |  |                |       |      |  |   |       |  
|                                      |  | $              | 2,398 |      |  | $ | 1,621 |  
|                                      |  |                |       |      |  |   |       |  

F-26



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Realized and unrealized gain (loss) on investments was as follows:

|                                                                |  |                              |        |                |  |            |      |       |  |   |       |   |  |   |        |  
|--------------------------------------------------------------- |  | ---------------------------- | ------ | -------------- |  | ---------- | ---- | ----- |  | - | ----- | - |  | - | ------ | -
|                                                                |  | Year Ended December 31, 2002
|                                                                |  |                             
|                                                                |  |                              |        |                |  | Assets     |      |       |  |   |       |   |  |  
|                                                                |  | Retained                     |        | Acquired       |  | Loans      |      |       |  |  
|                                                                |  | Interests (1)                |        | in Liquidation |  | Receivable |      | Total
|                                                                |  |                              |        |                |  |            |      |      
|                                                                |  | (In thousands)              
|Realized losses                                                 |  | $                            | (1,981 | )              |  | $          |     |       |  | $ | (215  | ) |  | $ | (2,196 | )
|Sale of assets                                                  |  |                              |       |                |  |            | (17  | )     |  |   | 1,463 |   |  |   | 1,446  |  
|Change in unrealized
appreciation (depreciation)
on investments |  |                              | 1,466  |                |  |            | (421 | )     |  |   | (268  | ) |  |   | 777    |  
|                                                                |  |                              |        |                |  |            |      |       |  |   |       |   |  |   |        |  
|Total realized and unrealized
gain (loss) on investments        |  | $                            | (515   | )              |  | $          | (438 | )     |  | $ | 980   |   |  | $ | 27     |  
|                                                                |  |                              |        |                |  |            |      |       |  |   |       |   |  |   |        |  

|                                                         |  |                              |        |                |  |            |       |       |  |   |        |   |  |   |        |  
|-------------------------------------------------------- |  | ---------------------------- | ------ | -------------- |  | ---------- | ----- | ----- |  | - | ------ | - |  | - | ------ | -
|                                                         |  | Year Ended December 31, 2001
|                                                         |  |                             
|                                                         |  |                              |        |                |  | Assets     |       |       |  |   |        |   |  |  
|                                                         |  | Retained                     |        | Acquired       |  | Loans      |       |       |  |  
|                                                         |  | Interests (1)                |        | in Liquidation |  | Receivable |       | Total
|                                                         |  |                              |        |                |  |            |       |      
|                                                         |  | (In thousands)              
|Realized losses                                          |  | $                            | (1,303 | )              |  | $          |      |       |  | $ | (1,025 | ) |  | $ | (2,328 | )
|Sale of assets                                           |  |                              |       |                |  |            | 2,732 |       |  |   | 2,732  |   |  |   |        |  
|Change in unrealized
appreciation on
investments         |  |                              | 603    |                |  |            |      |       |  |   | 216    |   |  |   | 819    |  
|                                                         |  |                              |        |                |  |            |       |       |  |   |        |   |  |   |        |  
|Total realized and unrealized
gain (loss) on investments |  | $                            | (700   | )              |  | $          |      |       |  | $ | 1,923  |   |  | $ | 1,223  |  
|                                                         |  |                              |        |                |  |            |       |       |  |   |        |   |  |   |        |  

|                                                                |  |                              |     |                |  |            |   |       |  |   |      |   |  |   |     |  
|--------------------------------------------------------------- |  | ---------------------------- | --- | -------------- |  | ---------- | - | ----- |  | - | ---- | - |  | - | --- | -
|                                                                |  | Year Ended December 31, 2000
|                                                                |  |                             
|                                                                |  |                              |     |                |  | Assets     |   |       |  |   |      |   |  |  
|                                                                |  | Retained                     |     | Acquired       |  | Loans      |   |       |  |  
|                                                                |  | Interests (1)                |     | in Liquidation |  | Receivable |   | Total
|                                                                |  |                              |     |                |  |            |   |      
|                                                                |  | (In thousands)              
|Realized losses                                                 |  | $                            |    |                |  | $          |  |       |  | $ | (17  | ) |  | $ | (17 | )
|Sale of assets                                                  |  |                              |    |                |  |            |  |       |  |   | 564  |   |  |   | 564 |  
|Change in unrealized
appreciation (depreciation)
on investments |  |                              | 871 |                |  |            |  |       |  |   | (469 | ) |  |   | 402 |  
|                                                                |  |                              |     |                |  |            |   |       |  |   |      |   |  |   |     |  
|Total realized and unrealized
gain (loss) on investments        |  | $                            | 871 |                |  | $          |  |       |  | $ | 78   |   |  | $ | 949 |  
|                                                                |  |                              |     |                |  |            |   |       |  |   |      |   |  |   |     |  



---

|(1) |  | Includes the mortgage-backed security of our affiliate.
|--- |  | -------------------------------------------------------

Note 9. Taxable Income:

We qualify as a regulated investment company (RIC) under the Code. If
a company meets certain diversification and distribution requirements,
it qualifies for pass-through tax treatment. We would cease to qualify
for pass-through tax treatment if we were unable to comply with these
requirements or if we ceased to qualify as a business development
company under the 1940 Act. We are also subject to a 4% excise tax
(and, in certain cases, corporate level income tax) if we fail to make
certain distributions. Failure to qualify as a RIC would subject us to
Federal income tax as if we were an ordinary corporation, resulting in a
substantial reduction in both our net assets and the amount of income
available for distribution to our shareholders.

We may make an election under the Code to treat distributions declared
in the current year as distributions of the prior years taxable income.
Upon election, the Code provides that, in certain circumstances, a
dividend declared subsequent to the close of an entitys taxable year
and prior to the extended due date of the entitys tax return may be
considered as having been made in the prior tax year in satisfaction of
income distribution requirements. Having met these
requirements,

F-27



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

we elected on our 2001 tax return to apply approximately $2.4 million of
2002 distributions to the 2001 tax year and anticipate utilizing a
portion of 2003 distributions to meet our 2002 distribution
requirements.

The following reconciles net income to taxable income available to
common shareholders as follows:

|                                                |                         |   |                          |        |      |   |        |        |   |   |        |      |  
|----------------------------------------------- | ----------------------- | - | ------------------------ | ------ | ---- | - | ------ | ------ | - | - | ------ | ---- | -
|                                                |                         |   | Years Ended December 31,
|                                                |                         |   |                         
|                                                |                         |   | 2002                     |        | 2001 |   | 2000  
|                                                |                         |   |                          |        |      |   |       
|                                                |                         |   | (In thousands)          
|Net income                                      |                         | $ | 5,983                    |        |      | $ | 10,567 |        |   | $ | 11,253 |     
|Preferred dividends                             |                         |   | (250                     | )      |      |   | (250   | )      |   |   | (251   | )   
|                                                |                         |   |                          |        |      |   |        |        |   |   |        |     
|Net income available to common shareholders     |                         |   | 5,733                    |        |      |   | 10,317 |        |   |   | 11,002 |     
|Book/tax differences:                           |                         |   |                          |        |      |   |        |        |   |   |        |     
|                                                | Retained Interests, net |   |                          | 1,371  |      |   |        | 867    |   |   |        | 574  |  
|                                                | Gains on sales          |   |                          | (1,463 | )    |   |        | (2,732 | ) |   |        | (564 | )
|                                                | Valuation adjustments   |   |                          | 1,207  |      |   |        | 637    |   |   |        | (585 | )
|                                                | Other, net              |   |                          | 183    |      |   |        | 200    |   |   |        | 137  |  
|                                                |                         |   |                          |        |      |   |        |        |   |   |        |     
|Taxable income available to common shareholders |                         | $ | 7,031                    |        |      | $ | 9,289  |        |   | $ | 10,564 |     
|                                                |                         |   |                          |        |      |   |        |        |   |   |        |     
|Distributions to common shareholders            |                         | $ | 6,638                    |        |      | $ | 10,076 |        |   | $ | 11,846 |     
|                                                |                         |   |                          |        |      |   |        |        |   |   |        |     

Distributions per share for dividend reporting purposes were as follows:

|                  |  |                          |       |         |  |           |       |         |  |           |       |         |  |        |       |   |  |   |       |  |  |  |       |  
|----------------- |  | ------------------------ | ----- | ------- |  | --------- | ----- | ------- |  | --------- | ----- | ------- |  | ------ | ----- | - |  | - | ----- |  |  |  | ----- | -
|                  |  | Years Ended December 31,
|                  |  |                         
|                  |  | 2002                     |       | 2001    |  | 2000     
|                  |  |                          |       |         |  |          
|                  |  | Amount                   |       |         |  |           |       | Amount  |  |           |       |         |  | Amount |       |   |  |  
|                  |  | Per Share                |       | Percent |  | Per Share |       | Percent |  | Per Share |       | Percent
|                  |  |                          |       |         |  |           |       |         |  |           |       |        
|Ordinary income   |  | $                        | 0.560 |         |  |           | 100.0 | %       |  | $         | 0.850 |         |  |        | 100.0 | % |  | $ | 0.774 |  |  |  | 77.4  | %
|Return of capital |  |                          |      |         |  |           |      |         |  |           |      |         |  |        |      |   |  |   | 0.226 |  |  |  | 22.6  | %
|                  |  |                          |       |         |  |           |       |         |  |           |       |         |  |        |       |   |  |   |       |  |  |  |       |  
|                  |  | $                        | 0.560 |         |  |           | 100.0 | %       |  | $         | 0.850 |         |  |        | 100.0 | % |  | $ | 1.000 |  |  |  | 100.0 | %
|                  |  |                          |       |         |  |           |       |         |  |           |       |         |  |        |       |   |  |   |       |  |  |  |       |  

Note 10. Earnings Per Common Share Computations:

The computations of basic earnings per common share are based on our
weighted average shares outstanding. The weighted average shares
outstanding were 11,854,000, 11,854,000 and 11,841,000 during 2002, 2001
and 2000, respectively. Due to the effect of stock options, our fully
diluted weighted average shares outstanding were increased by
approximately 400 shares and 4,000 shares during 2001 and 2000,
respectively. There was no change in the weighted average shares
outstanding during 2002 since our stock options were anti-dilutive.

Options to purchase 236,250, 164,605 and 169,305 common shares were
outstanding during 2002, 2001 and 2000, respectively, but were not
included in the computation of diluted earnings per share because the
options exercise prices were greater than the average market price of
the common stock.

Earnings are defined as net income and are reduced by the preferred
stock dividend requirements of PMCIC. Preferred stock dividend
requirements were approximately $250,000 during each of the years ended
December 31, 2002, 2001 and 2000.

Note 11. Dividends Paid and Declared:

During April, July and October 2002, we paid quarterly dividends of
$0.16, $0.16 and $0.12 per share of Common Stock to common shareholders
of record on March 28, 2002, June 28, 2002 and September 30, 2002,
respectively. During December 2002, we declared a $0.12 per share
dividend to common shareholders of record on December 31, 2002, which
was paid during January 2003. Dividends declared for the years ended
December 31, 2002, 2001 and 2000 were $0.56 per share, $0.85 per share
and $1.00 per share, respectively.

F-28



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 12. Dividend Reinvestment and Cash Purchase Plan:

We have a dividend reinvestment and cash purchase plan (the Plan) for
up to 1,000,000 shares of common stock. Participants in the Plan have
the option to reinvest all or a portion of dividends received. We use
the open market to purchase shares with the proceeds from the dividend
reinvestment portion of the plan. Accordingly, we do not issue new
shares or receive the proceeds. As a result, we had no share issuances pursuant to the Plan during 2002, 2001 and 2000.

Note 13. Profit Sharing Plan:

We have a profit sharing plan available to our full-time employees after
one year of employment. Vesting increases ratably to 100% after the
sixth year of employment. Pursuant to our profit sharing plan,
$220,000, $242,000 and $247,000, respectively, was expensed during 2002,
2001 and 2000, respectively. Contributions to the profit sharing plan
are at the discretion of our Board of Directors.

Note 14. Stock-Based Compensation Plan:

We have applied Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for our stock-based compensation plan. In
1995, SFAS No. 123 was issued which, if fully adopted by us would have
changed the methods we apply in recognizing the cost of our stock-based
compensation plan. Effective January 1, 2003, we adopted the fair value
recognition provisions of SFAS No. 123 prospectively to all awards granted, modified or settled after January 1, 2003.

Under The PMC Capital, Inc. 1997 Employee Stock Option Plan (the Option
Plan), we are authorized to issue up to 6% of the then outstanding shares of Common Stock (a maximum of approximately 711,000 shares at
December 31, 2002) pursuant to Awards granted to employees as incentive stock options
(intended to qualify under Section 422 of the Code) or non-qualified stock options.

Stock Options

We granted stock options during 2002, 2001 and 2000 to certain employees
that (1) all have contractual terms of five years, (2) have an exercise
price equal to the fair market value of the stock at grant date, and (3)
vest within 30 days of the date of grant.

F-29



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A summary of the status of our stock options as of December 31, 2002,
2001 and 2000 and the changes during the years ended on those dates are
as follows:

|                                                                     |  |            |         |          |  |            |       |          |  |            |         |          |  |   |       |  |  |   |         |   |  |   |       | 
|-------------------------------------------------------------------- |  | ---------- | ------- | -------- |  | ---------- | ----- | -------- |  | ---------- | ------- | -------- |  | - | ----- |  |  | - | ------- | - |  | - | ----- | 
|                                                                     |  | 2002       |         | 2001     |  | 2000      
|                                                                     |  |            |         |          |  |           
|                                                                     |  | Number of  |         | Weighted |  | Number of  |       | Weighted |  | Number of  |         | Weighted
|                                                                     |  | Shares     |         | Average  |  | Shares     |       | Average  |  | Shares     |         | Average 
|                                                                     |  | Underlying |         | Exercise |  | Underlying |       | Exercise |  | Underlying |         | Exercise
|                                                                     |  | Options    |         | Prices   |  | Options    |       | Prices   |  | Options    |         | Prices  
|                                                                     |  |            |         |          |  |            |       |          |  |            |         |         
|Outstanding, January 1                                               |  |            | 251,355 |          |  | $          | 10.96 |          |  |            | 209,905 |          |  | $ | 11.72 |  |  |   | 196,055 |   |  | $ | 12.15 | 
|Granted                                                              |  |            | 58,350  |          |  | $          | 6.64  |          |  |            | 57,250  |          |  | $ | 8.00  |  |  |   | 66,800  |   |  | $ | 9.03  | 
|Exercised                                                            |  |            |        |          |  |            |      |          |  |            |        |          |  |   |      |  |  |   | (24,400 | ) |  | $ | 8.06  | 
|Forfeited                                                            |  |            | (3,150  | )        |  | $          | 8.47  |          |  |            | (15,800 | )        |  | $ | 11.11 |  |  |   | (28,550 | ) |  | $ | 11.55 | 
|Expired                                                              |  |            | (70,305 | )        |  | $          | 14.23 |          |  |            |        |          |  |   |      |  |  |   |        |   |  |   |      | 
|                                                                     |  |            |         |          |  |            |       |          |  |            |         |          |  |   |       |  |  |   |         |   |  |   |       | 
|Outstanding, December 31                                             |  |            | 236,250 |          |  | $          | 8.92  |          |  |            | 251,355 |          |  | $ | 10.96 |  |  |   | 209,905 |   |  | $ | 11.72 | 
|                                                                     |  |            |         |          |  |            |       |          |  |            |         |          |  |   |       |  |  |   |         |   |  |   |       | 
|Exercisable, December 31                                             |  |            | 178,050 |          |  | $          | 9.67  |          |  |            | 198,605 |          |  | $ | 11.75 |  |  |   | 150,605 |   |  | $ | 12.77 | 
|                                                                     |  |            |         |          |  |            |       |          |  |            |         |          |  |   |       |  |  |   |         |   |  |   |       | 
|Weighted-average
fair value of stock
options granted
during the year |  | $          | 0.55    |          |  |            |       |          |  | $          | 0.35    |          |  |   |       |  |  | $ | 0.57    |   |  |   |       | 
|                                                                     |  |            |         |          |  |            |       |          |  |            |         |          |  |   |       |  |  |   |         |   |  |   |       | 

The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants during 2002, 2001 and 2000:

|                        |  |      |       |      |  |      |       |   |  |  |       |  
|----------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|Assumption              |  | 2002 |       | 2001 |  | 2000
|                        |  |      |       |      |  |     
|Expected Term (years)   |  |      | 3.0   |      |  |      | 3.0   |   |  |  | 3.0   |  
|Risk-Free Interest Rate |  |      | 3.56  | %    |  |      | 4.39  | % |  |  | 6.40  | %
|Expected Dividend Yield |  |      | 8.43  | %    |  |      | 10.63 | % |  |  | 11.03 | %
|Expected Volatility     |  |      | 23.14 | %    |  |      | 17.69 | % |  |  | 19.78 | %

The following table summarizes information about stock options
outstanding at December 31, 2002:

| |  |                      |  |              |         |             |  |             |       |              |  |             |      |          |  |  |         |  |  |   |       |  |  | 
| |  | -------------------- |  | ------------ | ------- | ----------- |  | ----------- | ----- | ------------ |  | ----------- | ---- | -------- |  |  | ------- |  |  | - | ----- |  |  | 
| |  |                      |  |              |         | Number      |  |             |       |              |  | Weighted    |      | Number   |  |  |         | 
| |  |                      |  |              |         | Outstanding |  | Weighted    |       | Average      |  | Exercisable |      | Weighted
| |  |                      |  |              |         | at          |  | Average     |       | Remaining    |  | at          |      | Average 
| |  | Range of             |  | December 31, |         | Exercise    |  | Contractual |       | December 31, |  | Exercise   
| |  | Exercise Prices      |  | 2002         |         | Price       |  | Life        |       | 2002         |  | Price      
| |  |                      |  |              |         |             |  |             |       |              |  |            
| |  | $6.64 to $9.06       |  |              | 197,050 |             |  | $           | 7.90  |              |  |             | 3.10 |          |  |  | 138,850 |  |  | $ | 8.43  | 
| |  | $14.0625 to $14.0625 |  |              | 39,200  |             |  | $           | 14.06 |              |  |             | 0.40 |          |  |  | 39,200  |  |  | $ | 14.06 | 
| |  |                      |  |              |         |             |  |             |       |              |  |             |      |          |  |  |         |  |  |   |       | 
| |  | $6.64 to $14.0625    |  |              | 236,250 |             |  | $           | 8.92  |              |  |             | 2.70 |          |  |  | 178,050 |  |  | $ | 9.67  | 
| |  |                      |  |              |         |             |  |             |       |              |  |             |      |          |  |  |         |  |  |   |       | 

Note 15. Fair Values of Liabilities:

The estimates of fair value of our notes and debentures payable as
required by SFAS No. 107 differ from the carrying amounts of liabilities
primarily as a result of the effects of discounting future cash flows.
The estimated fair value is based on a present value calculation based
on prices of the same or similar instruments after considering risk,
current interest rates and remaining maturities. Considerable judgment
is required to interpret market data and develop estimates of fair
value. Accordingly, our estimate of the fair value of our notes and
debentures payable may not be indicative of the amounts we could realize
in a current market exchange.

F-30



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The estimated fair values of our notes and debentures payable were as
follows:

|                             |  |                          |        |       |  |           |        |       |  |   |        |           |  |   |        | 
|---------------------------- |  | ------------------------ | ------ | ----- |  | --------- | ------ | ----- |  | - | ------ | --------- |  | - | ------ | 
|                             |  | Years Ended December 31,
|                             |  |                         
|                             |  | 2002                     |        | 2001 
|                             |  |                          |        |      
|                             |  |                          |        |       |  | Estimated |        |       |  |   |        | Estimated
|                             |  | Carrying                 |        | Fair  |  | Carrying  |        | Fair 
|                             |  | Value                    |        | Value |  | Value     |        | Value
|                             |  |                          |        |       |  |           |        |      
|                             |  | (In thousands)          
|Notes and debentures payable |  | $                        | 54,310 |       |  | $         | 54,915 |       |  | $ | 76,310 |           |  | $ | 75,999 | 
|                             |  |                          |        |       |  |           |        |       |  |   |        |           |  |   |        | 

Note 16. Supplemental Disclosure of Cash Flow Information:

Information regarding our non-cash activities was as follows:

|                                                                                    |  |                          |       |      |  |      |       |  |  |   |       | 
|----------------------------------------------------------------------------------- |  | ------------------------ | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                                                    |  | Years Ended December 31,
|                                                                                    |  |                         
|                                                                                    |  | 2002                     |       | 2001 |  | 2000
|                                                                                    |  |                          |       |      |  |     
|                                                                                    |  | (In thousands)          
|Interest paid                                                                       |  | $                        | 4,848 |      |  | $    | 5,493 |  |  | $ | 5,348 | 
|                                                                                    |  |                          |       |      |  |      |       |  |  |   |       | 
|Loans and interest receivable transferred to SPEs, net                              |  | $                        | 4,435 |      |  | $    | 4,215 |  |  | $ | 3,154 | 
|                                                                                    |  |                          |       |      |  |      |       |  |  |   |       | 
|Reclassification from loans receivable to assets acquired
in liquidation            |  | $                        | 2,629 |      |  | $    | 314   |  |  | $ |      | 
|                                                                                    |  |                          |       |      |  |      |       |  |  |   |       | 
|Assumption of loans receivable by affiliate                                         |  | $                        | 885   |      |  | $    |      |  |  | $ |      | 
|                                                                                    |  |                          |       |      |  |      |       |  |  |   |       | 
|Loan receivable originated in connection with sale of
asset acquired in liquidation |  | $                        | 325   |      |  | $    |      |  |  | $ |      | 
|                                                                                    |  |                          |       |      |  |      |       |  |  |   |       | 
|Loans and interest receivable transferred from SPE, net                             |  | $                        |      |      |  | $    | 6,409 |  |  | $ |      | 
|                                                                                    |  |                          |       |      |  |      |       |  |  |   |       | 

Note 17. Related Party Transactions:

Pursuant to SBA rules and regulations, distributions from our
consolidated subsidiaries, First Western, PMCIC and Western Financial,
are limited. As of both December 31, 2002 and 2001, the amounts of
dividends available for distribution were approximately $0.5 million.

We are affiliated with PMC Commercial through common management. Our
executive officers are the same as the executive officers of PMC
Commercial and three of our directors or officers are trust managers of
PMC Commercial. PMC Advisers evaluates and services loans receivable
and other investments of PMC Commercial pursuant to the investment
management agreements entered into between PMC Commercial and PMC
Advisers. Through June 30, 2000, PMC Advisers charged fees of between
0.40% and 1.67%, annually, to PMC Commercial based upon the average
principal outstanding of PMC Commercials loans. Commencing July 1,
2000, the highest rate charged was reduced from 1.67% to 1.55%. In
addition, the investment management agreements (i) provide for an annual
fee of 0.70% of the original cost of properties owned by PMC Commercial
and (ii) include compensation to PMC Advisers for its assistance in the
issuance of PMC Commercials debt and equity securities and the
acquisition by PMC Commercial of properties. The investment management
agreements were amended on July 1, 2001 to provide for a fee of $10,000
upon the sale of each limited service hospitality property owned by PMC
Commercial and an annual loan origination fee equal to five basis points
of loans funded for the first $20 million in loans and 2.5 basis points
thereafter. The investment management agreements are renewable on an
annual basis. In the event the investment management agreements are
terminated or not renewed by PMC Commercial (other than as a result of a
material breach by PMC Advisers) or terminated by PMC Advisers (as a
result of a material breach by PMC Commercial), certain compensation is
required to be paid to PMC Advisers by PMC Commercial.

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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fees earned pursuant to the investment management agreements were as
follows:

|                                   |  |                          |       |      |  |      |       |  |  |   |       | 
|---------------------------------- |  | ------------------------ | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                   |  | Years Ended December 31,
|                                   |  |                         
|                                   |  | 2002                     |       | 2001 |  | 2000
|                                   |  |                          |       |      |  |     
|                                   |  | (In thousands)          
|Loan servicing and origination fee |  | $                        | 1,927 |      |  | $    | 1,803 |  |  | $ | 1,699 | 
|Lease supervision fee              |  |                          | 401   |      |  |      | 461   |  |  |   | 500   | 
|                                   |  |                          |       |      |  |      |       |  |  |   |       | 
|                                   |  | $                        | 2,328 |      |  | $    | 2,264 |  |  | $ | 2,199 | 
|                                   |  |                          |       |      |  |      |       |  |  |   |       | 

PMC Capital allocates overhead to PMC Advisers to the extent that PMC
Advisers utilizes the staff and facilities of PMC Capital. The overhead
allocated during 2002, 2001 and 2000, was $1,927,000, $1,803,000 and
$1,699,000, respectively. These amounts are included in advisory fee
income in the accompanying consolidated statements of operations. In no
event will the allocated expenses exceed the income available from the
operations of PMC Advisers. The lease supervision fee is included in
equity in income of unconsolidated subsidiary, net in the accompanying
consolidated statements of operations. At December 31, 2002 and 2001,
the balance due to PMC Advisers from PMC Commercial under the investment
management agreements was $585,000 and $574,000, respectively.

In October 2002, PMC Funding acquired two assisted care living
facilities with a fair value of approximately $1.2 million for $101,000
in cash and the assumption of notes payable to PMC Capital and First
Western. PMC Funding operated one of the two assisted care living
facilities while the other facility is vacant. On January 15, 2003, PMC
Funding sold the operating assisted care living facility for $975,000.
The proceeds were used to repay in full the mortgage held by PMC
Capital, including additional costs incurred prior to liquidation and
accrued interest. The remaining funds were used to repay a portion of
the receivable due to First Western. As of December 31, 2002, the
underlying loan receivable held by PMC Capital related to these
facilities was valued at approximately $788,000.

During December 2002, PMC Capital exercised its option to repurchase a
loan which was deemed to be a charged-off loan (in accordance with the
transaction documents) from the 2000 Joint Venture for its principal
balance of $2.3 million plus accrued interest.

Note 18. Commitments and Contingencies:

Operating Leases

In September 1998, we entered into a five-year lease for office space
commencing December 1998. We may at our option, renew the term of the
lease for two additional five-year periods. At December 31, 2002, we
had an agreement to lease office space in Missouri. Rental expense
amounted to approximately $328,000, $321,000 and $315,000 during 2002,
2001 and 2000, respectively. Future minimum payments remaining under
these leases are $284,000 for 2003 and $24,000 for 2004.

Loan Commitments

Commitments to extend credit are agreements to lend to a customer
provided that the terms established in the contract are met. At
December 31, 2002, we had approximately $29.4 million of total loan
commitments outstanding. Of these commitments, $5.5 million are for
loans to be originated by First Western, a portion of which will be sold
pursuant to SBA Guaranteed Sales. Commitments generally have fixed
expiration dates and require payment of a fee to us. Since some
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements.

Employment Agreements

We have employment contracts with certain of our officers for terms
expiring through June 2004. Annual remuneration during the term of the
contracts does not exceed $315,000 for any one individual. Future
minimum payments under these contracts are $1,182,000, $1,058,000 and
$467,000 in 2003, 2004 and 2005, respectively.

Compensation to officers was approximately $1.6 million during each of
the years ended December 31, 2002, 2001 and 2000.

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PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Litigation

In the normal course of business, including the operation of our assets
acquired in liquidation, we are subject to various proceedings and
claims, the resolution of which will not, in managements opinion, have
a material adverse effect on our consolidated financial position or
results of operations.

Structured Loan Sale Transactions

PMC Capital and PMC Commercial have entered into cross indemnification
agreements regarding the performance of their respective loans
receivable sold to the Joint Ventures. To the extent that poor
performance by either PMC Capital or PMC Commercials sold loans
receivable (the Underperforming Company) is pervasive enough to cause
the other company (the Performing Company) to not receive cash flow
that it otherwise would have received, then the Underperforming Company
must make the Performing Company whole. If the cash flow reduction is
considered to be temporary, then interest will be paid as compensation
to the Performing Company. In general, when a loan is liquidated, it
may cause a deferral of cash flow to the Performing Company and, as a
result, interest would be charged to the Underperforming Company until
the cash flow from the Joint Venture repays the Performing Company. As a
result of the Credit Enhancement Provisions described below, PMC
Commercial had a cash deferral, and we paid compensation to PMC
Commercial of less than $1,000. If the reduction of cash flows is
deemed permanent, (i.e.,to the extent that the Underperforming Company
will not be able to satisfy the shortfall with the assets they have
contributed to the related structured loan sale transaction), the
reduction in cash flows must be paid to the Performing Company by the
Underperforming Company. At December 31, 2002, the maximum potential
amount of future payments to PMC Commercial (undiscounted and without
consideration of any recoveries from the underlying loans receivable) we
could be required to make under these cross indemnification agreements
was approximately $34.3 million and the discounted amount was $23.5
million which represents the estimated fair value of the Retained
Interests reflected on PMC Commercials consolidated balance sheet for
the Joint Ventures. All of our loans are collateralized; however, the
maximum potential amount of future payments we could be required to make
under these cross indemnification agreements has not considered any
proceeds from the liquidation of collateral underlying these loans.
Upon completion of a joint securitization and on each subsequent
quarterly reporting date, management evaluates the need to recognize a
liability associated with these cross indemnification agreement. Based
on our present cash flow assumptions, including stress test analyses of
increasing the anticipated losses on each of the loan pools, it does not
appear that the loans receivable sold by us will cause any permanent
cash flow reductions to PMC Commercial nor will the loans receivable
sold by PMC Commercial cause any permanent cash flow reductions to us.
Accordingly, we believe that the fair value of these cross
indemnification agreements at inception of the Joint Ventures and as of
December 31, 2002 and 2001 was zero; thus, no liability was recorded.
If the performance of our sold loans receivable deteriorates, it may be
necessary for us to perform under these cross indemnification
agreements.

When our structured loan sale transactions were completed, the
transaction documents that the SPE entered into contained provisions
(the Credit Enhancement Provisions) that govern the assets and the
flow of funds in and out of the SPE formed as part of the structured
loan sale transactions. The Credit Enhancement Provisions include
specified limits on the delinquency, default and loss rates on loans
receivable included in each SPE. If, at any measurement date, the
delinquency, default or loss rate with respect to any SPE were to exceed
the specified limits, the Credit Enhancement Provisions would
automatically increase the level of credit enhancement requirements for
that SPE. During the period in which the specified delinquency, default
or loss rate was exceeded, excess cash flow from the SPE, if any, would
be used to fund the increased credit enhancement levels instead of being
distributed, which would delay or reduce our distribution. As a result
of our impaired loans in the 2000 Joint Venture, a Credit Enhancement
Provision was triggered in November 2002. As a consequence, cash flows
relating to this transaction were deferred and utilized to fund the
increased reserve requirements. Our cash flow deferral at December 31,
2002 and February 28, 2003 was approximately $192,000 and $282,000,
respectively. Based on current cash flow assumptions, management
anticipates that these funds will be received in future periods.

F-33



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 19. Selected Quarterly Financial Data(unaudited):

The following represents our selected quarterly financial data which, in
the opinion of management, reflects adjustments (comprising only normal
recurring adjustments) necessary for fair presentation.

|                                                         |  |                                       |       |             |  |             |       |         |  |       |       |   |  |   |       |   |  |   |        | 
|-------------------------------------------------------- |  | ------------------------------------- | ----- | ----------- |  | ----------- | ----- | ------- |  | ----- | ----- | - |  | - | ----- | - |  | - | ------ | 
|                                                         |  | Year Ended December 31, 2002         
|                                                         |  |                                      
|                                                         |  | First                                 |       | Second      |  | Third       |       | Fourth  |  |       |       |  
|                                                         |  | Quarter                               |       | Quarter (1) |  | Quarter (1) |       | Quarter |  | Total
|                                                         |  |                                       |       |             |  |             |       |         |  |      
|                                                         |  | (In thousands, except per share data)
|Total investment income                                  |  | $                                     | 4,785 |             |  | $           | 3,968 |         |  | $     | 3,704 |   |  | $ | 4,205 |   |  | $ | 16,662 | 
|Net investment income                                    |  | $                                     | 2,119 |             |  | $           | 1,221 |         |  | $     | 941   |   |  | $ | 1,675 |   |  | $ | 5,956  | 
|Total realized and unrealized
gain (loss) on investments |  | $                                     | (439  | )           |  | $           | 1,243 |         |  | $     | (392  | ) |  | $ | (385  | ) |  | $ | 27     | 
|Net income                                               |  | $                                     | 1,680 |             |  | $           | 2,464 |         |  | $     | 549   |   |  | $ | 1,290 |   |  | $ | 5,983  | 
|Basic and diluted earnings
per share                     |  | $                                     | 0.14  |             |  | $           | 0.20  |         |  | $     | 0.04  |   |  | $ | 0.10  |   |  | $ | 0.48   | 

|                                                         |  |                                       |       |         |  |         |       |         |  |       |       |   |  |   |       |   |  |   |        | 
|-------------------------------------------------------- |  | ------------------------------------- | ----- | ------- |  | ------- | ----- | ------- |  | ----- | ----- | - |  | - | ----- | - |  | - | ------ | 
|                                                         |  | Year Ended December 31, 2001         
|                                                         |  |                                      
|                                                         |  | First                                 |       | Second  |  | Third   |       | Fourth  |  |       |       |  
|                                                         |  | Quarter                               |       | Quarter |  | Quarter |       | Quarter |  | Total
|                                                         |  |                                       |       |         |  |         |       |         |  |      
|                                                         |  | (In thousands, except per share data)
|Total investment income                                  |  | $                                     | 5,253 |         |  | $       | 5,582 |         |  | $     | 4,836 |   |  | $ | 5,081 |   |  | $ | 20,752 | 
|Net investment income                                    |  | $                                     | 2,333 |         |  | $       | 2,455 |         |  | $     | 2,132 |   |  | $ | 2,424 |   |  | $ | 9,344  | 
|Total realized and unrealized
gain (loss) on investments |  | $                                     | 127   |         |  | $       | 2,071 |         |  | $     | (242  | ) |  | $ | (733  | ) |  | $ | 1,223  | 
|Net income                                               |  | $                                     | 2,460 |         |  | $       | 4,526 |         |  | $     | 1,890 |   |  | $ | 1,691 |   |  | $ | 10,567 | 
|Basic and diluted earnings
per share                     |  | $                                     | 0.20  |         |  | $       | 0.38  |         |  | $     | 0.15  |   |  | $ | 0.14  |   |  | $ | 0.87   | 



---

|(1) |  | Certain amounts were previously reported in discontinued
operations in our quarterly filings on Form 10-Q for the periods
ended June 30, 2002 and September 30, 2002. Such amounts have been
reclassified to the presentation adopted at December 31, 2002 and are
included as a component of net investment income.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 20. Subsequent Events:

On March 27, 2003, we entered into an Agreement and Plan of Merger with PMC Commercial.
Under the terms of the merger agreement, PMC Capital will be merged into PMC Commercial, with PMC Commercial continuing
as the surviving entity. Each issued and outstanding share of PMC Capital common stock will be converted into 0.37 of a common share of
PMC Commercial. The merger has been recommended by each companys special committee and approved by the Board of Directors of PMC Capital and the Board of Trust Managers
of PMC Commercial. In addition, the boards and management of each company have entered into voting agreements pursuant to which they have agreed to vote their shares in favor
of the merger and related transactions. Completion of the merger, which is expected to occur in the fourth quarter of 2003, is subject to approval by the shareholders
of PMC Capital and PMC Commercial, certain governmental consents and customary closing conditions.

During March 2003, we declared a $0.12 per share dividend to common shareholders of record on March 31, 2003,
to be paid on April 14, 2003.

F-34



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##### Table of Contents



Report of Independent Accountants
On Accompanying Consolidating Information

To the Shareholders and Board of Directors of
PMC Capital, Inc.:

The report on our audit of the consolidated financial statements of PMC Capital,
Inc. and its subsidiaries as of December 31, 2002 and for the year then ended
appears on page F-2 of this Annual Report on Form 10-K. That audit was conducted
for the purpose of forming an opinion on the consolidated financial statements
taken as a whole. The consolidating information is presented for purposes of
additional analysis of the consolidated financial statements rather than to
present the financial position, results of operations and cash flows of the
individual companies. The consolidating information has been subjected to the
auditing procedures applied in the audit of the consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the consolidated financial statements taken as a whole.

PricewaterhouseCoopers LLP

Dallas, Texas
March 11, 2003, except for Note 20,   as to which the date is March 27, 2003

F-35



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2002(In thousands)

|                                           |                                                           |   |              |        |             |   |             |         |      |   |              |        |              |   |             |        |               |   |            |        |         |   |        |        |   |   |        |        |  
|------------------------------------------ | --------------------------------------------------------- | - | ------------ | ------ | ----------- | - | ----------- | ------- | ---- | - | ------------ | ------ | ------------ | - | ----------- | ------ | ------------- | - | ---------- | ------ | ------- | - | ------ | ------ | - | - | ------ | ------ | -
|                                           |                                                           |   |              |        |             |   |             |         |      |   |              |        |              |   |             |        |               |   | FIRST      |        | WESTERN |   |        |        |  
|                                           |                                                           |   |              |        |             |   |             |         |      |   | CONSOLIDATED |        |              |   |             |        | WESTERN SBLC, |   | FINANCIAL  |        | PMC    
|                                           |                                                           |   |              |        |             |   |             |         |      |   | BEFORE       |        | PMC CAPITAL, |   | INC. AND    |        | CAPITAL       |   | INVESTMENT
|                                           |                                                           |   | CONSOLIDATED |        | ELIMINATION |   | ELIMINATION |         | INC. |   | SUBSIDIARY   |        | CORPORATION  |   | CORPORATION
|                                           |                                                           |   |              |        |             |   |             |         |      |   |              |        |              |   |            
|ASSETS                                     |                                                           |   |              |        |             |   |             |         |      |   |              |        |              |   |             |        |               |   |            |        |         |   |        |        |   |   |        |       
|Investments at value:                      |                                                           |   |              |        |             |   |             |         |      |   |              |        |              |   |             |        |               |   |            |        |         |   |        |        |   |   |        |       
|                                           | Loans receivable                                          |   | $            | 87,245 |             |   | $           |        |      |   | $            | 87,245 |              |   | $           | 33,380 |               |   | $          | 14,469 |         |   | $      | 12,859 |   |   | $      | 26,537 |  
|                                           | Retained interests in transferred assets                  |   |              | 40,003 |             |   |             |        |      |   |              | 40,003 |              |   |             | 37,271 |               |   |            | 2,732  |         |   |        |       |   |   |        |       |  
|                                           | Cash equivalents                                          |   |              | 4,915  |             |   |             |        |      |   |              | 4,915  |              |   |             | 2,044  |               |   |            | 108    |         |   |        | 209    |   |   |        | 2,554  |  
|                                           | Mortgage-backed security of affiliate                     |   |              | 1,381  |             |   |             |        |      |   |              | 1,381  |              |   |             | 1,381  |               |   |            |       |         |   |        |       |   |   |        |       |  
|                                           | Restricted investments                                    |   |              | 299    |             |   |             |        |      |   |              | 299    |              |   |             | 121    |               |   |            | 178    |         |   |        |       |   |   |        |       |  
|                                           | Investment in subsidiaries                                |   |              | 81     |             |   |             | (22,180 | )    |   |              | 22,261 |              |   |             | 22,261 |               |   |            |       |         |   |        |       |   |   |        |       |  
|                                           | Assets acquired in liquidation                            |   |              | 2,252  |             |   |             |        |      |   |              | 2,252  |              |   |             | 1,171  |               |   |            |       |         |   |        |       |   |   |        | 1,081  |  
|                                           |                                                           |   |              |        |             |   |             |         |      |   |              |        |              |   |             |        |               |   |            |        |         |   |        |        |   |   |        |       
|Total investments at value                 |                                                           |   | 136,176      |        |             |   | (22,180     | )       |      |   | 158,356      |        |              |   | 97,629      |        |               |   | 17,487     |        |         |   | 13,068 |        |   |   | 30,172 |       
|                                           |                                                           |   |              |        |             |   |             |         |      |   |              |        |              |   |             |        |               |   |            |        |         |   |        |        |   |   |        |       
|Other assets:                              |                                                           |   |              |        |             |   |             |         |      |   |              |        |              |   |             |        |               |   |            |        |         |   |        |        |   |   |        |       
|                                           | Due from affiliates                                       |   |              | 1,839  |             |   |             | (16,140 | )    |   |              | 17,979 |              |   |             | 17,597 |               |   |            | 382    |         |   |        |       |   |   |        |       |  
|                                           | Deferred charges, deposits and other assets               |   |              | 728    |             |   |             |        |      |   |              | 728    |              |   |             | 274    |               |   |            | 148    |         |   |        | 149    |   |   |        | 157    |  
|                                           | Receivable for loans sold                                 |   |              | 637    |             |   |             |        |      |   |              | 637    |              |   |             |       |               |   |            | 637    |         |   |        |       |   |   |        |       |  
|                                           | Accrued interest receivable                               |   |              | 225    |             |   |             |        |      |   |              | 225    |              |   |             | 91     |               |   |            | 30     |         |   |        | 26     |   |   |        | 78     |  
|                                           | Cash                                                      |   |              | 563    |             |   |             |        |      |   |              | 563    |              |   |             | 172    |               |   |            | 352    |         |   |        | 23     |   |   |        | 16     |  
|                                           | Property and equipment, net                               |   |              | 98     |             |   |             |        |      |   |              | 98     |              |   |             | 98     |               |   |            |       |         |   |        |       |   |   |        |       |  
|                                           |                                                           |   |              |        |             |   |             |         |      |   |              |        |              |   |             |        |               |   |            |        |         |   |        |        |   |   |        |       
|Total other assets                         |                                                           |   | 4,090        |        |             |   | (16,140     | )       |      |   | 20,230       |        |              |   | 18,232      |        |               |   | 1,549      |        |         |   | 198    |        |   |   | 251    |       
|                                           |                                                           |   |              |        |             |   |             |         |      |   |              |        |              |   |             |        |               |   |            |        |         |   |        |        |   |   |        |       
|Total assets                               |                                                           | $ | 140,266      |        |             | $ | (38,320     | )       |      | $ | 178,586      |        |              | $ | 115,861     |        |               | $ | 19,036     |        |         | $ | 13,266 |        |   | $ | 30,423 |       
|                                           |                                                           |   |              |        |             |   |             |         |      |   |              |        |              |   |             |        |               |   |            |        |         |   |        |        |   |   |        |       
|LIABILITIES AND SHAREHOLDERS EQUITY       |                                                           |   |              |        |             |   |             |         |      |   |              |        |              |   |             |        |               |   |            |        |         |   |        |        |   |   |        |       
|Liabilities:                               |                                                           |   |              |        |             |   |             |         |      |   |              |        |              |   |             |        |               |   |            |        |         |   |        |        |   |   |        |       
|                                           | Current portion of notes and debentures payable           |   | $            | 5,000  |             |   | $           |        |      |   | $            | 5,000  |              |   | $           | 5,000  |               |   | $          |       |         |   | $      |       |   |   | $      |       |  
|                                           | Dividends payable                                         |   |              | 1,486  |             |   |             |        |      |   |              | 1,486  |              |   |             | 1,423  |               |   |            |       |         |   |        |       |   |   |        | 63     |  
|                                           | Borrower advances                                         |   |              | 1,754  |             |   |             |        |      |   |              | 1,754  |              |   |             | 798    |               |   |            | 138    |         |   |        | 422    |   |   |        | 396    |  
|                                           | Accrued interest payable                                  |   |              | 748    |             |   |             |        |      |   |              | 748    |              |   |             | 355    |               |   |            | 12     |         |   |        | 130    |   |   |        | 251    |  
|                                           | Accounts payable                                          |   |              | 1,569  |             |   |             |        |      |   |              | 1,569  |              |   |             | 123    |               |   |            | 1,428  |         |   |        |       |   |   |        | 18     |  
|                                           | Due to affiliates                                         |   |              | 102    |             |   |             | (694    | )    |   |              | 796    |              |   |             | 101    |               |   |            |       |         |   |        | 403    |   |   |        | 292    |  
|                                           | Other liabilities                                         |   |              | 1,294  |             |   |             |        |      |   |              | 1,294  |              |   |             | 1,058  |               |   |            | 65     |         |   |        |       |   |   |        | 171    |  
|                                           |                                                           |   |              |        |             |   |             |         |      |   |              |        |              |   |             |        |               |   |            |        |         |   |        |        |   |   |        |       
|Total current liabilities                  |                                                           |   | 11,953       |        |             |   | (694        | )       |      |   | 12,647       |        |              |   | 8,858       |        |               |   | 1,643      |        |         |   | 955    |        |   |   | 1,191  |       
|Notes and debentures payable               |                                                           |   | 49,310       |        |             |   | (15,446     | )       |      |   | 64,756       |        |              |   | 35,000      |        |               |   | 15,446     |        |         |   | 4,310  |        |   |   | 10,000 |       
|                                           |                                                           |   |              |        |             |   |             |         |      |   |              |        |              |   |             |        |               |   |            |        |         |   |        |        |   |   |        |       
|Total liabilities                          |                                                           |   | 61,263       |        |             |   | (16,140     | )       |      |   | 77,403       |        |              |   | 43,858      |        |               |   | 17,089     |        |         |   | 5,265  |        |   |   | 11,191 |       
|                                           |                                                           |   |              |        |             |   |             |         |      |   |              |        |              |   |             |        |               |   |            |        |         |   |        |        |   |   |        |       
|Commitments and contingencies              |                                                           |   |              |        |             |   |             |         |      |   |              |        |              |   |             |        |               |   |            |        |         |   |        |        |   |   |        |       
|Cumulative preferred stock of subsidiary   |                                                           |   | 7,000        |        |             |   | 3,000       |         |      |   | 4,000        |        |              |   |            |        |               |   |           |        |         |   |       |        |   |   | 4,000  |       
|                                           |                                                           |   |              |        |             |   |             |         |      |   |              |        |              |   |             |        |               |   |            |        |         |   |        |        |   |   |        |       
|Shareholders equity:                      |                                                           |   |              |        |             |   |             |         |      |   |              |        |              |   |             |        |               |   |            |        |         |   |        |        |   |   |        |       
|                                           | Cumulative preferred stock of subsidiary, 3%              |   |              |       |             |   |             | (3,000  | )    |   |              | 3,000  |              |   |             |       |               |   |            |       |         |   |        |       |   |   |        | 3,000  |  
|                                           | Common stock                                              |   |              | 119    |             |   |             | (22     | )    |   |              | 141    |              |   |             | 119    |               |   |            |       |         |   |        | 21     |   |   |        | 1      |  
|                                           | Additional paid-in capital                                |   |              | 71,508 |             |   |             | (22,373 | )    |   |              | 93,881 |              |   |             | 71,508 |               |   |            | 2,000  |         |   |        | 7,934  |   |   |        | 12,439 |  
|                                           | Undistributed (dividends in excess of) retained earnings  |   |              | (2,022 | )           |   |             | (785    | )    |   |              | (1,237 | )            |   |             | (2,691 | )             |   |            | 850    |         |   |        | 330    |   |   |        | 274    |  
|                                           | Net unrealized appreciation (depreciation) on investments |   |              | 2,398  |             |   |             |        |      |   |              | 2,398  |              |   |             | 3,067  |               |   |            | 97     |         |   |        | (284   | ) |   |        | (482   | )
|                                           |                                                           |   |              |        |             |   |             |         |      |   |              |        |              |   |             |        |               |   |            |        |         |   |        |        |   |   |        |       
|                                           |                                                           |   | 72,003       |        |             |   | (26,180     | )       |      |   | 98,183       |        |              |   | 72,003      |        |               |   | 2,947      |        |         |   | 8,001  |        |   |   | 15,232 |       
|                                           | Less treasury stock                                       |   |              |       |             |   |             | 1,000   |      |   |              | (1,000 | )            |   |             |       |               |   |            | (1,000 | )       |   |        |       |   |   |        |       |  
|                                           |                                                           |   |              |        |             |   |             |         |      |   |              |        |              |   |             |        |               |   |            |        |         |   |        |        |   |   |        |       
|Total shareholders equity                 |                                                           |   | 72,003       |        |             |   | (25,180     | )       |      |   | 97,183       |        |              |   | 72,003      |        |               |   | 1,947      |        |         |   | 8,001  |        |   |   | 15,232 |       
|                                           |                                                           |   |              |        |             |   |             |         |      |   |              |        |              |   |             |        |               |   |            |        |         |   |        |        |   |   |        |       
|Total liabilities and shareholders equity |                                                           | $ | 140,266      |        |             | $ | (38,320     | )       |      | $ | 178,586      |        |              | $ | 115,861     |        |               | $ | 19,036     |        |         | $ | 13,266 |        |   | $ | 30,423 |       
|                                           |                                                           |   |              |        |             |   |             |         |      |   |              |        |              |   |             |        |               |   |            |        |         |   |        |        |   |   |        |       

The accompanying notes to the consolidated financial statements are an integral part of these consolidating financial statements.

F-36



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002(In thousands, except per share data)

|                                                         |                                                        |                                                                 |        |              |        |             |        |             |   |      |        |              |        |              |        |             |        |               |       |            |      |         |       |     |      |   |       |       |      |  
|-------------------------------------------------------- | ------------------------------------------------------ | --------------------------------------------------------------- | ------ | ------------ | ------ | ----------- | ------ | ----------- | - | ---- | ------ | ------------ | ------ | ------------ | ------ | ----------- | ------ | ------------- | ----- | ---------- | ---- | ------- | ----- | --- | ---- | - | ----- | ----- | ---- | -
|                                                         |                                                        |                                                                 |        |              |        |             |        |             |   |      |        |              |        |              |        |             |        |               |       | FIRST      |      | WESTERN |       |     |      |  
|                                                         |                                                        |                                                                 |        |              |        |             |        |             |   |      |        | CONSOLIDATED |        |              |        |             |        | WESTERN SBLC, |       | FINANCIAL  |      | PMC    
|                                                         |                                                        |                                                                 |        |              |        |             |        |             |   |      |        | BEFORE       |        | PMC CAPITAL, |        | INC. AND    |        | CAPITAL       |       | INVESTMENT
|                                                         |                                                        |                                                                 |        | CONSOLIDATED |        | ELIMINATION |        | ELIMINATION |   | INC. |        | SUBSIDIARY   |        | CORPORATION  |        | CORPORATION
|                                                         |                                                        |                                                                 |        |              |        |             |        |             |   |      |        |              |        |              |        |            
|Investment income:                                       |                                                        |                                                                 |        |              |        |             |        |             |   |      |        |              |        |              |        |             |        |               |       |            |      |         |       |     |      |   |       |      
|                                                         | Interest                                               |                                                                 | $      | 7,507        |        |             | $      |            |   |      | $      | 7,507        |        |              | $      | 2,828       |        |               | $     | 1,393      |      |         | $     | 996 |      |   | $     | 2,290 |     
|                                                         | Income from retained interests in transferred assets   |                                                                 |        | 5,202        |        |             |        |            |   |      |        | 5,202        |        |              |        | 4,675       |        |               |       | 527        |      |         |       |    |      |   |       |      |     
|                                                         | Advisory fee income                                    |                                                                 |        | 1,927        |        |             |        |            |   |      |        | 1,927        |        |              |        | 1,927       |        |               |       |           |      |         |       |    |      |   |       |      |     
|                                                         | Premium income                                         |                                                                 |        | 650          |        |             |        |            |   |      |        | 650          |        |              |        |            |        |               |       | 650        |      |         |       |    |      |   |       |      |     
|                                                         | Equity in income of subsidiaries, net                  |                                                                 |        | 307          |        |             |        | (2,698      | ) |      |        | 3,005        |        |              |        | 3,005       |        |               |       |           |      |         |       |    |      |   |       |      |     
|                                                         | Other income, net                                      |                                                                 |        | 1,069        |        |             |        |            |   |      |        | 1,069        |        |              |        | 679         |        |               |       | 97         |      |         |       | 191 |      |   |       | 102   |     
|                                                         |                                                        |                                                                 |        |              |        |             |        |             |   |      |        |              |        |              |        |             |        |               |       |            |      |         |       |     |      |   |       |      
|Total investment income                                  |                                                        |                                                                 | 16,662 |              |        |             | (2,698 | )           |   |      | 19,360 |              |        |              | 13,114 |             |        |               | 2,667 |            |      |         | 1,187 |     |      |   | 2,392 |      
|                                                         |                                                        |                                                                 |        |              |        |             |        |             |   |      |        |              |        |              |        |             |        |               |       |            |      |         |       |     |      |   |       |      
|Expenses:                                                |                                                        |                                                                 |        |              |        |             |        |             |   |      |        |              |        |              |        |             |        |               |       |            |      |         |       |     |      |   |       |      
|                                                         | Interest                                               |                                                                 |        | 4,588        |        |             |        |            |   |      |        | 4,588        |        |              |        | 2,349       |        |               |       | 3          |      |         |       | 757 |      |   |       | 1,479 |     
|                                                         | Salaries and related benefits                          |                                                                 |        | 3,940        |        |             |        |            |   |      |        | 3,940        |        |              |        | 3,940       |        |               |       |           |      |         |       |    |      |   |       |      |     
|                                                         | General and administrative                             |                                                                 |        | 914          |        |             |        |            |   |      |        | 914          |        |              |        | 849         |        |               |       | 30         |      |         |       | 13  |      |   |       | 22    |     
|                                                         | Loss from operations of assets acquired in liquidation |                                                                 |        | 391          |        |             |        |            |   |      |        | 391          |        |              |        | 2           |        |               |       | 2          |      |         |       |    |      |   |       | 387   |     
|                                                         | Rent                                                   |                                                                 |        | 328          |        |             |        |            |   |      |        | 328          |        |              |        | 328         |        |               |       |           |      |         |       |    |      |   |       |      |     
|                                                         | Professional fees                                      |                                                                 |        | 325          |        |             |        |            |   |      |        | 325          |        |              |        | 325         |        |               |       |           |      |         |       |    |      |   |       |      |     
|                                                         | Profit sharing plan                                    |                                                                 |        | 220          |        |             |        |            |   |      |        | 220          |        |              |        | 220         |        |               |       |           |      |         |       |    |      |   |       |      |     
|                                                         |                                                        |                                                                 |        |              |        |             |        |             |   |      |        |              |        |              |        |             |        |               |       |            |      |         |       |     |      |   |       |      
|Total expenses                                           |                                                        |                                                                 | 10,706 |              |        |             |       |             |   |      | 10,706 |              |        |              | 8,013  |             |        |               | 35    |            |      |         | 770   |     |      |   | 1,888 |      
|                                                         |                                                        |                                                                 |        |              |        |             |        |             |   |      |        |              |        |              |        |             |        |               |       |            |      |         |       |     |      |   |       |      
|Net investment income                                    |                                                        |                                                                 | 5,956  |              |        |             | (2,698 | )           |   |      | 8,654  |              |        |              | 5,101  |             |        |               | 2,632 |            |      |         | 417   |     |      |   | 504   |      
|                                                         |                                                        |                                                                 |        |              |        |             |        |             |   |      |        |              |        |              |        |             |        |               |       |            |      |         |       |     |      |   |       |      
|Realized and unrealized gain (loss) on investments:      |                                                        |                                                                 |        |              |        |             |        |             |   |      |        |              |        |              |        |             |        |               |       |            |      |         |       |     |      |   |       |      
|                                                         |                                                        | Realized losses                                                 |        |              | (2,196 | )           |        |             |  |      |        |              | (2,196 | )            |        |             | (1,981 | )             |       |            | (215 | )       |       |     |     |   |       |       |     |  
|                                                         |                                                        | Sale of assets                                                  |        |              | 1,446  |             |        |             |  |      |        |              | 1,446  |              |        |             | 1,463  |               |       |            | (130 | )       |       |     |     |   |       |       | 113  |  
|                                                         |                                                        | Change in unrealized appreciation
(depreciation) on investments |        |              | 777    |             |        |             |  |      |        |              | 777    |              |        |             | 1,400  |               |       |            | 85   |         |       |     | (248 | ) |       |       | (460 | )
|                                                         |                                                        |                                                                 |        |              |        |             |        |             |   |      |        |              |        |              |        |             |        |               |       |            |      |         |       |     |      |   |       |      
|Total realized and unrealized gain (loss) on investments |                                                        |                                                                 | 27     |              |        |             |       |             |   |      | 27     |              |        |              | 882    |             |        |               | (260  | )          |      |         | (248  | )   |      |   | (347  | )    
|                                                         |                                                        |                                                                 |        |              |        |             |        |             |   |      |        |              |        |              |        |             |        |               |       |            |      |         |       |     |      |   |       |      
|Net increase in net assets resulting from operations     |                                                        | $                                                               | 5,983  |              |        | $           | (2,698 | )           |   | $    | 8,681  |              |        | $            | 5,983  |             |        | $             | 2,372 |            |      | $       | 169   |     |      | $ | 157   |      
|                                                         |                                                        |                                                                 |        |              |        |             |        |             |   |      |        |              |        |              |        |             |        |               |       |            |      |         |       |     |      |   |       |      
|Preferred dividends                                      |                                                        | $                                                               | 250    |              |        | $           | (250   | )           |   | $    | 500    |              |        | $            | 250    |             |        | $             |      |            |      | $       |      |     |      | $ | 250   |      
|                                                         |                                                        |                                                                 |        |              |        |             |        |             |   |      |        |              |        |              |        |             |        |               |       |            |      |         |       |     |      |   |       |      
|Basic and diluted earnings per share                     |                                                        | $                                                               | 0.48   |              |        |             |        |             |   |      |        |              |        |              |        |             |        |               |       |            |      |         |       |     |      |   |       |      
|                                                         |                                                        |                                                                 |        |              |        |             |        |             |   |      |        |              |        |              |        |             |        |               |       |            |      |         |       |     |      |   |       |      

The accompanying notes to the consolidated financial statements are an integral part of these consolidating financial statements.

F-37



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF SHAREHOLDERS EQUITY
DECEMBER 31, 2002(In thousands)

|                                        |                                                      |   |           |        |        |   |         |     |          |   |                |         |            |   |               |        |            |   |       |       |       |   |       |        |   |   |         |         |  
|--------------------------------------- | ---------------------------------------------------- | - | --------- | ------ | ------ | - | ------- | --- | -------- | - | -------------- | ------- | ---------- | - | ------------- | ------ | ---------- | - | ----- | ----- | ----- | - | ----- | ------ | - | - | ------- | ------- | -
|                                        |                                                      |   |           |        |        |   |         |     |          |   |                |         |            |   | Undistributed |        | Net        |   |       |       |       |   |       |        |  
|                                        |                                                      |   |           |        |        |   |         |     |          |   |                |         |            |   | (Dividends in |        | Unrealized |   |       |       |       |   |       |        |  
|                                        |                                                      |   |           |        |        |   |         |     |          |   | Additional     |         | Excess of) |   | Appreciation  |        |            |   |       |       | Total
|                                        |                                                      |   | Preferred |        | Common |   | Paid-in |     | Retained |   | (Depreciation) |         | Treasury   |   | Shareholders'
|                                        |                                                      |   | Stock, 3% |        | Stock  |   | Capital |     | Earnings |   | on Investments |         | Stock      |   | Equity       
|                                        |                                                      |   |           |        |        |   |         |     |          |   |                |         |            |   |              
|PMC CAPITAL, INC                        |                                                      |   |           |        |        |   |         |     |          |   |                |         |            |   |               |        |            |   |       |       |       |   |       |        |   |   |         |        
|                                        | Balances, January 1, 2002                            |   | $         |       |        |   | $       | 119 |          |   | $              | 71,508  |            |   | $             | (386   | )          |   | $     | 1,667 |       |   | $     |       |   |   | $       | 72,908  |  
|                                        | Net increase in net assets resulting from operations |   |           |       |        |   |         |    |          |   |                |        |            |   |               | 4,583  |            |   |       | 1,400 |       |   |       |       |   |   |         | 5,983   |  
|                                        | Preferred dividend of consolidated subsidiary        |   |           |       |        |   |         |    |          |   |                |        |            |   |               | (250   | )          |   |       |      |       |   |       |       |   |   |         | (250    | )
|                                        | Dividends on common stock                            |   |           |       |        |   |         |    |          |   |                |        |            |   |               | (6,638 | )          |   |       |      |       |   |       |       |   |   |         | (6,638  | )
|                                        |                                                      |   |           |        |        |   |         |     |          |   |                |         |            |   |               |        |            |   |       |       |       |   |       |        |   |   |         |        
|                                        | Balance, December 31, 2002                           |   | $         |       |        |   | $       | 119 |          |   | $              | 71,508  |            |   | $             | (2,691 | )          |   | $     | 3,067 |       |   | $     |       |   |   | $       | 72,003  |  
|                                        |                                                      |   |           |        |        |   |         |     |          |   |                |         |            |   |               |        |            |   |       |       |       |   |       |        |   |   |         |        
|FIRST WESTERN SBLC, INC. AND SUBSIDIARY |                                                      |   |           |        |        |   |         |     |          |   |                |         |            |   |               |        |            |   |       |       |       |   |       |        |   |   |         |        
|                                        | Balances, January 1, 2002                            |   | $         |       |        |   | $       |    |          |   | $              | 2,000   |            |   | $             | 1,113  |            |   | $     | 12    |       |   | $     | (1,000 | ) |   | $       | 2,125   |  
|                                        | Net increase in net assets resulting from operations |   |           |       |        |   |         |    |          |   |                |        |            |   |               | 2,287  |            |   |       | 85    |       |   |       |       |   |   |         | 2,372   |  
|                                        | Dividends to parent company                          |   |           |       |        |   |         |    |          |   |                |        |            |   |               | (2,550 | )          |   |       |      |       |   |       |       |   |   |         | (2,550  | )
|                                        |                                                      |   |           |        |        |   |         |     |          |   |                |         |            |   |               |        |            |   |       |       |       |   |       |        |   |   |         |        
|                                        | Balance, December 31, 2002                           |   | $         |       |        |   | $       |    |          |   | $              | 2,000   |            |   | $             | 850    |            |   | $     | 97    |       |   | $     | (1,000 | ) |   | $       | 1,947   |  
|                                        |                                                      |   |           |        |        |   |         |     |          |   |                |         |            |   |               |        |            |   |       |       |       |   |       |        |   |   |         |        
|WESTERN FINANCIAL CAPITAL CORPORATION   |                                                      |   |           |        |        |   |         |     |          |   |                |         |            |   |               |        |            |   |       |       |       |   |       |        |   |   |         |        
|                                        | Balances, January 1, 2002                            |   | $         |       |        |   | $       | 21  |          |   | $              | 7,934   |            |   | $             | 113    |            |   | $     | (36   | )     |   | $     |       |   |   | $       | 8,032   |  
|                                        | Net increase in net assets resulting from operations |   |           |       |        |   |         |    |          |   |                |        |            |   |               | 417    |            |   |       | (248  | )     |   |       |       |   |   |         | 169     |  
|                                        | Dividends to parent company                          |   |           |       |        |   |         |    |          |   |                |        |            |   |               | (200   | )          |   |       |      |       |   |       |       |   |   |         | (200    | )
|                                        |                                                      |   |           |        |        |   |         |     |          |   |                |         |            |   |               |        |            |   |       |       |       |   |       |        |   |   |         |        
|                                        | Balance, December 31, 2002                           |   | $         |       |        |   | $       | 21  |          |   | $              | 7,934   |            |   | $             | 330    |            |   | $     | (284  | )     |   | $     |       |   |   | $       | 8,001   |  
|                                        |                                                      |   |           |        |        |   |         |     |          |   |                |         |            |   |               |        |            |   |       |       |       |   |       |        |   |   |         |        
|PMC INVESTMENT CORPORATION              |                                                      |   |           |        |        |   |         |     |          |   |                |         |            |   |               |        |            |   |       |       |       |   |       |        |   |   |         |        
|                                        | Balances, January 1, 2002                            |   | $         | 3,000  |        |   | $       | 1   |          |   | $              | 12,439  |            |   | $             | 57     |            |   | $     | (22   | )     |   | $     |       |   |   | $       | 15,475  |  
|                                        | Net increase in net assets resulting from operations |   |           |       |        |   |         |    |          |   |                |        |            |   |               | 617    |            |   |       | (460  | )     |   |       |       |   |   |         | 157     |  
|                                        | Dividends to parent company                          |   |           |       |        |   |         |    |          |   |                |        |            |   |               | (150   | )          |   |       |      |       |   |       |       |   |   |         | (150    | )
|                                        | Dividends, preferred                                 |   |           |       |        |   |         |    |          |   |                |        |            |   |               | (250   | )          |   |       |      |       |   |       |       |   |   |         | (250    | )
|                                        |                                                      |   |           |        |        |   |         |     |          |   |                |         |            |   |               |        |            |   |       |       |       |   |       |        |   |   |         |        
|                                        | Balance, December 31, 2002                           |   | $         | 3,000  |        |   | $       | 1   |          |   | $              | 12,439  |            |   | $             | 274    |            |   | $     | (482  | )     |   | $     |       |   |   | $       | 15,232  |  
|                                        |                                                      |   |           |        |        |   |         |     |          |   |                |         |            |   |               |        |            |   |       |       |       |   |       |        |   |   |         |        
|ELIMINATION ADJUSTMENTS                 |                                                      |   |           |        |        |   |         |     |          |   |                |         |            |   |               |        |            |   |       |       |       |   |       |        |   |   |         |        
|                                        | Equity in income of subsidiaries                     |   |           |       |        |   |         |    |          |   |                |        |            |   |               | (2,698 | )          |   |       |      |       |   |       |       |   |   |         | (2,698  | )
|                                        | Dividends to parent company                          |   |           |       |        |   |         |    |          |   |                |        |            |   |               | 2,900  |            |   |       |      |       |   |       |       |   |   |         | 2,900   |  
|                                        | Preferred dividend of consolidated subsidiary        |   |           |       |        |   |         |    |          |   |                |        |            |   |               | 250    |            |   |       |      |       |   |       |       |   |   |         | 250     |  
|                                        | Stock of subsidiaries                                |   |           | (3,000 | )      |   |         | (22 | )        |   |                | (22,373 | )          |   |               |       |            |   |       |      |       |   |       | 1,000  |   |   |         | (24,395 | )
|                                        | Undistributed earnings of subsidiaries               |   |           |       |        |   |         |    |          |   |                |        |            |   |               | (1,237 | )          |   |       |      |       |   |       |       |   |   |         | (1,237  | )
|                                        |                                                      |   |           |        |        |   |         |     |          |   |                |         |            |   |               |        |            |   |       |       |       |   |       |        |   |   |         |        
|                                        |                                                      |   | (3,000    | )      |        |   | (22     | )   |          |   | (22,373        | )       |            |   | (785          | )      |            |   |      |       |       |   | 1,000 |        |   |   | (25,180 | )      
|                                        |                                                      |   |           |        |        |   |         |     |          |   |                |         |            |   |               |        |            |   |       |       |       |   |       |        |   |   |         |        
|CONSOLIDATED                            |                                                      | $ |          |        |        | $ | 119     |     |          | $ | 71,508         |         |            | $ | (2,022        | )      |            | $ | 2,398 |       |       | $ |      |        |   | $ | 72,003  |        
|                                        |                                                      |   |           |        |        |   |         |     |          |   |                |         |            |   |               |        |            |   |       |       |       |   |       |        |   |   |         |        

The accompanying notes to the consolidated financial statements are an integral part of these consolidating financial statements.

F-38



---



##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2002(In thousands)

|                                                    |                                                                                                                             |                                                                                     |                                                      |         |              |        |         |        |             |       |             |         |              |        |             |         |             |        |               |        |           |        |        |         |        |     |         |         |         |     |  
|--------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | ---------------------------------------------------- | ------- | ------------ | ------ | ------- | ------ | ----------- | ----- | ----------- | ------- | ------------ | ------ | ----------- | ------- | ----------- | ------ | ------------- | ------ | --------- | ------ | ------ | ------- | ------ | --- | ------- | ------- | ------- | --- | -
|                                                    |                                                                                                                             |                                                                                     |                                                      |         |              |        |         |        |             |       |             |         | CONSOLIDATED |        |             |         |             |        | FIRST         |        | WESTERN   |        |        |         |       
|                                                    |                                                                                                                             |                                                                                     |                                                      |         |              |        |         |        |             |       |             |         | BEFORE       |        |             |         |             |        | WESTERN SBLC, |        | FINANCIAL |        | PMC   
|                                                    |                                                                                                                             |                                                                                     |                                                      |         |              |        |         |        | ELIMINATION |       | ELIMINATION |         | PMC CAPITAL, |        | INC. AND    |         | CAPITAL     |        | INVESTMENT   
|                                                    |                                                                                                                             |                                                                                     |                                                      |         | CONSOLIDATED |        | ENTRIES |        | ENTRIES     |       | INC.        |         | SUBSIDIARY   |        | CORPORATION |         | CORPORATION
|                                                    |                                                                                                                             |                                                                                     |                                                      |         |              |        |         |        |             |       |             |         |              |        |             |         |            
|Cash flows from operating activities:               |                                                                                                                             |                                                                                     |                                                      |         |              |        |         |        |             |       |             |         |              |        |             |         |             |        |               |        |           |        |        |         |        |     |         |        
|                                                    | Net increase in net assets resulting from
operations                                                                        |                                                                                     | $                                                    | 5,983   |              |        | $       | (2,698 | )           |       | $           | 8,681   |              |        | $           | 5,983   |             |        | $             | 2,372  |           |        | $      | 169     |        |     | $       | 157     |        
|                                                    | Adjustments to reconcile net increase in net assets
resulting from operations to net cash provided by
operating activities: |                                                                                     |                                                      |         |              |        |         |        |             |       |             |         |              |        |             |         |             |        |               |        |           |        |        |         |        |     |         |         |        
|                                                    |                                                                                                                             |                                                                                     | Loans funded, held for sale                          |         |              | (6,006 | )       |        |             |      |             |         |              | (6,006 | )           |         |             |       |               |        |           | (6,006 | )      |         |        |    |         |         |         |    |  
|                                                    |                                                                                                                             |                                                                                     | Proceeds from sale of guaranteed loans               |         |              | 6,146  |         |        |             |      |             |         |              | 6,146  |             |         |             |       |               |        |           | 6,146  |        |         |        |    |         |         |         |    |  
|                                                    |                                                                                                                             |                                                                                     | Realized and unrealized (gain) loss on investments   |         |              | (27    | )       |        |             |      |             |         |              | (27    | )           |         |             | (882   | )             |        |           | 260    |        |         |        | 248 |         |         |         | 347 |  
|                                                    |                                                                                                                             |                                                                                     | Unrealized premium income, net                       |         |              | (65    | )       |        |             |      |             |         |              | (65    | )           |         |             |       |               |        |           | (65    | )      |         |        |    |         |         |         |    |  
|                                                    |                                                                                                                             |                                                                                     | Depreciation and amortization                        |         |              | 254    |         |        |             |      |             |         |              | 254    |             |         |             | 70     |               |        |           |       |        |         |        | 66  |         |         |         | 118 |  
|                                                    |                                                                                                                             |                                                                                     | Accretion of loan discount and deferred fees         |         |              | (136   | )       |        |             |      |             |         |              | (136   | )           |         |             | (10    | )             |        |           | (118   | )      |         |        |    |         |         |         | (8  | )
|                                                    |                                                                                                                             |                                                                                     | Equity in income of unconsolidated subsidiaries, net |         |              | (307   | )       |        |             | 2,698 |             |         |              | (3,005 | )           |         |             | (3,005 | )             |        |           |       |        |         |        |    |         |         |         |    |  
|                                                    |                                                                                                                             |                                                                                     | Other operating assets and liabilities               |         |              | 1,661  |         |        |             |      |             |         |              | 1,661  |             |         |             | 480    |               |        |           | 668    |        |         |        | 63  |         |         |         | 450 |  
|                                                    |                                                                                                                             |                                                                                     |                                                      |         |              |        |         |        |             |       |             |         |              |        |             |         |             |        |               |        |           |        |        |         |        |     |         |        
|Net cash provided by operating activities           |                                                                                                                             |                                                                                     | 7,503                                                |         |              |        |        |        |             |       | 7,503       |         |              |        | 2,636       |         |             |        | 3,257         |        |           |        | 546    |         |        |     | 1,064   |        
|                                                    |                                                                                                                             |                                                                                     |                                                      |         |              |        |         |        |             |       |             |         |              |        |             |         |             |        |               |        |           |        |        |         |        |     |         |        
|Cash flows from investing activities:               |                                                                                                                             |                                                                                     |                                                      |         |              |        |         |        |             |       |             |         |              |        |             |         |             |        |               |        |           |        |        |         |        |     |         |        
|                                                    | Loans funded                                                                                                                |                                                                                     |                                                      | (39,807 | )            |        |         |       |             |       |             | (39,807 | )            |        |             | (10,875 | )           |        |               | (2,574 | )         |        |        | (10,344 | )      |     |         | (16,014 | )      
|                                                    | Purchase of loans through exercise of option                                                                                |                                                                                     |                                                      | (1,176  | )            |        |         |       |             |       |             | (1,176  | )            |        |             | (1,176  | )           |        |               |       |           |        |        |        |        |     |         |        |        
|                                                    | Principal collected                                                                                                         |                                                                                     |                                                      | 13,891  |              |        |         |       |             |       |             | 13,891  |              |        |             | 3,241   |             |        |               | 3,784  |           |        |        | 1,957   |        |     |         | 4,909   |        
|                                                    | Proceeds from debt issued by SPEs, net                                                                                      |                                                                                     |                                                      | 37,901  |              |        |         |       |             |       |             | 37,901  |              |        |             | 9,465   |             |        |               |       |           |        |        | 10,930  |        |     |         | 17,506  |        
|                                                    | Proceeds from retained interests in transferred assets                                                                      |                                                                                     |                                                      | 4,343   |              |        |         |       |             |       |             | 4,343   |              |        |             | 3,946   |             |        |               | 397    |           |        |        |        |        |     |         |        |        
|                                                    | Proceeds from mortgage-backed security of affiliate                                                                         |                                                                                     |                                                      | 313     |              |        |         |       |             |       |             | 313     |              |        |             | 313     |             |        |               |       |           |        |        |        |        |     |         |        |        
|                                                    | Proceeds from sale of assets                                                                                                |                                                                                     |                                                      | 498     |              |        |         |       |             |       |             | 498     |              |        |             |        |             |        |               | 355    |           |        |        |        |        |     |         | 143     |        
|                                                    | Distributions from unconsolidated subsidiaries                                                                              |                                                                                     |                                                      | 393     |              |        |         |       |             |       |             | 393     |              |        |             | 393     |             |        |               |       |           |        |        |        |        |     |         |        |        
|                                                    | Investment in unconsolidated subsidiary                                                                                     |                                                                                     |                                                      | (100    | )            |        |         |       |             |       |             | (100    | )            |        |             | (100    | )           |        |               |       |           |        |        |        |        |     |         |        |        
|                                                    | Purchase of property and equipment and other assets                                                                         |                                                                                     |                                                      | (594    | )            |        |         |       |             |       |             | (594    | )            |        |             | (246    | )           |        |               | (80    | )         |        |        |        |        |     |         | (268    | )      
|                                                    | Investment in retained interests in transferred assets                                                                      |                                                                                     |                                                      | (4,425  | )            |        |         |       |             |       |             | (4,425  | )            |        |             | (4,425  | )           |        |               |       |           |        |        |        |        |     |         |        |        
|                                                    | Investment in restricted cash                                                                                               |                                                                                     |                                                      | (203    | )            |        |         |       |             |       |             | (203    | )            |        |             | (121    | )           |        |               | (82    | )         |        |        |        |        |     |         |        |        
|                                                    | Advances (to) from unconsolidated affiliates, net                                                                           |                                                                                     |                                                      | (541    | )            |        |         |       |             |       |             | (541    | )            |        |             | (1,022  | )           |        |               |       |           |        |        | 936     |        |     |         | (455    | )      
|                                                    |                                                                                                                             |                                                                                     |                                                      |         |              |        |         |        |             |       |             |         |              |        |             |         |             |        |               |        |           |        |        |         |        |     |         |        
|Net cash provided by (used in) investing activities |                                                                                                                             |                                                                                     | 10,493                                               |         |              |        |        |        |             |       | 10,493      |         |              |        | (607        | )       |             |        | 1,800         |        |           |        | 3,479  |         |        |     | 5,821   |        
|                                                    |                                                                                                                             |                                                                                     |                                                      |         |              |        |         |        |             |       |             |         |              |        |             |         |             |        |               |        |           |        |        |         |        |     |         |        
|Cash flows from financing activities:               |                                                                                                                             |                                                                                     |                                                      |         |              |        |         |        |             |       |             |         |              |        |             |         |             |        |               |        |           |        |        |         |        |     |         |        
|                                                    |                                                                                                                             | Payment of dividends to parent                                                      |                                                      |         |             |        |         |        |            |       |             |         |             |        |             |         | 2,900       |        |               |        | (2,550    | )      |        |         | (200   | )   |         |         | (150    | )  
|                                                    |                                                                                                                             | Payment of dividends on common stock                                                |                                                      |         | (7,586       | )      |         |        |            |       |             |         | (7,586       | )      |             |         | (7,586      | )      |               |        |          |        |        |         |       |     |         |         |        |    
|                                                    |                                                                                                                             | Payment of dividends on preferred stock                                             |                                                      |         | (250         | )      |         |        |            |       |             |         | (250         | )      |             |         |            |        |               |        |          |        |        |         |       |     |         |         | (250    | )  
|                                                    |                                                                                                                             | Payment of notes payable                                                            |                                                      |         | (5,000       | )      |         |        |            |       |             |         | (5,000       | )      |             |         | (5,000      | )      |               |        |          |        |        |         |       |     |         |         |        |    
|                                                    |                                                                                                                             | Payment of SBA debentures                                                           |                                                      |         | (17,000      | )      |         |        |            |       |             |         | (17,000      | )      |             |         |            |        |               |        |          |        |        |         | (6,000 | )   |         |         | (11,000 | )  
|                                                    |                                                                                                                             | Advances to unconsolidated affiliates, net                                          |                                                      |         |             |        |         |        |            |       |             |         |             |        |             |         | 3,039       |        |               |        | (3,039    | )      |        |         |       |     |         |         |        |    
|                                                    |                                                                                                                             |                                                                                     |                                                      |         |              |        |         |        |             |       |             |         |              |        |             |         |             |        |               |        |           |        |        |         |        |     |         |        
|Net cash used in financing activities               |                                                                                                                             |                                                                                     | (29,836                                              | )       |              |        |        |        |             |       | (29,836     | )       |              |        | (6,647      | )       |             |        | (5,589        | )      |           |        | (6,200 | )       |        |     | (11,400 | )      
|                                                    |                                                                                                                             |                                                                                     |                                                      |         |              |        |         |        |             |       |             |         |              |        |             |         |             |        |               |        |           |        |        |         |        |     |         |        
|Net decrease in cash and cash equivalents           |                                                                                                                             |                                                                                     | (11,840                                              | )       |              |        |        |        |             |       | (11,840     | )       |              |        | (4,618      | )       |             |        | (532          | )      |           |        | (2,175 | )       |        |     | (4,515  | )      
|Cash and cash equivalents, beginning of year        |                                                                                                                             |                                                                                     | 17,318                                               |         |              |        |        |        |             |       | 17,318      |         |              |        | 6,834       |         |             |        | 992           |        |           |        | 2,407  |         |        |     | 7,085   |        
|                                                    |                                                                                                                             |                                                                                     |                                                      |         |              |        |         |        |             |       |             |         |              |        |             |         |             |        |               |        |           |        |        |         |        |     |         |        
|Cash and cash equivalents, end of year              |                                                                                                                             | $                                                                                   | 5,478                                                |         |              | $      |        |        |             | $     | 5,478       |         |              | $      | 2,216       |         |             | $      | 460           |        |           | $      | 232    |         |        | $   | 2,570   |        
|                                                    |                                                                                                                             |                                                                                     |                                                      |         |              |        |         |        |             |       |             |         |              |        |             |         |             |        |               |        |           |        |        |         |        |     |         |        
|Supplemental disclosure:                            |                                                                                                                             |                                                                                     |                                                      |         |              |        |         |        |             |       |             |         |              |        |             |         |             |        |               |        |           |        |        |         |        |     |         |        
|                                                    |                                                                                                                             | Interest paid                                                                       |                                                      | $       | 4,848        |        |         | $      |            |       |             | $       | 4,848        |        |             | $       | 2,435       |        |               | $      | 14        |        |        | $       | 847    |     |         | $       | 1,552   |    
|                                                    |                                                                                                                             |                                                                                     |                                                      |         |              |        |         |        |             |       |             |         |              |        |             |         |             |        |               |        |           |        |        |         |        |     |         |        
|                                                    |                                                                                                                             | Loans and interest receivable transferred to SPE, net                               |                                                      | $       | 4,435        |        |         | $      |            |       |             | $       | 4,435        |        |             | $       | 4,435       |        |               | $      |          |        |        | $       |       |     |         | $       |        |    
|                                                    |                                                                                                                             |                                                                                     |                                                      |         |              |        |         |        |             |       |             |         |              |        |             |         |             |        |               |        |           |        |        |         |        |     |         |        
|                                                    |                                                                                                                             | Reclassification from loans receivable to assets
acquired in liquidation            |                                                      | $       | 2,629        |        |         | $      |            |       |             | $       | 2,629        |        |             | $       | 1,083       |        |               | $      | 105       |        |        | $       |       |     |         | $       | 1,441   |    
|                                                    |                                                                                                                             |                                                                                     |                                                      |         |              |        |         |        |             |       |             |         |              |        |             |         |             |        |               |        |           |        |        |         |        |     |         |        
|                                                    |                                                                                                                             | Assumption of loans receivable by affiliate                                         |                                                      | $       | 885          |        |         | $      |            |       |             | $       | 885          |        |             | $       | 789         |        |               | $      | 96        |        |        | $       |       |     |         | $       |        |    
|                                                    |                                                                                                                             |                                                                                     |                                                      |         |              |        |         |        |             |       |             |         |              |        |             |         |             |        |               |        |           |        |        |         |        |     |         |        
|                                                    |                                                                                                                             | Loan receivable originated in connection with sale of
asset acquired in liquidation |                                                      | $       | 325          |        |         | $      |            |       |             | $       | 325          |        |             | $       |            |        |               | $      |          |        |        | $       |       |     |         | $       | 325     |    
|                                                    |                                                                                                                             |                                                                                     |                                                      |         |              |        |         |        |             |       |             |         |              |        |             |         |             |        |               |        |           |        |        |         |        |     |         |        

The accompanying notes to the consolidated financial statements are an integral part of these consolidating financial statements.

F-39



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##### Table of Contents






EXHIBITS

|        |  |                                                                                                                                                                                                             
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                                                 
|        |  |                                                                                                                                                                                                             
|*2.1    |  | Agreement and Plan of Merger by and between PMC Commercial Trust and PMC Capital,
Inc. dated March 27, 2003.                                                                                                
|        |  |                                                                                                                                                                                                             
|*2.2    |  | Form of Voting Agreement pursuant to Agreement and Plan of
Merger  PMC Capital, Inc.  dated March 27, 2003.                                                                                               
|        |  |                                                                                                                                                                                                             
|*2.3    |  | Form of Voting Agreement pursuant to Agreement and Plan of
Merger  PMC Commercial Trust  dated March 27, 2003.                                                                                            
|        |  |                                                                                                                                                                                                             
|3.1     |  | Articles of Incorporation (incorporated by reference to
Exhibit 1 to the Registration Statement on Form N-2
(Registration No. 33-2535) (the N-2 Registration Statement)
dated June 28, 1983).             
|        |  |                                                                                                                                                                                                             
|3.2     |  | Amendment to Articles of Incorporation (incorporated by
reference to Exhibit 4 (b) (1) to Amendment No. 9 to the N-2
Registration Statement dated May 1, 1991).                                             
|        |  |                                                                                                                                                                                                             
|3.3     |  | By-Laws, as amended (incorporated by reference to Exhibit 2 to
Amendment No. 7 to the N-2 Registration Statement dated May 5,
1989).                                                                        
|        |  |                                                                                                                                                                                                             
|4.1     |  | Certificate of Common Stock (incorporated by reference to
Exhibit 4 to Amendment No. 1 to the N-2 Registration Statement
dated November 10, 1983).                                                          
|        |  |                                                                                                                                                                                                             
|4.22    |  | Debenture dated September 27, 1995 for $7,000,000 loan with
SBA (incorporated by reference from Registrants Form 10-K for
the fiscal year ended December 31, 1995).                                        
|        |  |                                                                                                                                                                                                             
|4.27    |  | Senior Note dated April 19, 1995 for $5,000,000 with Security
Life of Denver Insurance Company (incorporated by reference
from Registrants Form 10-K for the fiscal year ended December
31, 1995).         
|        |  |                                                                                                                                                                                                             
|4.28    |  | Senior Note dated April 19, 1995 for $2,000,000 with Peerless
Insurance Company (incorporated by reference from Registrants
Form 10-K for the fiscal year ended December 31, 1995).                        
|        |  |                                                                                                                                                                                                             
|4.29    |  | Senior Note dated April 19, 1995 for $2,000,000 with Indiana
Insurance Company (incorporated by reference from Registrants
Form 10-K for the fiscal year ended December 31, 1995).                         
|        |  |                                                                                                                                                                                                             
|4.30    |  | Senior Note dated April 19, 1995 for $1,000,000 with Security
Life of Denver Insurance Company (incorporated by reference
from Registrants Form 10-K for the fiscal year ended December
31, 1995).         
|        |  |                                                                                                                                                                                                             
|4.32    |  | Senior Note Agreement dated July 19, 1999 for $10,000,000 with
Equitable Life Insurance Company of Iowa (incorporated by
reference from Registrants Form 10-K for the fiscal year
ended December 31, 1999).
|        |  |                                                                                                                                                                                                             
|4.33    |  | Senior Note Agreement dated July 19, 2000 for $10,000,000 with
Equitable Life Insurance Company of Iowa (incorporated by
reference from Registrants Form 10-K for the fiscal year
ended December 31, 2000).

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##### Table of Contents



|      |  |                                                                                                                                                                                                                                                                                              
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.34  |  | Debenture dated September 27, 2000 for $4,310,000
loan with SBA (incorporated by reference
from Registrants Form 10-K for the fiscal
year ended December 31, 2000).                                                                                                                         
|      |  |                                                                                                                                                                                                                                                                                              
|4.35  |  | Debenture dated September 27, 2000 for $3,000,000 loan with
SBA (incorporated by reference from Registrants Form 10-K for
the fiscal year ended December 31, 2000).                                                                                                                         
|      |  |                                                                                                                                                                                                                                                                                              
|4.36  |  | Senior Note Agreement dated July 19, 2001 for $10,000,000 with
Security Life of Denver Insurance Company.                                                                                                                                                                                    
|      |  |                                                                                                                                                                                                                                                                                              
|*10.1 |  | Employment contract between the Registrant and Lance B.
Rosemore dated July 1, 2002.                                                                                                                                                                                                         
|      |  |                                                                                                                                                                                                                                                                                              
|*10.2 |  | Employment contract between the Registrant and Andrew S.
Rosemore dated July 1, 2002.                                                                                                                                                                                                        
|      |  |                                                                                                                                                                                                                                                                                              
|*10.4 |  | Employment contract between the Registrant and Jan F. Salit
dated July 1, 2002.                                                                                                                                                                                                              
|      |  |                                                                                                                                                                                                                                                                                              
|*10.5 |  | Employment contract between the Registrant and Barry N. Berlin
dated July 1, 2002.                                                                                                                                                                                                           
|      |  |                                                                                                                                                                                                                                                                                              
|10.6  |  | Employment contract between the Registrant and Mary J.
Brownmiller dated July 1, 2001.                                                                                                                                                                                                       
|      |  |                                                                                                                                                                                                                                                                                              
|10.7  |  | First Amended and Restated Revolving Credit Note dated as of
March 15, 1998 (incorporated by reference to Exhibit 10.1 from
Registrants Form 10-Q for the quarterly period ended March
31, 1998).                                                                                           
|      |  |                                                                                                                                                                                                                                                                                              
|10.9  |  | PMC Capital, Inc. 1997 Employee Stock Option Plan
(incorporated by reference to Exhibit 10.10 from Registrants
Form 10-K for the fiscal year ended December 31, 1997).                                                                                                                      
|      |  |                                                                                                                                                                                                                                                                                              
|10.10 |  | Employment contract between the Registrant and Cheryl T.
Murray dated July 1, 2001.                                                                                                                                                                                                          
|      |  |                                                                                                                                                                                                                                                                                              
|10.11 |  | Servicing Agreement by and among Harris Trust savings Bank, as
Trustee and Supervisory Servicer, PMC Capital L.P. 1998-1, as
Issuer, and PMC Capital, Inc., as Servicer (incorporated by
reference to Exhibit 10.12 from Registrants Form 10-K for the
fiscal year ended December 31, 1998).
|      |  |                                                                                                                                                                                                                                                                                              
|10.12 |  | Second Amendment to Loan Agreement and Amendment to Loan
Documents and Renewal and Extension of loan dated as of March
15, 1998 (incorporated by reference to Exhibit 10.2 from
Registrants Form 10-Q for the quarterly period ended March
31, 1998).                                       
|      |  |                                                                                                                                                                                                                                                                                              
|10.13 |  | Servicing Agreement by and among Harris Trust Savings Bank, as
Trustee and Supervisory Servicer, PMC Capital L.P. 1999-1, as
Issuer, and PMC Capital, Inc., as Servicer (incorporated by
reference to Exhibit 10.1 from Registrants Form 10-Q for the
quarterly period ended June 30, 1999).

E-2



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##### Table of Contents



|      |  |                                                                                                                                                                                                                                                                                                                            
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.14 |  | Trust Indenture between PMC Joint Venture, L.P. 2000 and BNY
Midwest Trust Company, dated as of December 15, 2000.
(incorporated by reference to Exhibit 2.1 from Registrants
Form 8-K filed on March 13, 2001).                                                                                                          
|      |  |                                                                                                                                                                                                                                                                                                                            
|10.15 |  | Servicing Agreement by and among BNY Midwest Trust Company,
PMC Joint Venture, L.P. 2000 and PMC Capital and PMC
Commercial Trust, dated as of December 15, 2000 (incorporated
by reference to Exhibit 2.2 from Registrants Form 8-K filed
on March 13, 2001).                                                            
|      |  |                                                                                                                                                                                                                                                                                                                            
|10.16 |  | Servicing Agreement by and among BNY Midwest Trust Company as
Trustee and Supervisory Servicer, PMC Joint Venture, L.P.
2001, as Issuer, and PMC Capital, Inc. and PMC Commercial
Trust, as Servicers (incorporated by reference to Exhibit 10.1
from Registrants Form 10-Q for the quarterly period ended
June 30, 2001).
|      |  |                                                                                                                                                                                                                                                                                                                            
|10.17 |  | Trust Indenture by and among BNY Midwest Trust Company as
Trustee and PMC Joint Venture, L.P. 2001, as Issuer
(incorporated by reference to Exhibit 10.2 from Registrants
Form 10-Q for the quarterly period ended June 30, 2001).                                                                                        
|      |  |                                                                                                                                                                                                                                                                                                                            
|10.18 |  | Third Amendment to Credit Agreement dated June 12, 2001
between PMC Capital, Inc. and Bank One, NA. (incorporated by
reference from Registrants Form 10-K for the year ended
December 31, 2001).                                                                                                                          
|      |  |                                                                                                                                                                                                                                                                                                                            
|10.19 |  | Fourth Amendment to Credit Agreement dated July 18, 2001
between PMC Capital, Inc. and Bank One, NA. (incorporated by
reference from Registrants Form 10-K for the year ended
December 31, 2001).                                                                                                                         
|      |  |                                                                                                                                                                                                                                                                                                                            
|10.20 |  | Fifth Amendment to Credit Agreement dated August 2001 between
PMC Capital, Inc. and Bank One, NA. (incorporated by reference
from Registrants Form 10-K for the year ended December 31,
2001).                                                                                                                            
|      |  |                                                                                                                                                                                                                                                                                                                            
|10.21 |  | Sixth Amendment to Credit Agreement dated October 2001 between
PMC Capital, Inc. and Bank One, NA. (incorporated by reference
from Registrants Form 10-K for the year ended December 31,
2001).                                                                                                                           
|      |  |                                                                                                                                                                                                                                                                                                                            
|10.23 |  | Seventh Amendment to Credit Agreement dated October 2002
between PMC Capital, Inc. and Bank One, NA. (incorporated by
reference from Registrants Form 10-Q for the quarterly period
ended September 30, 2002).                                                                                                            
|      |  |                                                                                                                                                                                                                                                                                                                            
|10.24 |  | Trust Indenture between PMC Joint Venture, L.P. 2002-1 and BNY
Midwest Trust Company, dated April 3, 2002 (incorporated by
reference to Exhibit 2.1 from Registrants Form 8-K filed on
April 19, 2002).                                                                                                                   
|      |  |                                                                                                                                                                                                                                                                                                                            
|10.25 |  | Servicing Agreement by and among BNY Midwest Trust Company,
PMC Joint Venture, L.P. 2002-1, PMC Capital, Inc.                                                                                                                                                                                                              

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##### Table of Contents



|       |  |                                                                                                                                             
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------
|       |  | and PMC Commercial Trust, dated April 3,
2002 (incorporated by reference to Exhibit
2.2 from Registrants Form 8-K filed on
April 19, 2002).
|       |  |                                                                                                                                             
|*10.26 |  | Eighth Amendment to Credit Agreement dated March 19, 2003
between PMC Capital, Inc. and Bank One, N.A.                                      
|       |  |                                                                                                                                             
|*10.27 |  | Investment Management Agreement between PMC Capital, PMC
Commercial and PMC Advisers, Ltd. dated July 1, 2002.                              
|       |  |                                                                                                                                             
|*10.28 |  | Form of Distribution and Indemnification Agreement.                                                                                         
|       |  |                                                                                                                                             
|*21.1  |  | Subsidiaries of Registrant                                                                                                                  
|       |  |                                                                                                                                             
|*23.1  |  | Consent of PricewaterhouseCoopers LLP                                                                                                       
|       |  |                                                                                                                                             
|*99.1  |  | Certification-Chief Executive Officer                                                                                                       
|       |  |                                                                                                                                             
|*99.2  |  | Certification-Chief Financial Officer                                                                                                       



---

|* |  | Filed herewith
|- |  | --------------

E-4