<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-K

            [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
                  For the Fiscal Year Ended December 31, 1997

         [ ]  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: 811-3780

                               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.)

17290 PRESTON ROAD, 3RD FLOOR, 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 [ ]

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]

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 February
27, 1998  as reported on the American Stock Exchange, was approximately $123
million.  Common Stock held by each officer and director and by each person who
owns 10% or more of the outstanding Common Stock have 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 February 27, 1998, the Registrant had 11,734,591 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 to be held on
May 14, 1998 are incorporated by reference into Part III.
<PAGE>   2
                               PMC CAPITAL, INC.
                                   FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 1997

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


                               TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                            Form
                                                                            10-K
                                                                            Report
Item                                                                        Page
----                                                                        ----
  <S>                                                                       <C>
                                     PART I

  1.   Business   . . . . . . . . . . . . . . . . . . . . . . . . . . . .    1
  2.   Properties   . . . . . . . . . . . . . . . . . . . . . . . . . . .    9
  3.   Legal Proceedings  . . . . . . . . . . . . . . . . . . . . . . . .    9
  4.   Submission of Matters to a Vote of Security Holders  . . . . . . .    9


                                     PART II

  5.   Market for the Registrant's  Common Stock and Related
           Shareholder Matters  . . . . . . . . . . . . . . . . . . . . .   10
  6.   Selected Consolidated Financial Data   . . . . . . . . . . . . . .   11
  7.   Management's Discussion and Analysis of Financial Condition
           and Results of Operations  . . . . . . . . . . . . . . . . . .   12
  7A.  Quantitative and Qualitative Disclosures about Market Risk   . . .   20
  8.   Consolidated Financial Statements and Supplementary Data   . . . .   20
  9.   Changes in and Disagreements with Accountants on Accounting
           and Financial Disclosure   . . . . . . . . . . . . . . . . . .   20

                                    PART III

  10.  Directors and Executive Officers of the Registrant   . . . . . . .   21
  11.  Executive Compensation   . . . . . . . . . . . . . . . . . . . . .   21
  12.  Security Ownership of Certain Beneficial Owners and Management   .   21
  13.  Certain Relationships and Related Transactions   . . . . . . . . .   21

                                     PART IV

  14.  Exhibits, Financial Statements, Schedules and Reports
           on Form 8-K  . . . . . . . . . . . . . . . . . . . . . . . . .   22
  Signatures  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   23
  Financial Statements  . . . . . . . . . . . . . . . . . . . . . . . . .   F-1
  Exhibits    . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   E-1
</TABLE>
<PAGE>   3
                                     PART I

ITEM 1.   BUSINESS

GENERAL

              PMC Capital, Inc.  ("PMC Capital" or "PMC" and, together with its
subsidiaries, the "Company") is a diversified closed-end management investment
company that operates as a business development company ("BDC") under the
Investment Company Act of 1940, as amended (the "1940 Act").  The common stock
of the Company (the "Common Stock") is traded on the American Stock Exchange
under the symbol "PMC."  The Company engages in the business of originating
loans to small businesses either directly or through its three principal
subsidiaries:  First Western SBLC, Inc. ("First Western"), PMC Investment
Corporation ("PMIC") and Western Financial Capital Corporation ("Western
Financial").  First Western, PMIC 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 PMC Advisers, LTD ("PMC Advisers"), PMC Funding Corp. ("PMC
Funding"), PMC Capital Corp. 1996-A ("PMC  Capital Corp."), PMC Trust 1996-A,
and PMC Capital Limited Partnership (the "Partnership").  PMC Advisers is an
investment advisor who evaluates and services loans and other investment
alternatives pursuant to a fee arrangement.  PMC Capital has elected to be
taxed as a regulated investment company and distributes substantially all its
taxable income as dividends to its shareholders, thereby incurring no Federal
income tax liability on such income.

              The Company primarily originates loans to individuals and small
business concerns in the lodging industry.  The Company also targets the
medical, food service, service, retail and commercial real estate industries.
The Company primarily lends to businesses in the Southwest and Southeast
regions of the United States.  A majority of the Company's loans in the lodging
industry are to owner-operated facilities generally operating under national
franchises.  The Company believes that franchise operations offer attractive
lending opportunities because such businesses employ proven business concepts,
have consistent product quality, are screened and monitored by franchisors and
generally have a higher rate of success as compared to other independently
operated businesses.

              PMC Capital, incorporated in Florida under the name of  Pro-Med
Capital, Inc. in June 1983, became the successor by merger to Western Capital
Corporation (founded in 1979) in December 1983 and changed its name to "PMC
Capital, Inc." in March 1991.   The principal executive offices of the Company
are located at 17290 Preston Road, Third Floor, Dallas, Texas 75252.

              Earnings per share on a quarterly basis since 1988 were as
follows:

<TABLE>
<CAPTION>
                                                               Per Share Earnings
                         -------------------------------------------------------------------------------------------------
                          1997       1996      1995      1994       1993      1992      1991      1990      1989      1988
                         -----      -----     -----     -----      -----     -----     -----     -----     -----     -----
<S>                      <C>        <C>       <C>       <C>        <C>       <C>       <C>       <C>       <C>       <C>
First Quarter ......     $0.29      $0.27     $0.23     $0.19      $0.18     $0.18     $0.15     $0.13     $0.09     $0.09
Second Quarter .....      0.31       0.30      0.25      0.23       0.23      0.23      0.15      0.12      0.11      0.09
Third Quarter ......      0.30       0.30      0.27      0.26       0.25      0.19      0.18      0.13      0.10      0.10
Fourth Quarter .....      0.45*      0.31      0.28      0.44*      0.21      0.19      0.16      0.14      0.11      0.09
                         -----      -----     -----     -----      -----     -----     -----     -----     -----     -----
                         $1.35      $1.18     $1.03     $1.12      $0.87     $0.79     $0.64     $0.52     $0.41     $0.37
                         =====      =====     =====     =====      =====     =====     =====     =====     =====     =====
</TABLE>

* Includes $0.21 in 1997 and $0.24 in 1994 relating to structured sales of
  portions of the loan portfolio.

LENDING PROGRAMS

              FIRST WESTERN

              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 7(a) Program (the "7(a)
Program").  While the eligibility requirements of the 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 exceed $5.0
million (other than with respect to certain industries where eligibility is
determined based on a number of employees), (ii) liquid assets or real estate
equity of the borrower (and certain affiliates) cannot exceed certain limits
and (iii) the maximum aggregate SBA loan guarantees to a borrower cannot exceed
$750,000.





                                       1
<PAGE>   4
              SBA 7(a) Program lenders are required to pay a fee of between 40
basis points and 50 basis points ("SBA Servicing Fees") per annum on the
outstanding principal balance of any loans sold in the secondary market
depending upon when the loan was sold.  At present, a 50 basis point fee is in
effect for loans originated after October, 1995.  The value of the guaranteed
portion of loans decreased as a result of this fee.

              The fees charged to the borrower by the SBA for the SBA's
guaranty of a loan to the lender are based on the size of the originated loan,
and range from 2% to 3.875% of the guaranteed portion of the loan.  First
Western had a decrease in loan origination volume during 1996 and 1997
partially as a result of these increased fees, rule changes as described below
and an increase in competition.  Due to the decrease in loan origination
volume, the premiums recognized from the sale of the government guaranteed
portion of SBA 7(a) Program loans sold in the secondary market decreased from
$2.8 million in 1995 to $1.9 million during 1996 and $1.8 million in 1997.

              Effective March 1, 1996, certain eligibility requirements of the
7(a) Program were amended.   The following are the present eligibility
requirements:

When the total amount of the proposed financing:

              (a)    Is $250,000 or less, each 20 percent owner of the
                     applicant must contribute to the business personal liquid
                     assets per the SBA rules and regulations ("Personal Liquid
                     Assets")  in excess of two times the total financing or
                     $100,000, whichever is greater;

              (b)    Is between $250,001 and $500,000, each 20 percent owner of
                     the applicant must contribute Personal Liquid Assets to
                     the business in excess of one and one-half times the total
                     financing or $500,000, whichever is greater; and

              (c)    Exceeds $500,000, each 20 percent owner of the applicant
                     must contribute to the business Personal Liquid Assets in
                     excess of one times the total financing or $750,000,
                     whichever is greater.

              As described under the caption "Managements Discussion and
Analysis of Financial Condition and Results of Operations" the above noted
changes have caused the Company to place less reliance on the 7(a) Program
lending activities.  Continued program and market changes may have an adverse
effect on future periods of operations.  The future profitability of the
Company's 7(a) Program lending activities will be impacted by a number of
factors including:  (i) the more efficient capital structure achieved by First
Western's  securitization and sale of portions of the Company's portfolio (see
Securitization and Structured Financing Programs) and the timing and
availability of portfolio for future securitizations, (ii) volume of lending,
(iii) length of loans, (iv) structure of sales to the secondary market, (v)
interest rates charged and related terms, (vi) quality of portfolio, (vii)
prepayment experience and (viii) legislative and/or regulatory changes.  Any
other aspect of SBA programs under which the Company participates could be
modified by legislation or agency policy changes.  PMC Capital has established
alternative lending strategies to address the above noted changes and would
pursue additional strategies should the SBA programs under which any of its
subsidiaries operates were to be eliminated or significantly curtailed.

              At December 31, 1997 and 1996,  First Western had outstanding
loans receivable, net, in an aggregate amount of $8.2 million and $26.3
million, respectively.  During December 1997, First Western completed a
securitization and structured sale of $22.8 million of its unguaranteed SBA
loan portfolio (the "First Western Securitization").  This transaction was
rated by Moody's Investors Service in two traunches with the majority (93%)
rated "Aaa" and the subordinated piece (7%) rated "A1".  During the years ended
December 31, 1997 and 1996, First Western originated $29.5 million and $29.2
million, respectively, in loans and sold $21.6 million and $20.0 million,
respectively, of the guaranteed portion of its loans into the secondary market
(without recourse to the Company).  At December 31, 1997 and 1996, First
Western had loans receivable with aggregate balances of approximately $104,000
and $412,000 (1.2% and 1.6%, respectively, of First Western's outstanding loans
receivable, net) greater than 60 days past due.  Realized and unrealized losses
on First Western's investments (not including the effect of the First Western
Securitization and any valuation adjustments on investments in interest-only
strip receivables) were $111,000 and $56,000 during the years ended December
31, 1997 and 1996, respectively.





                                       2
<PAGE>   5
              PMIC

PMIC is a licensed specialized small business investment company ("SSBIC") under
the Small Business Investment Act of 1958, as amended ("SBIA"). PMIC 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
SBIC, PMIC is eligible to obtain long-term, fixed-rate funding from the SBA
through the issuance of debentures which are guaranteed by the SBA.  For any
debentures issued by PMIC prior to 1996, the interest rate has been reduced
through an SBA subsidy by 3% during the first five years.  As an SSBIC, prior to
1996 PMIC was eligible to issue preferred stock to the SBA with either a 3% or
4% per annum cumulative dividend rate.  Issuance of debentures is subject to SBA
approval and availability.  See "Overview of SBA Regulations."

At December 31, 1997 and 1996, PMIC had loans receivable, net, in an aggregate
amount of   $ 48.9 million  and $28.6 million, respectively. During the years
ended December 31, 1997 and 1996, PMIC originated $24.1 million and $19.3
million, respectively, in loans and during the year ended December 31, 1996
transferred $24.8 million in loans to PMC Capital in conjunction with a
structured financing (the "Structured Financing").  At December 31, 1997 and
1996, PMIC had loans receivable with aggregate balances of approximately
$873,000 and $160,000  (1.8% and 0.8%, respectively, of PMIC's loans receivable,
net) greater than 60 days past due. Realized and unrealized losses on PMIC's
investments were $124,000 and $27,000 during the years ended December 31, 1997
and 1996, respectively.

WESTERN FINANCIAL

Western Financial is a licensed small business investment company ("SBIC") under
the SBIA that provides  loans to small business concerns and persons 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.   Issuance of debentures is subject to SBA approval and
availability.  See "Overview of SBA Regulations."

At December 31, 1997 and 1996, Western Financial had loans receivable, net, in
an aggregate amount of $21.9 million and $14.4 million, respectively. During the
years ended December 31, 1997 and 1996, Western Financial originated $12.9
million and $7.5 million, respectively, in loans and during the year ended
December 31, 1996 transferred $10.0 million in loans to PMC Capital in
conjunction with the Structured Financing.  At December 31,  1997 and 1996,
Western Financial had loans receivable with aggregate principal balances of
approximately $153,000 and $215,000 (0.7% and 1.5%, respectively, of Western
Financial's loans receivable, net) greater than 60 days past due.  Realized and
unrealized losses on Western Financial's investments were $7,000 and $64,000,
respectively, during the years ended December 31, 1997 and 1996.

PMC CAPITAL

PMC Capital has originated both fixed-rate and variable-rate loans to borrowers
on a non-SBA supported basis using criteria similar to that utilized by its
three principal investment company subsidiaries whose loans are funded under the
SBA programs. These loans are:  (i) to borrowers who exceed the eligibility
requirements of the 7(a) Program or SBIC programs,  (ii) payable in monthly
installments of principal and interest based upon four to 25 year amortization
periods, with the balance due at maturity (typically four to 20 years), (iii)
primarily collateralized by real estate and (iv) generally guaranteed by the
principals of the borrowers.  The funding for this lending program is limited to
the extent of leverage available to PMC Capital. However, since the formation of
PMC Commercial Trust ("PMC Commercial") in 1993 most fixed-rate non-SBA
supported loans have been funded by PMC Commercial and such loans will be made
by the Company only to the extent that PMC Commercial does not have available
funds.  PMC Commercial is a Texas real estate investment trust and an affiliate
of PMC Capital.

At December 31, 1997 and 1996, PMC Capital had loans receivable, net, in an
aggregate amount of $48.3 million and $24.1 million, respectively. During the
years ended December 31, 1997 and 1996, PMC Capital originated $19.9 million and
$14.2 million in loans, respectively, and during the year ended December 31,
1996 contributed $45.6 million in loans to the Partnership (including the $34.8
million in loans transferred from PMIC and Western Financial to PMC Capital in
conjunction with the Structured Financing).   At December 31, 1997, PMC Capital
had a loan receivable with an aggregate balance of approximately $461,000 (1.0%
of PMC Capital's loans receivable, net) outstanding greater than 60 days.  At
December 31, 1996, PMC Capital had no loans receivable greater than 60 days past
due.  PMC Capital had no realized or unrealized losses during the years ended
December 31, 1997 and 1996.





                                       3
<PAGE>   6
NON INVESTMENT COMPANY SUBSIDIARIES

       The accompanying consolidated financial statements include the accounts
of PMC and its wholly owned regulated investment company subsidiaries.  The
accounts of PMC Advisers, PMC Funding, PMC Capital Corp., PMC Trust 1996-A and
the Partnership are accounted for by the equity method of accounting in
conformity with the requirements of the Federal securities laws.

       PMC ADVISERS

       PMC Advisers, organized in July 1993, is a registered investment advisor
under the Investment Advisers Act of 1940 which acts as the investment advisor
for PMC Commercial.  PMC Advisers provides investment advisory services to PMC
Commercial pursuant to an investment management agreement (the "Investment
Management Agreement") entered into between PMC Capital, PMC Advisers and PMC
Commercial.  As the investment advisor for PMC Commercial, PMC Advisers has
earned $1,622,000, $1,562,000 and $1,189,000 in advisory fees during the years
ended December 31, 1997, 1996 and 1995, respectively.

       PMC CAPITAL CORP., PMC TRUST 1996-A AND THE PARTNERSHIP

       The Partnership was formed as a special purpose affiliate of the
Company.  On November 13, 1996, the Partnership, a Delaware limited
partnership, completed the Structured Financing through a private placement
(the "Private Placement") of approximately $40.7 million of its Loan-Backed
Fixed Rate Notes, Series 1996-A (the "Notes").  The Notes, issued at par, which
have a stated maturity in 2011 and bear interest at the rate of 6.725% per
annum, were originally collateralized by approximately $45.7 million of loans
(the "Initial Loan Contribution") contributed by PMC Capital to the
Partnership.  The net book value of the Initial Loan Contribution after
deferred commitment fees, discounts and accrued interest receivable on the date
of transfer was approximately $45.5 million.  In connection with the Private
Placement, the Notes were given a rating of "Aa2" by Moody's Investors Service.
The Partnership has the exclusive obligation for repayment of the Notes, and
the holders of the Notes have no recourse to PMC Capital or its other
subsidiaries or their assets in the event of nonpayment of the underlying loans
receivable.  The net proceeds from the issuance of the Notes (approximately
$37.5 million before giving effect to payment of issuance costs of
approximately $396,000 and after giving effect to the funding of a $2.04
million reserve fund held by the trustee as collateral) were distributed to PMC
Capital.  PMC Capital Corp. was formed in November 1996 to act as the
independent trustee of PMC Trust 1996-A which is the general partner of the
Partnership and owns a 1% general partnership interest in the Partnership.  PMC
Capital owns a 99% limited partnership interest in the Partnership.  PMC is the
servicer for all loans held by the Partnership.

       PMC FUNDING

       PMC Funding is a Florida corporation that holds assets on behalf of the
Company.  PMC Capital is the sole shareholder of PMC Funding.  Operations from
PMC Funding consist of income generated from the operation of properties held
and charter revenue derived from use by third parties of PMC Funding's
airplane.  PMC Funding discontinued the use of its' airplane for charter during
1997.

ELECTION TO BE A BUSINESS DEVELOPMENT COMPANY

       In 1980, the 1940 Act was amended to permit closed-end investment
companies which make certain types of investments ("Qualifying Assets") to
elect to become business development companies ("BDCs") rather than registered
investment companies.  Under this amendment (the "1980 Amendment"), BDCs must
register their shares under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and become subject to the Exchange Act's periodic
reporting requirements rather than the 1940 Act's reporting requirements.
During 1994, PMC Capital elected to operate as a BDC.  Companies having
securities registered under the Exchange Act, such as PMC Capital, must file
quarterly rather than semi-annual financial reports.  The 1980 Amendment
provides BDCs with greater  operating flexibility relating to capital
structure, portfolio diversification, transactions with downstream affiliates,
executive stock options and the frequency which they may make distributions
from capital gains, that may be greater than that available to registered
investment companies.

       Under the 1980 Amendment, a BDC such as PMC Capital may only acquire
Qualifying Assets provided that, at the time of their acquisition, Qualifying
Assets represent at least 70% of the value of the BDC's total assets.  The





                                       4
<PAGE>   7
principal categories of Qualifying Assets relevant to the business of PMC
Capital are the following:

(1)    Securities purchased in transactions not involving any public offering
from the issuer of such securities, which issuer is an eligible portfolio
company.  An eligible portfolio company is defined in the 1980 Amendment as any
issuer which:

       (a)    is organized under the laws of, and has its principal place of
              business in, the United States;

       (b)    is not an investment company other than an SBIC wholly-owned by
              the BDC (PMC Capital's investments in and advances to PMIC,
              Western Financial and First Western are Qualifying Assets ); and

       (c)    does not have any class of securities with respect to which a
              broker or dealer may extend margin credit.

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

(3)    Cash, cash items, Government securities or high quality debt securities
maturing in one year or less from the time of investment.

       In addition, a BDC must have been organized (and have its principal
place of business) in the United States for the purpose of making investments
in the type of securities described in (1) above and, in order to classify the
securities as Qualifying Assets for purposes of the 70% test, the BDC must make
available to the issuer of the securities significant managerial assistance
which means, among other things:

       (1)    Any arrangement whereby the BDC, through its directors, officers
              or employees, offers to provide, and, if accepted, does so
              provide, significant guidance and council concerning the
              management, operations or business objectives and policies of a
              portfolio company; or

       (2)    In the case of an SBIC, making loans to a portfolio company.

       Under the 1980 Amendment, now that PMC Capital has elected to be
regulated as a BDC, it may not change the nature of its business so as to cease
to be, or withdraw its election as, a BDC unless authorized by the vote of a
majority of shares of Common Stock.

FUNDAMENTAL AND OTHER POLICIES OF THE COMPANY AND ITS SUBSIDIARIES

       PMC Capital and each of its investment company subsidiaries have
designated certain investment policies as "fundamental policies," which may
only be changed with the approval of the holders of  PMC Capital's outstanding
shares of Common Stock as described below.

       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.  All
other investment policies of PMC Capital may be changed by its Board of
Directors 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.





                                       5
<PAGE>   8
       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.     PMIC 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 PMIC may not be changed without the prior written
consent of the SBA.

       As stated above, the Company has a fundamental policy regarding
investment in the lodging industry.  At December 31, 1997 and 1996, loans to
businesses in the lodging industry comprised 59% and 44% of its total assets,
respectively.

       There can be no assurance that the Company will continue to experience
the positive results it has historically achieved from lending to the lodging
industry or that market conditions will enable the Company to maintain or
increase its level of loan concentration in this industry.  Any economic
factors that negatively impact this industry could have a material adverse
effect on the business of the Company.  Additionally, at December 31, 1997,
loans to businesses located in Texas, Georgia and Florida comprised
approximately 33%, 9% and 8% of the Company's outstanding loan portfolio,
respectively.  A decline in economic conditions in any of these states may
adversely affect the Company.

COMPETITION

       The Company's primary competition comes from banks, financial
institutions and other lending companies.  Additionally, there are lending
programs which have been established by national franchisors in the lodging
industry.  Some of these competitors have greater financial and larger
managerial resources than the Company.  Competition has increased as the
financial strength of the banking and thrift industries improved.  In
management's opinion, there has been an increasing amount of competitive
lending activity at advance rates and interest rates which are considerably
more aggressive than those offered by the Company.  In order to maintain a
quality portfolio, the Company will continue to adhere to its historical
underwriting criteria, and as a result, certain loan origination opportunities
will not be funded by the Company.  The Company believes that it competes
effectively with such entities on the basis of the lending programs offered,
the interest rates, maturities and payment schedules, the quality of its
service, its reputation as a lender, the timely credit analysis and decision
making processes, and the renewal options available to borrowers.   In
addition, to the extent that the investment opportunities reviewed by PMC
Advisers conform to the investment criteria of PMC Commercial, and PMC
Commercial has funds available to make these investments, such investments will
be made by PMC Commercial.

       Late in the fourth quarter of 1996, the Company began marketing a new
variable rate lending program (the "Prime Lending Program") which is separate
from the 7(a) Program of First Western, the Company's other variable rate
lending program.  The Prime Lending Program is designed to refinance existing
real estate collateralized commercial loans with borrowers who have proven
timely payment histories and loan-to-value and debt coverage ratios within the
Company's underwriting criteria.  Loans funded within the Prime Lending Program
will have variable interest rates based on the Prime Rate (as defined below).
As of December 31, 1997, the Company had funded $47.8 million in the Prime





                                       6
<PAGE>   9
Lending Program with a weighted average interest rate of 1.3% above the Prime
Rate.

       Additionally, the Company was approved in March  1997 as a licensee
under the Rural Economic Development Business and Industry Loan Program
sponsored by the U.S. Department of Agriculture (the "B & I Loan Program").
Under the B & I Loan Program, loans are to be originated in rural areas
(generally areas with a population of less than 50,000)  and are partially
guaranteed by the U.S. Government.  The U.S. Government guarantees repayment
generally up to 80% of the principal amount of loans originated under the B & I
Loan Program.  The Company presently has several loans in the process of
closing.

       In addition to being designated as a "Certified SBA lender" in Miami,
Florida and as a "Preferred SBA lender" in Dallas, Texas, in December 1995
First Western was granted the designation of a "preferred lender" in over 50
additional districts of the SBA.  Under the 7(a) Program, in order to have an
SBA guarantee, the lender must have some level of SBA approval.  Within the
7(a) Program, the different status levels for SBA approvals are (i) guaranteed
lender, (ii) certified lender and (iii) preferred lender.  Approval of loans
under the guaranteed lender program requires the greatest amount of review time
by the SBA while loans under the preferred lender program require the least.
The granting of preferred lender status to First Western assists the Company in
competing for loan origination opportunities due to the reduction in approval
time.

LEVERAGE

       The Company has borrowed funds and issued shares of preferred stock, and
intends to borrow additional funds through advances on its revolving credit
facility and through the issuance of notes payable or SBA debentures, if
available, see "Overview of SBA Regulations."  As a result, the Company is
leveraged.  The SBA and private lenders have fixed dollar claims on the
Company's assets superior to the claims of the holders of Common Stock.  Any
increase in the interest rate earned by the Company 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 its net income and
earnings per share to increase more than it would without leverage, while any
decrease in the interest rate earned by the Company 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 the Company to repay indebtedness or meet
its obligations in respect of any outstanding preferred stock on a timely
basis, the Company may be required to dispose of assets at a time which it
would not otherwise do so and at prices which may be below the net book value
of such assets.  Dispositions of assets may adversely impact the Company's
results of operations.

INTEREST RATE AND PREPAYMENT RISK

       As a result of the general downward trend in interest rates, the Company
has experienced an increased rate in the prepayment  of its loans.  On such
prepayments, to the extent the loans were on a fixed-rate of interest, the
Company  received the immediate benefit of the prepayment charge, however, the
proceeds from the prepayments were invested initially in temporary investments
and have been reloaned or committed to be reloaned at lower rates.  See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations".  The impact of the lower lending rates is partially offset (based
on current market conditions) by the reduced cost of the Company's borrowings.
See"Interest Rate and Prepayment Risk".

       Net income of the Company is effected by the spread between the rate at
which it borrows funds and the rate at which it loans these funds.  The
portfolio of PMC Capital, Western Financial and PMIC have typically been long-
term and have loans with both variable and fixed interest rates and the
borrowed funds of these companies are typically long-term and at fixed interest
rates.  First Western originates variable-rate loans and has utilized equity
capital of PMC Capital and through structured sale of its portfolio in 1994 and
1997 to obtain funds necessary to originate loans.  If the yield on loans
originated by the Company with funds obtained from borrowings or the issuance
of preferred stock fails to cover the cost of such funds, the Company's cash
flow will be reduced.  During periods of changing interest rates, interest rate
mismatches could negatively impact the Company's net income, dividend yield and
the market price of the Common Stock.  Most of the fixed-rate loans that the
Company originates have prepayment penalties.  If interest rates decline, the
Company may experience significant prepayments. Such prepayments, as well as
scheduled repayments, are likely to be reloaned or invested at lower rates,
which may have an adverse effect on the Company's ability to maintain dividend
distributions at existing levels.   First Western's loans (all variable
interest rate) do not have prepayment penalties.





                                       7
<PAGE>   10
SECURITIZATION AND STRUCTURED FINANCING PROGRAMS

       Since December 1994, the Company has relied upon its ability to
aggregate and sell portions of its loan portfolio in the asset-backed
securities market to generate cash proceeds for funding additional loans.
Further, gains on sales generated by the Company's securitizations represent a
material portion of the Company's revenues.  Accordingly, adverse changes in
the Company's "Asset-Backed Securities Program" or in the asset-backed
securities market for the type of product generated by the Company generally
could materially adversely affect the Company's ability to originate and
securitize loans on a timely basis and upon terms reasonably favorable to the
Company.  Any delay in the sale of receivables beyond a quarter-end or year end
would eliminate the gain on sale in the given quarter or year and adversely
affect the Company's reported earnings for such quarter or year.  Any such
adverse changes or delays could have a material adverse effect on the Company's
financial position, liquidity and results of operations.

       The Company retains a substantial portion of the default and prepayment
risk associated with the loan portfolio that is sells pursuant to the Asset-
Backed Securities Program.  A large component of the gain recognized on such
sales and the corresponding asset recorded on the Company's balance sheet is an
interest-only strip receivable which is based on the present value of estimated
future excess cash flows which will be received by the Company from the
securitized loans.  Accordingly, the interest-only strip receivable is
calculated on the basis of management's assumptions concerning, among other
things, defaults and prepayments.  Actual defaults and prepayments may vary
from management's assumptions, possibly to a material degree.  Prepayments on
loans are commonly measured relative to a prepayment standard or model.  The
model used for purposes of determining future cash flows, the Constant
Prepayment Rate ("CPR"), represents an assumed constant rate of prepayment per
annum relative to the then outstanding principal balance of the pool of
serviced loans.  The CPR does not purport to be either a historical description
of the prepayment experience of the pool or a prediction of the anticipated
rate of prepayment of the pool.

       Greater than anticipated prepayments of principal will decrease the fair
value attributed to the interest-only strip receivable.  Fewer than anticipated
prepayments of principal will increase the fair value attributed to the
interest-only strip receivable.  The effect on the Company's yield due to
principal prepayments on the underlying securitized loans occurring at a rate
that is faster (or slower) than the rate anticipated by the Company in the
period immediately following the completion of the securitization will not be
entirely offset by a subsequent like reduction (or increase) in the rate of
principal payments.  The weighted average lives of the underlying securitized
loans will also be affected by the amount and timing of delinquencies and
defaults on the underlying securitized loans and the recoveries, if any, on
defaulted underlying securitized loans.

       In addition, the Company is required to deposit substantial amounts of
the cash flows generated by its interests in the Company sponsored
securitizations ("restricted cash") into spread accounts which are pledged to
the security holders.

       The Company regularly measures its default, prepayment and other
assumptions against the actual performance of securitized receivables including
the guaranteed portion of loans sold.  If the Company were to determine, as a
result of such regular review or otherwise, that it underestimated (or
overestimated) defaults and/or prepayments, or that any other material
assumptions were inaccurate, the Company would be required to adjust the
carrying value of its interest-only strip receivable by making a charge to
income and adjusting the carrying value of the interest-only strip receivable
on its balance sheet.  An impairment of the interest-only strip receivable
(i.e. reduction of estimated future cash flows) and the corresponding decreases
in earnings and cash flow could limit the Company's ability to service debt and
could affect future securitizations and other financings.  During 1997, as a
result of increased prepayment speeds, the Company provided for an unrealized
loss and corresponding valuation allowance of $300,000 on the interest-only
strip receivables.  Although the Company believes that it has made reasonable
assumptions as to the future cash flows of the various pools of loans that have
been sold in securitization transactions, actual rates of default or prepayment
may differ from those assumed and other assumptions may be required to be
revised upon future events.  Generally, the form of credit enhancement
agreement entered into in connection with securitization transactions contains
specified limits on the delinquency, default and loss rates on the receivables
included in each trust.  If, at any measurement date, the delinquency, default
or loss rate with respect to any trust were to exceed the specified limits,
provisions of the credit enhancement agreement would automatically increase the
level of credit enhancement requirements for that trust.  During the period in
which the specified delinquency, default or loss rate was exceeded, excess cash
flow, if any, from the trust would be used to fund the increased credit
enhancement levels instead of being distributed to the Company, which would
have an adverse effect on the Company's cash flow.





                                       8
<PAGE>   11
EMPLOYEES

       At December 31, 1997, the Company had 63 employees.  Management of the
Company believes its relationship with its employees is good.

OVERVIEW OF SBA REGULATIONS

       The lending operations of First Western, PMIC and Western Financial are
regulated by the SBA establishing, among other things, maximum interest rates
that borrowers may be charged (which currently may not exceed the greater of
19% per annum or 11% above the Company's cost of funds from the SBA) and
minimum and maximum maturities for the Company's loans  (which generally range
from four to 25 years).  Borrowers must satisfy certain criteria established by
the SBA to qualify for loans originated by the Company 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 loan proceeds can be employed by the borrower.

       As part of the legislation by Congress in 1996, several increased costs
were put into effect for new SBA debentures.  A flat 3% "draw-down" fee
replaced the 2% commitment fee and interest rates charged on newly issued SBA
Debentures increased by 100 basis points.  The interest rates previously
charged on SBA debentures were approximately 70 basis points over the 10 year
Treasury Note.  As adjusted, the present rates on newly issued SBA Debentures
would be approximately 170 basis points over the 10 year Treasury Note.  As
part of this legislation, the availability of 3% subsidized debentures and the
right of the SBA to purchase preferred stock of an SSBIC was repealed.  This
has no effect on previously issued debentures or preferred stock of SSBICs
including PMIC.


ITEM 2.   PROPERTIES

       The Company's headquarters are located at 17290 Preston Road, Dallas,
Texas  75252  where its facilities comprise approximately 12,400 square feet of
space pursuant to leases with a corporation, a majority of whose shareholders
are officers and/or directors of the Company.  In addition, at December 31,
1997, the Company also leased office space in Hollywood, Florida, Phoenix,
Arizona and Atlanta, Georgia.  The  aggregate annual lease payments for the
year ended December 31, 1997 were approximately $229,000.


ITEM 3.   LEGAL PROCEEDINGS

       The Company is involved from time to time in routine litigation
incidental to its business.  The Company does not believe that the current
proceedings will have a material adverse effect on the results of operations or
financial condition of  the Company.


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 the year ended December 31, 1997.





                                       9
<PAGE>   12
                                    PART II


ITEM 5.       MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
              MATTERS

       The 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 dividends per share
declared by the Company for each such period.



<TABLE>
<CAPTION>
                                                        Regular    Special
                                                       Dividends  Dividends
                                                          Per        Per
Quarter Ended                       High        Low      Share      Share
-------------                       ----        ---      -----     ------
<S>                                <C>         <C>       <C>       <C>
December 31, 1997 ..............   $15.25      $14.00    $0.320    $0.020
September 30, 1997 .............   $15.50      $13.75    $0.315      ----
June 30, 1997 ..................   $14.88      $12.50    $0.310      ----
March 31, 1997 .................   $14.50      $13.38    $0.305      ----

December 31, 1996 ..............   $14.75      $12.88    $0.300    $0.020
September 30, 1996 .............   $14.25      $11.75    $0.295      ----
June 30, 1996 ..................   $13.38      $12.38    $0.280      ----
March 31, 1996 .................   $13.63      $11.88    $0.270      ----


December 31, 1995 ..............   $13.25      $11.38    $0.260    $0.065
September 30, 1995 .............   $12.00      $10.88    $0.255      ----
June 30, 1995 ..................   $12.13      $10.75    $0.250      ----
March 31, 1995 .................   $13.50      $11.13    $0.245      ----
</TABLE>

       On February 27, 1998, there were approximately 1,900 shareholders of
record of Common Stock and the last reported sales price of the Common Stock
was $14.06 per share.





                                       10
<PAGE>   13
ITEM 6.       SELECTED CONSOLIDATED FINANCIAL DATA

       The following  summary  of  Selected Consolidated  Financial  Data  of
the  Company as of and for the five years in the period ended December 31,
1997.  The following data should  be  read  in conjunction with the
consolidated financial statements of the Company 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 financial data
presented below has been derived from the consolidated financial statements of
the Company audited by Coopers & Lybrand L.L.P., independent public
accountants, whose report with respect thereto is included elsewhere in this
Form 10-K.


<TABLE>
<CAPTION>
                                                                               Years Ended December 31,
                                                      -------------------------------------------------------------------------
                                                         1997            1996            1995            1994            1993
                                                      ---------       ---------       ---------       ---------       ---------
                                                                    (in thousands, except per share information)
<S>                                                   <C>             <C>             <C>             <C>             <C>
Operating:
  Operating income ..............................     $  24,406       $  23,821       $  21,262       $  16,450       $  15,670
  Operating expenses ............................     $ (10,602)      $ (10,454)      $  (9,541)      $  (7,578)      $  (5,933)
  Realized and unrealized gain (loss)
   on investments ...............................     $   1,818       $    (147)      $    (359)      $   3,151       $    (404)
  Net operating income and realized
   and unrealized gain (loss) on
   investments ..................................     $  15,622       $  13,220       $  11,362       $  12,023       $   9,333
  Dividends declared, common ....................     $  14,543       $  12,853       $  11,600       $  11,244       $   9,367
  Earnings per common share .....................     $    1.35       $    1.18       $    1.03       $    1.12       $    0.87
  Dividends per common share ....................     $    1.27       $    1.16       $    1.08       $    1.06       $    0.89
  Weighted average common
   shares outstanding ...........................        11,411          11,002          10,768          10,650          10,579
  Loans funded ..................................     $  86,361       $  70,154       $  77,567       $  75,349       $  74,091

At end of period:
  Loans receivable, net .........................     $ 127,240       $  93,354       $ 110,499       $  75,264       $  71,528
  Total assets ..................................     $ 165,839       $ 163,431       $ 159,002       $ 125,416       $ 112,515
  SBA debentures payable ........................     $  41,290       $  44,570       $  43,540       $  26,280       $  20,280
  Notes payable .................................     $  35,000       $  35,000       $  35,001       $  25,001       $  25,001
  Preferred stock of consolidated
   subsidiary ...................................     $   7,000       $   7,000       $   7,000       $   5,000       $   3,000
  Common shareholders' equity ...................     $  70,166       $  62,903       $  59,088       $  57,371       $  55,524
  Number of common shares
   outstanding ..................................        11,631          11,162          10,871          10,684          10,603
Ratios:
  Return on average assets ......................           9.7%            8.3             8.0%           10.3%            9.4%
  Return on average common
   shareholders' equity .........................          23.3%           21.3%           19.2%           21.2%           16.8%
</TABLE>





                                       11
<PAGE>   14
ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
              CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

GENERAL
The Company's operations include originating and servicing commercial loans for
its own account as well as operating as an investment advisor who evaluates and
services loans under a fee arrangement for PMC Commercial.  The Company sells
the guaranteed portion its loans originated under the SBA 7(a) Program. In
addition, during November 1996 the Company securitized a portion of its fixed
rate portfolio as part of the Structured Financing as an additional source of
working capital and in December 1997 sold the unguaranteed portion of its loans
originated under the SBA 7(a) Program as part of a securitization and sale.
Historically, the Company has retained servicing and residual interests in all
loans sold.

       The Company's revenue sources include the following:

       o      Interest earned on loans originated and retained including the
              effect of commitment fees collected at the inception of the loan.
       o      Advisory fee income from the management of PMC Commercial.
       o      Equity in the income of non-investment company subsidiaries.
       o      Premiums recognized from the sale of the government guaranteed
              portion of 7(a) Program loans sold into the secondary market.
       o      Interest earned on temporary (short-term) investments.
       o      Other fees, including: late fees, prepayment fees, construction
              monitoring and site visit fees.

       In order to generate revenues, PMC originates commercial loans.  The
following table sets forth information concerning the aggregate gross loans
funded for the Company and the respective changes from previous years:


<TABLE>
<CAPTION>
                                            YEARS ENDED DECEMBER 31,
                      ---------------------------------------------------------------
                            1997                 1996                  1995
                      -------------------- --------------------  --------------------
                                             (In millions)
                                 Increase             Increase              Increase
Company               Funded    (Decrease) Funded    (Decrease)  Funded    (Decrease)
-------               ------    ---------- ------    ----------  ------    ----------
<S>                   <C>          <C>     <C>          <C>      <C>         <C>
PMIC ...........      $24.1        25%     $19.3        (9%)     $21.2       108%
Western
  Financial .....      12.9        72%       7.5        (6%)       8.0        11
First Western ...      29.5         1%      29.2       (28%)      40.6        (2%)
PMC Capital .....      19.9        40%      14.2        84%        7.7       (53%)
                      -----                -----                 -----
Total ...........     $86.4        23%     $70.2        (9%)     $77.5         3%
                      =====                =====                 =====
</TABLE>

       In 1993, the Company organized an investment advisor which pursuant to
the terms of an investment management agreement acts as the investment advisor
for PMC Commercial.  The Company's subsidiary, PMC Advisers, has been the
investment advisor for PMC Commercial since the completion of PMC Commercial's
public offering in December 1993 (see footnote 14 to the accompanying
consolidated financial statements).  During 1997 PMC Advisers earned management
fees of approximately $1.6 million from PMC Commercial.

       The Company also earns income through its equity ownership in its non-
investment company subsidiaries, primarily the Partnership.  In November 1996
the Partnership completed the Private Placement of approximately $40.7 million
of Notes which were issued at par and have an interest rate of 6.725%.  The
Notes were originally collateralized by approximately $45.7 million of loans
contributed to the Partnership by PMC Capital.  The net proceeds of the
issuance of the Notes, approximately $37.5 million were distributed to PMC
Capital were utilized to originate additional loans.  The differential between
the interest received on the collateralized loans (originally $45.7 million at
an average yield of 11.5%) and the interest paid on the Notes (originally $40.7
million at 6.725%), less any loan losses and amortization of transaction fees,
contribute to the profit of PMC Capital.





                                       12
<PAGE>   15
       Due to the reduction of loan origination opportunities experienced by
First Western over the past several years, the Company has actively sought to
increase other sources of revenues and thereby reduce its reliance on the
income generated by First Western.  During this period the Company's other
lending activities have increased and the Company has established other revenue
sources such as the investment advisory income.

       Substantially all of the First Western loans are variable rate which
The Wall Street Journal on the first day of the applicable period ("Prime
Rate").  The spread over the Prime Rate charged by First Western ranges from
1.0% to 2.75%.

       Prime rates utilized by First Western were as follows:

<TABLE>
<CAPTION>
                            1997           1996          1995
                            ----           ----          ----
       <S>                  <C>            <C>           <C>
       First Quarter        8.25%          8.50%         8.50%
       Second Quarter       8.50%          8.25%         9.00%
       Third Quarter        8.50%          8.25%         9.00%
       Fourth Quarter       8.50%          8.25%         8.75%
</TABLE>

       Due to the decline in interest rates since 1995 and the increased
availability of either fixed rate loans or variable rate loans with interest
rates less than that on the outstanding portfolio of First Western, prepayments
have increased.

       There has been an increasing amount of competitor lending activity at
advance rates and interest rates which are considerably more aggressive than
those offered by the Company.  In order to maintain a quality portfolio, the
Company has and will continue to adhere to its historical underwriting
criteria, and as a result, certain loan origination opportunities have and will
not be funded by the Company.  In response to this competition, the Company has
instituted the Prime Lending Program as described below.  The yield on these
loans (assuming no change in the Prime Rate) is lower than the Company has
historically experienced.

       Late in the fourth quarter of 1996 the Company began marketing a
variable-rate lending program (the "Prime Lending Program") which is separate
from the 7(a) Program of First Western, the Company's other variable rate
lending program.  The Prime Lending Program provides funds to refinance
existing real estate secured commercial loans with borrowers who have proven
timely payment histories and loan-to-value and debt coverage ratios within the
Company's underwriting criteria.  Several of the loans refinanced under this
program were originally SBA 7(a) Program loans and that some of these loan
originations have refinanced loans of First Western's.  These loans have
variable interest rates based on the Prime Rate.

       As a result of the Prime Lending Program, the Company experienced a 23%
increase in loans originated from $70.2 million during the year ended December
31, 1996 to $ 86.4 million during the year ended December 31, 1997.

       Additionally, the Company has been approved as a licensee under the
Rural Economic Development Business and Industry Loan Program sponsored by the
U.S. Department of Agriculture (the "B & I Loan Program").  Under the B & I
Loan Program, loans are to be originated in rural areas (generally city areas
with a population of less than 50,000) and are partially guaranteed by the U.S.
Government.  The U.S. Government guarantees repayment of up to 80% of the
principal amount of loans originated under the B & I Loan Program.

       As a result of its working capital requirements for loan originations as
well as holding borrowers advances and cash reserves for its completed
securitizations or structured financings, the Company has temporary short-term
investments.  In order to minimize its short-term investment positions, the
Company may enter into a bank warehouse facility and anticipates greater
utilization of its revolving credit facility.

       The Company receives other investment income from various sources
including late fees, prepayment fees, construction monitoring and site visit
fees.  The net amount of other investment income earned during 1997 was
$504,000.  The amount earned will vary based on volume funded, the mix of loans
(construction versus non-construction), the rate on loans originated (whether
fixed or floating) as well as the general level of interest rates.

       Expenses primarily consist of interest expense and company overhead.
Expenses were 44% of total income during the year ended December 31, 1997
compared to 43% during the year ended December 31, 1996.





                                       13
<PAGE>   16
       Interest expense was $5.5 million during 1997.  Interest expense is
primarily derived from (i) $35 million of unsecured notes with a weighted
average interest rate of 7.4% and weighted average remaining maturity of 3.8
years as of December 31, 1997, and (ii) $41,290,000 of debentures due to the
SBA as a result of borrowings made by the Company's SBIC subsidiaries, with a
weighted average interest rate of 6.7% and weighted average remaining maturity
of 5.1 years as of December 31, 1997.  At December 31, 1997, the Company had no
borrowings outstanding pursuant to its revolving credit facility, and had
availability of $15 million.  Any borrowings thereunder would bear interest at
a rate based on either the prime rate or Libor.

       Company overhead was $5.1 million in 1997 and is comprised of salaries
and related benefits, general and administrative, profit sharing plan, rent,
legal and accounting, SBA fees and directors and shareholders expense.  The
Company's operations are centralized from its headquarters in Dallas, Texas.
The Company presently has other marketing offices located in Atlanta, Georgia;
Austin, Texas and Phoenix, Arizona.  The largest overhead expense is the
salaries and related benefits which consist of salaries for the Company's
officers and employees who provide for all of the Company's management and
portfolio functions including marketing, servicing, accounting and portfolio
analysis.  Salaries and related benefits were 14% and 13%, respectively, of
total income during the years ended December 31, 1997 and 1996.  It is
anticipated that overhead will continue to increase as the Company's portfolio
under management increases.

       General and administrative expenditures consist primarily of Texas
franchise and other taxes, advertising and promotional expense, telephone
services, corporate printing costs and general office expenses.  General and
administrative expenses were 3% of total income during the year ended December
31, 1997 compared to 4% during the year ended December 31, 1996.  These costs
are anticipated to increase in proportion to the growth of the Company's
portfolio under management.  During the year ended December 31, 1997, the
Company expensed approximately $40,000 relating to the Texas franchise tax.

       Profit sharing plan, rent, legal and accounting, SBA fees and directors
and shareholders expense (collectively the "Other Administrative Costs")
aggregated $822,000 for the year ended December 31, 1997.   The Other
Administrative Costs were 3% of total income for each of the years ended
December 31, 1997 and 1996.  These costs are anticipated to increase in
proportion to the increase in salaries and general administrative expense as a
result of the anticipated growth of the Company's portfolio under management.

CERTAIN ACCOUNTING CONSIDERATIONS

       Effective January 1, 1997, the Company adopted as required, SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities."  SFAS No. 125 provides for the accounting and
reporting of transfers and servicing of financial assets based on a financial-
components approach.

       The transfer of assets that qualifies for sale treatment under SFAS No.
125 is generally accounted for by the seller by:  (i) derecognizing all assets
sold, (ii) recognizing all assets obtained and liabilities incurred at their
relative fair value, and (iii) recognizing all assets retained at their
allocated previous carrying amount based on relative fair values.  The Company
typically receives cash and retains the right  to receive contractual servicing
fees and the right to receive future interest income on loans sold that exceed
the contractually specified servicing fee (the interest-only strip receivable)
in exchange  for a portion of the loan, typically the guaranteed portion of an
SBA 7(a) loan.  The difference between (i) the carrying value of the portion of
loans sold and (ii) the sum of (a) cash received, (b) the relative fair values
of the servicing rights and (c) the interest-only strip receivable retained,
constitutes the gain on sale.

       SFAS No. 125 also requires that amounts carried previously as excess
servicing assets be reclassified between a servicing asset and an interest-only
strip receivable, as defined.  Accordingly, the Company reclassified its excess
servicing asset (net of an allowance for credit losses on loans sold) of
$4,896,000 at December 31, 1996 to $1,753,000 of a servicing asset and
$3,143,000 of an interest-only strip receivable.

       In accordance with SFAS No. 125, the servicing asset is amortized in
proportion to and over the period of estimated net servicing income and is
evaluated for impairment by stratifying the servicing assets by one or more of
the predominant risk characteristics of the underlying financial assets.  The
interest-only strip receivable is accounted for as an investment in debt
securities classified as available for sale under SFAS No. 115. As of the date
a securitization is completed, an asset is established and classified as an
"interest-only strip receivable".  This receivable is initially valued based on
management's estimate of the anticipated discounted future cash flows retained
by the Company related to the pool of securitized loans.  The discount rate is
a market rate based on interest rate levels at the time of completion of the
transaction considering the risks inherent in the transaction.





                                       14
<PAGE>   17
       On a quarterly basis thereafter, income generated by the interest-only
strip receivable is recognized based on an "internal rate of return"  (the
"IRR") which during the initial reporting period after completion of the
securitization is the market rate used in valuing the interest-only strip
receivable.  Management updates the anticipated future cash flows on a
quarterly basis and determines a revised IRR based on the recorded interest-
only strip receivable at such balance sheet date.  If during any evaluation of
the value of the interest-only strip receivable it is determined that the IRR
is lower than a "risk free" rate for an asset of similar duration, a realized
loss will be incurred which adjusts the recorded value of the interest-only
strip receivable to the market value.

       In addition,  on a quarterly basis, the Company measures the fair value
of the interest-only strip  receivable based upon the future anticipated cash
flows discounted to reflect the current market interest rates for investments
of this type.  Any appreciation (depreciation) of the interest-only strip
receivable is reflected on the accompanying consolidated statements of income
as an unrealized gain (loss) on investments.  During the year ended December
31, 1997, the Company provided for an unrealized loss and corresponding
valuation allowance of $300,000 related to the interest-only strip receivable.

       The estimated net servicing income and the investment in the interest-
only strip receivable are based in part upon management's estimate of
prepayment speeds, including default rates.  There can be no assurance of the
accuracy of these estimates.  If the prepayment speeds occur at a faster rate
than anticipated, the amortization of the servicing asset  will be accelerated
and the value of the interest-only strip receivable will decline.  If
prepayments occur slower than anticipated, cash flows would exceed estimated
amounts and total income in future periods would be enhanced.  During the year
ended December 31, 1997 as compared to the prior year, the amount of
amortization of the servicing asset was increased as a result of increased
prepayment speeds. (See - Securitization and Structured Financing Programs)

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

       Interest income decreased by $1,435,000 (8%), from $18,571,000 for the
year ended December 31, 1996 to $17,136,000 for the year ended December 31,
1997.  This decrease was primarily attributable to a reduction in PMC Capital's
loan portfolio resulting from the Structured Financing completed during
November 1996 and the First Western Securitization in December 1997 and a
reduction in interest rates on loan originations in 1997.  The average retained
loan portfolio outstanding decreased 9% from $124.9 million during the year
ended December 31, 1996 to $113.8 million during the year ended December 31,
1997.  Accordingly, interest income on loans (not including the Partnership)
decreased by $1,725,000, or 10%, from $17,504,000 during the year ended
December 31, 1996 to $15,779,000 during the year ended December 31, 1997.
Including the interest earned by the Partnership of $591,000 and $4,662,000
during the years ended December 31, 1996 and 1997, respectively, interest
income on loans increased by $2,346,000 (13%) to $20,441,000 for the year ended
December 31, 1997 as compared to $18,095,000 during the year ended December 31,
1996.  During the year ended December 31, 1997, the Company earned increased
interest on short-term investments due to the funds received from the
Structured Financing and the First Western Securitization in December 1997.  As
a result, during the year ended December 31, 1997, average temporary
investments outstanding were $28.9 million, a 36% increase from $21.3 million
during the year ended December 31, 1996.  Accordingly, interest on temporary
investments increased by $291,000, or 27%, from $1,067,000 during the year
ended December 31, 1996 to $1,358,000 during the year ended December 31, 1997.

       Premium income decreased by $166,000 (9%), from $1,942,000 for the year
ended December 31, 1996 to $1,776,000 for the year ended December 31, 1997.
This decrease was primarily attributable to lower premium percentages paid for
the loans sold during the year ended December 31, 1997 as compared to December
31, 1996.  The primary reason for the lower premium percentages is that the
spread above Prime for loans originated and sold was lower in 1997 than 1996.
When the lower interest rate loans are sold, the percentage premium paid is
usually less, accordingly, the income recognized from loan sales decreased even
though the loans sold increased from $20.0 million during the year ended
December 31, 1996 to $21.6 million during the year ended December 31, 1997.

       Other investment income, net, decreased by $104,000 (17%), from $608,000
for the year ended December 31,  1996 to $504,000 for the year ended December
31, 1997.  This decrease was primarily attributable to a decrease in prepayment
fees on the fixed-rate loan portfolio received during the year ended December
31, 1997 as compared to the year ended December 31, 1996.

       Equity in income (loss) of unconsolidated subsidiaries increased by
$2,191,000, from income, net, of $369,000 during the year ended December 31,
1996 to income, net, of $2,560,000 during the year ended December 31, 1997.
The increase is primarily due to the formation of the Partnership in November
1996 which had net profits of $2,608,000 during the year ended December 31,
1997 compared to $328,000 during the year ended December 31, 1996.  The
Partnership profits include all yield generated from the loans contributed by
PMC Capital less the cost of the Notes issued by the





                                       15
<PAGE>   18
Partnership.  Offsetting a portion of the Partnership income were the
operations of PMC Funding which had a decrease in revenues from charter
services of its airplane which resulted in a reduction in profits from a net
income of $41,000 during the year ended December 31, 1996 to a net loss of
$48,000 during the year ended December 31, 1997.

       Other income, net, increased by $99,000 (4%), from $2,331,000 during the
year ended December 31, 1996 to $2,430,000 during the year ended December 31,
1997. This increase was primarily a result of an increase in advisory fees.
This increase was achieved even though a $251,000 fee was generated by PMC
Advisers during the year ended December 31, 1996 related to an equity offering
of PMC Commercial for which there was no comparable transaction in 1997.

       Operating expenses, not including interest, increased by $308,000 (6%),
from $4,746,000 during the year ended December 31, 1996 to $5,054,000 during
the year ended December 31, 1997.  This increase was a result of an increase in
salaries and related benefits of 255,000 (8%), from $3,180,000 during the year
ended December 31, 1996, to $3,435,000 during the year ended December 31, 1997.
The increase in salaries and related benefits was attributable to an increased
number of employees (due to the increase in portfolio under management, the
complexity of the financing transactions undertaken by the Company and an
increase in marketing personnel), and a general increase in the level of
salaries for employees during 1996 and 1997.  Rent expense increased by $16,000
(8%) during the year ended December 31, 1997 as compared to the year ended
December 31, 1996 due to the opening of a new office during 1997 (Phoenix,
Arizona) and the expansion of the Company's space occupied and an increase in
the base rent at its headquarters.  Legal and accounting increased by $43,000
(29%) during the year ended December 31, 1997 as compared to the year ended
December 31, 1996 due to the increased cost of the annual audit (primarily
attributable to the formation of the Partnership) and increases in general
corporate legal services.  General and administrative costs decreased by
$46,000 during the year ended December 31, 1997 as compared to the year ended
December 31, 1996 due to reductions in state franchise taxes.

       Interest expense decreased by $160,000 (3%), from $5,708,000 during the
year ended December 31, 1996 to $5,548,000  during the year ended December 31,
1997.  The decrease was primarily attributable to the repayment at maturity of
approximately $2.5 million and $1.0 million in SBA debentures during February
1997 and September 1997, respectively.

       Realized and unrealized gain (loss) on investments (not including the
sale of assets) changed from a loss of $147,000 during the year ended December
31, 1996 to a loss of $542,000 during the year ended December 31, 1997.   The
period ended December 31, 1997 includes the effect of the $300,000 unrealized
loss related to the interest-only strip receivables.  During both periods, loan
losses were minimal.  During the year ended December 31, 1996, the Company
recognized $35,000 in recoveries from previously written-off loans which
reduced the net loss during the period.  There were no comparable recoveries
during the year ended December 31, 1997.  During the year ended December 31,
1997, the Company recognized approximately $100,000 in reversal of reserves on
loans that paid in full or have become amortizing loans and the likelihood of
collection has significantly increased which reduced the net loss during the
period.  There were no comparable adjustments during the year ended December
31, 1996.

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

       Interest income increased by $2,241,000 (14%) from $16,330,000 for the
year ended December 31, 1995, to $18,571,000 for the year ended December 31,
1996.  This increase was primarily attributable to the growth in the Company's
portfolio.  The average loan portfolio outstanding during the  year ended
December 31, 1996 was $124.9 million, a 33% increase from $94.1 million in the
comparable period of 1995.  Accordingly, interest income on loans increased by
$3,076,000 (21%) from $14,428,000 during the year ended December 31, 1995, to
$17,504,000 during the year ended December 31, 1996.  Average temporary
investments outstanding during the year ended December 31, 1996 were $21.3
million, a 34% decrease from $32.4 million for the year ended December 31,
1995.  Accordingly, interest income on temporary investments decreased by
$835,000 (44%) from $1,902,000 during the year ended December 31, 1995 to
$1,067,000 during the year ended December 31, 1996.

       Premium income decreased by $905,000 (32%) from $2,847,000 for the year
ended December 31, 1995, to $1,942,000 for the year ended December 31, 1996.
This decrease was primarily attributable to a 33% decrease in the guaranteed
portion of loans held for sale or sold (under the 7(a) Program) during the year
ended December 31, 1996 ($20.0 million) as compared to the year ended December
31, 1995 ($29.9 million).

       Other investment income, net, increased by $240,000 (65%) from $368,000
for the year ended December 31, 1995, to $608,000 for the year ended December
31, 1996.  This increase was primarily attributable to an increase of $200,000
in fees received on loans which prepaid during the year ended December 31, 1996
as compared to the year ended December 31, 1995.  The Company experienced a
greater number of loan prepayments in 1996 as compared to 1995 because of the
general decline in interest rates and the increased competition for financing
in the lodging industry.





                                       16
<PAGE>   19
       Equity in income (loss) of unconsolidated subsidiaries increased by
$447,000, from a loss of $78,000 during the year ended December 31, 1995 to
income of $369,000 during the year ended December 31, 1996.  The increase is
primarily  due to the formation of the Partnership in November 1996 which had
net profits of $328,000.  The Partnership profits include all yield generated
from the loans contributed by PMC Capital less the cost of the Notes issued by
the Partnership.  The net income from the Partnership included $80,000 in fees
received on prepaid loans.  In addition, PMC Funding realized an increase in
revenues from charter services of its airplane which resulted in a change in
profits from a loss of $78,000 during the year ended December 31, 1995 to a
profit of $41,000 during the year ended December 31, 1996.

       Other income, net, increased by $536,000 (30%) from $1,795,000 during
the year ended December 31, 1995, to $2,331,000 during the year ended December
31, 1996.  This increase was primarily a result of investment management fees
generated by PMC Advisers which increased by approximately $400,000 (33%) from
$1.2 million during the year ended December 31, 1995 to $1.6 million during the
year ended December 31, 1996.

       Operating expenses, excluding interest, increased by $255,000 (6%) from
$4,492,000 during the year ended December 31, 1995, to $4,747,000 during the
year ended December 31, 1996.  This increase was a result of an increase in
salaries and related benefits of $402,000 (15%) from $2,778,000 during the year
ended December 31, 1995, to $3,180,000 during the year ended December 31, 1996.
The increase in salaries and related benefits was a result of increased number
of employees (due to the increase in portfolio under management and the
complexity of the financing transactions undertaken by the Company), and a
general increase in the level of salaries for employees during 1996.  This
increase was offset partially by a $210,000 decrease in administrative and
general costs.  During the third quarter of 1995, the Company expensed
approximately $106,000 of costs pertaining to its decision not to pursue an
offering of common stock of PMIC.  Also, the Company had reductions in
advertising, telephone and travel expenses when comparing the year ended
December 31, 1996 to the year ended December 31, 1995.  Advertising reductions
were due to fewer newspaper ad placements, telephone reductions were due to a
change in long distance carriers and travel reductions were due to increased
use of PMC Funding's airplane.

       Interest expense increased by $659,000 (13%) from $5,049,000 during the
year ended December 31, 1995, to $5,708,000 during the year ended December 31,
1996.  The increase was primarily attributable to: (i) the interest expense on
approximately $17.3 million of SBA debentures which were issued or assumed
during the year ended December 31, 1995 by PMIC and Western Financial, (ii) the
assumption of $1,030,000 of SBA debentures in June 1996, (iii) the scheduled
increase in the interest rate on $2.0 million of PMIC's SBA debentures during
June 1995 and (iv) the issuance of $10.0 million of unsecured notes by PMC
Capital in April 1995.

       Realized and unrealized gain (loss) on investments changed from a loss
of $359,000 during the year ended December 31, 1995 to a loss of $147,000
during the year ended December 31, 1996.  The decrease in the aggregate losses
on a dollar amount and a percentage basis was due to continued steady
performance of the lodging portion of the portfolio.  In addition, to the
extent loans were deemed non-performing or were liquidated or foreclosed upon,
the percentage recovery has generally been substantial due to the high
concentration of real estate collateral on such loans.  Realized and unrealized
gain (loss) on investments as a percentage of average loans receivable for the
years ended December 31, 1996 and 1995 were 0.12% and 0.38%, respectively.


CASH FLOW ANALYSIS

       The Company generated $10.6 million and $14.1 million from operating
activities during the years ended December 31, 1997 and 1996, respectively.
The decrease of $3.5 million (25%) was primarily attributable to the equity in
the income of the unconsolidated subsidiaries which is an adjustment to net
income and classified as an investing activity to the extent of dividends paid
to PMC (see discussion of investing activities below).  Included in cash flows
from operating activities is the lending activity of First Western relating to
the government guaranteed portion of loans originated which are sold into the
secondary market ("Government Guaranteed Lending").  During the years ended
December 31, 1997 and 1996, the Company had a net source of cash of  $1,016,000
and a net use of cash of $1,927,000, respectively, from Government Guaranteed
Lending activities.  During the year ended December 31, 1997 the Company used
net cash of $2.1 million from the change in operating assets and liabilities as
compared to a source of cash of $2.1 million during the year ended December 31,
1996.

       The Company used $30.4 million and $26.1 million from investing
activities during the years ended December 31, 1997 and 1996, respectively.
The Company increased its use of funds for loans originated by $17.5 million
from $48.2 million during the year ended December 31, 1996 to $65.7 million
during the year ended December 31, 1997.  During the year ended December 31,
1997 principal collected was $10.0 million as compared to $22.6  million during
the year ended December 31, 1996.  This decrease of $12.6 million (56%) was
primarily due to prepayments on larger principal balance





                                       17
<PAGE>   20
fixed rate loans during 1996 primarily in the portfolios of PMC Capital and
PMIC.  This trend did not continue primarily as a result of the loan sale
pursuant to the Structured Financing.  The Company also had increased
prepayment activity on the variable rate portfolio of First Western during both
1996 and 1997 (which loans have no prepayment fees).

       The Company had a net use of  $12.7 million from financing activities
during the year ended December 31, 1997.  The Company generated $30.4 million
from financing activities during the year ended December 31, 1996.  The source
of funds in 1996 were primarily the net proceeds from the issuance of Notes by
the Partnership ($37.5 million) which were distributed to PMC Capital and $2.8
million from dividend reinvestment plan stock issuances.  There was no
comparable transaction during the year ended December 31, 1997.  Dividends paid
during the year ended December 31, 1997 were $13.2 million as compared to $11.9
million during the year ended December 31, 1996, an increase of $1.3 million
(11.0%).

LIQUIDITY AND CAPITAL RESOURCES

       The primary use of the Company's funds is to originate loans.  The
Company also uses funds to acquire loans from governmental agencies and/or
their agents, for the payment of financing costs, dividends to shareholders,
general and administrative expenses, capital expenditures, advances on loan
liquidations and principal due on borrowing facilities.  Approximately $3.2
million of the Company's SBA debentures was paid in full at maturity during
1997 and $1.5 million was paid in full at maturity in February 1998.  As a
regulated investment company, pursuant to the Internal Revenue Code of 1986,
the Company is required to pay out substantially all of its net investment
company taxable income to the common shareholders.  To sustain growth in the
size of its investment portfolio, the Company continually reviews the need for
obtaining additional funds from either:  (i) debt offerings and additional
credit facilities, (ii) securitization and sale of a portion of the loan
portfolio and/or (iii) equity offerings.  Historically, the Company's primary
sources of capital and liquidity have been debentures issued through programs
of the SBA, private and public issuances of common stock, the issuance of
senior unsecured notes, the securitization and sale of its loan portfolio and
the utilization of its short-term, uncollateralized revolving credit facility.

       The Company has a dividend reinvestment and cash purchase plan ("DRP")
available to its shareholders (see Note 10 to the accompanying financial
statements).  During March, 1998 the Company temporarily suspended the optional
cash purchase portion of the DRP since the use of leverage is currently more
cost effective than the issuance of additional equity.  Revisions are currently
in process which amend the calculation of the purchase price of the shares
issued related to open market purchases under the plan.

       Loan commitments outstanding at December 31, 1997  to various
prospective small business companies, including the unfunded portion of
projects in the construction phase, amounted to approximately $49.6 million.
Of these commitments, $17.1 million were for loans partially guaranteed by the
SBA of which approximately $12.0 million would be sold (when fully funded) into
the secondary market.  Such commitments are made in the ordinary course of the
Company's business.  Commitments to extend credit are agreements to lend to a
customer provided that the terms established in the contract are met.
Commitments generally have fixed expiration dates and require payment of a fee.
Since some commitments expire without the proposed loan closing, the total
commitment amounts do not necessarily represent future cash requirements.

       In order to meet its working capital requirements and increase the size
of its investment portfolio, the Company and the Partnership have completed the
First Western Securitization in December 1997 and the Company completed the
following transactions since the beginning of 1995:

<TABLE>
<CAPTION>
                                                             STATED
                                                            MATURITY
   DATE                AMOUNT             RATE                DATE                DESCRIPTION
   ----                ------             ----                ----                -----------
<S>                 <C>             <C>                     <C>                     <C>
April, 1995         $  5,000,000          8.600%           April, 2003            Unsecured note
April, 1995         $  5,000,000      Libor + 1.300%       April, 2004            Unsecured note
May, 1995           $  2,000,000          4.000%           May, 2010              Preferred Stock - PMIC
May, 1995 (1)       $  2,260,000    7.500% to 10.400%      Up to December, 2002   SBA Debentures
March, 1995         $  3,000,000          4.840% (2)       March, 2005            SBA Debentures
June, 1995          $  5,000,000          3.690% (2)       June, 2005             SBA Debentures
September, 1995     $  7,000,000          3.875% (2)       September, 2005        SBA Debentures
May, 1996 (1)       $  1,030,000          9.300%           June, 2000             SBA Debentures
November, 1996      $ 40,746,000          7.080%           August, 2011           Structured Financing(3)
</TABLE>

       (1)    Assumed debentures from a non-affiliated SBIC.
       (2)    Rate increases 3% five years from the date of issuance until
              maturity.
       (3)    Fixed rate loan-backed notes issued by the Partnership.





                                       18
<PAGE>   21
       PMC has a $15 million uncollateralized revolving credit facility which
expires May 1998.  Advances pursuant to the credit facility bear interest at
the Company's option at either the lender's prime rate less 50 basis points or
LIBOR plus 175 basis points.  The credit facility requires the Company to meet
certain covenants, the most restrictive of which includes that the ratio of net
charge-offs to net loans receivable will not exceed 2%, and the ratio of assets
to senior debt  (as defined in the note agreement) will not fall below 150%.
At December 31, 1997, the Company did not have any balance outstanding on this
credit facility.  At December 31, 1997, the Company was in compliance with all
covenants of this facility.

       Due to changes in the SBIC program increasing the cost and availability
of SBA debentures and preferred stock, the Company has utilized other sources
of funds to expand its loan portfolio.  The cost and terms of these other
sources of funds are not as favorable as those historically achieved on SBA
debentures and SSBIC preferred stock; however, the Company has been able to
issue debt through private placement of notes and generate working capital
through securitization and sale of a portion of its portfolio. Since additional
funds are required in order to meet the Company's current outstanding
commitments, the Company is in the process of structuring a securitized sale or
structured financing of its variable-rate loans originated as part of the Prime
Lending Program.  There can be no assurance that a securitization or structured
financing will be completed or, if completed, will be on the terms attained on
similar transactions completed by the Company.  If additional funds are
required, the Company will attempt to either issue additional unsecured notes
and/or privately or publicly raise equity.  Management believes that through
utilization of one or more of these sources of debt or equity capital, the
Company should meet its liquidity needs for the foreseeable future.

       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 the Company from the Securities and
Exchange Commission.

RECENT ACCOUNTING PRONOUNCEMENTS

Reporting Comprehensive Income (SFAS 130)
       In June 1997, The Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income,"
which is effective for fiscal years beginning after December 15, 1997.  This
statement establishes standards for reporting and display of comprehensive
income and its components.

Disclosures about Segments of an Enterprise and Related Information (SFAS 131)
       In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131").  SFAS 131 is effective for
fiscal years beginning after December 15, 1997.  This statement establishes
standards for the way that public companies report information about segments
in annual and interim financial statements.

YEAR 2000 COMPLIANCE

       The Company is in the final stages of identifying those computer
applications where program changes will be required in order for the
applications to process information accurately subsequent to 1999.  Since the
Company currently uses an outside service bureau for a majority of its payroll
data processing, the Company is dependent on the service bureau to be Year 2000
compliant.  The service bureau has not yet informed the Company that it is or
will be Year 2000 compliant.  The Company also uses purchased software programs
for a variety of functions, such as for check processing and information
resource.  The majority of the companies providing these software programs are
Year 2000 compliant.  The Company uses proprietary software for its collection
processing and is in the process of identifying the costs required to update
such programs.  The cost is not expected to be material.  In the event that any
of the Company's significant vendors do not successfully and timely achieve
Year 2000 compliance, the Company's business or operations could be adversely
affected.





                                       19
<PAGE>   22
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-K

       This Form 10-K contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which are intended to be covered by the safe
harbors created thereby.  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.  The forward-
looking statements included herein are based on current expectations that
involve numerous risks and uncertainties.  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 the control of the Company.  Although the Company believes 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 the Company or any other person that the
objectives and plans of the Company will be achieved.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

            Not applicable

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





                                       20
<PAGE>   23
                                    PART III


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

       Incorporated herein by reference to the Company's 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 to be held on May 14, 1998.


ITEM 11.  EXECUTIVE COMPENSATION

       Incorporated herein by reference to the Company's 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 to be held on May 14, 1998.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

       Incorporated herein by reference to the Company's 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 to be held on May 14 , 1998.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

       Incorporated herein by reference to the Company's 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 to be held on May 14, 1998.





                                       21
<PAGE>   24
                                    PART IV


ITEM 14.  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





                                       22
<PAGE>   25
                                   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 30, 1998

       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.

<TABLE>
<CAPTION>
       Name                                       Title                          Date
       ----                                       -----                          ----
<S>                                                                            <C>
/S/ DR. FREDRIC M. ROSEMORE                Chairman of the Board               March 30, 1998
----------------------------------         and Treasurer
 DR. FREDRIC M. ROSEMORE

/S/ LANCE B. ROSEMORE                      President, Chief Executive          March 30, 1998
----------------------------------         Officer, Secretary and Director
LANCE B. ROSEMORE                          (Principal Executive Officer)


/S/ DR. ANDREW S. ROSEMORE                 Executive Vice President,           March 30, 1998
----------------------------------         Chief Operating Officer
DR. ANDREW S. ROSEMORE                     and Director


/S/ BARRY N. BERLIN                        Chief Financial Officer             March 30, 1998
----------------------------------         (Principal Financial and
BARRY N. BERLIN                            Accounting Officer)


/S/ LEE RUWITCH                            Director                            March 30, 1998
----------------------------------
LEE RUWITCH

/S/ DR. MARTHA GREENBERG                   Director                            March 30, 1998
----------------------------------
DR. MARTHA GREENBERG

/S/ DR. IRVIN BORISH                       Director                            March 30, 1998
----------------------------------
DR. IRVIN BORISH

/S/ THOMAS HAMILL                          Director                            March 30, 1998
----------------------------------
THOMAS HAMILL

/S/ ROBERT DIAMOND                         Director                            March 30, 1998
----------------------------------
ROBERT DIAMOND

/S/ BARRY IMBER                            Director                            March 30, 1998
----------------------------------
 BARRY IMBER
</TABLE>





                                       23

<PAGE>   26
                       PMC CAPITAL, INC AND SUBSIDIARIES
                                   FORM 10-K
                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
<S>                                                                                                     <C>
PMC CAPITAL, INC AND SUBSIDIARIES

     Summary of Selected Financial Information .....................................................     F-2

     Quarterly Statistics ..........................................................................     F-3

     Report of Independent Accountants .............................................................     F-4

     Consolidated Financial Statements:

         Financial Highlights ......................................................................     F-5

         Consolidated Balance Sheets as of December 31, 1997 and 1996 ..............................     F-6

         Consolidated Schedule of Investments as of December 31, 1997 ..............................     F-7

         Consolidated Statements of Income for the Years Ended December 31, 1997, 1996 and 1995 ....     F-9

         Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1997,
              1996 and 1995 ........................................................................     F-10

         Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996
              and 1995 .............................................................................     F-11

         Notes to Consolidated Financial Statements ................................................     F-12

     Consolidating Financial Statements:

         Consolidating Balance Sheet as of December 31, 1997 .......................................     F-32

         Consolidating Statement of Income for the Year Ended December 31, 1997 ....................     F-33

         Consolidating Statement of Shareholders' Equity for the Year Ended December 31, 1997 ......     F-34

         Consolidating Statement of Cash Flows for the Year Ended December 31, 1997 ................     F-35

PMC CAPITAL LIMITED PARTNERSHIP

     Report of Independent Accountants .............................................................     F-36

     Statements of Assets, Liabilities and Partners' Capital as of December 31, 1997 and 1996 ......     F-37

     Statements of Income for the year ended December 31, 1997 and for the Period From
         November 8, 1996 (Inception) to December 31, 1996 .........................................     F-38

     Statements of Partners' Capital for the year ended December 31, 1997 and for the Period
         From November 8, 1996 (Inception) to December 31, 1996 ....................................     F-39

     Statements of Cash Flows for the year ended December 31, 1997 and for the Period From
         November 8, 1996 (Inception) to December 31, 1996 .........................................     F-40

     Notes to Financial Statements .................................................................     F-41
</TABLE>


                                      F-1
<PAGE>   27
--------------------------------------------------------------------------------
                       PMC CAPITAL, INC AND SUBSIDIARIES
                   SUMMARY OF SELECTED FINANCIAL INFORMATION

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

<TABLE>
<CAPTION>
                                                                                  Years Ended December 31,
                                                          -------------------------------------------------------------------------
                                                            1997            1996            1995            1993            1994
                                                          ---------       ---------       ---------       ---------       ---------
                                                                       (in thousands, except per share data and ratios)
<S>                                                       <C>             <C>             <C>             <C>             <C>
OPERATING:

       Operating income .............................     $  24,406       $  23,821       $  21,262       $  16,450       $  15,670

       Operating expenses ...........................       (10,602)        (10,454)         (9,541)         (7,578)         (5,933)

       Realized and unrealized gain (loss)
         on investments .............................         1,818            (147)           (359)          3,151            (404)
                                                          ---------       ---------       ---------       ---------       ---------

       Net operating income and realized
         and unrealized gain (loss) on
         investments ................................     $  15,622       $  13,220       $  11,362       $  12,023       $   9,333
                                                          =========       =========       =========       =========       =========

       Dividends declared, common ...................     $  14,543       $  12,853       $  11,600       $  11,244       $   9,367
                                                          =========       =========       =========       =========       =========

       Earnings per common share ....................     $    1.35       $    1.18       $    1.03       $    1.12       $    0.87
                                                          =========       =========       =========       =========       =========

       Dividends per common share ...................     $    1.27       $    1.16       $    1.08       $    1.06       $    0.89
                                                          =========       =========       =========       =========       =========

       Weighted average common shares
         outstanding ................................        11,411          11,002          10,768          10,650          10,579
                                                          =========       =========       =========       =========       =========

       Loans funded .................................     $  86,361       $  70,154       $  77,567       $  75,349       $  74,091
                                                          =========       =========       =========       =========       =========

AT END OF PERIOD:

       Loans receivable, net ........................     $ 127,240       $  93,354       $ 110,499       $  75,264       $  71,528
                                                          =========       =========       =========       =========       =========

       Total assets .................................     $ 165,839       $ 164,964       $ 159,002       $ 125,416       $ 112,515
                                                          =========       =========       =========       =========       =========

       SBA debentures payable .......................     $  41,290       $  44,570       $  43,540       $  26,280       $  20,280
                                                          =========       =========       =========       =========       =========

       Notes payable ................................     $  35,000       $  35,000       $  35,001       $  25,001       $  25,001
                                                          =========       =========       =========       =========       =========

       Preferred stock of consolidated subsidiary ...     $   7,000       $   7,000       $   7,000       $   5,000       $   3,000
                                                          =========       =========       =========       =========       =========

       Common shareholders' equity ..................     $  70,166       $  62,903       $  59,088       $  57,371       $  55,524
                                                          =========       =========       =========       =========       =========

       Number of common shares outstanding ..........        11,631          11,162          10,871          10,684          10,603
                                                          =========       =========       =========       =========       =========

RATIOS:

       Return on average assets .....................           9.7%            8.3%            8.0%           10.3%            9.4%
                                                          =========       =========       =========       =========       =========

       Return on average common shareholders'
         equity .....................................          23.3%           21.3%           19.2%           21.2%           16.8%
                                                          =========       =========       =========       =========       =========
</TABLE>


                                      F-2
<PAGE>   28
--------------------------------------------------------------------------------
                        PMC CAPITAL, INC AND SUBSIDIARIES
                              QUARTERLY STATISTICS
                 (UNAUDITED, IN THOUSANDS EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31, 1997
                                      -----------------------------------------------------------------------------
                                        FIRST            SECOND           THIRD           FOURTH
                                        QUARTER          QUARTER         QUARTER          QUARTER          TOTAL
                                      -----------      -----------     -----------      -----------     -----------
<S>                                   <C>              <C>             <C>              <C>             <C>
OPERATING INCOME ................     $     5,954      $     6,103     $     6,082      $     6,267     $    24,406

NET OPERATING INCOME ............     $     3,324      $     3,488     $     3,471      $     3,521     $    13,804

NET GAIN (LOSS) ON INVESTMENTS ..     $       (57)     $        38     $       (20)     $     1,857     $     1,818

NET INCREASE IN NET ASSETS
     RESULTING FROM OPERATIONS ..     $     3,267      $     3,526     $     3,451      $     5,378     $    15,622

-------------------------------------------------------------------------------------------------------------------
                                                   PER SHARE
-------------------------------------------------------------------------------------------------------------------

OPERATING INCOME ................     $     0.530      $     0.538     $     0.531      $     0.540     $     2.139

NET OPERATING INCOME ............     $     0.296      $     0.307     $     0.303      $     0.303     $     1.209

NET GAIN (LOSS) ON INVESTMENTS ..     $    (0.005)     $     0.003     $    (0.002)     $     0.160     $     0.156

NET INCREASE IN NET ASSETS
     RESULTING FROM OPERATIONS ..     $     0.291      $     0.310     $     0.301      $     0.463     $     1.365
</TABLE>

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31, 1996
                                      -----------------------------------------------------------------------------
                                        FIRST            SECOND           THIRD           FOURTH
                                        QUARTER          QUARTER         QUARTER          QUARTER          TOTAL
                                      -----------      -----------     -----------      -----------     -----------
<S>                                   <C>              <C>             <C>              <C>             <C>
OPERATING INCOME ................     $     5,480      $     5,904     $     6,051      $     6,386     $    23,821

NET OPERATING INCOME ............     $     3,012      $     3,346     $     3,421      $     3,588     $    13,367

NET GAIN (LOSS) ON INVESTMENTS ..     $       (17)     $        (1)    $       (23)     $      (106)    $      (147)

NET INCREASE IN NET ASSETS
     RESULTING FROM OPERATIONS ..     $     2,995      $     3,345     $     3,398      $     3,482     $    13,220

-------------------------------------------------------------------------------------------------------------------
                                                   PER SHARE
-------------------------------------------------------------------------------------------------------------------

OPERATING INCOME ................     $     0.502      $     0.539      $     0.550      $     0.574      $     2.165

NET OPERATING INCOME ............     $     0.276      $     0.305      $     0.311      $     0.323      $     1.215

NET GAIN (LOSS) ON INVESTMENTS ..     $    (0.002)              --      $    (0.002)     $    (0.010)     $    (0.014)

NET INCREASE IN NET ASSETS
     RESULTING FROM OPERATIONS ..     $     0.274      $     0.305      $     0.309      $     0.313      $     1.201
</TABLE>


                                      F-3
<PAGE>   29

                        REPORT OF INDEPENDENT ACCOUNTANTS


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


We have audited the accompanying consolidated balance sheets of PMC Capital,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1997 and the financial
highlights for each of the five years in the period ended December 31, 1997. We
have also audited the accompanying consolidated schedule of investments as of
December 31, 1997. These financial statements and the financial highlights are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on our
audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included the examination or confirmation of
securities owned as of December 31, 1997 and 1996. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements and financial highlights
referred to above present fairly, in all material respects, the consolidated
financial position of PMC Capital, Inc. and subsidiaries as of December 31, 1997
and 1996, the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, and the financial
highlights for each of the five years in the period ended December 31, 1997, and
the consolidated schedule of investments as of December 31, 1997, in conformity
with generally accepted accounting principles.

Our audit was conducted for the purpose of forming an opinion on the
consolidated financial statements taken as a whole. The supplementary
consolidating balance sheet and the related consolidating statements of income,
cash flows, and shareholders' equity are presented for purposes of additional
analysis rather than to present the financial position, results of operations,
and cash flows of the individual companies, and are not a required part of the
consolidated financial statements. The supplementary 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.


                                              COOPERS AND LYBRAND L.L.P.


Dallas, Texas
February 28, 1998


                                      F-4
<PAGE>   30
--------------------------------------------------------------------------------
                       PMC CAPITAL, INC AND SUBSIDIARIES
                              FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------

          The following financial highlights of the Company should be read in
conjunction with the consolidated financial statements and the notes thereto
appearing elsewhere on this Form 10-K. The financial highlights below provide
information about the Company's financial history. It uses the Company's fiscal
year (which ends December 31) and expresses the per share operating performance
in terms of a single share outstanding throughout each fiscal period. The
information is derived from the audited consolidated financial statements. The
financial highlights have been audited by Coopers & Lybrand L.L.P., independent
accountants.

<TABLE>
<CAPTION>
                                                                                Years Ended December 31,
                                                                --------------------------------------------------------
                                                                  1997        1996        1995        1994        1993
                                                                --------    --------    --------    --------    --------
<S>                                                             <C>         <C>         <C>         <C>         <C>
PER SHARE OPERATING PERFORMANCE (1):

       Net asset value, beginning of period .................   $   5.64    $   5.44    $   5.37    $   5.24    $   5.20
                                                                --------    --------    --------    --------    --------
       Net operating income .................................       1.21        1.21        1.09        0.83        0.92
       Net gains or losses on securities
         realized and unrealized (2) ........................       0.47        0.17        0.08        0.37        0.02
                                                                --------    --------    --------    --------    --------
           Total from investment operations .................       1.68        1.38        1.17        1.20        0.94
                                                                --------    --------    --------    --------    --------

       Less distributions:
         Preferred shareholder of consolidated subsidiary ...       0.02        0.02        0.02        0.01        0.01
         Common shareholders ................................       1.27        1.16        1.08        1.06        0.89
                                                                --------    --------    --------    --------    --------

            Total distributions .............................       1.29        1.18        1.10        1.07        0.90
                                                                --------    --------    --------    --------    --------

       Net asset value, end of period .......................   $   6.03    $   5.64    $   5.44    $   5.37    $   5.24
                                                                ========    ========    ========    ========    ========

       Per share market value, end of period ................   $  14.56    $  14.00    $  12.63    $  13.50    $  14.50
                                                                ========    ========    ========    ========    ========

       Total investment return ..............................         13%         20%          2%          0%         16%
                                                                ========    ========    ========    ========    ========

RATIOS AND SUPPLEMENTAL DATA:

       Net assets, end of period ( in thousands) ............   $ 70,166    $ 62,903    $ 59,088    $ 57,371    $ 55,524
                                                                ========    ========    ========    ========    ========
       Ratio of expenses to average net assets ..............         16%         17%         16%         13%         11%
                                                                ========    ========    ========    ========    ========
       Ratio of operating income to average net assets ......         21%         22%         20%         16%         18%
                                                                ========    ========    ========    ========    ========
       Ratio of net operating income and realized and
         unrealized gain (loss) on investments to
         average net assets .................................         24%         22%         20%         21%         17%
                                                                ========    ========    ========    ========    ========
       Portfolio turnover (3) ...............................         20%         16%         30%         65%         54%
                                                                ========    ========    ========    ========    ========
</TABLE>

Footnotes:

(1)       The per share changes during the year are based on the weighted
          average number of shares outstanding of the Company during the year
          presented.

(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 the portfolio turnover rate are the
          sales of loans through the secondary market or private placement.


                                      F-5
<PAGE>   31

                        PMC CAPITAL, INC AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                             DECEMBER 31,
                                                                       ----------------------
                                                                          1997         1996
                                                                       ---------    ---------
<S>                                                                    <C>          <C>
                                     ASSETS

INVESTMENTS AT VALUE:
  Loans receivable, net .............................................  $ 127,240    $  93,354
  Cash equivalents ..................................................     17,237       49,677
  Investment in unconsolidated subsidiaries .........................      7,797        8,585
  Interest-only strip receivables ...................................      3,708        3,143
  Restricted investments ............................................      2,798        1,229
  Real property owned ...............................................        296          303
                                                                       ---------    ---------
TOTAL INVESTMENTS ...................................................    159,076      156,291
                                                                       ---------    ---------

OTHER ASSETS:
  Receivable for loans sold .........................................      1,346        2,508
  Due from unconsolidated subsidiaries ..............................      1,302        1,097
  Servicing asset ...................................................      1,607        1,753
  Deferred charges, deposits and other assets .......................      1,398          885
  Accrued interest receivable .......................................        608          376
  Cash ..............................................................        265          340
  Property and equipment, net .......................................        237          181
                                                                       ---------    ---------
TOTAL OTHER ASSETS ..................................................      6,763        7,140
                                                                       ---------    ---------
TOTAL ASSETS ........................................................  $ 165,839    $ 163,431
                                                                       =========    =========

                      LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES:
  SBA debentures payable ............................................  $  41,290    $  44,570
  Notes payable .....................................................     35,000       35,000
  Accounts payable ..................................................      3,269        4,145
  Dividends payable .................................................      4,018        3,635
  Borrower advances .................................................      1,678        1,795
  Accrued interest payable ..........................................      1,316        1,442
  Due to unconsolidated subsidiaries ................................        279        1,076
  Deferred fee revenue ..............................................        571          419
  Other liabilities .................................................      1,252        1,446
                                                                       ---------    ---------
TOTAL LIABILITIES ...................................................     88,673       93,528
                                                                       ---------    ---------
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,
       11,631,000 and 11,162,000 shares issued and outstanding
       at December 31, 1997 and 1996, respectively ..................        116          112
  Additional paid-in capital ........................................     68,555       62,125
  Undistributed net operating income ................................      2,289        1,101
  Net unrealized depreciation on investments ........................       (794)        (435)
                                                                       ---------    ---------
                                                                          70,166       62,903
                                                                       ---------    ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..........................  $ 165,839    $ 163,431
                                                                       =========    =========
NET ASSET VALUE PER COMMON SHARE ....................................  $    6.03    $    5.64
                                                                       =========    =========
</TABLE>

              THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                        CONSOLIDATED FINANCIAL STATEMENTS.


                                      F-6
<PAGE>   32

                        PMC CAPITAL INC AND SUBSIDIARIES
                      CONSOLIDATED SCHEDULE OF INVESTMENTS
                    DECEMBER 31, 1997 (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                RETAINED LOANS                              SERVICED LOANS (2)
                                               --------------------------------------------------      ----------------------------
                                               NUMBER                                                  NUMBER
                                                OF                                                      OF
            CATEGORY/ISSUER (1)                LOANS    VALUE          %        COST         %         LOANS      COST         %
            -------------------                -----   --------      -----    --------     ------      ------   --------    -------
<S>                                            <C>     <C>           <C>      <C>          <C>         <C>      <C>         <C>
LOANS TO SMALL BUSINESS CONCERNS (3):
  SMALL BUSINESS LENDING COMPANY LOANS:
  FIRST WESTERN SBLC, INC AND SUBSIDIARY
    Hotels and motels ......................      60   $  4,149        3.3%   $  4,207        3.3%        127   $ 91,886       30.9%
    Gasoline/service stations ..............      13        115        0.1%        126        0.1%         17      4,902        1.6%
    Restaurants ............................      32        340        0.3%        439        0.4%         67     12,306        4.1%
    Laundromats ............................       6          5         --           6         --          10      1,241        0.4%
    Retail, other ..........................      32      1,709        1.3%      1,732        1.4%         63      8,182        2.8%
    Health care ............................       8         39         --          41         --          11        794        0.3%
    Food and grocery stores ................       8          5         --          23         --          12      2,910        1.0%
    Services ...............................      45      1,241        1.0%      1,317        1.0%         88     13,122        4.4%
    Manufacturing ..........................      12        124        0.1%        124        0.1%         13      2,718        0.9%
    Wholesale ..............................      17        469        0.4%        469        0.4%         21      3,975        1.3%
    Car washes .............................      --         --         --          --         --           1        104         --
                                               -----   --------      -----    --------     ------      ------   --------    -------
  Total ....................................     233      8,196        6.5%      8,484        6.7%        430    142,140       47.7%
                                               -----   --------      -----    --------     ------      ------   --------    -------

  SMALL BUSINESS INVESTMENT COMPANY LOANS:
  WESTERN FINANCIAL CAPITAL CORPORATION
    Hotels and motels ......................      19     11,824        9.3%     12,035        9.3%         26     17,741        6.0%
    Gasoline / service stations ............       5      1,951        1.5%      1,970        1.5%          7      2,482        0.8%
    Restaurants ............................       1      1,159        0.9%      1,165        0.9%          2      1,352        0.5%
    Retail, other ..........................       2      1,501        1.2%      1,558        1.2%          4      1,687        0.6%
    Services ...............................      13      3,113        2.4%      3,208        2.5%         15      3,472        1.2%
    Health care ............................      22      1,078        0.8%      1,132        0.9%         23      1,173        0.4%
    Food and grocery stores ................       1        100        0.1%        100        0.1%          1        100         --
    Manufacturing ..........................       1         51         --          51         --           1         51         --
    Agriculture ............................       2        871        0.7%        879        0.7%          2        879        0.3%
    Transportation .........................       1        101        0.1%        103        0.1%          1        103         --
    Other notes receivable .................       4        109        0.1%        146        0.1%          5        234        0.1%
                                               -----   --------      -----    --------     ------      ------   --------    -------
  Total ....................................      71     21,858       17.1%     22,347       17.3%         87     29,274        9.9%
                                               -----   --------      -----    --------     ------      ------   --------    -------

  SPECIALIZED SMALL BUSINESS INVESTMENT COMPANY LOANS:
  PMC INVESTMENT CORPORATION
    Hotels and motels ......................      55     42,727       33.6%     43,483       33.6%         78     60,642       20.4%
    Gasoline / service stations ............       7      3,468        2.7%      3,525        2.7%          9      4,339        1.5%
    Restaurants ............................       1        278        0.2%        278        0.2%          1        278        0.1%
    Retail, other ..........................       1         50         --          51         --           1         51         --
    Services ...............................       3        481        0.4%        491        0.4%          3        491        0.2%
    Health care ............................      12        457        0.4%        570        0.4%         12        570        0.2%
    Food and grocery stores ................       4        758        0.6%        769        0.6%          6      1,515        0.5%
    Other notes receivable .................       2        630        0.5%        763        0.6%          2        763        0.3%
                                               -----   --------      -----    --------     ------      ------   --------    -------
  Total ....................................      85     48,849       38.4%     49,930       38.5%        112     68,649       23.2%
                                               -----   --------      -----    --------     ------      ------   --------    -------

  COMMERCIAL LOANS:
  PMC CAPITAL, INC
    Hotels and motels ......................      43     39,956       38.2%     39,911       30.8%         56     48,624       16.3%
    Gasoline / service stations ............       2        583        0.5%        585        0.5%          2        585        0.2%
    Restaurants ............................       1        155        0.1%        156        0.1%          1        156         --
    Retail, other ..........................       2      1,859        1.5%      1,861        1.4%          2      1,859        0.6%
    Services ...............................       2      1,418        1.1%      1,419        1.1%          2      1,418        0.5%
    Commercial real estate .................       5      3,575        3.1%      3,912        3.0%          5      3,912        1.3%
    Apartment complex ......................       1        791        0.6%        799        0.6%          1        799        0.3%
                                               -----   --------      -----    --------     ------      ------   --------    -------
  Total ....................................      56     48,337       38.0%     48,643       37.5%         69     57,353       19.2%
                                               -----   --------      -----    --------     ------      ------   --------    -------
  TOTAL LOANS RECEIVABLE (4) ...............     445   $127,240      100.0%   $129,404      100.0%        698   $297,416      100.0%
                                               =====   ========      =====    ========     ======      ======   ========    =======
</TABLE>


                            (Continued on next page)


                                      F-7
<PAGE>   33

                        PMC CAPITAL INC AND SUBSIDIARIES
                      CONSOLIDATED SCHEDULE OF INVESTMENTS
                               DECEMBER 31, 1997
                                   (CONTINUED)


<TABLE>
<CAPTION>
                    CATEGORY/ISSUER                                     VALUE         %         COST         %
                    ---------------                                    --------    -------    --------    -------
<S>                                                                    <C>         <C>        <C>         <C>
TOTAL LOANS RECEIVABLE (FROM PRIOR PAGE) ...........................   $127,240       80.0%   $129,404       80.1%
                                                                       --------    -------    --------    -------

MONEY MARKET AND FUND DEPOSIT ACCOUNTS (5):
      Certificates of deposit (6) ..................................      1,089        0.7%      1,089        0.7%
      Bank money market saving accounts ............................      5,647       15.2%      5,647        3.5%
      SunTrust, overnight repo account .............................        182        0.1%        182        0.1%
      Short-term government agency securities ......................      7,984        5.9%      7,984        4.9%
      Dreyfus, Cash Management Plus money market fund ..............      2,021        1.3%      2,021        1.9%
      Goldman Sachs,  Prime Obligation money market fund ...........        518        0.3%        518        0.3%
                                                                       --------    -------    --------    -------
     Total money market and fund deposit accounts ..................     17,441       31.1%     17,441       10.8%
                                                                       --------    -------    --------    -------
INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES:
      Investment in PMC Limited Partnership ........................      7,473        4.7%      7,473        4.6%
      Investment in PMC Advisers, LTD ..............................         26         --          26         --
      Investment in PMC Capital Corp 1996-A and PMC Trust 1996-A ...        253        0.2%        253        0.2%
      Investment in PMC Funding Corp ...............................         45         --          45         --
                                                                       --------    -------    --------    -------
     Total investment in unconsolidated subsidiaries ...............      7,797        4.9%      7,797        4.8%
                                                                       --------    -------    --------    -------
OTHER INVESTMENTS:
      Interest-only strip receivable ...............................      3,708        2.3%      4,008        2.5%
      SunBank Miami, restricted investments ........................      1,206        0.8%      1,206        0.7%
      Bank One Trust Company, restricted investments ...............      1,388        0.9%      1,388        0.7%
      Real property owned ..........................................        296        0.2%        329        0.2%
                                                                       --------    -------    --------    -------
     Total other investments .......................................      6,598        4.1%      6,931        4.8%
                                                                       --------    -------    --------    -------
TOTAL INVESTMENTS (7) ..............................................   $159,076      100.0%   $161,573      100.0%
                                                                       ========    =======    ========    =======
</TABLE>

(1)       Names have been omitted as disclosure to the public may be detrimental
          to the small business.

(2)       Balances include retained loans, loans sold into the secondary market

          ($102.1 million), the loans contributed to the Partnership ($34.3
          million) and the unguaranteed portion of First Western loans sold and
          serviced ($31.5 million). The balance does not include approximately
          $110.8 million of loan portfolio serviced on behalf of PMC Commercial
          Trust.

(3)       Interest rates on loans receivable range from 8.0% to 14.9%.

(4)       Balances are at face value of loans, less discounts aggregating
          $109,000 in accordance with Emerging Issues Task Force 88-11,
          discounts on purchased loans of $406,000, deferred fee revenue of $12
          million and reserves of $494,000.

(5)       Interest or dividend rates on money market and fund deposit accounts
          range from 4.8% to 6.1%.

(6)       Interest rates on certificates of deposit range from 5.2% to 5.6%. All
          certificates held by either PMC or any of its subsidiaries are less
          than $100,000 in any one institution, generally have original
          maturities of 90 days and are considered to be cash equivalents.

(7)       The aggregate cost of investments for Federal income tax purposes is
          $160.7 million.

              THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                        CONSOLIDATED FINANCIAL STATEMENTS.


                                      F-8
<PAGE>   34

                       PMC CAPITAL, INC AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF INCOME
                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                     YEARS ENDED DECEMBER 31,
                                                               --------------------------------
                                                                 1997        1996        1995
                                                               --------    --------    --------
<S>                                                            <C>         <C>         <C>
INVESTMENT INCOME:
  Interest .................................................   $ 17,136    $ 18,571    $ 16,330
  Premium income ...........................................      1,776       1,942       2,847
  Other investment income, net .............................        504         608         368
                                                               --------    --------    --------

Total investment income ....................................     19,416      21,121      19,545

Other income, net ..........................................      2,430       2,331       1,795
Equity in income (loss) of unconsolidated subsidiaries .....      2,560         369         (78)
                                                               --------    --------    --------

Total income ...............................................     24,406      23,821      21,262
                                                               --------    --------    --------
EXPENSES:
  Interest .................................................      5,548       5,708       5,049
  Salaries and related benefits ............................      3,435       3,180       2,778
  General and administrative ...............................        797         843       1,053
  Profit sharing plan ......................................        243         217         190
  Rent .....................................................        229         213         203
  Legal and accounting .....................................        192         149         152
  Small Business Administration fees .......................        108          99          77
  Directors and shareholders expense .......................         50          45          39
                                                               --------    --------    --------

Total expenses .............................................     10,602      10,454       9,541
                                                               --------    --------    --------

Net  operating income ......................................     13,804      13,367      11,721
                                                               --------    --------    --------

REALIZED AND UNREALIZED GAIN (LOSS)
  ON INVESTMENTS:
    Loans written-off ......................................       (183)       (214)       (309)
    Recoveries on loans written-off ........................         --          35          40
    Sale of assets .........................................      2,360          --          --
    Change in unrealized appreciation
      (depreciation) on investments ........................       (359)         32         (90)
                                                               --------    --------    --------

Total realized and unrealized gain (loss) on investments ...      1,818        (147)       (359)
                                                               --------    --------    --------

NET OPERATING INCOME AND REALIZED AND UNREALIZED
  GAIN (LOSS) ON INVESTMENTS ...............................   $ 15,622    $ 13,220    $ 11,362
                                                               ========    ========    ========

PREFERRED DIVIDENDS ........................................   $    250    $    251    $    222
                                                               ========    ========    ========

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING .................     11,411      11,002      10,768
                                                               ========    ========    ========

EARNINGS PER COMMON SHARE ..................................   $   1.35    $   1.18    $   1.03
                                                               ========    ========    ========
</TABLE>

              THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                       CONSOLIDATED FINANCIAL STATEMENTS.


                                      F-9
<PAGE>   35

                       PMC CAPITAL, INC AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                  NET
                                                                UNDISTRIBUTED  UNREALIZED
                                                     ADDITIONAL      NET      DEPRECIATION
                                            COMMON    PAID-IN     OPERATING       ON
                                            STOCK     CAPITAL      INCOME     INVESTMENTS    TOTAL
                                           --------  ---------- ------------- ------------  --------
<S>              <C>                       <C>        <C>         <C>         <C>           <C>
BALANCE, JANUARY 1, 1995 ...............   $    107   $ 56,254    $  1,387    $   (377)     $ 57,371

Issuances of common stock pursuant
  to dividend reinvestment and cash
  purchase plan, 187,005 shares ........          2      2,175          --          --         2,177

Net income .............................         --         --      11,452         (90)       11,362

Dividends:

  Preferred ............................         --         --        (222)         --          (222)

  Common ( $108 per common share ) .....         --         --     (11,600)         --       (11,600)
                                           --------   --------    --------    --------      --------

BALANCE, DECEMBER 31, 1995 .............        109     58,429       1,017        (467)       59,088

Issuances of common stock pursuant
  to dividend reinvestment and cash
  purchase plan, 291,042 shares ........          3      3,696          --          --         3,699

Net income .............................         --         --      13,188          32        13,220

Dividends:

  Preferred ............................         --         --        (251)         --          (251)

  Common ( $116 per common share ) .....         --         --     (12,853)         --       (12,853)
                                           --------   --------    --------    --------      --------

BALANCE, DECEMBER 31, 1996 .............        112     62,125       1,101        (435)       62,903

Issuances of common stock pursuant
  to dividend reinvestment and cash
  purchase plan, 468,706 shares ........          4      6,430          --          --         6,434

Net income .............................         --         --      15,981        (359)       15,622

Dividends:

  Preferred ............................         --         --        (250)         --          (250)

  Common ( $127 per common share ) .....         --         --     (14,543)         --       (14,543)
                                           --------   --------    --------    --------      --------

BALANCE, DECEMBER 31, 1997 .............   $    116   $ 68,555    $  2,289    $   (794)     $ 70,166
                                           ========   ========    ========    ========      ========
</TABLE>

              THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                       CONSOLIDATED FINANCIAL STATEMENTS.


                                      F-10
<PAGE>   36

                        PMC CAPITAL, INC AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                           YEARS ENDED DECEMBER 31,
                                                                                       --------------------------------
                                                                                         1997        1996        1995
                                                                                       --------    --------    --------
<S>                                                                                    <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net operating income and realized and unrealized gain (loss) on investments ......   $ 15,622    $ 13,220    $ 11,362
  Adjustments to reconcile net operating income and realized and unrealized gain
    (loss) on investments to net cash provided by operating activities:
        Loans funded, held for sale ................................................    (20,622)    (21,915)    (30,468)
        Proceeds from sale of guaranteed loans .....................................     21,638      19,988      30,299
        Change in unrealized depreciation on investments and loans written-off .....        543         182         359
        Unrealized premium income, net .............................................        215          (5)         80
        Depreciation and amortization ..............................................      1,032       1,084       1,142
        Accretion of loan discount and deferred fees ...............................     (1,623)       (957)       (799)
        Deferred fees collected ....................................................        766         785       1,050
        (Gain) loss on sale of assets ..............................................     (2,360)         --          26
        Equity in (income) loss of unconsolidated subsidiaries .....................     (2,560)       (369)         78
        Net change in operating assets and liabilities:
            Accrued interest receivable ............................................       (231)        347        (298)
            Other assets ...........................................................       (527)        357        (166)
            Accrued interest payable ...............................................       (127)          8         401
            Borrower advances ......................................................       (116)       (465)       (694)
            Other liabilities ......................................................     (1,069)      1,812         503
                                                                                       --------    --------    --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ..........................................     10,581      14,072      12,875
                                                                                       --------    --------    --------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Loans funded .....................................................................    (65,739)    (48,239)    (47,098)
  Principal collected and other adjustments ........................................     10,069      22,647      10,651
  Proceeds from interest-only strip receivables ....................................        648          --          --
  Purchase of furniture and fixtures and other assets ..............................       (139)       (127)        (53)
  Purchase of government securities ................................................         --          --      (3,942)
  Proceeds from maturities of government securities ................................         --          --       8,947
  Proceeds from sale of assets .....................................................     22,986          --         233
  Proceeds from partnership distributions ..........................................      3,347          --          --
  Release of (investment in) restricted cash .......................................     (1,569)        556        (251)
  Investment in unconsolidated subsidiaries ........................................         --        (893)       (400)
                                                                                       --------    --------    --------
NET CASH USED IN INVESTING ACTIVITIES ..............................................    (30,397)    (26,056)    (31,913)
                                                                                       --------    --------    --------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance or assumption of  SBA debentures .........................         --         941      15,000
   Proceeds from issuance of notes payable .........................................         --          --      10,000
   Proceeds from issuance of common stock ..........................................      5,475       2,834       1,399
   Proceeds from issuance of preferred stock .......................................         --          --       2,000
   Proceeds from unconsolidated subsidiary .........................................         --      37,803          --
   Proceeds from revolving credit facility .........................................      8,300          --          --
   Payment on revolving credit facility ............................................     (8,300)         --          --
   Payment of dividends on common stock ............................................    (13,197)    (11,935)    (11,189)
   Payment of dividends on preferred stock .........................................       (250)       (250)       (204)
   Payment of SBA debentures .......................................................     (3,280)         --          --
   Advances from (to) unconsolidated affiliates, net ...............................     (1,004)      1,114         357
   Payment of issuance costs on notes and debentures ...............................       (443)        (80)       (447)
                                                                                       --------    --------    --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ................................    (12,699)     30,427      16,916
                                                                                       --------    --------    --------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...............................    (32,515)     18,443      (2,122)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR .......................................     50,017      31,574      33,696
                                                                                       --------    --------    --------

CASH AND CASH EQUIVALENTS, END OF YEAR .............................................   $ 17,502    $ 50,017    $ 31,574
                                                                                       ========    ========    ========

SUPPLEMENTAL DISCLOSURE:
   Interest paid ...................................................................   $  5,631    $  5,433    $  4,648
                                                                                       ========    ========    ========

   Dividends reinvested ............................................................   $    963    $    880    $    777
                                                                                       ========    ========    ========

   Loans receivable acquired in exchange for SBA debentures ........................   $     --    $    158    $  2,109
                                                                                       ========    ========    ========

   Reclassification from loans receivable to real property owned ...................   $    203    $    453    $     65
                                                                                       ========    ========    ========

   Loans to facilitate sale of real property owned .................................   $     --    $     --    $     85
                                                                                       ========    ========    ========

   Loans contributed to unconsolidated subsidiary, net .............................   $     --    $ 45,145    $     --
                                                                                       ========    ========    ========
</TABLE>

              THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                       CONSOLIDATED FINANCIAL STATEMENTS.


                                      F-11
<PAGE>   37

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

NOTE 1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BUSINESS

PMC Capital, Inc. ("PMC" or "PMC" Capital") is a diversified, closed-end
management investment company that has elected to operate as a business
development company under the Investment Company Act of 1940 (the "1940 Act").
PMC engages in the business of originating loans to small businesses either
directly or through its three principal subsidiaries: First Western SBLC, Inc.
("First Western"), PMC Investment Corporation ("PMIC") and Western Financial
Capital Corporation ("Western Financial"). First Western, PMIC and Western
Financial are registered under the 1940 Act as diversified, closed-end
management investment companies. In addition, PMC is either directly or
indirectly the sole shareholder or partner of PMC Advisers, LTD ("PMC
Advisers"), PMC Funding Corp. ("PMC Funding"), PMC Capital Corp. 1996-A ("PMC
Capital Corp."), PMC Trust 1996-A and PMC Capital Limited Partnership ( the
"Partnership"). PMC has elected to be taxed as a regulated investment company
and distributes substantially all of its taxable income as dividends to
shareholders.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of PMC and its wholly
owned regulated investment company subsidiaries (collectively, the "Company").
Intercompany transactions have been eliminated in consolidation.

The accounts of PMC Advisers, PMC Funding, PMC Capital Corp., PMC Trust 1996-A
and the Partnership are accounted for by the equity method of accounting in
conformity with Federal securities laws.

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 7(a) Program (the "SBA 7(a)
Program"). The eligibility requirements of the SBA 7(a) Program vary by the
industry of the borrower and other factors.

PMIC is a licensed specialized small business investment company ("SSBIC") under
the Small Business Investment Act of 1958, as amended ("SBIA"). PMIC 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. The
interest rates on loans originated by PMIC are either fixed or variable based on
the prime lending rate ("Prime Rate"). As an SSBIC, PMIC is eligible to obtain
long-term, fixed-rate, funding from the SBA through the issuance of debentures
(which are guaranteed by the SBA and on which the interest rate is reduced
through an SBA subsidy by 3% during the first five years) and preferred stock.

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". The interest rates on loans originated by PMIC are either
fixed or variable based on the Prime Rate. As an SBIC, Western Financial is
eligible to obtain long-term, fixed-rate, funding from the SBA through the
issuance of debentures.

PMC originates loans to borrowers on a non-SBA supported basis using similar
criteria as that used for other loans that are funded under the SBA programs
utilized by the subsidiaries. These loans are made to borrowers who exceed the
eligibility requirements of the SBA 7(a) Program or SBIC programs.

UNCONSOLIDATED ENTITIES

PMC Advisers, organized in 1993, is a registered investment advisor under the
Investment Advisers Act of 1940 which acts as the investment advisor for PMC
Commercial Trust ("PMC Commercial" or the "Trust"), a Texas real estate
investment trust and an affiliate of PMC Capital.


                                      F-12
<PAGE>   38

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

NOTE 1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

PMC Funding is a Florida corporation that holds assets on behalf of the Company.
PMC Capital is the sole shareholder of PMC Funding.

The Partnership was formed as a Delaware limited partnership in November 1996 to
act as a special purpose affiliate of the Company. The Partnership was
established to acquire loans from the Company and to issue fixed-rate debt
through a private placement.

PMC Capital Corp. is a Delaware corporation formed in November 1996 to be the
independent trustee of the general partner of the Partnership. PMC Trust 1996-A
is a Delaware business trust formed in November 1996 to be the general partner
of the Partnership.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

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

VALUATION OF INVESTMENTS

Loans Receivable: Loans receivable are carried at the Board of Directors'
estimate of fair value. The Board of Directors has estimated the fair value of
loans receivable to approximate the amortized costs of the loans, unless there
is doubt as to the realization of the loan (a "Problem Loan"). A valuation
reserve is established for a Problem Loan based on the creditor's payment
history, collateral value, guarantor support and other factors.

Loans, including impaired loans, are generally classified as nonaccrual if they
are past due as to maturity or payment of principal or interest for a period of
more than 60 days. If a loan or a portion of a loan is classified as doubtful or
is partially reserved or charged-off, the loan is classified as non-accrual.
Loans that are on a current payment status or past due less than 60 days may
also be classified as non-accrual if repayment in full of principal and/or
interest is in doubt.

Deferred fees consist of non-refundable fees less direct loan origination costs.
These fees are being recognized over the expected life of the related loan as an
adjustment of yield.

When selling the SBA-guaranteed portion of loans, the basis of the retained
portion of the loans has been reduced by the differential between the face
amount of the unguaranteed portion of the loans and the value as determined in
accordance with the Financial Accounting Standards Board ("FASB") Emerging
Issues Task Force ("EITF") 88-11. This difference being the Retained Loan
Discount. At the time of sale, premium income has been reduced by the Retained
Loan Discount. Unless the underlying loans are paid in full or sold, the
Retained Loan Discount is amortized over the life of the underlying loan based
on an effective yield method. When a loan is prepaid, the remaining Retained
Loan Discount is recognized as an increase to interest income. When a loan is
sold, the remaining Retained Loan Discount is included as a reduction to the
basis of the retained portion of the underlying loan as a reduction of cost.

Interest-only Strip Receivable and Servicing Asset: Effective January 1, 1997,
the Company prospectively adopted Statement of Financial Accounting Standards
("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." SFAS No. 125 provides for the accounting
and reporting of transfers and servicing of financial assets based on a
financial-components approach.

The transfer of assets that qualifies for sale treatment under SFAS No. 125 is
generally accounted for by the seller by: (i) derecognizing all assets sold,
(ii) recognizing all assets obtained and liabilities incurred at their relative
fair value, and (iii) recognizing all assets retained at their allocated
previous carrying amount based on relative fair values. The Company typically
receives cash and retains the right to receive contractual servicing fees and
the right to receive future interest income on loans sold that exceed the
contractually specified servicing fee (the interest-only strip receivable) in
exchange for a portion of the


                                      F-13
<PAGE>   39

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

NOTE 1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

loan, typically the guaranteed portion of an SBA 7(a) loan. The difference
between (i) the carrying value of the portion of loans sold and (ii) the sum of
(a) cash received, (b) the relative fair values of the servicing rights and (c)
the interest-only strip receivable retained, constitutes the gain on sale.

SFAS No. 125 also requires that amounts carried previously as excess servicing
assets be reclassified to a servicing asset and an interest-only strip
receivable, as defined. Accordingly, the Company reclassified its excess
servicing asset (net of an allowance for credit losses on loans sold) of
$4,896,000 at December 31, 1996 to $1,753,000 of a servicing asset and
$3,143,000 of an interest-only strip receivable.

In accordance with SFAS No. 125, the servicing asset is amortized in proportion
to and over the period of estimated net servicing income and is evaluated for
impairment by stratifying the servicing assets by one or more of the predominant
risk characteristics of the underlying financial assets. The interest-only strip
receivable is accounted for as an investment in debt securities classified as
available for sale under SFAS No. 115. As of the date a securitization is
completed, an asset is established and classified as an "interest-only strip
receivable". This receivable is initially valued based on management's estimate
of the anticipated discounted future cash flows retained by the Company related
to the pool of securitized loans. The discount rate is a market rate based on
interest rate levels at the time of completion of the transaction considering
the risks inherent in the transaction.

On a quarterly basis thereafter, income generated by the interest-only strip
receivable is recognized based on an "internal rate of return" (the "IRR") which
during the initial reporting period after completion of the securitization is
the market rate used in valuing the interest-only strip receivable. Management
updates the anticipated future cash flows on a quarterly basis and determines an
updated IRR based on the recorded interest-only strip receivable during the
following quarter. If during any evaluation of the value of the interest-only
strip receivable it is determined that the IRR is lower than a "risk free" rate
for an asset of similar duration, a realized loss will be incurred which adjusts
the recorded value of the interest-only strip receivable to the market value.

In addition, commencing with the first quarter of 1997 and for each quarter
thereafter, the Company measures the fair value of the interest-only strip
receivable based upon the future anticipated cash flows discounted to reflect
the current market interest rates for investments of this type. Any appreciation
(depreciation) of the interest-only strip receivable is reflected on the
accompanying consolidated statements of income as an unrealized gain (loss) on
investment. During the year ended December 31, 1997, there was a valuation
reserve of $300,000 related to the interest-only strip receivable recognized
with a corresponding $300,000 unrealized loss on investment.

The estimated net servicing income and the investment in the interest-only strip
receivable are based in part upon management's estimate of prepayment speeds,
including default rates. There can be no assurance of the accuracy of these
estimates. If the prepayment speeds occur at a faster rate than anticipated, the
amortization of the servicing asset will be accelerated and the value of the
interest-only strip receivable will decline, accordingly total income during the
period of change and subsequent periods would be reduced. If prepayments occur
slower than anticipated, cash flows would exceed estimated amounts and total
income during the period of change and subsequent periods would be enhanced.
During the year ended December 31, 1997 as compared to the prior year, the
amount of amortization of the servicing asset was increased as a result of
increased prepayment speeds.

Real Property Owned: Real property owned is carried at the Board of Directors'
estimate of fair value, based upon appraisals and other factors.

Cash equivalents: Cash equivalents are carried at value, which approximates
cost.

VALUATION OF DEBT

Debt incurred by the Company is valued at cost.


                                      F-14
<PAGE>   40

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

NOTE 1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

PROPERTY AND EQUIPMENT

Property, equipment and leasehold improvements are carried at their value, which
is cost less accumulated depreciation and amortization. Depreciation and
amortization is computed using accelerated and straight-line methods, with
estimated useful lives ranging from five to 15 years.

NET UNREALIZED DEPRECIATION ON INVESTMENTS

Included in net unrealized depreciation on investments is valuation allowances
for loans receivable and the interest-only strip receivables.

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS

Realized gains or losses are measured by the difference between the proceeds
from the sale and the cost basis of the investment, without regard to unrealized
gains and losses previously recognized. The gain or loss calculated also
includes loans written-off or charged-down during the year and recoveries of
loans written-off or charged-down in prior years.

Other changes in the value of investments are included as changes in the
unrealized appreciation (depreciation) on investments in the statements of
income.

Realized gains on the sale of the unguaranteed portion of SBA loans are
recognized based upon the difference between the sales price as adjusted for the
value of the anticipated future cash values (as reduced by the effect of future
credit losses) and the carrying value of the assets (including the Retained Loan
Discount).

INTEREST INCOME

Interest income includes income on loans and the yield on the interest-only
strip receivables. Interest income is accrued as earned and the accrual of
interest is generally suspended when the related loan becomes 60 days past due
("Non-accrual Loan"). Interest income on a Non-accrual Loan is recognized on the
cash basis.

PREMIUM INCOME

For loans originated by the SBLC, gain on the sale of the SBA guaranteed portion
of such loans to the secondary market has been adjusted to reflect a normal
service fee for the future servicing rights retained by the Company. Premium
income represents the differential between the value attributable to the sale of
a loan to the secondary market and the principal balance (cost) of the loan in
accordance with EITF 88-11. The sale price includes the value attributable to
any excess servicing spread retained by the Company plus any cash received.

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 over the life of the related obligation.

FEDERAL INCOME TAXES

The Company has elected to be treated as a regulated investment company by
meeting certain requirements of the Internal Revenue Code relating to the
distribution of its net investment income to shareholders. Thereby the Company
incurs no Federal income tax liability on such income. Based on its status as a
regulated investment company, the Company may elect to retain, deem to
distribute or distribute, in whole or in part, net long-term capital gains
realized on the disposition of its investments.

Any dividends declared by the Company in October, November or December of any
calendar year, payable to shareholders of record on a specified date in such
month and actually paid during January of the following year, may be treated as
if it were received by the shareholders on December 31 of the year declared.

DISTRIBUTIONS TO SHAREHOLDERS

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


                                      F-15
<PAGE>   41

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

NOTE 1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

STATEMENT OF CASH FLOWS

The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents for purposes of the
consolidated statement of cash flows.

RECENT ACCOUNTING PRONOUNCEMENTS

Reporting Comprehensive Income

In June 1997, The Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which is effective for fiscal years beginning
after December 15, 1997. This statement establishes standards for reporting and
display of comprehensive income and its components.

Disclosures about Segments of an Enterprise and Related Information

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". SFAS No.
131 is effective for fiscal years beginning after December 15, 1997. This
statement establishes standards for the way that public companies report
information about segments in annual and interim financial statements.
Presently, the Company only operates in one segment of business.

RECLASSIFICATION

Certain prior period amounts have been reclassified to conform to current year
presentation.

NOTE 2.  LOANS RECEIVABLE:

Loans receivable consist primarily of loans made under SBIC, SSBIC and SBLC
programs established by the SBA and financings to businesses outside of the SBA
loan programs.

As an SBLC, First Western originates loans which are partially guaranteed by the
SBA and which are collateralized generally, with first liens on real and/or
personal property of the borrower. The SBA guarantees repayment of up to 90% of
the principal amount of the loans originated by First Western. First Western
sells, without recourse, the guaranteed portion of its loans into the secondary
market ("SBA Guaranteed Sales") while retaining the rights to service the loans.
Funding for the SBA 7(a) Program depends on the annual appropriations by the
U.S. Congress. At December 31, 1997, included in loans receivable are
approximately $4.5 million which represents the guaranteed portion of First
Western loans available for sale.

The principal balance of the loans serviced on behalf of third parties by First
Western was approximately $133.7 million and $137.7 million at December 31, 1997
and 1996, respectively.

First Western's loans: (i) generally range in original principal amount from
$50,000 to $1,100,000, (ii) provide for a variable rate of interest based on
1.0% to 2.75% above the then prevailing prime rate, (iii) have a term of seven
to 25 years, (iv) may be prepaid without penalty and (v) require monthly
payments covering accrued interest and amortization of principal based in part
on the remaining useful life of the assets collateralizing the loans and on the
borrowers' use of loan proceeds.

PMIC and Western Financial originate loans that are payable in monthly
installments of principal and interest based upon four to 20 year amortization
periods, with the balance due at maturity. These loans are collateralized with
first liens on real and/or personal property and are generally guaranteed by the
principals of the borrower.

PMC originates loans to borrowers on a non-SBA supported basis, using similar
criteria for loans that are funded under the SBA programs utilized by its three
principal subsidiaries. These loans are: (i) to borrowers who exceed the
eligibility requirements of the 7(a) Program or SBIC programs, (ii) payable in
monthly installments of principal and interest based upon four to 25 year
amortization periods, with the balance due at maturity, (iii) generally
collateralized by real estate and/or equipment and (iv) are generally guaranteed
by the principals of the borrower.


                                      F-16
<PAGE>   42

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

NOTE 2.   LOANS RECEIVABLE: (CONTINUED)

The Company's portfolio of investments consists of loans to borrowers located
principally in the southern portion of the United States. The most significant
concentration of loans were to borrowers in Texas, Florida and Georgia, as noted
below:

<TABLE>
<CAPTION>
                                     Percentage of Loan Portfolio
                    State                   December 31,
                    -----            ----------------------------
                                          1997       1996
                                          ----       ----
<S>                                       <C>        <C>
                    Texas                   33%        38%
                    Georgia                  9%        11%
                    Florida                  8%        13%
                    Other                   50%        38%
                                          ----       ----
                                           100%       100%
                                          ====       ====
</TABLE>

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

<TABLE>
<CAPTION>
                                                Years Ended December 31,
                                                ------------------------
                                                   1997           1996
                                                ---------      ---------
<S>                                             <C>            <C>
          Balance, beginning of period ......   $ 435,000      $ 467,000
          Provision for losses ..............     242,000        182,000
          Loans written-off .................    (183,000)      (214,000)
                                                ---------      ---------
          Balance, end of period ............   $ 494,000      $ 435,000
                                                =========      =========
</TABLE>

Loans receivable with an aggregate retained balance of $1.5 million and $1.0
million were greater than 60 days past due, litigation against the borrowers has
commenced, or the loans are in the process of liquidation at December 31, 1997
and 1996, respectively.

At December 31, 1997 and 1996, the recorded investment in loans identified as
impaired in accordance with SFAS No. 114 totaled $3.1 million and $1.0 million,
respectively. Of this total, at December 31, 1997 and 1996, approximately $1.9
million and $80,000 respectively, related to loans with no valuation reserve,
since the estimated fair value of the collateral for each loan exceeds the
respective loan balance. Approximately $1.2 million and $900,000 of these loans
at December 31, 1997 and 1996, have a corresponding valuation allowance of
$472,000 and $412,000, respectively. At December 31, 1997 and 1996, the Company
has recognized $22,000 and $23,000 in valuation allowances on identified problem
loans of $95,000 and $317,000, respectively, which were not deemed impaired. The
Company did not recognize any material amount of interest on impaired loans
during the portion of the period that they were impaired. Had these impaired
loans performed in accordance with their original terms, interest income of
approximately $264,000 and $113,000, respectively, would have been recognized
during the years ended December 31, 1997 and 1996.

In addition to the SBA Guaranteed Sales, First Western sells through separate
transactions, the unguaranteed portion of certain of its originated loans
through private placements ("SBA Unguaranteed Sales"). First Western retains the
right to service all such loans. The guaranteed portions are sold to either
dealers in government guaranteed loans or institutional investors and certain of
the unguaranteed portions have been sold in privately negotiated transactions
between First Western and the purchasers.

During the year ended December 31, 1996, PMC Capital contributed approximately
$45.7 million (aggregate principal balance due, including $34.4 million in loans
transferred from PMIC and Western Financial to PMC Capital) of loans to the
Partnership without recourse (see Note 15). At December 31, 1997, the remaining
principal balance outstanding on those loans was $34.3 million.

NOTE 3.   SERVICING ASSET AND PREMIUM INCOME:

By retaining the right to service the loan, First Western earns an interest rate
spread equal to the difference between the interest rate on the loan and the
interest rate paid to the purchaser on the sold portion (this difference being
the "Servicing Spread"). On SBA Guaranteed Sales, First Western or PMC
recognizes premium income by receiving either a cash premium, an excess
servicing right on the sale or a combination of these elements. On SBA
Guaranteed Sales that involve receiving the maximum


                                      F-17
<PAGE>   43

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

NOTE 3.   SERVICING ASSET AND PREMIUM INCOME: (CONTINUED)

premium, First Western retains the minimum Servicing Spread of 1% required by
SBA regulations ("SBA Minimum Servicing"). When receiving the maximum premium,
PMC or First Western recognizes as premium income the difference between the
amount received from the purchaser and the aggregate of the outstanding
principal amount of the guaranteed portion plus any value of the Servicing
Spread in excess of normal servicing fees (the "Excess Servicing Spread").

On SBA Guaranteed Sales, First Western recognizes premium income equal to the
value of the Excess Servicing Spread, plus the difference, if any, between the
amount received from the purchaser and the outstanding principal amount of the
guaranteed portion sold as valued in accordance with EITF 88-11.

The Board of Directors estimates the value of the Excess Servicing Spread based
upon various factors including premiums realized on comparable transactions in
the secondary market with a 1% servicing fee being retained, comparable market
bids with normal servicing rates on SBA loans and the likelihood of prepayment.
The value of the Excess Servicing Spread is recognized as premium income at the
time of the sale and is concurrently capitalized as an asset on the Company's
balance sheet as the Servicing Asset and the interest only strip receivable.

The activity in the servicing asset is summarized as follows:

<TABLE>
<CAPTION>
                                                                      Years Ended December 31,
                                                          ---------------------------------------------
                                                              1997             1996             1995
                                                          -----------      -----------      -----------
<S>                                                       <C>              <C>              <C>
          Aggregate balance, beginning of year ......     $ 1,753,000      $ 7,514,000      $ 7,694,000
          Aggregate additions, net of allowances ....         328,000          707,000          791,000
          Amortization, net .........................        (474,000)      (1,792,000)        (971,000)
                                                          -----------      -----------      -----------
                                                            1,607,000        6,429,000        7,514,000
          Reclassifications pursuant to SFAS No. 125:
               Valuation  reserves ..................              --       (1,533,000)              --
               Allocation to interest-only
                   strip receivables ................              --       (3,143,000)              --
                                                          -----------      -----------      -----------
          Aggregate balance, end of year ............     $ 1,607,000      $ 1,753,000      $ 7,514,000
                                                          ===========      ===========      ===========
</TABLE>

NOTE 4.   PROPERTY AND EQUIPMENT:

At December 31, 1997 and 1996, property and equipment consisted of the
following:

<TABLE>
<CAPTION>
                                                         1997         1996
                                                       --------     --------
<S>                                                    <C>          <C>
          Furniture and equipment .............        $392,000     $319,000
          Leasehold improvements ..............         150,000      150,000
          Automobiles .........................          13,000       13,000
                                                       --------     --------
                                                        555,000      482,000
          Less:  accumulated depreciation .....         318,000      301,000
                                                       --------     --------
                                                       $237,000     $181,000
                                                       ========     ========
</TABLE>

Depreciation and amortization expense for the years ended December 31, 1997,
1996 and 1995 was approximately $59,000, $49,000 and $57,000, respectively.

NOTE 5.    NOTES PAYABLE:

PMC has a $15 million uncollateralized revolving credit facility which expires
May 1998. Advances pursuant to the credit facility bear interest at the
Company's option at the bank's prime rate less 50 basis points or the London
Interbank Offering Rate (LIBOR) plus 175 basis points. The credit facility
requires the Company to meet certain covenants, the most restrictive of which
includes that the ratio of net charge-offs to net loans receivable will not
exceed 2%, and the ratio of assets to senior debt (as defined in the note
agreement) will not fall below 150%. At December 31, 1997 and 1996, the Company
had no amounts outstanding pursuant to this credit facility and the Company was
in compliance with all covenants of this facility.

                                      F-18




<PAGE>   44




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

NOTE 5.    NOTES PAYABLE: (CONTINUED)

PMC has $35 million in outstanding debt pursuant to private placements of
uncollateralized notes. These borrowings have been utilized to fund commitments
of the non-SBA lending program. The notes require the Company to meet certain
covenants (terms are as defined in the applicable note agreement), the most
restrictive of which require; (i) that net loans receivable exceed 150% of
senior funded debt, (ii) the increase in the Company's loan valuation reserve
for any 12 month period must not exceed 3% of net loans receivable and (iii) the
Company's consolidated earnings plus interest expense must exceed 150% of
interest expense. At December 31, 1997, the Company was in compliance with all
of the covenants of these notes. At December 31, 1997 and 1996 outstanding
uncollateralized notes were as follows:

<TABLE>
<CAPTION>
                                    Interest                                            Final
      Date                            Rate                      Amount                 Maturity
-----------------                 --------------             -----------          -----------------
<S>                               <C>                        <C>                  <C>
  July 19, 1993                       7.20%                  $20,000,000(2)          July 19, 2001
December 15, 1993                     6.97%                    5,000,000          December 15, 2002
  April 19, 1995                      8.60%                    5,000,000            April 19, 2003
  April 19, 1995                  LIBOR +1.3% (1)              5,000,000            April 19, 2004
                                                             -----------
                                                             $35,000,000
                                                             ===========
</TABLE>


(1) Reset quarterly, 7.08% at December 31, 1997.
(2) Payable in three equal annual installments commencing July 19, 1999.

     Principal payments required on the notes at December 31, 1997, are as
follows:

<TABLE>
<CAPTION>
   Year Ending
   December 31,             Amount
-----------------         -----------
<S>                        <C>
      1998                 $       --
      1999                   6,666,667
      2000                   6,666,667
      2001                   6,666,666
      2002                   5,000,000
      2003                   5,000,000
      2004                   5,000,000
                           -----------
                           $35,000,000
                           ===========
</TABLE>

NOTE 6.   SBA DEBENTURES PAYABLE:

Debentures payable represent amounts due to the SBA as a result of borrowing
made pursuant to the SBIA.

At December 31, 1997, the maturities, interest rates and principal payments on
the SBA debentures were as follows:

<TABLE>
<CAPTION>
     Maturity Date (1)           Interest Rate                 Amount
 --------------------------     ----------------            -----------
<S>                                <C>                      <C>
 February 1, 1998                  (2)  8.850%              $ 1,500,000
 August 18, 1999                        8.125%                1,000,000
 September 1, 1999                      8.800%                2,500,000
 December 1, 1999                  (3)  8.600%                  650,000
 January 2, 2000                        7.875%                3,000,000
 March 1, 2000                          9.350%                1,000,000
 June 1, 2000                      (3)  9.300%                  300,000
</TABLE>







                                      F-19



<PAGE>   45




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

NOTE 6.   SBA DEBENTURES PAYABLE: (CONTINUED)

<TABLE>
<S>                                      <C>                      <C>
       June 1, 2000                           9.300%                2,000,000
       June 1, 2000                      (4)  9.300%                1,030,000
       September 1, 2000                      9.600%                4,310,000
       December 1, 2002                  (3)  7.510%                  510,000
       September 1, 2004                 (5)  5.200%                3,000,000
       September 1, 2004                      8.200%                3,000,000
       March 1, 2005                     (6)  4.840%                3,000,000
       June 1, 2005                      (7)  3.690%                5,000,000
       September 1, 2005                 (8)  3.875%                7,000,000
       September 1, 2006                      7.590%                2,490,000
                                                                  -----------
                                                                  $41,290,000
                                                                  ===========
</TABLE>

          (1)          During 1997, the Company paid off $3,280,000 in
                       debentures payable at their maturity. Total debentures
                       outstanding at December 31, 1996 were $44,570,000.

          (2)          Paid off in February 1998.

          (3)          During April 1995, the Company assumed $2,260,000 in SBA
                       debentures from a non-affiliated small business
                       investment corporation in exchange for loans receivable
                       of $2,109,062 and cash of $150,938. The loans acquired
                       were initially originated by the Company and a portion
                       sold to the non-affiliated small business investment
                       corporation. All of these loans were purchased at par and
                       were performing according to their terms at the time of
                       reacquisition.

          (4)          During May 1996, the Company assumed $1,030,000 in SBA
                       debentures from a non-affiliated SBIC in exchange for
                       loans receivable of approximately $200,000 and cash of
                       approximately $900,000. The loans acquired were initially
                       originated by the Company and a portion sold to the
                       non-affiliated SBIC. All of these loans were purchased at
                       par and were performing according to their terms at the
                       time of reacquisition.

          (5)          The interest rate will increase to 8.200% in September
                       1999 until maturity.

          (6)          The interest rate will increase to 7.840% in March 2000
                       until maturity.

          (7)          The interest rate will increase to 6.690% in June 2000
                       until maturity.

          (8)          The interest rate will increase to 6.875% in September
                       2000 until maturity.


NOTE 7.   COMMITMENTS AND CONTINGENCIES:

OPERATING LEASES
During 1991, the Company entered into an agreement to lease its corporate office
space for a 15 year period from a corporation, a majority of whose principals
are officers and directors of the Company. Leasehold improvements of $150,000
have been paid to the corporation for costs incurred during the build-out of the
leased premises. The lease has been amended to allow the Company to terminate
such lease without penalty upon 60 days written notice to the corporation. The
Company has also entered into agreements to lease additional space in the same
building for one year periods.

The independent members of the Board of Directors decide on an annual basis
whether PMC will continue the leases and the annual lease payment.

At December 31, 1997, the Company has additional agreements to lease office
space in Hollywood,Florida; Phoenix, Arizona; and Atlanta, Georgia.


                                      F-20



<PAGE>   46




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

NOTE 7.   COMMITMENTS AND CONTINGENCIES: (CONTINUED)

Rental expense amounted to approximately $229,000, $213,000 and $203,000 during
the years ended December 31, 1997, 1996 and 1995, respectively.

Future minimum lease payments at December 31, 1997 are as follows:

<TABLE>
<CAPTION>
Year Ending
December 31,                        Amount
------------                      ----------
<S>                               <C>
      1998                        $  219,000
      1999                           219,000
      2000                           204,000
      2001                           203,000
      2002                           203,000
      Thereafter                     812,000
                                  ----------
                                  $1,860,000
                                  ==========
</TABLE>

LOAN COMMITMENTS
Loan commitments outstanding at December 31, 1997, to various prospective small
business companies, including the unfunded portion of projects in the
construction phase, amounted to approximately $49.6 million. Of these
commitments, $17.1 million are for loans to be originated by First Western, a
portion of which will be sold pursuant to SBA Guaranteed Sales. These
commitments are made in the ordinary course of the Company's business and in
management's opinion, are generally on the same terms as those to existing
borrowers. Commitments to extend credit are agreements to lend to a customer
provided that the terms established in the contract are met. Commitments
generally have fixed expiration dates and require payment of a fee. Since some
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.

EMPLOYMENT AGREEMENTS
The Company has employment contracts with certain of its officers and/or
employees for terms expiring June 2000. Annual remuneration during the term of
the contracts do not exceed $315,000. Future minimum payments under these
contracts are as follows:

<TABLE>
<CAPTION>
 Year Ending
 December 31,                                 Amount
 ------------                               -----------
<S>                                         <C>
     1998                                   $ 1,512,000
     1999                                     1,468,000
     2000                                       825,000
                                            -----------
                                            $ 3,805,000
                                            ===========
</TABLE>

During the years ended December 31, 1997, 1996 and 1995 compensation to officers
was approximately $1,639,000, $1,382,000, and $1,229,000, respectively.

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

NOTE 8.   CREDIT AND INTEREST RATE RISK:

In connection with First Western's structured sale of $22.8 million of
unguaranteed SBA loans during 1997 and a 94% portion of certain unguaranteed SBA
loans during 1994 for proceeds of $24.8 million, the Company is subject to
credit risk. Pursuant to the structured sales, the investors' protection from
losses is provided by: (i) the subordination of the Company's right to receive
payment on loans receivable aggregating approximately $1.6 million at the time
of sale ($600,000 at December 31, 1997), (ii) the subordination of the
interest-only strip receivable related to the Company's right to receive the
Servicing Spread


                                      F-21



<PAGE>   47




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


NOTE 8.   CREDIT AND INTEREST RATE RISK: (CONTINUED)

on those loans sold in the securitizations ($1,157,000 at December 31, 1997,
included in interest-only strip receivable on the accompanying balance sheet)
and (iii) cash deposits provided by the Company. At December 31, 1997,
approximately $2,594,000 of cash deposits held in interest bearing accounts were
restricted.

Impairment of the interest-only strip receivable is measured based on its fair
value. In measuring impairment at December 31, 1997 and 1996, the servicing
portfolio was evaluated based upon the predominant risk characteristics which
the Company has determined to be prepayment and payment default risks. The
Company evaluated the serviced portfolio for both the interest-only strip
receivable related to SBA Guaranteed Sales and related to the sale of the
unguaranteed portion of SBA loans in 1994 and 1997 (the "SBA Unguaranteed
Sales"). Based upon current prepayment assumptions, estimates of default rates
and a discount factor considering the current interest rate environment, the
Company has provided for an unrealized loss and corresponding valuation
allowance of $300,000 on the interest-only strip receivable.

In connection with the Company's investment in the Partnership, all payments of
principal and interest on the loans contributed to the Partnership are to be
deposited with the trustee and are used to pay the noteholders the required
monthly principal and interest then due on the notes pursuant to the Trust
Indenture (as defined below) prior to releasing any excess funds to the
Partnership free and clear of the Trust Indenture. The Partnership's obligations
to the noteholders are also collateralized by: (i) the differential between the
outstanding principal balance remaining due on the underlying loans held by the
Partnership and the balance due the noteholders, (ii) the reserve account
established to provide liquidity to the noteholders ( the "Reserve Account") and
(iii) money held in the operating accounts of the Partnership to the extent they
are restricted pursuant to the terms of the trust indenture established by the
noteholders, the Company and the Partnership (the "Trust Indenture"). The Trust
Indenture provides for several covenants which would require, under certain
circumstances, that the excess cash , after payment of the required principal
and interest to the Partnership Noteholders (the "Excess Cash"), be retained in
the Reserve Account until the covenants are in compliance. Of the assets of the
Partnership at December 31, 1997, approximately $245,000 was Excess Cash which
was distributed to the Partners in January 1998.

The Company has a fundamental policy that requires investment of at least 25% of
its total assets in the lodging industry, and allows investment of up to 100% of
total assets in this industry. At December 31, 1997 and 1996, loans to
businesses in the lodging industry comprised 59% and 44% of its total assets,
respectively, and 77% and 77% of its loans receivable, net, respectively. There
can be no assurance that the Company will continue to experience the positive
results it has historically achieved from these lending activities or that
market conditions will enable the Company to maintain or increase this level of
loan concentration. Any economic factors that negatively impact the lodging
industry could have a material adverse effect on the business of the Company.
Additionally, loans to businesses located in Texas, Georgia and Florida
currently comprise approximately 33%, 9% and 8% of the Company's outstanding
loan portfolio, respectively. A decline in economic conditions in any of these
states may adversely affect the Company.

Net income of the Company is effected by the spread between the rate at which it
borrows funds and the rate at which it loans these funds. A significant portion
of the portfolios of PMC Capital, Western Financial and PMIC have typically been
long-term and at fixed rates and the borrowed funds of these companies are
typically long-term and at fixed rates. PMIC, WFCC and PMC have also originated
variable-rate loans. It is anticipated that the variable-rate loans originated
by PMIC, WFCC and PMC will be part of a structured financing or securitization
and sale which would be completed with a variable interest rate. First Western
originates variable-rate loans and has utilized equity capital of PMC Capital
and structured sales of loans to obtain funds necessary to originate loans. If
the yield on loans originated by the Company with funds obtained from borrowings
or the issuance of preferred stock fails to cover the cost of such funds, the
Company's cash flow will be reduced. During periods of changing interest rates,
interest rate mismatches could negatively impact the Company's net income,
dividend yield and the market price of the Common Stock. Most of the fixed-rate
loans that the Company originates have prepayment penalties. If interest rates
decline, the Company may experience significant prepayments. Such prepayments,
as well as scheduled repayments, are likely to be reloaned or invested at lower
rates, which may have an adverse effect on the Company's ability to maintain
dividend distributions at existing levels.





                                      F-22



<PAGE>   48




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

NOTE 9.   CUMULATIVE PREFERRED STOCK OF CONSOLIDATED SUBSIDIARY:

PMIC 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.

PMIC is entitled to redeem, in whole or in part, the 3% Preferred Stock by
paying 35% of 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 approximately $90,000 on the 3%
Preferred Stock were recognized during each of the years ended December 31,
1997, 1996 and 1995.

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 approximately $160,000, $160,000 and $132,000 were
recognized on the 4% Preferred Stock during the years ended December 31, 1997,
1996 and 1995, respectively.

Neither series of Preferred Stock has any 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 10.   SHAREHOLDERS' EQUITY:

The Company has a dividend reinvestment and cash purchase plan (the "Plan") for
up to 1,000,000 shares of common stock. As amended, effective March 1998,
participants in the Plan have the option to reinvest all or a portion of
dividends received plus an optional cash purchase of up to $5,000 per month. The
purchase price of the shares is 98% of the average of the high and low price of
the common stock as published for the five trading days immediately prior to the
dividend record date or prior to the optional cash payment purchase date,
whichever is applicable. During the years ended December 31, 1997, 1996 and
1995, the Company issued 468,706; 291,042; and 187,005 shares of common stock
pursuant to the Plan for proceeds (through cash and the reinvestment of
dividends) of approximately $6.4 million; $3.7 million; and $2.2 million,
respectively.

NOTE 11.   EARNINGS PER COMMON SHARE COMPUTATIONS:

The computations of basic earnings per common share are based on the weighted
average number of shares outstanding of the Company. For the purposes of
determining the diluted earnings per share, there was no change in the weighted
average shares outstanding for the effect of stock options during the year ended
December 31, 1997 since the stock options were anti-dilutive. Earnings are
defined as the net operating income and realized and unrealized gain (loss) on
investments and are reduced by the preferred stock dividend requirements of
PMIC. Preferred stock dividend requirements were approximately $250,000;
$250,000 and $222,000 during the years ended December 31, 1997, 1996 and 1995,
respectively. The weighted average number of shares used in the computations of
basis earnings per common share were 11.4 million, 11.0 million and 10.8 million
for the years ended December 31, 1997, 1996 and 1995, respectively.

NOTE 12.   BORROWER ADVANCES:

The Company finances several projects during the construction phase. At December
31, 1997, the Company was in the process of funding approximately $13.6 million
in construction projects, of which $4.6 million in funding remained. As part of
the monitoring process to verify that the borrowers' cash equity is utilized for
its intended purpose, the Company deposits amounts received from the borrowers
and releases the funds upon presentation of appropriate supporting
documentation. The Company had approximately $1.7 million and $1.8 million in
funds held on behalf of borrowers at December 31, 1997 and 1996, respectively,
which is included as a liability in the accompanying consolidated balance
sheets.

NOTE 13.  PROFIT SHARING PLAN:

The Company has a profit sharing plan available to its full-time employees after
one year of employment. Vesting increases ratably to 100% after the sixth year
of employment. Pursuant to the profit sharing plan, the Company has expensed
approximately $243,000, $217,000 and $188,000 during the years ended December
31, 1997, 1996 and 1995, respectively. Contributions to the profit sharing plan
are at the discretion of the Board of Directors.


                                      F-23



<PAGE>   49




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

NOTE 14.  RELATED PARTY TRANSACTIONS:

Pursuant to agreements between PMC Capital and its wholly owned subsidiaries,
during the three years ended December 31, 1997, PMC provided certain services to
the subsidiaries at no cost. These services and costs include salaries, rent and
other general corporate expenses. However, PMC retains all cash premiums on
First Western's SBA Guaranteed Sales ($1,991,000, $1,937,000 and $2,927,000
during the years ended December 31, 1997, 1996 and 1995, respectively) as
compensation for these services and for working capital provided by PMC Capital
to First Western.

During December 1993, PMC Advisers entered into an investment management
agreement with the Trust. The officers and certain trust managers of the Trust
are officers and directors of PMC. Pursuant to its agreement with PMC Advisers,
through June 30, 1996 the Trust paid PMC Advisers a base annual servicing fee of
0.50% of the average assets (as defined in the agreement) of the Trust under
management plus an advisory fee of 1% of the average invested assets (as defined
in the agreement ) of the Trust. In addition, through June 30, 1996, PMC
Advisers earned an advisory fee up to 1% of the average invested assets upon
meeting certain criteria in regards to investment returns to the Trust
shareholders. All such advisory fees were reduced by 50% with respect to the
value of average invested assets that exceed the beneficiaries' equity of the
Trust as a result of leverage or the issuance of preferred shares.

Effective July 1, 1996, the Investment Management Agreement was amended to
include compensation to PMC Advisers for its assistance in any issuance of debt
or equity securities for PMC Commercial. Such compensation includes a consulting
fee based on (i) 12.5% of any offering fees incurred by PMC Commercial pursuant
to the public offering or private placement of its common shares, and (ii) 50%
of any issuance or placement fees incurred by PMC Commercial pursuant to the
public offering or private placement of its debt securities or preferred shares
of beneficial interest. Of the amount of servicing and advisory fees paid or
payable to PMC Advisers for the year ended December 31, 1996, approximately
$251,000 was earned pursuant to a public offering of common shares by PMC
Commercial in July 1996.

Pursuant to the amended Investment Management Agreement, the quarterly servicing
and advisory fee (the "Base Fee") is based on the assets and capital structure
of PMC Commercial. As defined in the Investment Management Agreement, the Base
Fee is the sum of (i) 0.4167% (1.67% on an annual basis) of the lesser of (a)
the average quarterly value of common equity capital or (b) the average
quarterly value of all invested assets and (ii) 0.21875% (0.875% on an annual
basis) of the difference between the average quarterly value of all invested
assets and the average quarterly value of common equity capital. For purposes of
calculating the Base Fee, the average quarterly value of common equity capital
was not increased by the proceeds received from any public offering of common
shares by PMC Commercial (other than pursuant to its dividend reinvestment plan
or any employee/trust manager benefit plan) during the 180 calendar day period
immediately following such public offering. In no event will the aggregate
annual fees charged under the new agreement be greater than that which would
have been charged had there been no revision to the Investment Management
Agreement.

Pursuant to the applicable investment management agreement between PMC Advisers
and PMC Commercial, PMC Advisers earned $1.6 million, $1.6 million and $1.2
million during the years ended December 31, 1997, 1996 and 1995, respectively.


NOTE 15.  UNCONSOLIDATED WHOLLY OWNED ENTITIES:

As described in Note 1, PMC Advisers, PMC Funding, PMC Capital Corp., PMC Trust
1996-A and the Partnership are accounted for under the equity method of
accounting. The condensed balance sheet and income statement, as applicable, for
each of the entities on an individual basis are provided below (rounded to the
nearest thousand).











                                      F-24



<PAGE>   50




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

NOTE 15.  UNCONSOLIDATED WHOLLY-OWNED ENTITIES: (CONTINUED)

PMC ADVISERS
The following is the condensed balance sheet for PMC Advisers as of December 31,
1997 and 1996 and the condensed statements of income for the years ended
December 31, 1997, 1996 and 1995:

                             CONDENSED BALANCE SHEET

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                           ---------------------
                                                              1997        1996
                                                           --------     --------
<S>                                                        <C>          <C>
                  ASSETS
          Cash and cash equivalents ..................     $ 19,000     $ 63,000
          Due from affiliates, net ...................      371,000      649,000
          Other assets ...............................        8,000        7,000
                                                           --------     --------
                                                           $398,000     $719,000
                                                           ========     ========

                  LIABILITIES AND SHAREHOLDER'S EQUITY
          LIABILITIES:
               Due to parent .........................     $210,000     $395,000
               Deferred fee revenue ..................      150,000      286,000
               Other liabilities .....................       12,000       12,000
                                                           --------     --------
                                                            372,000      693,000
                                                           --------     --------
          SHAREHOLDER'S EQUITY:
               Common stock ..........................        1,000        1,000
               Additional paid-in capital ............       25,000       25,000
                                                           --------     --------
                                                             26,000       26,000
                                                           --------     --------
                                                           $398,000     $719,000
                                                           ========     ========
</TABLE>


                         CONDENSED STATEMENTS OF INCOME
                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
                                                 1997           1996            1995
                                              ----------     ----------     ----------
<S>                                           <C>            <C>            <C>
INCOME:
               Management fee ...........     $1,622,000     $1,562,000     $1,190,000
               Other income .............          4,000         14,000         55,000
                                              ----------     ----------     ----------
                  Total income ..........      1,626,000      1,576,000      1,245,000
                                              ----------     ----------     ----------
EXPENSES:
               General and administrative      1,603,000      1,572,000      1,242,000
               Other ....................         23,000          4,000          3,000
                                              ----------     ----------     ----------
                  Total expenses ........      1,626,000      1,576,000      1,245,000
                                              ----------     ----------     ----------

                  NET INCOME ............     $       --     $       --     $       --
                                              ==========     ==========     ==========
</TABLE>


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
the years ended December 31, 1997, 1996 and 1995, was $1,603,000, $1,571,000 and
$1,190,000, respectively. These amounts are included in Other income, net, on
the accompanying consolidated statements of income. In no event will the
allocated expenses exceed the income available from the operations of PMC
Advisers.







                                      F-25



<PAGE>   51




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

NOTE 15.  UNCONSOLIDATED WHOLLY-OWNED ENTITIES: (CONTINUED)

PMC FUNDING CORP.
The following is the condensed balance sheet for PMC Funding Corp. as of
December 31, 1997 and 1996 and the condensed statements of income for the years
ended December 31, 1997, 1996 and 1995:

                            CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                       DECEMBER 31,
                                                               ---------------------------
                                                                   1997             1996
                                                               -----------      -----------
<S>                                                            <C>              <C>
                   ASSETS
          Cash and cash equivalents ......................     $    18,000      $    81,000
          Property and equipment .........................         625,000          628,000
          Investment in real property ....................         467,000               --
          Other assets ...................................           7,000           26,000
                                                               -----------      -----------
                                                               $ 1,117,000      $   735,000
                                                               ===========      ===========
                   LIABILITIES AND SHAREHOLDER'S EQUITY
          LIABILITIES:
               Due to parent .............................     $ 1,072,000      $   642,000
                                                               -----------      -----------

          SHAREHOLDERS EQUITY:
               Common stock and additional paid-in capital         451,000          451,000
               Accumulated deficit .......................        (406,000)        (358,000)
                                                               -----------      -----------
                                                                    45,000           93,000
                                                               -----------      -----------
                                                               $ 1,117,000      $   735,000
                                                               ===========      ===========
</TABLE>


                         CONDENSED STATEMENTS OF INCOME
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
                                                            1997           1996         1995
                                                         ---------      ---------     ---------
<S>                                                      <C>            <C>           <C>
                  INCOME:
                  Investment income ................     $   1,000      $   3,000     $   3,000
                  Other income, net ................        90,000        173,000        46,000
                                                         ---------      ---------     ---------
                                                            91,000        176,000        49,000
                                                         ---------      ---------     ---------
                  EXPENSES:
                  General and administrative expense       139,000        135,000       126,000
                                                         ---------      ---------     ---------

                       NET INCOME (LOSS) ...........     $ (48,000)     $  41,000     $ (77,000)
                                                         =========      =========     =========
</TABLE>

PMC CAPITAL LIMITED PARTNERSHIP
On November 13, 1996, the Partnership (a newly formed special purpose affiliate
of the Company) completed a private placement of approximately $40.7 million of
its Loan-Backed Fixed Rate Notes, Series 1996-A (the "Notes"). The Notes, issued
at par, which have a stated maturity in 2011 and bear interest at the rate of
6.725% per annum, are collateralized by loans contributed by PMC Capital to the
Partnership. In connection with this private placement, the Notes were given a
rating of "Aa2" by Moody's Investors Service. The Partnership has the exclusive
obligation for the repayment of the Notes, and the holders of the Notes have no
recourse to PMC Capital or its other subsidiaries or their assets in the event
of nonpayment of the loans. The net proceeds from the issuance of the Notes
(approximately $37.5 million before giving effect to payment of offering costs
of approximately $396,000 and after giving effect to the funding of a $2.04
million reserve fund held by the trustee as collateral) were distributed to PMC
Capital. The net effect of the contributed loans less the distributed funds
comprises the limited partners capital on the following condensed statement of
assets, liabilities and partners' capital.





                                      F-26



<PAGE>   52




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

NOTE 15.  UNCONSOLIDATED WHOLLY-OWNED ENTITIES: (CONTINUED)

The following is the condensed statement of assets, liabilities and partners'
capital for PMC Capital Limited Partnership as of December 31, 1997 and 1996 and
for the year ended December 31, 1997 and the period November 8, 1996 (inception)
to December 31, 1996:

                             CONDENSED STATEMENTS OF
                    ASSETS, LIABILITIES AND PARTNERS' CAPITAL

<TABLE>
<CAPTION>
                                                                           DECEMBER 31,
                                                                   ---------------------------
                                                                       1997           1996
                                                                   -----------     -----------
<S>                                                                <C>             <C>
                  ASSETS
          Loans receivable, net ..............................     $33,975,000     $41,805,000
          Restricted investments - money market funds and cash       2,219,000       5,444,000
          Due from affiliates ................................          15,000         826,000
          Deferred borrowing costs and other assets ..........         485,000         640,000
                                                                   -----------     -----------

                                                                   $36,694,000     $48,715,000
                                                                   ===========     ===========
                  LIABILITIES AND PARTNERS' CAPITAL
          LIABILITIES:
               Notes payable .................................     $29,007,000     $40,183,000
               Accrued interest payable ......................         164,000         233,000
               Due to affiliates .............................          46,000          83.000
                                                                   -----------     -----------
                                                                    29,217,000      40,499,000
                                                                   -----------     -----------
          PARTNERS' CAPITAL:
               General Partner's interest ....................           4,000          11,000
               Limited Partner's interest ....................       7,473,000       8,205,000
                                                                   -----------     -----------
                                                                     7,477,000       8,216,000
                                                                   -----------     -----------
                                                                   $36,694,000     $48,715,000
                                                                   ===========     ===========
</TABLE>



                         CONDENSED STATEMENTS OF INCOME


<TABLE>
<CAPTION>
                                                     YEAR ENDED   NOVEMBER 8, 1996
                                                    DECEMBER 31,   (INCEPTION) TO
                                                        1997      DECEMBER 31, 1996
                                                     ----------   -----------------
<S>                                                  <C>            <C>
               INCOME:
               Interest income ..................    $4,823,000     $  599,000
               Other investment income, net .....       197,000        111,000
                                                     ----------     ----------
                                                      5,020,000        710,000
                                                     ----------     ----------
               EXPENSES:
               Interest expense ................      2,287,000        362,000
               General and expense administrative       125,000         20,000
                                                     ----------     ----------
                                                      2,412,000        382,000
                                                     ----------     ----------
          NET INCOME ...........................     $2,608,000     $  328,000
                                                     ==========     ==========
</TABLE>









                                      F-27



<PAGE>   53




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

NOTE 15.  UNCONSOLIDATED WHOLLY-OWNED ENTITIES: (CONTINUED)

PMC CAPITAL CORP. AND PMC TRUST 1996-A:
The following is the condensed combined balance sheet for PMC Capital Corp. (the
independent trustee of the general partner for PMC Capital Limited Partnership)
and PMC Trust 1996-A (the general partner for PMC Capital Limited Partnership),
as of December 31, 1997 and 1996. PMC Capital Corp. and PMC Trust 1996-A did not
have any income statement activity from inception through December 31, 1996
other than approximately $3,000 earned pursuant to PMC Trust 1996-A's interest
in the Partnership of which $2,000 was distributed as a dividend to PMC Capital:


                        CONDENSED COMBINED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                           DECEMBER 31,
                                                                     ------------------------
                                                                        1997           1996
                                                                     ---------      ---------
<S>                                                                  <C>            <C>
              ASSETS
          Cash .................................................     $   1,000      $   1,000
          Investment in Partnership ............................         3,000         11,000
          Due from parent ......................................       250,000        250,000
                                                                     ---------      ---------
                                                                     $ 254,000      $ 262,000
                                                                     =========      =========
               SHAREHOLDERS' AND BENEFICIAL OWNERS EQUITY
          Common stock and beneficial owners beneficial interest     $ 261,000      $ 261,000
          Retained earnings (deficit) ..........................        (7,000)         1,000
                                                                     ---------      ---------
                                                                     $ 254,000      $ 262,000
                                                                     =========      =========
</TABLE>



                     CONDENSED COMBINED STATEMENTS OF INCOME


<TABLE>
<CAPTION>
                                                YEAR ENDED      NOVEMBER 8, 1996
                                               DECEMBER 31,      (INCEPTION) TO
                                                   1997        DECEMBER 31, 1996
                                               ------------    -----------------
<S>                                              <C>               <C>
          Investment Income from partnership     $26,000           $ 3,000
                                                 -------           -------

          Net Income .......................     $26,000           $ 3,000
                                                 =======           =======

          Dividends Paid to Parent .........     $34,000           $ 2,000
                                                 =======           =======
</TABLE>


NOTE 16.   COMBINED FINANCIAL STATEMENTS:

As described in Note 1, the consolidated financial statements include the
accounts of PMC and its wholly owned regulated investment company subsidiaries.
The accounts of PMC Advisers, PMC Funding Corp., the Partnership, PMC Capital
Corp. and PMC Trust 1996-A (the "Unconsolidated Entities") are accounted for by
the equity method of accounting in conformity with Federal securities law. The
following is the condensed combined balance sheet as of December 31, 1997 and
1996 and the condensed combined statement of income for the years ended December
31, 1997 and 1996 for the Company and the Unconsolidated Entities.








                                      F-28



<PAGE>   54




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


NOTE 16.   COMBINED FINANCIAL STATEMENTS: (CONTINUED)

                        CONDENSED COMBINED BALANCE SHEET
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                       DECEMBER 31,
                                                                 ------------------------
                                                                    1997           1996
                                                                 ---------      ---------
<S>                                                               <C>            <C>
          ASSETS
          Investments at value:
               Loans receivable, net ........................     $ 161,215      $ 135,159
               Cash equivalents .............................        17,272         49,816
               Interest-only strip receivable ...............         3,708          6,429
               Restricted investments and real property owned         5,780          6,976
                                                                  ---------      ---------
                                                                    187,975        198,380
          Other assets ......................................         6,931          6,222
                                                                  ---------      ---------
               Total assets .................................     $ 194,906      $ 204,602
                                                                  =========      =========

          LIABILITIES AND SHAREHOLDERS' EQUITY
          LIABILITIES:
               SBA debentures payable .......................     $  41,290      $  44,570
               Notes payable ................................        64,007         75,183
               Other liabilities ............................        12,443         14,946
                                                                  ---------      ---------
                                                                    117,740        134,699
                                                                  ---------      ---------
               Cumulative preferred stock of subsidiary .....         7,000          7,000
                                                                  ---------      ---------

          SHAREHOLDERS' EQUITY:
               Common Stock .................................           116            112
               Additional paid-in capital ...................        68,555         62,125
               Undistributed net operating income ...........         2,289          1,101
               Net unrealized depreciation on investments ...          (794)          (435)
                                                                  ---------      ---------
                                                                     70,166         62,903
                                                                  ---------      ---------
               Total liabilities and shareholders' equity ...     $ 194,906      $ 204,602
                                                                  =========      =========
</TABLE>


                     CONDENSED COMBINED STATEMENT OF INCOME
                 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
                                 (In thousands)


<TABLE>
<CAPTION>
                                                                   1997         1996
                                                                 --------     --------
<S>                                                              <C>          <C>
         INCOME:
               Investment income ...........................     $ 24,437     $ 21,835
               Other income, net ...........................        2,542        2,504
                                                                 --------     --------
                  Total income .............................       26,979       24,339
                                                                 --------     --------
          EXPENSES:
               Interest ....................................        7,836        6,070
               Salaries and related benefits ...............        3,435        3,180
               General and administrative expenses .........        1,082          998
               Other .......................................          822          724
                                                                 --------     --------
                  Total expense ............................       13,175       10,972
                                                                 --------     --------
          Net operating income .............................       13,804       13,367
          Realized and unrealized gain (loss) on investments        1,818         (147)
                                                                 --------     --------
          NET OPERATING INCOME AND REALIZED AND UNREALIZED
                  GAIN (LOSS) ON INVESTMENTS ...............     $ 15,622     $ 13,220
                                                                 ========     ========
</TABLE>


                                      F-29



<PAGE>   55




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

NOTE 17.   STOCK BASED COMPENSATION PLAN:

During fiscal year 1997 the Company granted stock options under the PMC Capital,
Inc. 1997 Non-Employee Director Stock Option Plan and the PMC Capital, Inc. 1997
Employee Stock Option Plan (collectively, the "Plan") it sponsored. The Company
applies the Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for the Plan. In 1995, SFAS No. 123 "Accounting
for Stock-Based compensation" ("SFAS No. 123") was issued which, if fully
adopted by the Company, would change the methods the Company applies in
recognizing the cost of the Plan. Adoption of the cost recognition provisions of
SFAS No. 123 is optional and the Company has decided not to elect these
provisions of SFAS No. 123. However, pro-forma disclosures as if the Company
adopted the cost recognition provisions of SFAS No. 123 are required by SFAS No.
123 and are presented below.

Under the Plan, the Company is authorized to issue 6% of the then outstanding
shares of Common Stock pursuant to "Awards" granted as incentive stock options
(intended to qualify under Section 422 of the Internal Revenue Code of 1986, as
amended) to employees and non-qualified stock options to employees and
non-employee directors.

STOCK OPTIONS

The Company granted stock options in fiscal 1997 to certain employees and
directors. The stock options granted in fiscal 1997 have contractual term of
five years. All of the options granted to the employees and directors have an
exercise price equal to the fair market value of the stock at grant date. The
range of options granted during the year ended December 31, 1997 was from
$13.56 to $14.31. The options granted in fiscal 1997 vest 100% on the first
anniversary of the date of grant.

<TABLE>
<CAPTION>
                                                            1997
                                                 ------------------------
                                                 NUMBER OF      WEIGHTED
                                                   SHARES        AVERAGE
                                                 UNDERLYING     EXERCISE
                                                  OPTIONS         PRICES
                                                 ----------     ---------
<S>                           <C>                <C>            <C>
          Outstanding January 1 ............             --       n/a
          Granted ..........................         86,755     $   14.21
          Exercised ........................             --       n/a
          Forfeited and expired ............             --       n/a
                                                 ----------     ---------

          Outstanding December 31 ..........         86,755     $   14.21
                                                 ==========     =========
          Exercisable at December 31 .......             --        n/a
                                                 ==========     =========
          Weighted-average fair value of
             options granted during the year     $     0.54     $    0.54
                                                 ==========     =========
</TABLE>

The weighted-average remaining term of the options outstanding as of December
31, 1997 is 4.46 years. 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 in fiscal 1997:

<TABLE>
<CAPTION>
                              ASSUMPTION                          1997
                              ----------                         ------
<S>                                                               <C>
                              Expected Term (years)               3.0
                              Risk-Free Interest Rate             6.17%
                              Expected Dividend Yield             8.77%
                              Expected Volatility                11.41%
</TABLE>









                                      F-30



<PAGE>   56



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

NOTE 17.   STOCK BASED COMPENSATION PLAN: (CONTINUED)

PRO-FORMA NET INCOME AND EARNINGS PER COMMON SHARE

Had the compensation cost for the Company's stock-based compensation plans been
determined consistent with SFAS No. 123, the Company's net income and earnings
per common share for 1997 would approximate the pro forma amounts below (in
thousands, except per share data):


<TABLE>
<CAPTION>
                                                    DECEMBER 31, 1997
                                           -----------------------------------
                                           AS REPORTED              PRO FORMA
                                           -----------             -----------
<S>                                        <C>                     <C>
        SFAS No. 123 Charge                $       --              $        25
        APB 25 Charge                      $       --              $       --
        Net Income                         $    15,622             $    15,597
        Earnings Per Common Share          $      1.35             $      1.35
</TABLE>


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



                                      F-31
<PAGE>   57


                        PMC CAPITAL, INC AND SUBSIDIARIES
                           CONSOLIDATING BALANCE SHEET
                                DECEMBER 31, 1997
                     ( IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                                  FIRST
                                                                        CONSOLIDATED             WESTERN      WESTERN
                                                                           BEFORE        PMC       SBLC,     FINANCIAL      PMC
                                                             ELIMINATION ELIMINATION   CAPITAL,  INC. AND     CAPITAL    INVESTMENT
                                                CONSOLIDATED    ENTRIES    ENTRIES       INC.   SUBSIDIARY  CORPORATION CORPORATION
                                                ------------ ----------- -----------   -------- ----------  ----------- ------------
                      ASSETS

<S>                                                <C>         <C>         <C>         <C>         <C>         <C>        <C>
INVESTMENTS AT VALUE, SEE ACCOMPANYING SCHEDULE:
  Loans receivable, net .........................  $ 127,240   $      --   $ 127,240   $  48,337   $   8,196   $  21,858  $  48,849
  Cash equivalents ..............................     17,237          --      17,237      11,621       1,041       4,094        481
  Investment in unconsolidated subsidiaries .....      7,797     (23,378)     31,175      31,175          --          --         --
  Interest-only strip receivables ...............      3,708          --       3,708          --       3,708          --         --
  Restricted investments ........................      2,798          --       2,798          --       2,594          --        204
  Real property owned ...........................        296          --         296          --          96         125         75
                                                   ---------   ---------   ---------   ---------   ---------   ---------  ---------
Total investments ...............................    159,076     (23,378)    182,454      91,133      15,635      26,077     49,609
                                                   ---------   ---------   ---------   ---------   ---------   ---------  ---------
OTHER ASSETS:
  Receivable for loans sold .....................      1,346          --       1,346         104       1,242          --         --
  Due from unconsolidated subsidiaries ..........      1,302     (18,994)     20,296      20,258          24           4         10
  Servicing asset ...............................      1,607          --       1,607          --       1,607          --         --
  Deferred charges, deposits and other assets ...      1,398          --       1,398         328         482         171        417
  Accrued interest receivable ...................        608          --         608         235          13         123        237
  Cash ..........................................        265          --         265         187          54          16          8
  Property and equipment, net ...................        237          --         237         147          30          30         30
                                                   ---------   ---------   ---------   ---------   ---------   ---------  ---------
Total other assets ..............................      6,763     (18,994)     25,757      21,259       3,452         344        702
                                                   ---------   ---------   ---------   ---------   ---------   ---------  ---------
Total assets ....................................  $ 165,839   $ (42,372)  $ 208,211   $ 112,392   $  19,087   $  26,421  $  50,311
                                                   =========   =========   =========   =========   =========   =========  =========



                 LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES:
  SBA debentures payable ........................  $  41,290   $      --   $  41,290   $      --   $      --   $  17,290  $  24,000
  Notes payable .................................     35,000          --      35,000      35,000          --          --         --
  Accounts payable ..............................      3,269          --       3,269          69       3,145          53          2
  Dividends payable .............................      4,018          --       4,018       3,955          --          --         63
  Borrower advances .............................      1,678          --       1,678          57         464         211        946
  Accrued interest payable ......................      1,316          --       1,316         431          25         467        393
  Due to unconsolidated subsidiaries ............        279     (18,994)     19,273         283      13,742          --      5,248
  Deferred fee revenue ..........................        571          --         571         123          20         287        141
  Other liabilities .............................      1,252          --       1,252       1,023         203          10         16
                                                   ---------   ---------   ---------   ---------   ---------   ---------  ---------
Total liabilities ...............................     88,673     (18,994)    107,667      40,941      17,599      18,318     30,809
                                                   ---------   ---------   ---------   ---------   ---------   ---------  ---------
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 ..................................        116         (22)        138         116          --          21          1
  Additional paid-in capital ....................     68,555     (22,373)     90,928      68,555       2,000       7,934     12,439
  Undistributed net operating income ............      2,289      (1,983)      4,272       2,780         960         257        275
  Net unrealized depreciation on investments ....       (794)         --        (794)         --        (472)       (109)      (213)
                                                   ---------   ---------   ---------   ---------   ---------   ---------  ---------
                                                      70,166     (27,378)     97,544      71,451       2,488       8,103     15,502
  Less treasury stock ...........................         --       1,000      (1,000)         --      (1,000)         --         --
                                                   ---------   ---------   ---------   ---------   ---------   ---------  ---------
Total shareholders' equity ......................     70,166     (26,378)     96,544      71,451       1,488       8,103     15,502
                                                   ---------   ---------   ---------   ---------   ---------   ---------  ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......  $ 165,839   $ (42,372)  $ 208,211   $ 112,392   $  19,087   $  26,421  $  50,311
                                                   =========   =========   =========   =========   =========   =========  =========

NET ASSET VALUE PER COMMON SHARE ................  $    6.03
                                                   =========
</TABLE>


                  THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
                  OF THESE CONSOLIDATING FINANCIAL STATEMENTS.





                                      F-32
<PAGE>   58

                        PMC CAPITAL, INC AND SUBSIDIARIES
                        CONSOLIDATING STATEMENT OF INCOME
                      FOR THE YEAR ENDED DECEMBER 31, 1997
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                                               FIRST
                                                                      CONSOLIDATED            WESTERN    WESTERN
                                                                         BEFORE       PMC      SBLC,    FINANCIAL      PMC
                                                           ELIMINATION ELIMINATION  CAPITAL, INC. AND    CAPITAL   INVESTMENT
                                              CONSOLIDATED    ENTRIES    ENTRIES      INC.  SUBSIDIARY CORPORATION CORPORATION
                                              ------------ ----------- ----------- -------- ---------- ----------- -----------
INVESTMENT INCOME:
<S>                                               <C>        <C>        <C>        <C>       <C>        <C>        <C>
  Interest .....................................  $ 17,136   $     --   $ 17,136   $  3,959  $  5,911   $  2,446   $  4,820
  Premium income ...............................     1,776         --      1,776      1,991      (215)        --         --
  Other investment income, net .................       504         --        504        297        52         63         92
                                                  --------   --------   --------   --------  --------   --------   --------
Total investment income ........................    19,416         --     19,416      6,247     5,748      2,509      4,912

Other income, net ..............................     2,430         --      2,430      1,941       256        119        114
Equity in income (loss) of subsidiaries ........     2,560    (12,445)    15,005     15,005        --         --         --
                                                  --------   --------   --------   --------  --------   --------   --------
Total income ...................................    24,406    (12,445)    36,851     23,193     6,004      2,628      5,026
                                                  --------   --------   --------   --------  --------   --------   --------
EXPENSES:
  Interest .....................................     5,548         --      5,548      2,692         5      1,588      1,263
  Salaries and related benefits ................     3,435         --      3,435      3,435        --         --         --
  General and administrative ...................       797         --        797        735        29         16         17
  Profit sharing plan ..........................       243         --        243        243        --         --         --
  Rent .........................................       229         --        229        229        --         --         --
  Legal and Accounting .........................       192         --        192        187         3          1          1
  Small Business Administration fees ...........       108         --        108         --        --         41         67
  Directors and shareholders expense ...........        50         --         50         50        --         --         --
                                                  --------   --------   --------   --------  --------   --------   --------
Total expense ..................................    10,602         --     10,602      7,571        37      1,646      1,348
                                                  --------   --------   --------   --------  --------   --------   --------

Net  operating income ..........................    13,804    (12,445)    26,249     15,622     5,967        982      3,678
                                                  --------   --------   --------   --------  --------   --------   --------
REALIZED AND UNREALIZED GAIN (LOSS)
  ON INVESTMENTS:
    Loans written-off ..........................      (183)        --       (183)        --      (163)        --        (20)
    Sale of assets .............................     2,360         --      2,360         --     2,360         --         --
    Change in unrealized appreciation
      (depreciation) on investments ............      (359)        --       (359)        --      (248)        (7)      (104)
                                                  --------   --------   --------   --------  --------   --------   --------
                                                     1,818         --      1,818         --     1,949         (7)      (124)
                                                  --------   --------   --------   --------  --------   --------   --------
NET OPERATING INCOME AND REALIZED AND UNREALIZED
  GAIN (LOSS) ON INVESTMENTS ...................  $ 15,622   $(12,445)  $ 28,067   $ 15,622  $  7,916   $    975   $  3,554
                                                  ========   ========   ========   ========  ========   ========   ========

EARNINGS PER SHARE .............................  $  1.35
                                                  =======
</TABLE>

                  THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
                  OF THESE CONSOLIDATING FINANCIAL STATEMENTS

                                      F-33
<PAGE>   59


                       PMC CAPITAL, INC AND SUBSIDIARIES
                CONSOLIDATING STATEMENT OF SHAREHOLDERS' EQUITY
                               DECEMBER 31, 1997
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                    Net
                                                                                                Unrealized
                                                                    Additional  Undistributed  Appreciation               Total
                                               Preferred   Common    Paid-in    Net Operating (Depreciation) Treasury  Shareholders'
                                               Stock, 3%   Stock     Capital        Income    on Investments   Stock      Equity
                                               --------   --------   --------      --------     --------     --------   --------
<S>                                            <C>        <C>        <C>           <C>          <C>          <C>        <C>
PMC CAPITAL, INC
  Balances, January 1, 1997 .................  $     --   $    112   $ 62,125      $  1,701     $     --     $     --   $ 63,938

  Net income ................................        --         --         --        15,622           --           --     15,622
  Dividend reinvestment plan,  468,706 shares        --          4      6,430            --           --           --      6,434
  Dividends on common stock .................        --         --         --       (14,543)          --           --    (14,543)
                                               --------   --------   --------      --------     --------     --------   --------
  Balances, December 31, 1997 ...............  $     --   $    116   $ 68,555      $  2,780     $     --     $     --   $ 71,451
                                               ========   ========   ========      ========     ========     ========   ========

FIRST WESTERN SBLC, INC AND SUBSIDIARY

  Balances, January 1, 1997 .................  $     --   $     --   $  2,000      $  1,796     $   (224)     $(1,000)  $  2,572

  Net income ................................        --         --         --         8,164         (248)          --      7,916
  Dividends to parent company ...............        --         --         --        (9,000)          --           --     (9,000)
                                               --------   --------   --------      --------     --------     --------   --------
  Balances, December 31, 1997 ...............  $     --   $     --   $  2,000      $    960     $   (472)     $(1,000)  $  1,488
                                               ========   ========   ========      ========     ========     ========   ========
WESTERN FINANCIAL CAPITAL CORPORATION

  Balances, January 1, 1997 .................  $     --   $     21   $  7,934      $    110     $   (102)    $     --   $  7,963

  Net income ................................        --         --         --           982           (7)          --        975
  Dividends to parent company ...............        --         --         --          (835)          --           --       (835)
                                               --------   --------   --------      --------     --------     --------   --------
  Balances, December 31, 1997 ...............  $     --   $     21   $  7,934      $    257     $   (109)    $     --   $  8,103
                                               ========   ========   ========      ========     ========     ========   ========
PMC INVESTMENT CORPORATION

  Balances, January 1, 1997 .................  $  3,000   $      1   $ 12,439      $    527     $   (109)    $     --   $ 15,858

  Net income ................................        --         --         --         3,658         (104)          --      3,554
  Dividends to parent company ...............        --         --         --        (3,660)          --           --     (3,660)
  Dividends, preferred ......................        --         --         --          (250)          --           --       (250)
                                               --------   --------   --------      --------     --------     --------   --------
  Balances, December 31, 1997 ...............  $  3,000   $      1   $ 12,439      $    275     $   (213)    $     --   $ 15,502
                                               ========   ========   ========      ========     ========     ========   ========
ELIMINATION ADJUSTMENTS
  Equity in income of subsidiaries ..........        --         --         --       (12,445)          --           --    (12,445)
  Dividends to parent .......................        --         --         --        13,495           --           --     13,495
  Stock of subsidiaries .....................    (3,000)       (22)   (22,373)           --           --        1,000    (24,395)
  Undistributed earnings of subsidiaries ....        --         --         --        (3,033)          --           --     (3,033)
                                               --------   --------   --------      --------     --------     --------   --------
                                                 (3,000)       (22)   (22,373)       (1,983)          --        1,000    (26,378)
                                               --------   --------   --------      --------     --------     --------   --------

CONSOLIDATED ................................  $     --   $    116   $ 68,555      $  2,289     $   (794)    $     --   $ 70,166
                                               ========   ========   ========      ========     ========     ========   ========
</TABLE>

                  THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
                  OF THESE CONSOLIDATING FINANCIAL STATEMENTS.

                                     F-34
<PAGE>   60


                        PMC CAPITAL, INC AND SUBSIDIARIES
                     CONSOLIDATING STATEMENTS OF CASH FLOWS
                      FOR THE YEAR ENDED DECEMBER 31, 1997
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                                                     FIRST
                                                                             CONSOLIDATED           WESTERN     WESTERN
                                                                               BEFORE       PMC      SBLC,     FINANCIAL     PMC
                                                                  ELIMINATION ELIMINATION CAPITAL, INC., AND  INVESTMENT   CAPITAL
                                                      CONSOLIDATED  ENTRIES    ENTRIES      INC   SUBSIDIARY CORPORATION CORPORATION
                                                        --------   --------   --------   --------   --------   --------   --------
<S>                                                     <C>        <C>        <C>        <C>        <C>        <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net operating income and realized and
    unrealized gain (loss) on investments ............  $ 15,622   $(12,445)  $ 28,067   $ 15,622   $  7,916   $    975   $  3,554
  Adjustments to reconcile net operating
    income and realized and unrealized gain
    (loss) on investments to net cash
    provided by operating activities:
        Loans funded, held for sale ..................   (20,622)        --    (20,622)        --    (20,622)        --         --
        Proceeds from sale of guaranteed loans .......    21,638         --     21,638         --     21,638         --         --
        Change in unrealized depreciation on
            investments and loans written-off ........       543         --        543         --        412          7        124
        Unrealized premium income, net ...............       215         --        215         --        215         --         --
        Depreciation and amortization ................     1,032         --      1,032         94        844         35         59
        Accretion of loan discount and deferred fees .    (1,623)        --     (1,623)       (33)    (1,232)      (109)      (249)
        Deferred fees collected ......................       766         --        766        (58)        17        343        464
        (Gain) loss on sale of assets ................    (2,360)        --     (2,360)        --     (2,360)        --         --
        Equity in income of subsidiary ...............    (2,560)        --     (2,560)    (2,560)        --         --         --
       Net change in operating assets and liabilities:
           Accrued interest receivable ...............      (231)        --       (231)       (78)         2        (55)      (100)
           Other assets ..............................      (527)        --       (527)       (39)      (396)       (35)       (57)
           Accrued interest payable ..................      (127)        --       (127)        (1)       (27)       (97)        (2)
           Borrower advances .........................      (116)        --       (116)      (127)      (583)       (20)       614
           Other liabilities .........................    (1,069)        --     (1,069)      (115)      (960)        38        (32)
                                                        --------   --------   --------   --------   --------   --------   --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............    10,581    (12,445)    23,026     12,705      4,864      1,082      4,375
                                                        --------   --------   --------   --------   --------   --------   --------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Loans funded .......................................   (65,739)     8,337    (74,076)   (28,203)    (8,834)   (12,896)   (24,143)
  Principal collected and other adjustments ..........    10,069     (8,337)    18,406      3,989      5,559      5,406      3,452
  Proceeds from interest-only strip receivable .......       648         --        648         --        648         --         --
  Purchase of furniture and fixtures and other
     assets ..........................................      (139)        --       (139)      (114)       (25)        --         --
  Proceeds from sale of assets .......................    22,986         --     22,986         --     22,971         15         --
  Proceeds from partnership distributions ............     3,347      3,347         --         --         --         --         --
  Release of (investment in) restricted cash .........    (1,569)        --     (1,569)        --     (1,365)        --       (204)
  Investment in subsidiaries .........................        --     12,445    (12,445)   (12,445)        --         --         --
                                                        --------   --------   --------   --------   --------   --------   --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ..   (30,397)    15,792    (46,189)   (36,773)    18,954     (7,475)   (20,895)
                                                        --------   --------   --------   --------   --------   --------   --------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance of common stock ............     5,475         --      5,475      5,475         --         --         --
   Proceeds from revolving credit facility ...........     8,300         --      8,300      8,300         --         --         --
   Payment on revolving credit facility ..............    (8,300)        --     (8,300)    (8,300)        --         --         --
   Payment of dividends to parent ....................        --     (3,347)     3,347     16,842     (9,000)      (835)    (3,660)
   Payment of dividends on common stock ..............   (13,197)        --    (13,197)   (13,197)        --         --         --
   Payment of dividends on preferred stock ...........      (250)        --       (250)        --         --         --       (250)
   Payment of SBA debentures .........................    (3,280)        --     (3,280)        --         --     (3,280)        --
   Advances from (to) affiliates, net ................    (1,004)        --     (1,004)    13,442    (18,614)       (68)     4,236
   Payment of issuance costs on notes and debentures .      (443)        --       (443)        (4)      (439)        --         --
                                                        --------   --------   --------   --------   --------   --------   --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ..   (12,699)    (3,347)    (9,352)    22,558    (28,053)    (4,183)       326
                                                        --------   --------   --------   --------   --------   --------   --------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .   (32,515)        --    (32,515)    (1,510)    (4,235)   (10,576)   (16,194)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR .........    50,017         --     50,017     13,318      5,330     14,686     16,683
                                                        --------   --------   --------   --------   --------   --------   --------

CASH AND CASH EQUIVALENTS, END OF YEAR ...............  $ 17,502   $     --   $ 17,502   $ 11,808   $  1,095      4,110   $    489
                                                        ========   ========   ========   ========   ========   ========   ========

SUPPLEMENTAL DISCLOSURE:
   Interest paid .....................................  $  5,631   $     --   $  5,631   $  2,649   $     32   $  1,685   $  1,265
                                                        ========   ========   ========   ========   ========   ========   ========

   Dividends reinvested ..............................  $    963   $     --   $    963   $    963   $     --   $     --   $     --
                                                        ========   ========   ========   ========   ========   ========   ========

   Reclassification from loans receivable
     to real property owned ..........................  $    203   $     --   $    203   $     --   $    108   $     --   $     95
                                                        ========   ========   ========   ========   ========   ========   ========
</TABLE>

                 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
                    THESE CONSOLIDATED FINANCIAL STATEMENTS.

                                      F-35
<PAGE>   61







                        REPORT OF INDEPENDENT ACCOUNTANTS


To the General Partner
PMC Capital Limited Partnership:

We have audited the accompanying statement of assets, liabilities and partners'
capital of PMC Capital Limited Partnership (the "Partnership") as of December
31, 1997 and 1996, and the related statements of income, partners' capital and
cash flows for the year ended December 31, 1997 and for the period from November
8, 1996 (inception) to December 31, 1996. These financial statements are the
responsibility of the Partnership's General Partner. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PMC Capital Limited Partnership
as of December 31, 1997 and 1996, and the results of its operations and its cash
flows for the period from November 8, 1996 (inception) to December 31, 1996, in
conformity with generally accepted accounting principles.


                                                        COOPERS & LYBRAND L.L.P.


Dallas, Texas
February 28, 1998



                                      F-36










<PAGE>   62


                         PMC CAPITAL LIMITED PARTNERSHIP
             STATEMENT OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
                                 ( IN THOUSANDS)

<TABLE>
<CAPTION>
                                                               December 31,
                                                           -------------------
                                                             1997        1996
                                                           -------     -------
                                     ASSETS
<S>                                                        <C>         <C>
INVESTMENTS AT VALUE:
  Loans receivable, net ..............................     $33,975     $41,805
  Restricted investments - money market funds and cash       2,219       5,444
                                                           -------     -------
                                                            36,194      47,249
                                                           -------     -------
OTHER ASSETS:
  Due from affiliates ................................          15         826
  Deferred borrowing costs ...........................         296         390
  Accrued interest receivable ........................         189         239
  Other ..............................................          --          11
                                                           -------     -------

TOTAL OTHER ASSETS ...................................         500       1,466
                                                           -------     -------

TOTAL ASSETS .........................................     $36,694     $48,715
                                                           =======     =======

            LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
  Notes payable ......................................     $29,007     $40,183
  Accrued interest payable ...........................         164         233
  Due to affiliates ..................................          46          83
                                                           -------     -------

TOTAL LIABILITIES ....................................      29,217      40,499
                                                           -------     -------

COMMITMENTS AND CONTINGENCIES (NOTE 3)

PARTNERS' CAPITAL:
  General Partner's interest .........................           4          11
  Limited Partner's interest .........................       7,473       8,205
                                                           -------     -------

                                                             7,477       8,216
                                                           -------     -------

TOTAL LIABILITIES AND PARTNERS' CAPITAL ..............     $36,694     $48,715
                                                           =======     =======
</TABLE>


                  THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
                         OF THESE FINANCIAL STATEMENTS.

                                      F-37
<PAGE>   63


                        PMC CAPITAL LIMITED PARTNERSHIP
                              STATEMENTS OF INCOME
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                             November 8,
                                             Year Ended   1996 (Inception)
                                            December 31,   to December 31,
                                                1997             1996
                                               ------            ----
<S>                                            <C>               <C>
          INVESTMENT INCOME:
            Interest ...................       $4,823            $599
            Other investment income, net          197             111
                                               ------            ----
          Total investment income ......        5,020             710
                                               ------            ----
          EXPENSES:
            Interest ...................        2,287             362
            General and administrative .          125              20
                                               ------            ----
          Total expenses ...............        2,412             382
                                               ------            ----
          NET INCOME ...................       $2,608            $328
                                               ======            ====
</TABLE>


   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.


                                      F-38
<PAGE>   64


                         PMC CAPITAL LIMITED PARTNERSHIP
                         STATEMENTS OF PARTNERS' CAPITAL
          PERIOD FROM NOVEMBER 8, 1996 (INCEPTION) TO DECEMBER 31, 1997
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                         Limited         General
                                                         Partner's       Partner's
                                                         Interest        Interest         Total
                                                         --------        --------        --------
<S>                                                      <C>             <C>             <C>
Balance, November 8, 1996 (inception) ............       $     --        $     --        $     --

Limited Partner's contribution of loans receivable
     and other assets ............................         45,681              --          45,681

General Partner's cash contribution ..............             --              10              10

Net income .......................................            325               3             328

Partnership distributions ........................        (37,801)             (2)        (37,803)
                                                         --------        --------        --------

Balance, December 31, 1996 .......................          8,205              11           8,216

Net income .......................................          2,582              26           2,608

Partnership distributions ........................         (3,314)            (33)         (3,347)
                                                         --------        --------        --------

Balance, December 31, 1997 .......................       $  7,473        $      4        $  7,477
                                                         ========        ========        ========
</TABLE>

   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.


                                      F-39
<PAGE>   65


                         PMC CAPITAL LIMITED PARTNERSHIP
                            STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                               November 8,
                                                               Year Ended    1996 (Inception)
                                                              December 31,   to December 31,
                                                                  1997            1996
                                                                --------        --------
<S>                                                             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income ............................................       $  2,608        $    328
  Adjustments to reconcile net income
    to net cash provided by operating activities:
        Amortization ....................................             99              16
        Accretion of loan discount and deferred fees ....           (207)            (28)
        Net change in operating assets and liabilities:
            Accrued interest receivable .................             50            (239)
            Other assets ................................             11             (11)
            Accrued interest payable ....................            (69)            233
                                                                --------        --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ...............          2,492             299
                                                                --------        --------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Principal collected and other adjustments .............          8,037           3,904
  Release of (investment in) restricted cash ............          3,225          (5,444)
                                                                --------        --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES .....         11,262          (1,540)
                                                                --------        --------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance of notes payable ..............             --          40,183
   Proceeds from issuance of general partnership interest             --              10
   Partner distributions ................................         (3,347)        (37,803)
   Payment on notes payable .............................        (11,176)             --
   Advances from (to) affiliates, net ...................            774            (743)
   Payment of issuance costs on notes ...................             (5)           (406)
                                                                --------        --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES .....        (13,754)          1,241
                                                                --------        --------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....             --              --

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ............             --              --
                                                                --------        --------

CASH AND CASH EQUIVALENTS, END OF YEAR ..................       $     --        $     --
                                                                ========        ========
</TABLE>

   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

                                      F-40

<PAGE>   66



                         PMC CAPITAL LIMITED PARTNERSHIP
                          NOTES TO FINANCIAL STATEMENTS

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

         BUSINESS:
         PMC Capital Limited Partnership ("the Partnership") was formed as a
         Delaware limited partnership in November 1996 to act as a special
         purpose affiliate of PMC Capital, Inc. ("PMC Capital"). PMC Capital is
         a diversified, closed-end management investment company that has
         elected to operate as a business development company under the
         Investment Company Act of 1940. PMC engages in the business of
         originating loans to small businesses either directly or through its
         three principal subsidiaries. The Partnership was established to
         acquire loans from PMC Capital and to issue fixed-rate debt through a
         private placement. PMC Capital is either directly or indirectly the
         sole partner of the Partnership.

         PMC Capital Corp. is a Delaware corporation formed in November 1996 to
         be the independent trustee of the general partner of the Partnership.
         PMC Trust 1996-A is a Delaware business trust formed in November 1996
         to be the general partner of the Partnership.

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

         VALUATION OF INVESTMENTS
         Loans receivable are carried at amortized cost which is the loan
         principal balance less deferred fees and discounts, unless there is
         doubt as to the realization of the loan (a "Problem Loan"). A valuation
         reserve is established for a Problem Loan based on the creditor's
         payment history, collateral value, guarantor support and other factors.

         Loans, including impaired loans, are generally classified as
         non-accrual if they are past due as to maturity or payment of principal
         or interest for a period of more than 60 days. If a loan or a portion
         of a loan is classified as doubtful or is partially reserved or
         charged-off, the loan is classified as non-accrual. Loans that are on a
         current payment status or past due less than 60 days may also be
         classified as non-accrual if repayment in full of principal and/or
         interest is in doubt.

         Deferred fees consist of non-refundable fees less direct loan
         origination costs. These fees are being recognized over the expected
         life of the related loan as an adjustment of yield.

         REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
         Realized gains or losses are measured by the difference between the
         proceeds from the sale and the cost basis of the investment, without
         regard to unrealized gains and losses previously recognized. The gain
         or loss calculated also includes loans written-off or charged-down
         during the year and recoveries of loans written-off or charged-down in
         prior years.

         Other changes in the value of investments are included as changes in
         the unrealized appreciation (depreciation) on investments in the
         statement of income.

         INTEREST INCOME
         Interest income on loans is accrued as earned. The accrual of interest
         is generally suspended when the related loan becomes 60 days past due
         ("Non-accrual Loan"). Interest income on a Non-accrual Loan is
         recognized on the cash basis.





                                      F-41


<PAGE>   67




                         PMC CAPITAL LIMITED PARTNERSHIP
                          NOTES TO FINANCIAL STATEMENTS

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

         DEFERRED BORROWING COSTS
         Costs incurred in connection with the issuance of notes payable are
         included in deferred borrowing costs. These costs are amortized over
         the estimated life of the related obligation.

         STATEMENT OF CASH FLOWS
         The Company considers all highly liquid investments purchased with an
         original maturity of three months or less to be cash equivalents for
         purposes of the statement of cash flows.

NOTE 2.  LOANS RECEIVABLE:

         On November 13, 1996, PMC Capital contributed approximately $45.7
         million of loans (the "Contributed Loans") to the Partnership without
         recourse to PMC Capital.

         At December 31, 1997 and 1996 their was no recorded investment in loans
         identified as impaired.

         The Company's portfolio of investments consists of loans to borrowers
         located principally in the southern portion of the United States. The
         most significant concentration of loans were as noted below:

<TABLE>
<CAPTION>
                 Percentage of Loan Portfolio
State                  December 31,
-----            ------------------------
                   1997            1996
                 -------         --------
<S>                  <C>             <C>
Texas                37%             42%
Florida               9%             10%
Other                54%             48%
                    ----            ----
                    100%            100%
                    ====            ====
</TABLE>


         There were no loans receivable; (i) greater than 60 days past due, (ii)
         on which litigation against the borrowers had commenced, or (iii) which
         were in the process of liquidation at December 31, 1997 and 1996.


NOTE 3.  CREDIT RISK:

         At December 31, 1997 and 1996 loans to businesses in the lodging
         industry comprised 93% and 85% of loans receivable and 88% and 74% of
         total assets, respectively. There can be no assurance that the
         Partnership will experience the positive results which PMC Capital has
         historically achieved from these lending activities. Any economic
         factors that negatively impact the lodging industry could have a
         material adverse effect on the business of the Partnership.
         Additionally, at December 31, 1997 loans to businesses located in Texas
         comprised approximately 37% of the Partnership's outstanding loan
         portfolio. No other state had a concentration greater than 10%. A
         decline in economic conditions in any of these states may adversely
         affect the Partnership.










                                      F-42



<PAGE>   68




                         PMC CAPITAL LIMITED PARTNERSHIP
                          NOTES TO FINANCIAL STATEMENTS

NOTE 4.    NOTES PAYABLE:

           On November 13, 1996, the Partnership completed a private placement
           of approximately $40.7 million of its Loan-Backed Fixed Rate Notes,
           Series 1996-A (the "Notes"). The Notes, issued at par, which have a
           stated maturity in 2005 and bear interest at the rate of 6.725% per
           annum, are collateralized by the loans contributed by PMC Capital to
           the Partnership. In connection with this private placement, the Notes
           were given a rating of "Aa2" by Moody's Investors Service. The
           Partnership has the exclusive obligation for the repayment of the
           Notes, and the holders of the Notes have no recourse to PMC Capital
           or its other subsidiaries or their assets in the event of nonpayment
           of the loans. Required principal payments to the noteholders are
           based upon the collection of principal on the Contributed Loans. All
           principal collected on the Contributed Loans during the monthly
           period (as defined in the Trust Indenture) are used to make the
           required principal payment on the first business day of the following
           month.

NOTE 5.    PARTNERS' CAPITAL:

           The net proceeds from the issuance of the Notes (approximately $37.5
           million before giving effect to payment of offering costs of
           approximately $396,000 and after giving effect to the funding of a
           $2.04 million reserve fund held by the trustee as collateral) were
           distributed to PMC Capital. Pursuant to an agreement between PMC
           Capital and PMC Trust 1996-A, PMC Trust 1996-A waived any rights it
           had under the partnership agreement to receive any portion of such
           distribution.

NOTE 6.    FAIR VALUES OF FINANCIAL INSTRUMENTS:

           The estimates of fair value as required by Statement of Financial
           Accounting Standards ("SFAS") No. 107 differ from the value of the
           financial assets and liabilities determined by the General Partner
           primarily as a result of the effects of discounting future cash
           flows. Considerable judgement is required to interpret market data
           and develop the estimates of fair value. Accordingly, the estimates
           presented herein are not necessarily indicative of the amounts the
           Partnership could realize in a current market exchange or the amount
           that ultimately will be realized by the Partnership upon maturity or
           disposition.

           The estimated fair values of the Partnership's financial instruments
           pursuant to SFAS No. 107 are as follows:

<TABLE>
<CAPTION>
                                              1997                                 1996
                                    -------------------------            ------------------------
                                                    Estimated                           Estimated
                                    Carrying             Fair            Carrying          Fair
                                     Amount             Value             Amount            Value
                                    --------        ---------            ---------      ---------
                                                            (in thousands)
<S>                                 <C>              <C>                 <C>             <C>
Assets:
    Loans receivable, net           $ 33,975         $ 34,749            $  41,805       $ 42,894
    Restricted investments             2,219            2,219                5,444          5,444

Liabilities:
    Notes payable                     29,007           29,216               40,183         39,770
</TABLE>


           Loans receivable, net: The estimated fair value for all fixed rate
           loans is estimated by discounting the estimated cash flows using the
           current rate at which similar loans would be made to borrowers with
           similar credit ratings and maturities. The impact of delinquent loans
           on the estimation of the fair values described above is not
           considered to have a material effect and accordingly, delinquent
           loans have been disregarded in the valuation methodologies employed.




                                      F-43


<PAGE>   69



                         PMC CAPITAL LIMITED PARTNERSHIP
                          NOTES TO FINANCIAL STATEMENTS

NOTE 6.    FAIR VALUES OF FINANCIAL INSTRUMENTS: (CONTINUED)


           Restricted investments : The carrying amount is a reasonable
           estimation of fair value.

           Notes payable: The estimated fair value is based on present value
           calculation using prices of the same or similar instruments after
           considering risk, current interest rates and remaining maturities.

NOTE 7.    RELATED PARTY TRANSACTIONS:

           At December 31, 1997, the balance in due to affiliates of $46,000 was
           a result of payments on loans receivable of affiliates deposited
           directly by the borrower into the Partnership's operating bank
           account. The balance in due from affiliates of $15,000 was a result
           of payments on the Partnership's loans receivable deposited directly
           by the borrower into an affiliate's operating bank account. These
           balances were transferred to the appropriate company subsequent to
           year end.


                                      F-44


<PAGE>   70

                                    EXHIBITS

<TABLE>
<CAPTION>
    Exhibit          Description
    -------          -----------
<S>    <C>
       3.1           Articles of Incorporation, as amended (incorporated by
                     reference to Exhibit 4(b)(1) to Amendment No. 9 to the
                     Registration Statement on Form  N-2 (Registration No.
                     33-2535) (the "N-2 Registration Statement"), Amendment No.
                     9 dated November 29, 1991.

       3.2           By-Laws, as amended (incorporated by reference to Exhibit
                     2 to Amendment No.7 to the N-2 Registration Statement
                     dated April 27, 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, 1993).

       4.3           Debenture dated February 4, 1987 for $2,480,000 loan with
                     SBA - incorporated by reference from Registrant's Form
                     N-2, Amendment No. 6, dated April 27, 1988.

       4.4           Debenture dated February 17, 1988 for $1,500,000 loan With
                     SBA - incorporated by reference from Exhibit E 4(b)(5)(n)
                     to the Registrant's Form N-2, Amendment No. 7 dated April
                     27, 1991.

       4.5           Debenture dated June 27, 1990 for $2,000,000 loan with SBA
                     - incorporated by reference from Exhibit 4(b)(5)(n)
                     Registrant's Form N-2, Amendment No. 9, dated April 29,
                     1991.

       4.6           Debenture dated September 26, 1990 for $2,810,000 loan
                     with SBA - incorporated by reference from Exhibit
                     4(b)(5)(o) to the Registrant's Form N-2, Amendment 9,
                     dated April 29, 1991.

       4.7           Debenture dated September 26, 1990 for $1,500,000 loan
                     with SBA - incorporated by reference from Exhibit
                     4(b)(5)(p) to the Registrant's Form N-2, Amendment 9,
                     dated April 29, 1991.

       4.8           Debenture dated March 29, 1990 for $1,000,000 loan with
                     SBA - incorporated by reference from Exhibit 5(q) from
                     Registrant's Form N-2, Amendment No. 3, dated August 18,
                     1992.

       4.9           Debenture dated September 27, 1989 for $1,000,000 loan
                     with SBA - incorporated by reference from Exhibit 5(r)
                     from Registrant's Form N-2, Amendment No. 3, dated August
                     18, 1992.
</TABLE>




                                      E-1
<PAGE>   71
       4.10          Debenture dated September 27, 1989 for $1,500,000 loan
                     with SBA - incorporated by reference from Exhibit 5(s)
                     from Registrant's Form N-2, Amendment No. 3, dated August
                     18, 1992.

       4.11          Debenture dated January 2, 1990 for $3,000,000 loan with
                     SBA - incorporated by reference from Exhibit (5)(t) from
                     Registrant's Form N-2, Amendment No. 3, dated August 18,
                     1992.

       4.12          Debenture dated August 18, 1989 for $1,000,000 loan with
                     SBA - incorporated by reference from Exhibit (5)(u) from
                     Registrant's Form N-2, Amendment No. 3, dated August 18,
                     1992.

     **4.13          Debenture dated September 28, 1994 for $3,000,000 loan with
                     SBA.

     **4.14          Debenture dated September 28, 1994 for $3,000,000 loan with
                     SBA.

     **4.15          Senior Note dated July 19, 1993 for $6,000,000 with
                     Columbine Life Insurance Company.

     **4.16          Senior Note dated July 19, 1993 for $9,000,000 with Life
                     Insurance Company of Georgia.

     **4.17          Senior Note dated July 19, 1993 for $5,000,000 with
                     SouthLand Life Insurance Company.

     **4.18          Senior Note dated December 15, 1993 for $2,000,000 with
                     Peerless Insurance Company.

     **4.19          Senior Note dated December 15, 1993 for $3,000,000 with
                     Security Life of Denver Insurance Company.

    ***4.20          Debenture dated March 29, 1995 for $3,000,000 loan with
                     SBA.

    ***4.21          Debenture dated June 28, 1995 for $5,000,000 loan with SBA.

    ***4.22          Debenture dated September 27, 1995 for $7,000,000 loan with
                     SBA.

    ***4.24          Debenture dated December 20, 1989 for $650,000 loan with
                     SBA assumed from J & D Capital Corporation.

    ***4.25          Debenture dated June 27,1990 for $300,000 loan with SBA
                     assumed from J & D Capital Corporation.

    ***4.26          Debenture dated December 6, 1992 for $510,000 loan with SBA
                     assumed from J & D Capital Corporation.





                                      E-2
<PAGE>   72
         ***4.27     Senior Note dated April 19, 1995 for $5,000,000 with
                     Security Life of Denver Insurance Company.

         ***4.28     Senior Note dated April 19, 1995 for $2,000,000 with
                     Peerless Insurance Company.

         ***4.29     Senior Note dated April 19, 1995 for $2,000,000 with
                     Indiana Insurance Company.

         ***4.30     Senior Note dated April 19, 1995 for $1,000,000 with
                     Security Life of Denver Insurance Company.

        ****4.31     Debenture dated June 27, 1990 for $1,030,000 assumed from
                     ESLO Capital Corporation.

       ****10.1      Employment contract between the Registrant and Lance B.
                     Rosemore dated June 30, 1996.

       ****10.2      Employment contract between the Registrant and Andrew S.
                     Rosemore dated June 30, 1996.

       ****10.3      Employment contract between the Registrant and Fredric M.
                     Rosemore dated June 30, 1996.

       ****10.4      Employment contract between the Registrant and Jan F. Salit
                     dated June 30, 1996.

       ****10.5      Employment contract between the Registrant and Barry N.
                     Berlin dated June 30, 1996.

         **10.6      Employment contract between the Registrant and Mary J.
                     Brownmiller dated August 1, 1994.

       ****10.7      Master Promissory Note for $15,000,000 with Bank One, Texas
                     N.A.

       ****10.8      Servicing Agreement by and among Sun Trust Bank, PMC
                     Capital Limited Partnership and PMC Capital, Inc.

          *10.9      PMC Capital, Inc. 1997 Non-Employee Director Stock Option
                     Plan.

         *10.10      PMC Capital, Inc. 1997 Employee Stock Option Plan.

          *21        Subsidiaries of Registrant

          *27        Financial Data Schedule


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

                      **     Previously filed with the Commission as an exhibit
                             to the Registrant's Form 10-K for the fiscal year
                             ended December 31, 1994

                      ***    Previously filed with the Commission as an exhibit
                             to the Registrant's Form 10-K for the fiscal year
                             ended December 31, 1995

                      ****   Previously filed with the Commission as an exhibit
                             to the Registrant's Form 10-K for the fiscal year
                             ended December 31, 1996





                                      E-3